Diversification

The main problem with diversifying a product line or a business is that strategic coherence can be lost.

A good strategy has an internal coherence – the result of design – where the sum of the whole is greater than the sum of the parts. In such a strategy, the policies and actions align and fit in such a way as to multiply their effect. The risk of diversification is that it can undo this coherence, leading a firm into businesses and processes with which it is unfamiliar, and thereby eroding its competitive advantage.

Diversification decisions must be made wisely. The fit and alignment of diversification initiatives with a firm’s sources of advantage should be explored and examined deeply. Where diversification entails moving resources out of the current sources of advantage and into unfamiliar territory, that may be a warning signal to reflect and consider.

Highly diversified firms may offer a wide variety of products and services. But they may also experience lower profits because they are not particularly good at anything. This is the danger to avoid. Diversification which is poorly thought-out may result in average performance at best, and mediocrity at worst.

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