Unlocking Growth Potential: Navigating Diversification Strategies

As business enthusiasts, we often find ourselves pondering questions like: How can I foster customer loyalty? How do I attract new customers? How can I reduce costs? Ultimately, all these questions boil down to a fundamental inquiry: How can I enhance the value of my company?

In today's post, we're diving into the exciting world of diversification strategies—an essential approach to maximizing your growth potential while minimizing risks. Whether you're an entrepreneur, business operator, or manager, these insights will help you enhance the value of your company and pave the way for future success.

Photo by Suzanne D. Williams on Unsplash

It is easy to get anchored on your current offering and business model. However, it is crucial to recognize that what brought you success this far may not take you to the next level. In fact, studies reveal that half of all corporate profits of America’s largest companies come from something other than their original innovation. This prompts us to explore two angles of value creation within organizations: (i) what can I do better? (Improving), and (ii) what can I do next? (Transforming). In this post, we’ll focus on the latter. Leave a comment if you want to know more about the former.

What can I do next?

Looking back at history and drawing lessons from successful companies, we come across compelling cases of diversification that have created substantial value. Take Amazon, for example. While many know Amazon as the go-to-e-commerce platform where you can find virtually anything you want, it may surprise you to learn that in 2022, a staggering 76% of its operating profits actually came from AWS, its cloud service business. But wait, how did Amazon evolve from a bookseller to the most successful e-commerce platform in the Western world, and eventually become the largest provider of cloud services globally?

Connecting the dots in hindsight is always easier, but how can we chart a growth path for our own businesses? Where can we uncover the next growth lever?

Traditional recommendations typically tell you to listen to your customers, expand geographically, or expand to different customer segments. But what are the chances of success and what else could be done? Trial and error is probably expensive and may cost your business reputation. So how can we pragmatically answer this question and increase our chances of success?

In simple terms, I like to think of it in two steps: (a) understand the powers of your business, (b) find where you can expand under your power umbrella.

Understanding the Powers of Your Business:

The first step is to understand the ability of your company to consistently outperform its competitors. It means understanding the unique attributes, advantages, or capabilities that allow your company to thrive and achieve superior performance in its industry. Hamilton Helmer published a framework called 7 Powers that identifies seven sources of power that can contribute to a company’s competitive advantage: scale economies, network effects, counter-positioning, switching costs, branding, process advantages, and cornered resources. Leveraging these powers effectively helps a company dominate its market, generate above-average profits, and sustain long-term success, and misunderstanding can lead to wrong decisions.

Finding Where You Can Expand Under Your Power Umbrella:

Once you know what makes your business special and what set of unique capabilities and skills you have, it’s time to look for your customers’ needs and understand how close they are to your current value proposition. As someone who worked in consulting and has been to business school, I couldn’t help to use a 2x2 matrix to describe it. 😅

Framework by Hamilton Helmer and Chenyi Shi on Acquired

1. Unrelated Diversification: Neither the same needs nor the same skills

This scenario usually involves a high-risk proposition as you’re actually building a new business and can even find some agency problems to get things off the ground. On the other hand, it can allow a company to diversify its revenue streams and reduce its reliance on any one market or industry.

Alphabet Inc. (parent company of Google) ventured into various unrelated industries such as healthcare, autonomous vehicles, and smart home technology through its subsidiary, Alphabet Other Bets. One notable example is Waymo, a self-driving car technology company, which diversifies Alphabet's revenue streams and reduces its reliance on the advertising industry.

2. Reinvention: Same needs but a different set of skills

This scenario is usually led by the emergence of new technology or competition from a newcomer. If you are the incumbent, you might be forced to do it, but the opportunity is not great and quick adaptation is key.

Nokia, a former leading mobile phone manufacturer, faced challenges due to the emergence of smartphones. To adapt and reinvent itself, Nokia shifted its focus to telecommunications infrastructure and network equipment. By leveraging its expertise in networking technologies, Nokia transformed from a mobile phone manufacturer to a leading provider of network infrastructure and services.

3. Category Coaction: Different needs but the same set of skills

This is the scenario with the higher chances of success. If you can find somewhere you can use the same set of capabilities but do different work for customers, go for it. Especially if you have differential capability vs other companies who could also pursue that opportunity.

Apple capitalizes on its core skills in consumer electronics to cater to diverse customer needs. Expanding beyond iPhones, iPads, and Mac computers, Apple has successfully ventured into wearables with the Apple Watch, empowering users with fitness tracking and health monitoring capabilities. Moreover, through services like Apple Music, Apple TV+, and Apple Arcade, they have leveraged their expertise in software and content delivery to enhance the overall customer experience and broaden their offerings.

Now, let’s revisit the initial question: How did Amazon evolve from a bookseller to the most successful e-commerce platform in the Western world, and eventually become the largest provider of cloud services globally?

Amazon's early success as a bookseller can be attributed to its efficient logistics, extensive selection, and user-friendly interface. Building upon these foundational capabilities, Amazon embarked on a classical Category Coaction diversification strategy by gradually expanding its product offerings. Although the expansion from e-commerce to cloud services may seem like a high-risk unrelated diversification at first glance, the truth is that as the e-commerce business flourished, Amazon simultaneously developed a robust and scalable infrastructure—including data centers, storage systems, and networking capabilities—to support its operations. In leveraging its technology infrastructure to start a new business line, Amazon leveraged a different yet existing set of skills to fulfill the diverse needs of both existing and new customers.

Similarly, Apple is investing in self-driving cars, expected to be launched in 2026 and, in April 2023, Apple launched the Apple Card, offering a new high-yield savings account. Will self-driving cars of baking become for Apple what AWS is for Amazon today? Only time will tell.

In the ever-evolving business landscape, strategic moves and diversification can lead to remarkable transformations. Keeping an eye on emerging opportunities and leveraging existing strengths can unlock unprecedented growth and value for your organization.