Join Anil Gupta for an in-depth discussion in this video Creating new offerings for new customers, part of Designing Growth Strategies.
- Pursuing growth by radical diversification, that is creating or acquiring a business where you offer entirely new products and services to entirely new target customers, can be a high-risk strategy. How large the risks are depends on the extent to which the new business leverages the core capabilities of the company's existing operations. The oil giant Exxon's failed attempt to diversify into the computer business illustrates well the hazards of entering an entirely new business that requires a very different set of core capabilities than the company's existing operations.
The story goes back to the late 1970s, when after the Egypt-Israel War, Exxon faced an environment of very high oil prices and sharp contraction in the demand for oil. Exxon looked around for growth opportunities in new industries that were large in size, likely to keep growing at a double-digit pace, and acquired lots of capital.
It honed in on computing and decided to go head-to-head with IBM, HP, and other players by creating a new division called Exxon Office Systems and acquiring a slew of tech companies for a few billion dollars. The outcome was entirely predictable. Exxon committed almost every mistake imaginable. It bought weak companies, paid too much for the acquisitions, and didn't have a clue about how to integrate and manage them.
Knowing how to manage the oil business well doesn't teach a company much about how to manage the computing business in a way that can compete effectively against incumbents such as IBM and HP. Within a few short years, Exxon had concluded that diversifying into computing was a bad idea, shut down Exxon Office Systems, and wrote off virtually the entire investment.
Contrast the Exxon story with that of Amazon's highly successful diversification into cloud computing services. By the early 2000s, Amazon had solidified its position as the world's largest online retailer. Amazon's success in this business rested on three pillars. A large and supremely efficient IT infrastructure, an equally large and efficient warehousing and distribution system, and a rabidly customer-centric culture.
Jeff Bezos, Amazon's highly entrepreneurial and aggressive CEO decided to leverage the company's IT infrastructure and customer-centric culture to create a new business unit, Amazon Web Services. This unit had nothing to do with retailing. Rather its charter was to provide low-cost, highly scalable, on-demand cloud computing services to software developers as well as corporate clients such as the New York Times.
Over the last ten years, this business has grown to become one of the largest players in cloud computing and competes successfully in head-to-head competition with pure IT companies such as IBM, Microsoft, and Google. As the Amazon Web Services story illustrates, the key to successful radical diversification lies in making sure that the core capabilities you leverage from your existing businesses to the new one will play a dominant role in the new business.
Otherwise, the risk is high that incumbent players in the new arena will be much stronger than you and will drive you out as happened in the case of Exxon Office Systems. Now, look at the core capabilities underlying your current business. As with Amazon's move into cloud computing, might one or more of these core capabilities enable you to enter and win against incumbent players in entirely new markets? If so, then these opportunities deserve further analysis to determine whether or not they should be pursued.
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- The growth imperative
- Identifying opportunities for growth
- Assessing and choosing among the growth options
- Implementing the chosen growth strategy
- Organizing and leading for growth