The right diversification moves can be very successful. Yet, so many diversification efforts turn out poorly. So, choosing the right opportunities can make all the difference in the world.
Diversifying into adjacent business areas is generally thought to increase the chances for success. However, adjacencies can be a double edged sword. What looks like an adjacency for the industry in general may or may not be a good fit for every company in that industry.
An industry can encompass a relatively broad range of companies So, when diversifying, it is not good enough to merely acquire other companies in your industry, thinking successful diversification is likely because you are pursuing an adjacency. You need to understand why adjacencies tend to be more successful opportunities. Adjacencies are more successful because they are more likely fit with your company’s strengths. An industry can include a broad range of businesses, and not all businesses in your industry will necessarily be a good fit with your strengths. This is especially important if you plan to integrate an acquired adjacency into your business, rather than merely acquiring it and leaving it alone.
In other words, if an Ill-fitting acquired adjacency turns out poorly, it doesn’t matter that it seemed like a good idea because it was an adjacency. Just because it is in the same broad industry as your company, doesn’t make it a good opportunity. The adjacencies that are good diversification opportunities are the ones that fit well with your strengths.
