We’ve seen whole industries devastated in the wake of Covid-19. Many businesses, looking for ways to stay alive, have considered diversification. But all too often they flinch because a message has been drilled into them: Don’t diversify. “Stick to your knitting!”, the saying goes.
I’ve researched and written a book on diversification and I challenge this conventional wisdom.
It’s not that I don’t understand where it’s coming from. I know from experience in my own business, that the first question you ask yourself when considering diversification is “what do I know about this industry?” And if you’re not careful a kind of panic runs through you, questioning your capabilities and undermining your confidence. If you let it take hold you stay in your lane and keep doing the same thing, forever.
But this is the single-business mindset. It’s constricting – and unnecessary. Could a different mindset open a grand vista of growth opportunities for your business?
Greg owns a business which locates in-ground utilities prior to the construction of a building or the re-laying of a road. In developed cities, services frequently overlaying each other with the result that these networks are massively complex. Should a builder unexpectedly encounter water, electricity, gas, or other below-ground utilities the result can be an expensive project disruption. It can even result in the death of workers or passersby.
When Greg started his business 15 years ago, he faced only four serious competitors. Now he says there are more like 25. And the competition for work is intense. He was looking for an opportunity to expand. So, I asked him: “Have you considered diversifying?”
His response was immediate: “Funny you should mention that. Just the other day a friend of mine put this opportunity in front of me – to acquire a cheese-making business. While it’s doing well, the owners have decided to retire. We’d be acquiring it at less than the cost of the equipment. It comes with an option to buy the factory’s land in three years’ time. But what do I know about making cheese?”
It’s a typical question in a situation such as this. But it’s the wrong question coming as it does from a misplaced mindset. Before addressing Greg’s dilemma let’s look at the thinking of a successful diversifier.
Wesfarmers is a corporate diversifier and has been one for a long time. As Australia’s eighth largest company by market capitalization with 107,000 employees it provides a useful benchmark.
It’s made up of businesses ranging from home improvement (Bunnings Warehouse) to general merchandise and apparel (Kmart and Target) to office supplies (Officeworks) and many others in between. Successive CEOs have been hands-off adopting a multi-business mindset. This is that each CEO has been careful to avoid getting involved in the detailed operations of each division.
To ensure that this remains the case the company has set up a protocol. It’s called “The Wesfarmers Way.” This lays out how each division has its own board of directors or steering committee and is responsible for its own strategy development and execution. However, each division is tied into the corporate whole by two important mechanisms.
The first of these is overlapping management. The company’s CEO and Chief Financial Officer sit on the respective board or steering committee of each division.
The second is connecting performance measures. The overriding metric for Wesfarmers at the corporate level is return on equity (or shareholders’ funds). Its divisions are driven by a similar and contributing metric – return on invested capital. This ensures that there’s a clear line of sight between division outcomes and corporate results. It also produces unyielding accountability from each division manager with their focused businesses operating within a diversified whole.
Thinking Like a Multi-Business CEO
Greg’s challenge is to shift his single-business mindset to think like the CEO of Wesfarmers. How does this work?
To the single-business owner diversification appears as a frightening corporate challenge. You can see that in Greg’s response – “what do I know about making cheese?” The multi-business CEO’s answer is: “you don’t need to know anything.” Rob Scott, the CEO of Wesfarmers, doesn’t pretend to know the ins and outs of running hardware and clothing stores. He has division managers who do that.
This mindset shift was deftly captured by Jack Welch when he was CEO of another great diversifier, GE . He is regarded by many as one of the U.S.’s most effective CEOs in recent decades. His job he says, “is to put the best people on the biggest opportunities…and [make] the best allocation of dollars,” not to decide how to “produce a good [television] program…[or] build an engine.” Welch understood that was the role of division managers.
Greg’s concern is that he won’t have the detailed knowledge to span the utility-tracking industry and the cheese-making industry. And he probably won’t. But this is single-business thinking. From a multi-business CEO perspective, like that of Rob Scott and Jack Welch, it’s the division managers who work at the cutting edge of each industry. The success of the utility-tracking division is not dependent on the success of the cheese-making division.
Your Post-Covid Future
Covid-19 has taken its toll on Greg and his business working within strict workplace guidelines, lockdowns, and subsequent contract disputes. He’s exhausted.
What Greg needs most is to change his mindset – away from that of a single-business owner to that of a multi-business CEO. Then the question shifts to: Is the diversification opportunity a profitable one and can I find the division manager needed with the required skills to run it?
The trick is to diversify and focus, at the same time.
Author – Graham Kenny