Man Overboard! Why Diversification Cannot Save a Sinking Ship

Chris Heiler | October 14, 2010

In the September 2010 issue of Landscape Management, Editor-In-Chief Nicole Wisniewski asks, "Do you feel like you are drowning in a sea of recession, consumer confidence, low sales and even lower prices and profits?"

Most Green Industry folks I speak with would answer with a resounding "YES".

According to Wisniewski's article, The Five Biggest Ideas of the Year, her answer is to "jump on the diversification lifeboat".

Man Overboard!!!

Diversification may be a popular idea--especially during a recession--but that does not make it a good idea.

The lifeboat analogy is perfect. Diversifying your business may get you off a sinking ship, but not necessarily safely to shore.

Diversification is a short term strategy, not a long term solution.

Here are five reasons why I'm opposed to diversification:

1. Rolling out new products and services is expensive. The article goes on to say, "Reinventing your business may be just the boost you need to rebound from the recession." Well, sure--if you have any money left to reinvent your company.
2. Diversification leads to competition for capital between divisions.
3. Diversification leads to competition for management's attention between divisions.
4. When you diversify and try to appeal to everyone, you appeal to no one.
5. Offering everything to everyone can undermine how you are perceived from a quality standpoint.

As Andy Grove, former Chairman and CEO of Intel, said, "I'd rather have all my eggs in one basket and spend my time worrying about whether that's the right basket, then try to put one egg in every basket."

Did I say I was opposed to diversification? Let me clarify: I'm opposed to the type of diversification Landscape Management suggests as their #5 Biggest Idea of the Year, that is, adding new services such as maintenance, tree care, or landscape lighting, as an example, to your core design/build service.

This addition of related services is called "convergence". I've written about it previously. Convergence rarely works over the long haul, mainly due to the five reasons I stated above.

When is diversification an effective strategy for a business? When your business has an unwavering focus and you diversify "vertically" as opposed to "horizontally" (convergence).

Aquascape has this focus: "Water gardening".

Greg Wittstock, aka The Pond Guy, began his career as a pond builder. He did not grow Aquascape by expanding (horizontally) into landscape design/build, landscape maintenance, irrigation, or Christmas lighting. Greg maintained his focus on water gardening and expanded vertically within this niche.

Aquascape has a network of distributors and certified contractors selling and installing hundreds of water gardening products from water treatments to fish food. They have introduced the popular pondless waterfall, and in 2008, diversified further (vertically) by offering rainwater harvesting systems.

Here's how marketing guru Al Ries describes this type of diversification: "Focus, then stock in depth".

When it comes to "toys", nobody stocks in depth like Toys R Us. The same can be said about Staples and their focus on "office supplies". And how many variations of "gourmet coffee" does Starbucks offer? These are three examples of companies who diversify vertically as opposed to horizontally.

The Five Biggest Ideas of the Year cites Donnie Garritano, President of D&K Landscape in Las Vegas, as an example of successful diversification.

I think that's a bit premature after only two years into it. But, Garritano is on the right track.

Let's look at how D&K Landscape has diversified their business (statistics from Landscape Management): In 2008, revenues were split between landscape construction (70%) and landscape maintenance (30%).

Since, D&K Landscape has added playground equipment sales and playground design/build, operating this division under the name Creative Play.

Their business is now split 33% landscape construction, 33% landscape maintenance, and 33% playground equipment sales and playground design/build.

D&K Landscape has thus far diversified their business by convergence (horizontally).

Now what?

Garritano is quoted as saying, "What I learned is you have to spend resources on the biggest opportunities--not the biggest problems."

That's exactly right. As Al Ries said, "Search for the one thing that is working and then focus the entire company behind that single effort".

If Garritano and D&K Landscape see playground sales and design/build as their biggest opportunity, it will be interesting to see if they put the focus of the entire company behind it. Will they sacrifice their landscape design/build and landscape maintenance divisions to do so?

Al Ries said, "A focus should cover only that aspect of your business that represents the future".

Creative Play could be the future. A future focused on "playgrounds".

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