It seems as though the likes of Richard Branson and Elon Musk are driven by blind ambition. Is there no limit to what they will do? Send a Roadster into space; what is stopping us besides a little gravity?
In a world fascinated with newness, how do companies weight their growth ambitions with their tolerance for risk? Sometimes a new idea is innovation, and sometimes it is just a shiny object.
Constrained by capital, startups may only pursue one business or market. But at some point in a company's life cycle, a little voice goes off in the entrepreneurs' head that says "we ought to diversify." Entrepreneurs also know intuitively that the further they venture from what they know, the greater the risk.
All companies come to a fork in the road when they have to grow beyond their initial offering, and entrepreneurs are often conflicted between being operators and losing the artistry that made them great. The debates about when to double down in core and when to venture out can rip a management team to shreds.
Google has a formula that calibrates its growth ambition. The company invests 70 percent in its core, 20 percent in adjacent markets and 10 percent in "disruptive" or transformational businesses. Many other companies (large and small) have adopted a similar strategy of "smart diversification". A study published in the Harvard Business Review revealed that companies utilizing such a strategy realize 70 percent of their gains in the short term through "core" investments. But in the long term, 70 percent of their enterprise value is a result of transformational investments.
To pursue a smart diversification strategy, companies should:
Be aware of the conflict between competing competencies
The competencies required to succeed in one's core business and to transform are entirely different. The former requires a commitment to formality and process. Innovation requires a company to be outward facing and agile. It is not that core and non-core are in competition for resources; it is that they are in complete conflict with each other.
Be sure you hire both left-brain and right-brain thinkers. If you are a visionary entrepreneur or CEO, it is critical that you have senior managers who will get the work done and execute well. If you are detail-oriented, make sure you have leaders who push the envelope on vision.
Calculate your growth portfolio formula
Your company may not use the 70/20/10 formula, but every company should have one. In other words, consider what percentage of your effort should be dedicated newness (innovation and/or new markets you might enter). How does one calculate their formula? As is the answer to any question in business: it depends.
When industries are in decline, the only way to win business is to take it away from competition (often at lower prices). Growing industries are accepting of new competition. A company in a declining market may have more ambition to venture out than one growing in its core. Step one is to project industry growth in the industry you are in, as well as the sectors you may enter.
Create space for innovation.
While large and mid-market companies have dedicated resources for research and development and innovation, smaller companies can't employ people solely to explore new business opportunities. Systems must be put in place to ensure time for innovation. The hack-a-thons in Silicon Valley are well-known, but there are other ways companies can find space for innovation.
One of our smaller clients has the occasional "innovation day" where small groups bake out ideas. The entire session is gamified, and winners get a night out on the town. Every company should dedicate time (how much time depends on the proportion of your growth portfolio) for new ideas, innovation and new products.
Formalize investments into a business case.
Amazingly, many companies enter new businesses by mistake. Salespeople go out with their shotguns and just start shooting. Ask lots of questions such as, "What data supports entering this market? Do we know enough to achieve market leadership? Where are we in the food chain?" Every new business requires a business plan.
Be clear on who is mining the store.
In The Art of War, Sun Tzu said tactics without strategy is the noise before defeat. When a founder stops looking around the bend, they start losing their edge. Entrepreneurs must either be strategists and entrust the operation to others, or be operators and bring in people who can innovate for them. Never lose sight of what got you to where you are.