"They're Crazy for doing this!": How Big Bets create $Trillions

In this week’s edition:

• The 7 Different Diversification Strategies

Picture this: It’s 2007. You’ve been invested in Apple for years.
You genuinely believe they make the best Personal Computers in the World.

Steve Jobs announces Apple’s latest launch: the iPhone.

“Phones ??” You think to yourself. “Why ?? How are they going to pull that one off ?”

There have been hundreds of these moments throughout business history.
Many, even crazier than a computer-maker deciding to make phones.

Samsung was founded as a grocery store. Youtube started as a dating site.

But for every “iPhone Moment” there are thousands of failures.

As investors, we need to understand these pivotal moments.
It can mean the difference between missing out on the next big thing or getting caught in a costly flop.

Yet, Strategic Diversification is surprisingly one of the least discussed topics in the investing world.

In this newsletter, we’ll cover the different types of Diversification, examples of each one and Key considerations for Investors.

1. Horizontal Diversification

   1. What it is: Adding new products or services unrelated to existing ones but targeting the same customer base.

   2. Example: Microsoft acquiring LinkedIn, Amazon acquiring Twitch.

   3. Key Considerations: Do these products complement each other? Can they be marketed and sold together?

2. Vertical Diversification

   1. What it is: Expanding into different stages of the supply chain (backward or forward).

   2. Example: Netflix producing its own content (Backward) or if they were to create their own TVs (Forward).

   3. Key Considerations: Does this integration offer cost savings or better control over quality or the user experience? Are there risks in managing new parts of the supply chain?

3. Concentric Diversification

   1. What it is: Adding new products or services that are related to existing ones in terms of technology or marketing

   2. Example: Apple (computer manufacturer) introducing the iPhone (smartphone).

   3. Key Considerations: Is there enough overlap in technology or customer needs to make this expansion worthwhile? Does the company have the right expertise to succeed in this new market?

4. Conglomerate Diversification

   1. What it is: Expanding into unrelated industries.

   2. Example: Google's parent company Alphabet acquiring companies like Waymo (self-driving cars) and Verily (life sciences). 

   3. Key Considerations: Is there any potential synergy between these businesses? Does the company have the management bandwidth to handle such a diverse portfolio?

5. Geographic Diversification

   1. What it is: Expanding into new geographic markets.

   2. Example: Netflix expanding its streaming services globally, adapting its content library and user interface to different regions and languages.

   3. Key Considerations: Does the company understand the cultural and regulatory nuances of each new market? Can it overcome language barriers and logistical challenges?

6. Product Diversification

   1. What it is: Adding new products to an existing product line.

   2. Example: Samsung introducing new models of its Galaxy smartphones with different features and price points to appeal to various customer segments.

   3. Key Considerations: Will each new product appeal to a unique customer segment? Is there a risk of these products competing with each other (cannibalization)?

7. Market Diversification

   1. What it is:Targeting new customer segments or markets with existing products or services.

   2. Example: A software company initially focused on large enterprises adapting its product for small and medium-sized businesses.

   3. Key Considerations: Does the company understand the specific needs of this new market segment? Will the product need to be adjusted to meet these needs? How will the company effectively reach and engage this new audience?

The Decision of whether or not to Diversify is as Strategic as it comes.
The resources needed to land it successfully can be enormous.

In this era of rapid technological advancement and trends, companies themselves seem to hardly keep up with what to diversify into.

The “Next Breakthrough” has gone from Crypto to Metaverse to now GenAI.

As Warren Buffett wisely noted, knowing when to say "no" is a crucial skill for investors.
 
Remember, not every diversification is a home run. Conversely, missing out on a key Diversification can spell disaster for your company (think Kodak). 

As an investor, understanding the different types of diversification can help you evaluate a company's strategic decisions and determine if they align with your investment thesis.

This knowledge can empower you to make informed choices and potentially, if you’re very very lucky, identify the next pre-iPhone Apple or avoid the next Blockbuster.

The information contained in this newsletter is for general informational purposes only. It should not be construed as financial or investment advice. Please consult a qualified financial advisor before making any investment decisions.