The execution challenge of growth through diversification
How to accelerate and diversify growth is a conversation absorbing much conversation space around Executive and Board tables. The intersection of low economic growth, disruptive technologies, climate change, and competitive convergence is placing extreme pressure on companies’ ability to grow their core business at similar rates to those in the past. While many bright and divergent ideas to solve this low growth conundrum may be forthcoming, the practicality of execution is often forgotten – or at least until material resources have been absorbed.
Some enduring principles persist
When thinking about growth, and in particular growth through diversification, there appear to be some enduring foundational principles that support execution success. At the heart of these principles is competitive advantage – both being able to identify it and then leverage it.
A useful analogy
Imagining your company as a community on an island in a river delta is a useful analogy for thinking through the principles of executing growth through diversification.
Your island is the core of your competitive advantage. It is where you build your fortress. It is your location of greatest competitive strength with defenses well entrenched to ward off threats. However, competitive waters are unrelenting in eroding your shores. The rate of erosion is not consistent – varying depending on the intensity of upstream rains, the interplay of the competitive waters with surrounding islands (of competitive advantage), and the quality of your structures built to withstand the erosive pressures.
In addition to withstanding the erosive competitive pressures there is a constant pressure to find new space to support the growing community. When building bridges to diversified growth the most successful communities share some common foundational principles.
Four foundational principles for building a bridge to diversified growth
The first principle in the drive for diversifying growth is you can’t desert your core community! Your core must remain the strongest foundation, the central pylon of your bridge to diversification – at least for a material period of time. This is important both emotionally to keep your community ‘on-board’ with the diversification plans but is equally crucial to ensure sufficient resources are made available to redirect towards building the diversification bridge. This will likely mean tradeoffs need to occur within the community to free up sufficient human and financial capital to redirect at building the bridge. It may require giving some ground to eroding competitive pressures and/or it may mean redirecting resources into reinforcing structures to support high value assets and activities. Attempting to build a diversification bridge without a strong central pylon is a recipe for collapse.
The second principle for diversifying growth is to look for ‘free’ competitive territory to build your bridge foundations. This is rarely a case of just looking around for spare islands in the river delta as they are likely already populated with the fortress of competitors. More likely it is one of reading the competitive waters to see where islands of opportunity will form in the future. Seeking out the forming sand banks below the waters surface as a consequence of disruptive technology, disruptive business models, or changing customers sentiments is often the best approach. This is unlikely to happen without an outward looking team constantly surveying the competitive waters for the opportunity of tomorrow and being equipped to empower an ‘advance party’ to explore the opportunity. A clear investment thesis, speed in decision making, and calculated risk are key tools in their tool kit.
The third principle for diversifying growth is to seek out partners where there may be mutual benefit in sharing the bridge. Seeking to build a bridge pillar on someone else’s island of competitive advantage can be a resource hungry and uncertain endeavor – absorbing valuable physical and financial resources away from your core. Finding a surrounding island community who would also benefit from diversification and coming up with a mutually beneficial partnering arrangement can be a more certain and efficient way to build a stronger and enduring bridge.
The fourth principle for diversifying growth is don’t overstretch. The further you open the bridge span by stepping out the foundation from the central pylon, the lighter the construction of the bridge platform to prevent collapse. The lighter the construction, the lower the load bearing capacity, the higher maintenance required to maintain the step out integrity, and the greater the risk of the bridge being washed away in to the ebbs and flows of the competitive waters. Taking smaller step-outs and building a stronger bridge structure can bring the dual benefit of opening up new territory to grow and, by adjusting the flow of competitive water, reduce erosive pressures around your island of competitive advantage.
Execution as a focus
The stakes are high for companies attempting to defy these foundational principles. Not only are the returns to diversification disappointing but invariably the inefficient redirection of resources and focus does material damage to the core business, weakening defenses and losing territory to existing or new competitors.