The Value of the Right Kind of Diversification

Venturing into new lines of business can easily bring huge losses and may never make a profit. So, it’s important for companies to choose their new venture opportunities wisely.

Generally, this means identifying new areas to pursue that build closely upon what the business already knows how to do well. Disastrous failures can result from pursuing ventures that are too different from what the company understands. These failures often leave companies struggling to recover.

Sometimes, however, companies are able to correct their diversification missteps within a relativity reasonable time frame. A recent example of this was discussed in a Wall Street Journal article that ran in January 2024. The article reported that Goldman Sachs’ most recent performance had been rather strong. Previously, Goldman had been struggling with losses from diversifying beyond its traditional business in investment banking, going into areas more typical of retail consumer banking. The article noted that Goldman’s recent success, however, was not coming from its traditional investment banking business. Wealth management, a newer area for Goldman, spurred the firm’s improved performance.

As I see it, based upon my 25+ years researching business success and failure patterns, Goldman’s situation fits with the patterns. Although wealth management is a newer area for Goldman, wealth management has far more similarities with investment banking than Goldman’s troubled consumer banking ventures did. Thus, wealth management has far greater potential for success since it builds on Goldman’s strengths better than did the firm’s troubled ventures into consumer banking. And, pursuing a newer area that has good success potential enables the firm to better recover from earlier troubled new venture losses.

The lesson: diversification efforts that are more closely related to the company’s traditional business are more likely to be successful, allowing a business to more easily recover from ill suited new ventures.  Evolution, not revolution brings business success.


This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *