Focus or diversification?

Okay, I convinced you that those who do not diversify can get into a difficult situation, because a single product company ends up dying sooner or later. I also explained strategies for portfolio diversification and showed how to manage a product portfolio.

On the other hand, there are several examples of companies that have opted for focus. A very interesting story of focus strategy is 37signals. They were a website development company. To help them follow their website development projects, they developed software that allowed for greater visibility into project progress for everyone involved, including the client.

Customers enjoyed interacting with this software and asked 37signals to use this software on other projects at their companies. At that time, 37signals decided to turn this software into a product, and they named it Basecamp. After some time, they stopped developing on-demand software projects and focused all their attention on the Basecamp product.

Later, following the portfolio diversification strategy I described in the previous articles, they launched more products: Highrise, a contact management system; Backpack, internal communication system; and Campfire, the corporate chat system.

In early 2014, 37signals decided to adopt a new strategy. They decided that from that time on they would focus 100% on Basecamp. The other products would no longer accept new customers. And the “icing on the cake” of this strategy was the change of company name, which would no longer be called 37signals to become Basecamp. These changes turned out to be the subject of a Harvard Business Review article titled “Basecamp’s Strategy Offers a Useful Reminder: Less Is More” 2014 Basecamp Strategy offers a useful reminder: less is more – in which the author says:

“It’s a natural tendency for humans to want to do more. Most of us have difficulty moving away from tempting opportunities, whether at the dinner table or at work. That’s why we end up with indigestion at home, or overworked at work. That’s why it takes a lot of discipline, and even courage, to lose weight both physically and strategically.” – Ron Ashkenas

Focus is not such a rare strategy. Some other examples from the software world:

  • Facebook: Despite having a people profile, group page and company page, as well as an ad system (which could be considered as products), these systems are nonetheless different views of a single product. Yes, they have diversified their product portfolio, but always through acquisitions like Instagram and WhatsApp. These acquisitions continue to function as independent companies, each one is also 100% focused on their respective products.
  • Twitter: Another company that is a sizable company that remains 100% focused on its single product. It also focuses on a second group of customers, the advertisers, but always focusing on their one product.
  • LinkedIn: Another company that is of considerable size and still 100% focused on its unique product. They have also focused on a second group of customers, the advertisers, but always focusing on their unique product.
  • Spotify: Example of a company 100% focused on its only product, music streaming.
  • MailChimp: Email marketing software company. This company usually makes acquisitions, but all of their acquisitions are within the same theme, email marketing and email sending.
  • DigitalOcean: VPS (Virtual Private Servers) company which is also a good example of a company 100% focused on its single product.
  • Airbnb: intermediation company between people who want to rent real estate or rooms for short periods, and people who are looking for accommodation. It is a platform 100% focused on your only product.

On the other hand, we already talked about Google with its 177 products and its more than 70 discontinued products. This vast portfolio eventually led them to revise their brand strategy, and to create a “parent company” called Alphabet, of which Google would be just one company, and several companies of Google’s other products would become independent. This is a strategy of increasing focus, but nonetheless, Google remains a multi-product company (Search, Adwords, Gmail, Google Apps, App Engine, Youtube, Android, etc.).

Another extreme example of portfolio diversification is 3M, which has over 55,000 products in its portfolio. That’s right, you read that right, over 55,000 products in its portfolio. Just imagine 3M’s BCG matrix. 😛

So what is the best strategy?

With the examples given, the question remains: what is the best strategy, diversification or focus?

As I was preparing a presentation on this topic, I was struck by the spelling of the two words. Focus is a very short 5 letters word, while diversification has 15 letters. I found it curious that the complexity of the spelling of words is all about their meaning, at least in this case.

To understand which strategy is best, we must first understand the negative aspects of each strategy.

Focus

When a company is focused on a single product, it loses the opportunity to solve its customers’ other problems, which can be bad for two reasons. The first (and quite obvious) is the fact that you miss an opportunity to earn new revenue. The second (not so obvious) reason is the risk of losing the customer, because when she looks for who can solve this other problem, she may find someone who not only solves this other problem, but also the initial problem that your product already solves, and this customer may decide to move all her needs to this new supplier.

Also, as we saw in the article Are you thinking about your new product? No? So you are already late, a single product company may eventually die, either because its product has not crossed the chasm or because the product has reached maturity.

Diversification

On the other hand, diversification also has its disadvantages. The first is that more investment is required to take care of more than one product. You will need a development team for each of your products, and this can be costly.

Another disadvantage is the waste inherent in the structure of different groups working on similar things. For example, at Locaweb we have several products designed to allow customers to send emails; the email product itself, website hosting, reseller hosting, email marketing and SMTP. Because there are different teams that take care of each of these products, their architecture does not necessarily leverage the learning and infrastructure of each other.

How to choose?

To be able to choose between these two strategies, one has to look at both internal and external factors.

The internal factor to be looked at and understood is the company culture. If your company has a culture that values ​​entrepreneurship highly, it is very likely that diversification is most appropriate. On the other hand, if the company’s culture values ​​excellence very much, it is most appropriate to adopt a single product focus strategy. In Locaweb’s case, we have always had a very strong entrepreneurial spirit from the founders. While excellence is important to Locaweb, entrepreneurship is more. On the other hand, Conta Azul culture was always focused on excellence, which is clear in the focus on one product.

However, looking at the internal factors alone is not enough. You also need to look and understand the factors external to your company, i.e., the market. If you are in a small, low growth, or very competitive market, diversification is most appropriate. If you are in a poorly served market, focus is the best option.

In Locaweb’s case, we face competition across all our product lines. Recently, we have started to have international competition operating in Brazil in all our main lines of business. Therefore, diversification is the most appropriate strategy for us. On Conta Azul’s case, even though there’s competition, there’s a lot of room to grow. We have more 14.5MM micro and small enterprises in Brazil, enough market for more than one competitor. And Brazil’s bureaucracy creates an entry barrier against international competitors.

So a single product company will…

As I explained at the end of the article Are you thinking about your new product? No? So you are already late, a single product company will eventually die, because either its product will not cross the chasm or, if it does, it will eventually reach the end of its life.

However, as we have seen, there are several companies that choose to focus on single product rather than portfolio diversification. Does this mean that these companies are bound to die? Yes, but the fact that they know this makes them think better about the future, and what happens is that they not only prepare for the end of life, but also plan the end of life and new versions of their product that will come next.

That’s what I explained in the article Lifecycle of a software product, where I told how the TV market matured some 30 years after the TV was invented and that its manufacturers are always inventing it all the time. Something new to make us buy a new TV: first they were in black and white until they hit SmartTV. All of this so that they could continue to earn new revenue from their customers after the end of the previous product’s life.

Therefore, both focus and diversification are valid strategies. The important thing is to understand the pros and cons of each one well, and to understand in which context each one is most appropriate.

Feature lifecycle

If you decide to focus on one product, or even with a diversification strategy when you end up with one or more products that are big, with many features you think about applying the 4 phases lifecycle not only to a whole product, but also to its major features.

To give you an example, let’s imagine our whole product being Linkedin. Let’s say that we decide to develop a new feature for Linkedin, for instance, the article publishing feature I use to publish my articles on Linkedin. During the feature innovation phase, we’ll have to find the product-market fit. In this case it will be feature-market fit, and the market is the entire user base of Linkedin.

If we are able to find the feature-market fit, then it’s time to grow the feature usage, i.e., implement additional features to the publishing feature we’ve just launched so it can be a complete feature to be used by the maximum number of users possible.

After the growth of the publishing feature adoption in Linkedin user base, comes the feature maturity. In this stage, the publishing feature is complete in terms of its possibilities and since it’s used by the majority of the user base, its growth slows down.

Then, after growth comes the end of life stage for the publishing feature. It can happen if Linkedin as a whole enters this phase, or if the feature is replaced or discontinued for any reason.
Next time you decide to develop and launch a major feature for your product, you can apply the product lifecycle view to help you manage the lifecycle of this new major feature.

Concluding

In this article, we saw that not only from portfolio diversification lives a software product company. It is possible to survive by maintaining 100% focus on a single product. Incidentally, several companies have chosen this path successfully.

At Locaweb, we opted for the diversification strategy, both due to internal motivators and entrepreneurial culture, as well as external motivators, such as the constant increase of competition in all our business lines.

Often, I used to receive inquiries from employees, customers, and partners about our product portfolio of over 25 products. They ask us if this really is the right strategy for us. We believe we have adopted the most appropriate strategy, not only for the reasons already explained (entrepreneurial culture + competitive market), but mainly because of the growth numbers. If Locaweb had not diversified its product portfolio and had focused only on website hosting, today Locaweb would only have 38% of its current size.

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