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Diversification of business is a NEGATIVE signal
There has been this notion for quite some time that diversification is a GOOD thing, but I'd like to challenge that because I think it is actually a negative signal, especially when it pertains to moving away from a business's core existence. What inspired this post was @jazziyoung's post on Walmart.
Throughout time we've seen businesses get too big for their bridges and assume that they can become everything to everybody, only to later find out that the new verticals that they enter into end up costing them a lot of money, which causes them to sell them off 5-10 years later after people forget.
Focus is extremely important, and that's why I think it's important to include some quotes from the book Focus, by Al Ries:
- "The larger the market, the more specialization that takes place. The smaller the market, the less specialization that takes place and the more generalized the companies. As the world moves to a global economy, companies are going to have to become more specialized."
- "Whether you call it an umbrella or a tent, putting everything under one roof is a dangerous practice. It's the management theory that leads directly to the line-extension trap."
- "You can't defend a rapidly growing market like computers even if you are a financial powerhouse like IBM. From a strategic point of view, you have to be much more selective, picking and choosing the area in which you pitch your tent."
- "Power lies with the specialist, not the generalist."
- "Companies that broaden their line, for whatever reason, are vulnerable to narrowly focused competition that takes advantage of division, not convergence."
- "Concentration is the key to economic results. Economics results require that managers concentrate their efforts on the smallest number of activities that will produce the largest amount of revenue. . . No other principle is violated as constantly today as the basic principle of concentration. . . Our motto seems to be: let's do a little bit of everything." —Peter Drucker
- "Today a company needs a narrow focus to compete in a marketplace that is rapidly going global."
I could go on, but I think you get the point. Whenever you see/hear that a business is getting into a new vertical because it thinks that it will increase market share, take that as a sign that management is just throwing things at the wall to see what sticks—usually as a means to give the illusion to shareholders that they are expanding the business. In actuality, the most positive signal that a company is increasing its business standing is quite the opposite—contracting and doubling down on innovating on the main business and ignoring the other shiny carrots that present themselves. And just think about it... when you focus a magnifying glass in one place you start a fire, whereas if you move it all around nothing happens.
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