Will diversification create or destroy value?
In emerging economies there is also the danger that value is destroyed when partners do not deliver. Institutional voids—the weakness of formal and informal institutions such as courts—make it difficult to fight back. Hence, many firms decide to in-source activities. Take Neo Kingstone Hardware in Kenya; knowing that fuel shortage can make it difficult to keep the trucks on the road, the company set up its own fuel station, thereby reducing the dependency on suppliers.
In principle, this means that companies gain when they engage in related activities. But if one of these activities is small, it can also hold back growth elsewhere. That’s what happened in IBM. Eight years ago the companya small cloud computing business. IBM IT services should have benefited, but the cloud division was too small to service large corporations and governments that make up the core of its customer base.
In the platform era the opportunities to leverage customer relationships will grow even further. Amazon is perhaps the most effective firm in this regard. In the: “When we win a Golden Globe, it helps us sell more shoes.” Customer interactions are key and the prestigious award drives customers to the site, increasing the likelihood they make a purchase.
Whether the same dynamics hold out in the non-tech world is not entirely obvious, though with an eye on fresh ideas they might. Innovation is most likely to emerge when diverse thinking collides, i.e. providing some justification for diversification. To achieve this, traditional silos need to be busted. Microsoft has done this with a focus on growth-mindsets and collaboration replacing its prior focus on competition.
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