Beyond the Bet: How to Win or Lose in the Game of Diversification

Diversification is a high-stakes gamble, and like all gambles, it promises great rewards and perilous risks. Success stories like those of General Electric, Disney, and 3M are etched into the annals of corporate history, but the failures—like Quaker Oats with Snapple, or RCA's ill-fated ventures into computers, carpets, and rental cars—serve as stark reminders of the dangers lurking in the diversification game.

What makes diversification so unpredictable? First, companies often face these decisions in a pressure cooker. An attractive company comes into play, a competitor is circling, or the board demands expansion into new markets. Suddenly, senior managers are tasked with making sense of mountains of data—internal-rate-of-return calculations, market forecasts, competitive assessments—all under intense time pressure. Moreover, diversification as a strategy goes in and out of fashion, leaving little conventional wisdom to guide these crucial decisions.

But diversification doesn’t have to be a roll of the dice. Yes, uncertainty will always be part of the equation; all major business decisions involve risk. However, by considering the right questions, managers can push their thinking further and reduce the gamble.

The first question to ask is: What can our company do better than any of its competitors? It’s not about what your company does, but what it does better. This means identifying your strategic assets—those unique strengths that give your company a competitive edge. Blue Circle Industries, a British cement producer, failed in the 1980s because it misunderstood this. It expanded into real estate, lawn mowers, and gas stoves, all based on a vague business definition that had nothing to do with its core strengths. The result was predictably disastrous.

In contrast, the Boddington Group recognized that its strength lay in retailing and hospitality. By focusing on these strategic assets, Boddington transformed itself, creating significant shareholder value. Denis Cassidy, Boddington’s chairman at the time, understood that their brewery was no longer a viable asset in a consolidating beer market. Instead, the company leveraged its expertise in managing pubs and diversified into resort hotels, restaurants, and health clubs—a move that proved to be highly successful​(CV DENIS SAKLAKOV June …) .

The importance of strategic assets cannot be overstated. Diversification requires all the necessary assets, not just some. Coca-Cola learned this the hard way in the 1980s when it ventured into the wine business. Despite its strengths in marketing and distribution, Coca-Cola lacked the critical competence in winemaking. The venture failed because 90% of the necessary assets weren’t enough when the missing 10% was crucial .

This lesson echoes across industries. Companies like British Petroleum and Exxon found themselves in similar situations when they tried to diversify into the mineral business in the 1970s. Their competencies in exploration and large-scale project management weren’t enough to compensate for their lack of low-cost extraction capabilities and access to deposits. The result was a retreat from the mineral business a decade later .

But what if a company lacks some strategic assets? Should it abandon its plans to diversify? Not necessarily. Companies must consider whether they can acquire or develop the missing assets or change the rules of the game altogether. Sharp Corporation offers a valuable example. In the 1950s and 60s, Sharp leveraged its strengths in manufacturing radios to enter the television and microwave oven markets by acquiring the necessary technology from other companies. Similarly, Walt Disney expanded from animation into theme parks, cruise lines, and retail by acquiring or developing the strategic assets it needed .

However, diversifying isn’t just about acquiring assets; it’s about understanding whether those assets can work together in a new environment. Too many companies mistakenly believe they can separate competencies that, in reality, reinforce each other. McDonald’s success in fast food, for instance, is due to the synergy between its real estate, supply chain, and brand management competencies. Breaking these apart could undermine the entire business model.

In philosophy, this concept parallels Friedrich Nietzsche’s idea of the “will to power,” where strength comes from focused effort and unification, not fragmentation. Diversification, if done poorly, scatters a company’s energies and weakens its position .

Managers must also ask: Will we be just another player in the new market, or will we emerge as a leader? To gain a sustainable advantage, a company must create something unique that competitors cannot easily imitate or substitute. For example, 3M has diversified successfully because it built a culture of creativity and innovation that is difficult to replicate. On the other hand, Dell Computers disrupted IBM by bypassing dealers and selling directly to consumers—a move that substituted IBM’s distribution model with something more efficient and customer-centric .

In some cases, companies like Canon have managed to leapfrog competitors by fundamentally changing the rules of the game. When Canon entered the photocopier market, it didn’t compete with Xerox on Xerox’s terms. Instead, it targeted smaller businesses and consumers, selling machines outright through dealers rather than leasing them through a direct sales force. This strategic shift allowed Canon to dominate the market within two decades .

Beyond these tactical considerations, diversification also requires forward-thinking. Managers must ask: What can we learn from entering this new market, and how can it serve as a stepping stone for future opportunities? Canon’s entry into the copier business taught it how to build marketing organizations targeted at business customers, a skill that later helped it in the laser printer market. Similarly, Denmark’s Lan & Spar Bank used knowledge-sharing groups to capitalize on its diversification into direct banking, ranking it as one of the most profitable banks in Denmark despite its relatively small size .

Lastly, there’s a more profound philosophical consideration. Human evolution has come at the cost of brain mass reduction by about 10% in the last 2,000 years, possibly due to the pressures of diversification in our mental capacities. Specialization allows deep expertise, but it can narrow the mind, making it difficult to adapt when situations change. Just as companies must balance the benefits of deep expertise with the risks of over-specialization, so must individuals .

Diversification is a game of strategy and foresight. The stakes are high, and the risks are real, but with careful consideration and the right approach, the rewards can be extraordinary. Managers must study their cards, think two or three moves ahead, and understand that in the game of diversification, sometimes the best move is to hold, and sometimes it’s to fold.

References:

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