When moving beyond the status quo and taking the business in new directions, it is ever so important to choose those new directions wisely. Yet, too many companies pursue new lines of business without thoroughly considering whether those new areas are a good match for them. This is crucial because how well a new line fits can make all the difference in the world in the level of success the new line achieves.

Still, it is easy to find examples of companies pursuing new areas that did not perform as well as the company had hoped. And quite often, the less than expected performance most likely could have been prevented if the company had paid more attention to how well the new line of business fit. This situation occurs even for some of the most prestigious organizations.

An example is the investment banking organization Goldman Sachs. According to the March 4-5, 2023 Wall Street Journal article, “No Longer Everyone’s Bank—but It Has to be Someone’s“ by Telis Demos, Goldman Sachs has diversified from its traditional investment banking business, pursuing retail consumer banking areas such as credit cards and mortgages. Regarding consumer banking, “Goldman, with its background in the boom-and-bust businesses of investment banking and trading, never quite fit the mold,” according to the Wall Street Journal article. The article reports that Goldman “struggled to build its credit card business” and that “a long awaited mass market checking account never materialized.” The article said, “The effort racked up billions of dollars in losses—a rarity for a firm used to winning more deals than it loses.”

As I see it, these disappointing results are not surprising. Disappointing results commonly occur when a business goes off into new directions where it doesn’t fit the mold. New business directions are most likely to succeed when the new are a good fit with the existing business and, thus, build on the company’s strengths. Consumer banking is far different from the investment banking business that Goldman had historically been impressively successful at. So, start up efforts like Goldman’s push into consumer banking generally do disappoint and often lead to sizable losses, as was the case for Goldman.

It is also not unusual for companies to pursue ill-fitting, and ultimately disappointing, new areas shortly after their regulatory situation changes. This can occur when recently deregulated companies pursue new areas that they previously were prohibited from entering, are now able to pursue due to regulatory change, but are not able to thrive in due to lack of fit. Likewise, Goldman’s disappointing foray into consumer banking was affected by regulatory change. But, in Goldman’s case, it was not deregulation. Instead, Goldman faced new regulations that it had to meet to get help during the 2008 financial crisis. This required Goldman to be more like a traditional retail bank.

Also like many companies that struggle in new areas, Goldman’s performance markedly improved as a result of the businesses where the company had historically been strong. According to the Wall Street Journal article, “Goldman’s investment banking revenue surged in 2021, vaulting the bank over 20% return on equity for the first time in more than a decade. Even a down year for deal making last year was offset by another big year in the bank’s trading business. The two businesses together produced a combined return on equity over 16% in 2022, versus under 9% in 2019.”

In my view, an important lesson here is that new lines of business that don’t fit well with the company’s strengths will generally struggle and disappoint. This occurs even when the company is as prestigious as Goldman Sachs. Consequently, companies should choose wisely when starting up new lines of business. New lines too far afield from company strengths will likely disappoint, and businesses that are the company’s strengths, or are closely related to them, are the ones that are likely to thrive.

As the Wall Street Journal points out, Goldman is still refining its strategy, trying to identify areas where being like a traditional bank can be successful. And more recently, Goldman will have to deal with any possible banking industry repercussions related to the Silicon Valley Bank, Signature Bank, Credit Suisse crisis, if such repercussions should emerge. Nonetheless, businesses are most successful when the new areas they pursue build on their strengths.