Diversification Strategy: Should You Or Shouldn’t You Diversify?

Author: Christian Bamber
Posted: Monday 3rd October, 2011. 10:06:49

In one of the first Outside In articles (How is Corporate Strategy Relevant to the Veterinary Industry?), we mentioned diversification as part of a practice’s strategy. Primarily, diversification offers a means to increase revenue streams, market share and long-term sustainability, as well as spread corporate risk by not relying on one single source of income.

And so, the question I am frequently asked during the course of strategy formulation is whether a practice should consider diversification of its portfolio of activities or not. Many practices still only offer a single core service, that of providing primary veterinary care, so diversification for these involves offering one or more services or products above and beyond this core activity.

In answering the diversification question it is useful to look at the lessons from other industries throughout history and this is precisely what Christian Stadler has done in producing his book, “Enduring Success: What We Can Learn From Outstanding Organisations.”ⁱ

Stadler set out to examine how certain European companies developed over time and to answer three questions:

• How is it possible for some companies to succeed for more than 100 years?
• What distinguishes these companies from others that fall by the wayside?
• What can we learn from the experiences of these long-lived companies?

His insightful analysis looks at trends and correlations within vast amounts of data and puts forward suggestions that answer the above.

One of the key principles that appears to underpin success throughout history is an organisation’s approach to its diversification strategy and this principle provides some well-reasoned grounding when considering the argument to diversify.

To understand diversification options a little more, it is worth classifying an enterprise’s portfolio of businesses according to their “relatedness” to the core capability, and for studying diversification in Europe, four categories suffice: single, dominant, related, and unrelated businesses.^{ii iii}

A single-business company is defined as one where 95 per cent or more of revenue is generated by a single activity or line of business, for example De Beers diamond production and, on a smaller scale, the vast majority of veterinary practices.

A dominant-business company would generate between 70 per cent and 95 per cent of revenue from a single activity business, whereas a related-business company would have less than 70 per cent from a single activity but would have other businesses in related areas. Examples of related-business companies include Shell, Siemens and Nestlé.

Finally, companies in unrelated businesses would generate less than 70 per cent of their revenue from a single activity and would have businesses unrelated to the principal activity.

And here’s the key message: Stadler’s findings showed that related diversified companies were disproportionately represented among the “gold and silver medallist” European companies analysed i.e. the most successful companies managed to continuously diversify into related businesses

In other words, these companies understand that today’s business might not be profitable tomorrow (the Pfizer Performance Index might already be indicating this) and so they prepare by beginning new businesses internally or by forming strategic alliances with others. However, the important point is they also understand that the new businesses must exploit their existing resources and core competencies i.e. the “relatedness.”

What might such relatedness look like in the veterinary context? Well, examples of related diversification could include provision of veterinary-related financial packages or a physiotherapy service, or building a pet crematorium, merging with a diagnostic laboratory, offering equine stud facilities and breeding programmes, and so on. The limits of relatedness are bounded only by your expertise and resources, and by your innovative capability.

The findings also highlight how shifts in the business environment tend to increasingly force more and more businesses into the related diversification category. Occasionally, protected markets will shield alternative diversification strategies but a change in the competitive environment will be less forgiving.

The veterinary profession was perhaps one such protected market once upon a time but it has already begun to experience changes in competition through the Competition Commission’s actions regarding prescribing medicines and the obligation of veterinary wholesalers to supply pharmacies.

Now, here’s the tricky bit to see through: in the short-term, single businesses will often outperform related diversified firms, emphasising the concept of exploiting capabilities. However, in the long-term it is a different story. Unexpected events and the idiosyncrasies of business cycles are more likely to adversely impact single businesses, hence why a number of these single businesses eventually dropped out of the sample of 100 largest European manufacturing companies examined.

At the other extreme, studies have shown that unrelated diversification strategies have poor to moderate productivity at best^iv, in part due to difficulties in reconciling the allocation of resources and not “playing to one’s core competencies”.

However, one possible solution for companies favouring an unrelated diversification strategy is to create a subsidiary and then for the subsidiary to create a joint venture with a company more closely aligned to the subsidiary’s activities. In this way, the unrelated subsidiary is kept at arm’s length and is treated as more of an investment vehicle, whilst the parent company can concentrate resources on its core competencies.

So what is the conclusion here in the context of veterinary practice? Well, the evidence would indicate that ticking along with, or even expanding, a single core veterinary business might be fine in the short-term, if the competitive environment does not change.

However, what is the reality of this? We have already experienced some external changes to the competitive environment (cf. the Competition Commission) and also internal changes (e.g. the growth of the corporate veterinary practice). If we were prudent, we would not be so complacent as to disregard the possibility of future changes.

This can be very tricky to do when times are good and this has always been the challenge of strategists: to convey the need for change when everything seems to be running okay is often met with derision. Even now, many senior decision-makers are probably saying, “well, so long as we can ride through the current economic situation and come out the other side, everything will be fine.” Maybe, maybe not and, frankly, probably not.

The upshot is that Stadler’s study has shown that the right thing to do has been to adopt a diversification strategy and one that continuously diversifies into related areas. By diversifying into related businesses where current capabilities can best be applied, higher performance, sustainability and success over the long-term is much more likely.


ⁱ Stadler, C. (2011). Enduring Success: What We Can Learn From Outstanding Organisations. London: Stanford University Press.

ⁱⁱ Dyas, G. P. & Thanheiser, H. T. (1976). The Emerging European Enterprise, Boulder, CO: Westview.

ⁱⁱⁱ Channon, D. F. (1971). The Strategy and Structure of British Enterprise, Ph.D. diss., Harvard Business School.
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^iv Capon, N. et al. (1988). Corporate Diversity and Economic Performance: The Impact of Market Specialisation, Strategic Management Journal, 9.


Christian Bamber is Principal Consultant and Director of Approach Strategy, a consulting firm specialising in strategy services to service industries and not-for-profit organisations. For more information, please contact Approach Strategy at christian@approachstrategy.co.uk. Tel: 01225 722 654 or visit their website www.approachstrategy.co.uk

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