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THE CASE FOR DIVERSIFICATION

For young companies, is it better to stay focused or diversify?

A Monarch butterfly rests on a visitor's hand during the official Inauguration of the month of the Monarch butterfly at Chapultepec Zoo in Mexico City, Mexico, April 6, 2017.
REUTERS/Edgard Garrido
After the metamorphosis.
  • Tomer Bar Zeev
By Tomer Bar Zeev

CEO and co-founder, ironSource

Published

There’s no shortage of advice on whether to focus or diversify as a company, along with examples of which companies have done what correctly. However, the bulk of the discussion centers on massive global conglomerates (the Disneys or 3Ms of the world) as opposed to discussing how to tackle this dilemma at the earlier stage of a company’s growth. This is largely because conventional wisdom says the key to early success involves laser-like focus on a specific market, product and client base, cracking that, and then expanding.

But the benefits of diversification don’t have to be limited to later-stage or larger companies. While it’s not a risk-free strategy, diversifying early isn’t just a path for faster growth. It’s also a mindset informing the future trajectory of the company.

The options for diversification are varied, from vertical or horizontal diversification, concentric or heterogeneous. It might include offering something similar in the supply chain, creating new sales channels, expanding to new customer segments, or even just opening up an international office. Below are some of the decisions early or growth stage companies should look at when evaluating if and when to diversify, and some tips for how to get it done.

Attractive acquisition target versus a strong standalone

The first question is really about whether to diversify at all, which largely connects to the long-term goals of the company, and specifically about whether or not you want to be acquired.

If you’re focused on one product or service, then you’re (in most cases) aiming to be strategic for one particular market and therefore one category of buyer, which will make your company a more likely, natural target for getting acquired by someone in that buyer group. Think Cisco buying BabbleLabs and Amazon buying Zoox. Both of the startups were successful, one-service companies whose focus made them ripe for an acquisition.

Selling at the right time (i.e. not waiting too long) is crucial here though, since if you’re large enough to be meaningful, then your tech may eventually get replicated by the potential acquirer or another company, leaving your service obsolete.

If, however, the company’s goal is not M&A, then diversification is key to ensuring your risk is low and your unique selling point is strong. And the earlier on it’s done, the higher the chance of success.

Tactics versus strategy

This may seem like a bizarre piece of advice, but when your company is young, I would recommend focusing on tactics rather than strategy. Contrary to popular opinion, it can be risky in the early days to spend the majority of your time planning for the next 10 years, versus ensuring that you’re making it month to month in the most efficient way. Having a general vision of where you’re heading is important, but focus too much on the strategy and you may get blindsided along the way.

Focusing on tactics makes you agile, and agility can help you succeed in the most precarious stages of a company’s lifecycle. Take a company pivot for example—long a common milestone along the journey to success as founders re-evaluate product-market fit. By focusing on tactics and not on a future strategy or dream, you’re more open to and aware of new ideas or directions that might be more lucrative or promising, spurring you to adapt your business accordingly.

Take Avon for example. The founder was a book salesman who created a rose-scented perfume as a free gift to encourage people to buy his books. The perfume was much more popular than his books, so he abandoned selling books and started producing perfume instead. Wrigley has a similar story but instead of books it was soap and baking powder, and instead of perfume it was gum.

In some ways, the focus vs. diversification dilemma can be a mirror of the strategy vs. tactics dynamic. Of course, at a certain point it becomes equally important to build a long-term strategy, but having the openness to hear new ideas, and the flexibility to act on tactical diversification opportunities, can ultimately serve you better than sticking strictly to your original strategy.

How to diversify

There’s a wealth of information and formulas on how to diversify. Here are four that I think are natural and “easy” concepts for growth companies to consider.

1. Extending your existing capabilities/products/services

Once you have expertise in a certain area, dig into how you could adapt it for a different audience, need, or situation. For example, Kellogg’s moved from cereals into cereal bars (though they also had some unrelated diversification as a company) and Honda, which was originally a motorcycle business, took its knowledge of small, reliable engines and diversified into producing cars, and later lawn mowers and boat engines.

2. Buying another company

After going through multiple mergers and acquisitions—the first one being a year after founding ironSource—I’m a big believer in inorganic growth. When you want to expand your capabilities and/or expertise, there’s no quicker way than to acquire them. This could be something that will support your current offering (e.g Salesforce and Slack) or something that is closely analogous to your offering (e.g. Facebook buying WhatsApp and Instagram).

3. Cultivating internal innovation

When you’re passionate about something, creativity flourishes.

Many companies establish innovation labs where employees are tasked with developing with an open mind and no limitations—including not having to create products that relate to the company’s core business. At other times, it’s simply a drive to improve an existing system or process in your company that results in the next big thing. AWS came from a vision inside of Amazon to rely on their own web services; monday.com (originally daPulse) came from an initiative inside of Wix as a tool to improve the communication between teams; Suzuki was created by a silk weaver’s passion for inventing.

Often, giving the freedom to innovate to people who are most familiar with your company DNA and capabilities can birth new products or services that can provide a path to diversification.

4. New physical location

Opening up a new international office may not seem like diversification, but depending on the market, it can function in the same way, with the extent of the diversification depending on the gap between the two markets.

A given geographical market might be dominated by a subset of customers you are less used to serving, or represent an opportunity to grow a feature which has been less popular in other markets. There may be distribution differences, regulatory changes, and payment option adaptations, and in many cases, the product or service itself will also change.

In some ways, opening up a new office is the most difficult form of diversification, as it often feels like business as usual only in a different location, only this could not be further from the truth. This form of diversification can be as challenging yet also as rewarding as adding a new product line.

Diversification has many paths

Diversification can mean something different to every single business. It takes effort and its own kind of focus, so it’s important to first assess whether it’s something that your company is striving for, and if so then examining and perhaps also trialling different avenues that may suit your business and your company culture.

But remember, for diversification to be an option in the first place, openness and willingness to change is the most important criteria.

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