What’s Best for Your Business: Focusing vs Diversifying

The amount of people thinking about making it big in this crowded technology crazed world is impressive. Many will get out of their bed in the middle of the night and jot down ideas they thought will change the world. Most meditate on the likes of Bill Gates and Steve Jobs and wonder how they could replicate the same level of success. What made Microsoft and Apple successful? Microsoft focused on software and Apple did the same for hardware. Instagram focused on pictures and being social and it worked to the tune of a billion dollars. Is focusing on a niche the secret to creating the next big thing?

Focusing and the hidden cost

When you start any niche business, you are exposing yourself to a limited market. This can be a double edged sword for multiple reasons.

First, you will be dealing with lesser competition which is a good thing to some extent. However, you also have the danger of being restricted to a narrow market that might not stand the test of time. If you do a search on the internet for “stupid ideas that made millions” you will get the picture. Most of those niche businesses focus on a single product and someone did make money but the model is often difficult to sustain. People get bored and will always want something new. If you are too restricted by a narrow niche and cannot keep up the pace with current demands, that will lead to failure. One example of not keeping up the pace is Myspace. Another social media that bit the dust was Digg. At its apogee, Google was throwing $200 million at the Digg but that didn’t work out. It was finally sold for $500,000. The company couldn’t keep up with the times. Digg focus was narrow and when the primary product starts to fail, the brand had nothing else going for it and it ultimately withered.

Secondly, a niche market can be about building on what is already out there. There is no point in reinventing the wheel. Someone once said, “if nobody is doing it, it’s probably not worth doing”. That is to say, if you plan to start something completely different and out of the ordinary, you will likely fail. That is why starting a business that builds on what is available by making it better can be one of the best ways to succeed. Take your queue from the situation with Altavista and Google or MySpace and Facebook. The same niche but a better business model. This approach works because due diligence has been performed by others and the business model is viable. All you have to do is look at the weaknesses of the current players and build on that.

Thirdly, getting started on a focused business can make it easy to get your ideas off the ground quickly. You don’t have too many distractions. You can increase brand awareness and get a loyal customer base. This can lead to people buying your products just because they are familiar with the brand. When Microsoft offers Windows Operating Systems, people just don’t even bother to find out if there are alternatives. These customers will use Bill Gates software but will not trust the same brand with hardware. That is why nobody seems to care for Microsoft’s phone.

At this point, it is important to point out that a niche doesn’t always have to be narrow. Telecoms is a niche market. Mobile apps business is also a niche with a lot of possibilities. Internet marketing is another example which Google seems to have the formula nailed. What are the arguments for diversifying?

Diversifying and losing focus

If you are into stocks trading, you already know how volatile the market can be. That is why traders or anyone who deals in the financial market will advise you to diversify your portfolio. Can that same principle be applied to starting a business?

First, diversifying takes time and most startups do not have the resources to fight on many fronts at the same time. That often means those who are able to do that have deep pockets or are crazy. In order words, if you don’t have money, you cannot really move away from your core product.

Secondly, when you try to take on more than you can swallow, it can bring down your whole empire. Take for example News Corp, a media giant that wanted to play in the internet social media market. It acquired MySpace for a cool $580 million and sold it for $35 million. It didn’t bring down News Corp but you can imagine how that type of diversification could have easily swallowed a smaller company. eBay also tried to go down that road by purchasing Skype in a bid to get buyers to use voice to connect with sellers. It didn’t work out that way and eBay lost about $700 million. These are big numbers that show that trying to spread your income source can go horribly wrong and leave your finances in a mess.

If you plan to link an other income source to your core product, you need to take into account what your user base really wants. If you are diversifying through acquisition, cultural differences and common goals can be difficult to achieve. The key to success is often making sure any new product or service you bring into the core business is streamlined and can be easily dropped if it becomes too hot to handle.

Which is best, Focus or Diversify?

When you are a big brand, innovation is better than diversifying. When you take a look at Google, all they are doing is selling advertisement. The new Google glass is just another way to get people hooked on Google’s ecosystem and bring in advertising dollars. When Youtube came under the Google brand, the ultimate goal was to sell advertisement. This basically shows a common denominator. You must stick to your core business and improve on what you do best. Anything that is added must be designed to help you improve the core.

Focusing is the best for most businesses. Growing your business doesn’t often mean spreading yourself thin. Innovation that supports the core is often better than being jack of all trades and master of none. I would suggest specializing in an area or two to carve out a niche but diversify to meet new technology, marketplace shifts, and to have some multiple sources of income. The niche speciality can help you land some high paying contracts and will paint you as the expert, but putting all your eggs in one basket can be dangerous for a small time tech not just because of the sole source of income, but from the nature of the ever evolving tech business itself.

The jury is still out on this debate and there are pros and cons to both focusing and diversifying. We would love to hear your experiences and view on this topic, especially from techs that have been in the business for several years!