Lack of focus in professional service firms like advertising agencies is unfortunately the norm instead of the exception. Diversification is a natural human response to help mitigate uncertainty. The problem is that diversification is not really a business strategy, but rather the avoidance of a business strategy.
A wide body of business literature documents time and again that the most successful companies are those who are willing to make what business strategist Michael Raynor calls “strategic commitments.” In his compelling book “The Strategy Paradox,” Raynor observes:
“Firms that avoid strategic risk survive but do not prosper.”
This is a powerful way to think about the question of positioning. It essentially invites you to ponder the question “Do you want to just survive, or do you want to truly maximize your success?” Survival, while certainly desirable in these tough economic times, is hardly the reason talented professionals come to work every morning.
The nature – and power – of trade offs
To define and implement a strategy is to decide which trade-offs your company will make. You can’t offer every type of service or serve every type of client, so strategy is about deciding in which areas you intend to be excellent.
“Faced with this painful trade-off between the returns to the bold commitment and the risk of making the wrong commitment,” says Raynor, “most organizations forgo the possibility of glory for an existence bereft of greatness.” If your goal is greatness, the price is strategic commitment.
“The best laid plans of mice and men go oft awry,” wrote the poet Robert Burns, in a nod to modern strategy making. A positioning strategy is indeed a risk, but so is nothaving a strategy. In fact, the greater risk – at least financially speaking – appears to be in not taking a stand and not making strategic commitments.
The diversification discount
Economists have actually identified what they call a “diversification discount,” which is a measurement of the inefficiencies that arise by channeling money and energy into too many different activities, divisions and product lines. This is chronicled in studies like The Cost of Diversity: The Diversification Discount and Inefficient Investment and Diversification’s Effect on Firm Value.
In effect, you erode both the short- and long-term value of your firm by spreading your time and resources into too many areas.
Don’t ever forget that as a professional service firm, what you essentially sell is expertise, and expertise is gained and maintained by focusing on the areas in which you and your firm can truly be best in class.