Pour fuel on the biggest fire first

In the whirlwind of scaling a business, should companies diversify or double down on their core strengths? While diversification has its merits, choosing the right moment and method during your company's hyper-growth stage is crucial.

In the hyper-growth phase, undivided focus on your core business is paramount. This is the time to amplify what works - pouring fuel on the fire, so to speak. It's all about reinforcing product-market fit and driving growth. Diversifying too early can be more of a distraction than a benefit. For instance, at Wayfair, launching Design Services, a service-based model in contrast to the core product-centric model, required a vastly different approach and resources. This kind of context shift can dilute focus, which is vital for a company in fast-scaling mode.

Resource allocation in a high-growth company must be strategically prioritized. Resources are finite and should be directed towards initiatives with the highest return on investment (ROI). For example, at the time Wayfair was a $5 billion company, growing in double digits. A smaller venture like Design Services, with its minimal projected ROI, wouldn't warrant the diversion of valuable resources that could otherwise fuel the main growth engine.

The creation of new units during rapid growth can strain resources. These units, needing support from various departments, often find themselves low on the priority list, especially if their contribution to the overall company performance is minimal. This was evident with Wayfair's Design Services, where the allocation of cross-functional resources significantly slowed its progress, underlining the importance of strategic prioritization.

Diversifying into non-core sectors becomes more viable as the company's rapid growth phase stabilizes. It is at this time that other ventures make sense as the company seeks new avenues for growth. Furthermore, business units that enhance the core business can now be of tremendous value, as the scale of the business is such that the new business unit should return a relatively high ROI. This was our experience with Design Services during Wayfair's growth from $5 billion to $18 billion. A minor unit, contributing a fraction of total revenue, often struggles with resource allocation and growth until the primary business's growth steadies. Instead of launching the business unit when the Company was $5 billion and fast-scaling, launcing at $18 billion with slower growth would mean that the business unit would have a greater impact, and thus a greater chance to survive.

None of the above is against diversification. Instead of questioning if the company should diversify, the bigger question is how. When diversification is necessary, forming partnerships or investing in relevant ventures can be more strategic than internal development. In the case of Wayfair's Design Services, a partnership with emerging design service startups could have offered a more efficient entry into the market, serving customers and providing valuable industry insights without straining internal resources.

In the dynamic landscape of high-velocity business growth, strategic focus and precise timing are key. Companies must weigh the allure of diversification against the imperative of fortifying their core during rapid expansion phases. As seen in Wayfair's journey, understanding when to diversify, how to allocate resources wisely, and exploring external partnerships can make a significant difference in sustaining and maximizing growth.