Navigating Uncharted Territory - Innovation Run

Strategic Diversification by Core Competence

Technology alone does not drive transformation. In times of change and uncertainty, business success depends on the strategic alignment of competencies, customer needs, and market opportunities. Diversification - when based on existing strengths - can be a powerful response to crisis-driven volatility and sector-specific disruption.

While some industries face rising energy costs or regulatory pressure, others experience growth. Proactive diversification enables companies to shift strategically and build resilience without abandoning their core business.

Industry-Specific Challenges and the Need to Adapt

Each industry faces distinct pressures. In mechanical engineering, rapid innovation from consumer technology (e.g., AI) must be transferred to industrial settings. In the chemical sector, high energy prices and stringent regulations challenge profitability. Automotive companies must integrate digital features and new powertrains. Construction remains conservative, with low innovation uptake and high material and labor costs.

These dynamics demonstrate that standing still is not an option. Diversification enables organizations to adapt and thrive by applying their existing competencies in new directions.

Diversification and the Business Model

Diversification is not just a product strategy - it is a business model strategy. Combinations of emerging technologies (e.g., GPS, sensors, cloud platforms) enable new value propositions and service models. If companies do not act, others will.

A notable example is Mobike, a pioneer in stationless bike sharing. By combining durable hardware (e.g., chainless drives, solid rubber tires) with smart software (e.g., mobile apps, solar charging, GPS), Mobike created a self-sustaining system without human-operated stations. This business model shift was only possible through cross-domain innovation and illustrates how core technologies can be recombined to transform markets.

The Ansoff Matrix as a Strategic Tool

Diversification can take multiple forms - each with different levels of risk:

1. Market Penetration (Low Risk):
   Offering existing products in existing markets. E.g., Coca-Cola increases market share through branding, pricing, and distribution without changing the core product.
2. Market Development (Moderate Risk):
   Entering new geographic or industry markets with existing products. E.g., Tesla expanded its vehicle sales by building Gigafactories in new regions.
3. Product Development (Moderate Risk):
   Adding new products or technologies to existing markets. E.g., Apple expanded from computers to iPhones, iPads, and wearables using design and software competencies.
4. Diversification (High Risk):
   Introducing new products to new markets. E.g., Amazon evolved from book retailing into cloud services, media, logistics, and smart home solutions.

The goal is not always to pursue high-risk paths. Instead, companies should prioritize strategies based on their core strengths and market knowledge.

Learning from Setbacks: The Lego Example

Lego’s attempted diversification into unrelated toys led to a crisis in the early 2000s. The company recovered by focusing on its core product—the modular building system - and leveraging its community and licensing strategies (e.g., Star Wars, Harry Potter). Lego now successfully integrates physical products with digital experiences while maintaining brand strength and user loyalty.

Strategic Balance Across Innovation Horizons

Diversification must be balanced with core business continuity. Empirical benchmarks suggest a typical innovation portfolio split of:

• 70% on core business innovation (incremental improvements)
• 20% on adjacent markets or technologies
• 10% on radical innovations or entirely new markets

Recent data indicates a shift toward 60/30/10, reflecting the growing importance of adjacent diversification.

Roadmap for Competence-Based Diversification

Effective diversification begins with internal reflection:

1. Assess Core Competencies: Understand technical and organizational strengths.
2. Map External Trends: Identify market shifts, emerging technologies, and evolving customer needs.
3. Define Strategic Matches: Merge competencies with opportunities to develop new offerings or enter new sectors.
4. Evaluate Partnering Potential: Not all diversification must be pursued alone. Strategic alliances can accelerate entry and reduce risk.

Conclusion

Competence-based diversification strengthens resilience and creates options for sustainable growth. Rather than reacting to crises, companies can shape their future by building on what they do best - adapting technologies, business models, and partnerships to new contexts.

Discover methods and tools to identify growth areas based on your company’s core strengths. For tailored diversification support, check out our projects.