Lego was recently named the world’s most powerful brand but in 2003 it was struggling and consultants who were rushed in to sort out its problems recommended diversifying. The company quickly launched a range of jewellery for girls, clothes, theme parks and its own video games business – and almost went bust.
The problem was not that diversification is wrong in itself but that it was wrong for Lego at the time. Things improved quickly for the company when it changed tack and focussed on what it did best. It dumped things where it had no expertise, such as the Legoland theme parks, and almost halved the number of individual Lego brick designs from 13,000 to 6,500. Its strategy worked and the company’s profits soon outstripped those of Apple1.
Choosing between focus and diversification is one of the key strategic decisions that growing businesses have to make, and Lego’s story is perhaps the best example of why it’s important. While diversification may open up new opportunities, sticking to one product gives you the chance to improve what you are doing, increase efficiency in production and cement a loyal and supportive customer base.
Focus or diversify?
Cambridge Judge Business School Professor Jaideep Prabhu says that focussing on a core product or service can help to make the most of limited resources. It should also leave entrepreneurs time to work with suppliers and consumers to improve the offering and increase its chances of success. Those who are nurturing a brand new kind of product rather than just introducing a new competitor into the market, generally need a laser focus on that offering to succeed, he adds.
But if you focus on a single product and reach saturation point in your market, how can you continue to grow? Prabhu says that one answer could be to take the product into new regions, rather than develop new innovations. But this isn’t something to be done lightly because moving into new territories can create uncertainty and introduce new factors that are beyond the entrepreneur’s control, while also stretching resources.
Instead, if you have built an audience and have impressed them with your initial offering, you could choose to strike while the iron is hot and diversify your range. Adding more great products or services could see them buy from you again. Prabhu says that offering new lines to an existing audience is often a better strategy than expanding to a new geography with the same product.
“If you already have a solid customer base in a geography, the first step should be seeing if you can introduce line extensions to that existing audience,” he explains. “If you believe you have reached market saturation, consider modifications, ideally those that complement rather than cannibalise your product, such as a higher-end version that customers can graduate to from your launch product.”
Assessing your options
Deciding when to diversify is particularly difficult, says Dr Maksim Belitski, a lecturer in entrepreneurship at Henley Business School who has worked on research into innovation, entrepreneurship eco-systems and market-making strategy.
He says: “Innovation is very idiosyncratic. Choosing the time to diversify and offer new products varies between firms. It depends on the sector, region and size of the business. For example, some industries, such as IT may be able to roll out new products on a large scale quickly. Meanwhile, medical instruments and devices can take decades to perfect, making diversification more difficult. Your own location may also be a factor. Businesses based in areas with a large population may have access to a customer base with diverse needs, whereas organisations in smaller areas may find their audience is more homogenous.”
Belitski recommends waiting for certain levels of growth before offering new products. If you are exceeding 20% growth in demand for your product in a year, then it is right to start diversifying your products. If you are in an industry with less growth you may wish to wait. On the other hand if you see a 20% fall in sales then that may also be the right time to offer new products as the industry will be less attractive to new players but could still need the boost that a new product might offer.
He concludes that while there are many factors that can affect when it is right to diversify, the key is to stay completely immersed in developments in your industry to recognise possible opportunities for your business. “There are many sources of innovation,” he says. “For example, changes in regulation may be a good reason change. Many cities in Europe have areas that have become pedestrianised or bicycle only areas. This changes the way the retail industry operates but also offers opportunities for new delivery methods for many companies such as eco-delivery by bike or by foot. Or it might be trend-driven, where changes in design may be introduced to suit customer preferences. If you are able to monitor shifts in demand, that’s a good signal to try new products.”
As Lego has proved, getting it right is a good way to make sure that everything is awesome!
1abcnews.com, Nov 2009
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.