Diversification — moving beyond the core business into new products, markets, or industries — is one of the most contested strategic decisions a company can make. The empirical record is mixed: the academic literature shows that on average, diversification destroys shareholder value. Yet some diversified companies (Berkshire Hathaway, Johnson & Johnson, Samsung) have created enormous value. The difference is not whether to diversify — it's why, into what, and with what discipline.
| Test | What It Asks | Common Failure |
|---|---|---|
| Attractiveness Test | Is the target industry structurally attractive? Does it have acceptable long-term profitability? | Companies enter attractive industries without recognizing that attractiveness disappears once incumbents and new entrants compete hard |
| Cost of Entry Test | Will the cost of entry (acquisition premium, capability build) absorb future profits? | Paying too much for an acquisition captures all the value for the seller — buyer destroys value even if the strategy is right |
| Better-Off Test | Will the new business be better off inside the parent — or will the parent be better off for having it? | This is the most commonly skipped test. Most diversifiers can't honestly answer yes — they rely on vague "synergies" |
| Core Competence Test | Does the company have genuine, transferable capabilities — not just capital — that give it an advantage in the new business? | Leaders confuse "we know how to run businesses generally" with "we have specific capabilities that create advantage here" |
Michael J. Critelli (HBR, May 2005) is chairman and CEO of Pitney Bowes, a $5B company whose core product — the postage meter — is as old as the company itself (1920). Pitney Bowes has always lived with an existential question: in a world increasingly transformed by email and digital communications, is the physical mail business destined to go the way of the buggy whip? Critelli's essay is an honest, first-person account of how the company answered that question through 40 years of diversification — and why returning to core turned out to be the better answer.
Grew largely organically within the mailing space. Core = postage meter. Business built around a single product with genuine competitive advantages: innovation, distribution, relationships with postal services worldwide.
Triggered by a 1959 consent decree (antitrust). Fear of regulated breakup drove 40 years of diversification into: office equipment (copiers, fax), noncore financing leases (cars, airplanes), mortgage servicing, retail supply chain (Monarch Marking), business forms and gifts, international autonomy grants, technology licensing. Six strategies in parallel.
Spinning off the office systems group. Discontinuing noncore lease financing. Acquisitions now only to enhance core mail/document management or adjacent spaces. New operating principle: "provide solutions for companies to manage their mail and documents more effectively."
Critelli explicitly uses Andrew Grove's Only the Paranoid Survive framework: inflection points occur when the balance of forces in an industry shifts — often due to subtle, easy-to-overlook changes — and things suddenly rush toward a new competitive model. The right response to an inflection point is not diversification away from the business — it is paranoid monitoring of the signals and aggressive repositioning within the business.
The Coca-Cola model: Coca-Cola realized its market share vis-à-vis direct competitors (Pepsi) was huge and looked hard-won. But when Coke reframed to "share of total drinks consumption," it suddenly had a tiny share and an enormous growth opportunity. This mental model shift — from competitive share to "share of the stomach" — unlocked a decade of growth strategy.
Pitney Bowes' parallel reframe: Old metric: "How many meters did we place? How many customers do we have?" — a competitive share metric measured against other metering companies.
New metric: "How many pieces of mail are we participating in, and how many pennies do we get per piece?" — a value-chain participation metric.
Result: Pitney Bowes now participates in 30 billion pieces of mail per year at an average of 8.7 cents per piece. Revenue comes from mail before the meter (address verification software), at the meter (postage), and after the meter (digital delivery confirmation). That is the profit zone expansion — Slywotzky's framework applied.
Why this matters: The reframe shifted Pitney Bowes from a defensive posture (protecting the meter monopoly) to an offensive one (expanding participation in the entire mail value chain). This is the Bonchek & Libert mental model shift in action — new measurement model signals new business model.
Critelli's most candid passage: refocusing on core requires becoming "one company in form and spirit" — but this bucks a 35-year trend of autonomous, siloed business units. His predecessor created 4 discrete business lines with group presidents who had great freedom and accountability, which produced: customer-facing silos, deep cultural independence, and a Management Services division that told clients "we're vendor neutral" even when Pitney Bowes solutions were demonstrably better.
Critelli explicitly uses Adrian Slywotzky's concept of "profit zones" — the areas within any value chain where customers are willing to pay a premium. Rather than chasing diversification, Pitney Bowes maps and expands its profit zones within mail:
Elsbeth Johnson (HBR, June 2017; MIT Sloan) identifies three specific ways leaders send confusing signals to their organizations during strategic change — including diversification announcements and refocusing decisions. Her finding: followers need clear signals to make sense of what they are being asked to do. Leaders are far more visible than they realize, and are sending signals constantly — even when they don't intend to. Get the signals wrong and you get the opposite of the strategic change you asked for.
Express desired change as outcome targets, not activity lists. Followers who understand the outcome can find better ways to achieve it than any list of tasks the senior team could specify.
"Mundane behaviors" (Nadler & Tushman, 1990) — not just modeling values but making every operational decision consistently with the new direction.
How you allocate capital, people, and measurement signals what is real. A change without new metrics is a fad. A change without senior talent assigned to it is a hobby.
Johnson's diagnostic: before announcing any activities or projects, leaders must be able to answer these four questions with sufficient clarity. If they can't, any scoping of activities is premature.
Sales and Product Co was attempting to become more customer-centric. Before the change, its C-suite meeting agenda ran: sales → products → regulation → customers → AOB. Customer issues came last, before "any other business" — and consistently got skipped or rushed through by tired executives eager to close the meeting.
The single change: move "customers" to the top of the agenda — before everything else. The result: customer issues got the time, attention, and decision-making quality they deserved. And never again did a manager ask a C-suite exec "What did you discuss at the board meeting?" and hear the answer "We didn't get to the customer stuff."
The signal this sent: Customer centricity was not a strategy stated in a PowerPoint. It was the first thing discussed by the most senior people in the room, every single time they met. That is Signal 2 (Live the change) operationalized through a "mundane behavior" — not a speech, not a values workshop, not a rebranding. A meeting agenda change.
Johnson's insight: These mundane, instrumental, transactional changes are the ones followers read most carefully — precisely because they are not the glamorous work of strategic change.
Suncor Energy (TSX/NYSE: SU) is Canada's largest energy company by market capitalization, with its roots in the oil sands of Fort McMurray, Alberta. Originally Great Canadian Oil Sands Ltd (1967), wholly owned by Sun Oil Company (US), it became Suncor Energy in 1995. Its strategic story is a case study in diversification, followed by a refocusing that echoes Critelli's thesis almost exactly: after building a broad integrated energy portfolio, Suncor has been systematically returning to its core — oil sands production — as the only business where it has genuine, defensible competitive advantage.
The diversification logic (2009): The Petro-Canada merger was defensible as vertical integration (upstream → downstream → retail) — capturing more value from every barrel of oil produced. This is related diversification, not conglomerate diversification. The logic: owning the retail pump insulates Suncor from oil price volatility (downstream margins improve when crude prices fall).
The refocusing logic (2017–present): Suncor's genuine competitive advantage is in oil sands extraction — it has 50+ years of operating experience, proprietary upgrading technology, the lowest cost position among oil sands producers, and massive scale. In conventional, offshore, and international E&P, it has no such advantage — it is one of many players.
The Critelli parallel: Like Pitney Bowes, Suncor diversified partly out of anxiety (oil price volatility → integration as hedge) rather than genuine competitive advantage in the new businesses. The refocusing is the recognition that oil sands operational excellence — consistently deepened — creates more durable value than portfolio breadth.
The reframing question: Old: "How many barrels do we produce?" New: "What is our free cash flow per barrel from oil sands?" The metric shift signals the strategic refocus — Critelli's pieces-of-mail insight applied to energy.
Signal 1 (Tell — outcomes not tasks): Kruger's language has been outcome-specific: free cash flow per share, total shareholder return, cost per barrel of oil sands production. Not: "we will sell some assets." But: "we will return $X billion to shareholders over 3 years and reduce our cost per barrel to $Y." Outcome-level targets, not activity lists.
Signal 2 (Live — mundane behaviors): Kruger's "owner mentality" framing is itself a behavioral norm signal — "I'm going to run this company like I'm the owner" tells every business unit leader what decision criterion to apply. He has been visibly present in operational reviews (not just capital allocation meetings), signaling that operational discipline is the priority. Early decision: immediate asset divestiture announcements within his first months — calendar commitment demonstrated by speed.
Signal 3 (Resource — money and metrics): The capital allocation shift is the most powerful signal. Suncor's capital budget has been redirected from new greenfield projects and international acquisitions toward: (1) oil sands maintenance and efficiency, (2) share buybacks, (3) debt reduction. The budget is the strategy — and it says "oil sands core, everything else secondary."
| Test | Petro-Canada Merger (2009) | Renewable Energy Investments |
|---|---|---|
| Attractiveness | Downstream/retail structurally lower-margin than oil sands; volatile but predictable | Renewables attractive long-term; but Suncor entering a rapidly evolving market |
| Cost of Entry | ~$21B premium in 2009 — large but arguably justifiable given strategic fit | Capital cost manageable; opportunity cost was oil sands investment foregone |
| Better-Off Test | Marginal — retail/refining was not better off inside Suncor vs. independently (thin synergies) | Suncor had no advantage in renewables vs. specialized renewable developers — failed this test clearly |
| Core Competence | Oil sands expertise doesn't transfer to retail fuel retail; operational models are completely different | Suncor has no genuine renewable energy competence — capital only, not capability |
Rogers Communications (TSX: RCI.B) is Canada's largest wireless and cable company — but also the owner of Sportsnet, the Toronto Blue Jays, Rogers Centre, and dozens of media properties. Founded by Ted Rogers as a cable television company in 1960, Rogers built wireless dominance in the 1990s, then diversified aggressively into media (sports rights, broadcast, radio, magazines) in the 2000s. The strategic question Rogers presents: is its media portfolio genuine synergy with a connectivity core — or expensive over-diversification that distracts from the infrastructure business?
The stated logic: Owning premium content (NHL, Blue Jays) drives subscribers to Rogers' wireless and internet services. A customer who watches Sportsnet on Rogers Wireless is "stickier" than one without a content relationship. Vertical integration from content → distribution is the AT&T/Time Warner model.
Attractiveness Test: Marginal. Sports broadcasting is attractive (high NPS, passionate fans) but extremely capital-intensive. The NHL deal ($5.2B over 12 years) has been financially painful — Rogers has had to sublicense rights to CBC and TVA Sports to manage costs.
Better-Off Test: Questionable. Is Sportsnet better off inside Rogers vs. being independently owned? The answer hinges on whether there are genuine distribution synergies — and the evidence is mixed. The Blue Jays and Rogers Centre are even more disconnected from telecom core competence.
Core Competence Test: Fails for sports. Rogers' genuine advantage is network engineering, spectrum management, and distribution infrastructure. Running a major league baseball team and a national sports broadcaster requires completely different capabilities. There is no genuine capability transfer — Rogers can bundle Sportsnet, but it cannot operate Sportsnet better than a standalone broadcaster could.
The Critelli verdict applied: Rogers' connectivity consolidation (SHAW acquisition) passes all four tests — it deepens the core. Rogers' media/sports diversification fails the better-off and core-competence tests — it is the Pitney Bowes noncore lease financing equivalent: a plausible-sounding strategic rationale that survives board approval but doesn't create genuine competitive advantage.
Signal 1 (Tell — outcomes not tasks): Rogers' stated SHAW rationale emphasized outcome targets: national broadband coverage (rural Canada access), network investment commitments, and synergies ($1B+ in cost efficiencies. But the public narrative focused on regulatory approval process activities rather than outcome clarity for employees — a Signal 1 failure at the organizational level.
Signal 2 (Live — the governance disaster): The October 2021 board battle is Johnson's Signal 2 inverted. Edward Rogers' public attempt to remove the CEO while the company was managing the largest acquisition in Canadian telecom history sent an unmistakable signal: leadership was in conflict, the strategy was contested at the top, and employees should be uncertain. A textbook "after the meeting, debate begins" dysfunctional routine — except it was the board doing it publicly.
Signal 3 (Resource — the Freedom Mobile divestiture): The CRTC's condition (sell Freedom Mobile to Videotron) forced Rogers to resource the deal differently than planned — losing a wireless asset that was part of the strategic logic. How Rogers explained this trade-off to employees and investors (we gave up X to get Y) is a Signal 3 test: does the capital and resource reallocation tell a coherent story, or does it suggest the strategy was improvised?
| Business | Diversification Type | Critelli Verdict | Strategic Direction |
|---|---|---|---|
| Wireless | Core | Genuine advantage — scale, spectrum, brand | Invest and defend |
| Cable/Internet (incl. SHAW) | Related — horizontal expansion | Passes all four tests; deepens core | Integrate and grow |
| Sportsnet + NHL rights | Related (content-connectivity thesis) | Marginal — questionable better-off and core-competence tests | Rationalize; sublicense aggressively |
| Blue Jays + Rogers Centre | Unrelated to telecom core | Fails core-competence test; trophy asset more than strategic asset | Consider monetization options |
| Citytv, Radio | Unrelated to connectivity core | Marginal; content production doesn't enhance network advantage | Ongoing divestiture of non-core media |
Bad strategy masquerades as diversification: Rumelt's "bad strategy" — fluffy goals with no diagnosis — often takes the form of diversification announcements that lack his three-part kernel (diagnosis, guiding policy, coherent actions). "We will expand into adjacent markets" is bad strategy. "Our core is structurally declining; our guiding policy is to deepen the profit zones in the remaining value chain; our coherent actions are presort, fulfillment, and eBay partnership" is good strategy. Critelli's essay is a Rumelt-quality strategic argument.
Diversification as wrong quest: Anand & Barsoux's "Grass Is Always Greener" transformation trap (Routine 3 from Session 4) is the dysfunctional pattern that drives over-diversification. Companies facing core business challenges pursue adjacent markets — new geographies, new products, new services — to avoid confronting the hard work of fixing the core. Critelli diagnoses Pitney Bowes' 40-year diversification as exactly this pattern, triggered by regulatory anxiety rather than strategic logic.
Reframing IS a mental model shift: Critelli's "pieces of mail × pennies per piece" reframe is Bonchek & Libert's mental model → measurement model shift in action. Changing how you measure (from meters to pieces) changes how you think (from metering monopoly to value-chain participant), which changes what you do (profit zone expansion rather than diversification). The measurement model is the mental model made concrete.
ARM operationalizes Johnson's signals: Brad Power's ARM framework (Session 4) is the behavioral mechanism that makes Johnson's Signal 3 real. Changing what you measure (Signal 3) is the Reward lever — aligning performance evaluation with the new strategic direction. Changing what leaders spend time on (Signal 2) is the Model lever. Removing structural barriers (Signal 1 / outcomes clarity) is the Allow lever. The two frameworks are complementary: Johnson provides the leadership communication architecture; ARM provides the organizational behavior mechanism.
Diversification and M&A are the same decision: Most diversification happens through acquisitions. Session 6's acquisition and restructuring framework (Fast Forward Ch. 6, GE integration playbook) directly addresses the "pulling together" challenge Critelli describes. The better-off test and the integration plan are two sides of the same strategic judgment. And the Johnson signaling framework applies directly to post-merger communications.
Diversification as the strategic choice under examination: For your final exam company, run the full Session 5 diagnostic: What is the company's current diversification? Does it pass the four tests? What is the right profit zone expansion strategy vs. the wrong diversification? And how would you communicate the strategic direction using Johnson's three signals and four questions? This diagnostic applies to virtually any organization facing strategic change.
Apply Critelli (Back Where We Belong), Johnson (communications), and the four diversification tests. The session is about when to expand scope and when to refocus — both companies face that question from different positions.
"I'm very impressed. I hope that you are as well."