Why You Need To Diversify Your Business To Accelerate Growth

Feb 22, 2018 4 Min Read

The math behind thinking big

If you are thinking this is a motivation piece about the power of ambitious thinking, it’s not. What I’m going to lay out here has nothing to do with psychology or inspiration. This is basic math; a concept so simple, you will grow frustrated that your company doesn’t embrace it. My 12-year-old gets it. But the USD50bil company I worked with yesterday doesn’t.

This simple idea could overcome your company’s aversion to risk, help them see failure as learning, and accelerate its growth rate.

For the last 50 years, strategy has been premised on the idea that strategy is about making big choices. Who do we serve? What do we prove to them? How do we get it to them?

Most companies fail to apply the principle of diversification to their growth agendas.

American academic known for his economic theories and business strategy Michael Porter advises we choose promising industries. Good to Great author Jim Collins: that we build the right organisational structures. Harvard Business School professor Clayton Christensen: that we pick the right customer segments.

Your growth strategy, then, becomes a collection of big decisions.

But strategy is evolving

In today’s faster-paced, more agile world, companies that are winning – Amazon, Google, Tesla/SpaceX – are operating at a higher order. They understand the simple mathematical principle of diversification.

Watch this video interview and see how the founder took risks to diversify its business portfolio:

Investors live by this principle. If you spread your money across a variety of risky investments, you can create a predictable return. While some investments fail, others pop. The average results can be stable even if the individual results are erratic.

This is why smart investors assemble portfolios of investments, instead of funneling all of their capital into just one stock or bond.

Yet most companies fail to apply this simple principle to their growth agendas. They assess each growth idea individually. Taking each opportunity – each new product, new channel, new customer segment – they assess whether its risk-adjusted return fits what the company wishes to deliver.

As a result, they only pursue growth ideas with a comfortable level of safety. They grow risk-averse because few new, innovative ideas promise the level of predictability that their core business can.

New ideas carry risk. To remove that risk, most companies simply kill off new ideas.

Diversify your risks

A smarter option is to take more risks, not fewer, while measuring the diversified return of those risks. Jeff Bezos said it best:

Given a 10% chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong 9 times out of 10. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

The key to applying this diversification rule to accelerate your growth is to change your unit of measurement. Stop judging teams by the success or failure of their individual projects. Instead, give them a portfolio of ideas, and judge them by the return of their portfolio.

Let’s say you have five ideas for building new businesses with data. Don’t pick just one and hope it works. Pursue all five, understanding that some will fail while others will take off. Don’t assemble your team around one idea, organise them around a portfolio of ideas.

In other words, think bigger

Think in groups of ideas rather than individual ideas.

But what if your budget only allows you to pursue one idea? In that case, you have two choices. You could pick just one, as most companies do.

Or, a better choice, you could conduct less-expensive experiments that will bring down the cost of each idea by 80%. Instead of taking your USD5 and betting it on one stock, put USD1 into each of the five stocks in your portfolio.

New agile experimentation techniques make this easy. Read Sprint: How to Solve Big Problems and Test New Ideas in Just Five Days by the Google Ventures folks, Scrum: The Art of Doing Twice the Work in Half the Time by Jeff Sutherland, or The Start-Up Owner’s Manual: The Step-by-Step Guide for Building a Great Company by Steve Blank and Bob Dorf, and you will quickly understand how to do it.

Bundle your ideas

Now your bosses may want to hear your idea, while you know you need to pitch them a portfolio of ideas. Getting their heads around this diversification concept may take more time and effort than you think. So instead, simply trick the system.

Put the bundle of ideas into one group and give the group a name. Call it a multi-prong strategy or call it a concept. Take your five ideas for generating growth from data and call it “Data Services”. Take your five designs for new shoes and call it the “Shoe of the Future Project”.

  1. Pick five ideas.
  2. Bundle them together into one project.
  3. Give the project a name.
  4. Assemble an idea.
  5. Run five inexpensive experiments.
  6. Drop what fails and advance what works.

All yours, baby.

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Dr Kaihan is the founder of Outthinker, a former McKinsey & Co consultant and author of four business strategy books, most recently ‘Outthink the Competition’. He is a sought-after keynote speaker and a recognised expert on the topics of business growth strategy and innovation. He is also a faculty trainer with Leaderonomics.

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