From data to diversification

Apple’s recent decision to launch a new credit card and streaming service has been interpreted as an attempt to strengthen its services business in the face of falling global iPhone sales.

But is the firm’s decision to diversify destined to succeed and should other businesses pursuing growth in maturing or shifting markets follow its example?

Apple is not new to diversification. The company has a track record of diversifying to improve its performance and drive shareholder value. Once a computer hardware manufacturer, Apple Computer became Apple Inc in 2007, marking its focus on consumer electronics. More recently the company has been seeking to re-educate shareholders that instead of tracking global iPhone sales, they should be focusing on the projected growth figures for its services business – as this is where it believes the real growth opportunity lies.

Even with a strong list of partners, the company’s decision to become a content curator is not without risk. It will take time and money to develop a catalogue of high-quality news programmes, drama series, documentaries and films that will appeal to its global customer base.

In the meantime, established players such as Netflix and Amazon Prime Video are competing for consumers’ eyeballs and already offering user-friendly, competitively-priced services. However, with record revenue generated by Apple’s services business in Q2 2019, it is clear that the potential rewards are considerable.

The key to de-risking any move to diversify lies in good quality data and knowing how to use it. In Apple’s case, the business has a ready-made market for its credit card and streaming service and through a process of consumer market testing by profile, content type, territory and device, it can predict demand for its diversified offering with some degree of certainty. This data can be used to plot a roll-out plan that is geared to optimising returns while mitigating financial risk and protecting enterprise value.

Not all businesses opt to diversify for the same reason. Some are seeking growth in a market that is maturing rapidly or where regulations or other restrictions are limiting the company’s growth potential. Others want to de-risk their business model by investing in a variety of products or services, rather than just one. Whatever the motivation, a structured, data-driven process will improve their chances of success.

Research by Harvard Business School indicates that 95% of all new consumer products fail to achieve their commercial objectives. Many are dropped before reaching the market and others shortly after market entry. The later the decision to draw a line under the new product development (NPD) process, the more collateral damage is likely to have been done to the company’s financial performance and enterprise value. With the odds stacked against them, what can businesses do to de-risk their plans to diversify?

Move to an ‘adjacent square’

Rather than taking a leap into the unknown, the decision to diversify should be a calculated step into an ‘adjacent square’ where the business can leverage its existing expertise or tap into a known market. Achieving the right balance of proximity and stretch will enable the business to leverage its scope and scale to the fullest extent, while driving performance and controlling risks. For example, Amazon’s decision to launch its own fashion lines, instead of simply providing a platform for third-party sellers, was an example of vertical integration – a step designed to seize more margin and increase control. Alternatively, a horizontal step could take a business into an unknown market where it could apply some existing expertise or know-how.

Test the market

To mitigate risk when pursuing diversification, the business must be certain about whether there is market demand for any new product or service development. Just because a competitor is making strong profits from a specific activity doesn’t automatically mean that launching a rival product or service would achieve the same success. A detailed and analytical approach to market testing is required to ensure there is market demand to support the business case for diversification.

Get data-ready to diversify

Before deciding to diversify, a business should make sure it fully understands where value lies in its existing business model and where it will come from in the future. Such insights are critical when deciding how to leverage the scope and scale of the business. When preparing a business case for diversification, it is important to have a clear understanding of what success and failure might look like in terms of financial data at key points in the roll-out plan. Before making any move, it may be necessary to take a step back and ensure the business is data-ready to diversify, with access to reliable centralised data.

Roy Williams, co-founder and managing partner at management consultancy, Vendigital.