Diversification Dividend: How to Win in Today’s Market

To Merge or Not to Merge?

At the time of the Priceline merger proposal, Jan was a member of the Executive Board at Kouni. He explains that the leadership decided to dismiss the offer, believing their legacy and expertise could outcompete the new entrants.

Jan recalls the sentiment: “Who are they to talk to us with all our knowledge? They’re a bunch of arrogant new kids, a few hundred employees, loss-making. We can do this ourselves.” Kouni opted to transform independently rather than merge with a newcomer they perceived as lacking legacy experience. The result? A slow decline and eventual dismantling of the company.

Jan recalls that he was traumatized by this experience.

“We did everything. We tried innovation labs, digital transformation, and partnerships. We tried every single playbook strategy. And yet, we still failed.”

No matter what they attempted, the company was doomed to fail due to a combination of internal inertia and external disruption. “Ultimately, leadership and governance failed. No one had the right recipe, and when that happens, you can try every strategy in the book, but it won’t save you,” he explains.

Without the right structures in place to make bold decisions and protect long-term innovation, Kouni was unable to adapt in time.

The harsh reality is that most companies faced with comparable circumstances will suffer the same outcome. Having experienced this corporate failure firsthand, Jan now helps organizations prevent history from repeating itself. His key lesson is that most businesses fail in 10 years unless they intentionally build their next wave of growth. But why is failure so common?

The Harsh Reality: Why Most Companies Fail

Disruption is inevitable. Jan points to the S-curve model that demonstrates how businesses grow, plateau, and then decline unless they create the next wave of growth in time. The time window to jump to a new S-curve is now half what it was 40 years ago (less than 20 years). Yet most companies fail to transition due to denial, slow decision-making, or misaligned incentives.

The Kouni case exemplifies a common corporate misstep of betting on transformation rather than diversification. Transformation efforts often lead to bloated initiatives like consulting reports, culture programs, and incremental digitalization. Jan recalls, “I personally digitized the whole marketing production chain, a horror project. Everyone hated me. I would never do that again.” Kouni spent millions digitizing processes, implementing new tech, and restructuring, yet the market shift outpaced their efforts. These attempts all failed to address the fundamental business model shift. They ultimately lost half their revenue, mirroring the rise in online penetration.

Jan draws from Jim Collins’ How the Mighty Fall to describe the five stages of decline: hubris, denial, grasping for salvation, collapse, and irrelevance. Like many others, Kouni painfully went from denial to desperation before succumbing to market forces. Jan argues that the solution lies in companies mastering the art of “Unicorn Breeding.”

Unicorn Breeding: The Strategy for Sustainable Growth

Rather than trying to overhaul a legacy business, successful companies plant new ventures that can thrive independently. Unicorn breeding is the process of growing billion-dollar businesses within a corporate structure—an antidote to slow-motion failure.

Unicorn breeding follows a structured, organic process that Jan describes using the garden and forest metaphors. The Forest is the established core business, where existing revenue and assets provide stability. The Garden represents adjacent growth opportunities that leverage existing capabilities while exploring new market spaces. The Desert represents areas utterly detached from the company’s strengths, where ventures lack alignment and corporate support.

The process of unicorn breeding is as follows:

1. Planting the Seeds: Organizations must start by planting many potential growth initiatives. This requires strategic foresight, ensuring investments align with future market trends rather than just current performance metrics.
2. Tending to the Garden: Early-stage ventures require nurturing, with minimal interference from corporate governance that can stifle innovation. A protected, separate environment (the garden) allows these projects to grow without being crushed by short-term P&L pressures.
3. Selective Pruning: Not all initiatives will flourish. Companies must ruthlessly cut underperforming ventures and reinvest in those that show promise.
4. Expanding the Forest: When a venture reaches a significant scale, it transitions into the corporate “forest,” meaning it can sustain itself within the broader business. However, this integration must be carefully managed to avoid stifling the venture’s agility.
5. Maintaining the Ecosystem: Sustainable innovation requires ongoing governance, ensuring that new ideas continuously enter the pipeline and that corporate leaders commit to fostering long-term growth rather than chasing short-term wins.
6. Harvesting the Returns: The final step is capturing the value from successful ventures through reintegration, spin-offs, or acquisitions. “If you’ve nurtured the right ventures, protected them from interference, and scaled them effectively, they will generate significant returns. But without a clear strategy for harvesting, even the best ideas can get lost within the corporate machine,” Jan explains.

The key takeaway? Growing successful new businesses within a corporation requires patience, structured autonomy, and strategic discipline.

“You can’t force innovation into a corporate mold and expect it to thrive. It takes patience to nurture, autonomy to experiment, and discipline to scale. Without these, you’re just running experiments with no real future,” Jan explains.

While expanding innovation is essential, companies must also recognize the limits of diversification. Venturing too far beyond their core strengths can be just as dangerous as failing to innovate at all.

Avoiding the Desert: Staying Within Strategic Boundaries

While expanding into adjacencies is essential, Jan warns against moving too far from the core business into the Desert. This is a mistake that often leads to shareholder distrust and financial underperformance. “As a corporate entity, you should not go into the desert,” Jan cautions. “You should go into the adjacencies, where you can benefit from the protection, the assets, and the value that the forest brings to the group.”

Venturing too far into unrelated industries dilutes competitive advantage and can trigger a conglomerate discount, where investors devalue the company due to a perceived lack of focus. “If you diversify into areas that have no synergy effects with your forest, you’re dead. Your shareholders will kill you, meaning they’ll sell your shares. Your valuation will drop, and you’ll trade at a discount,” Jan explains.

Instead of chasing diversification for its own sake, companies should ensure that new ventures are strategically linked to their existing capabilities. Expanding into adjacencies allows innovation to thrive while still benefiting from corporate resources and expertise, avoiding the pitfalls of straying too far into unfamiliar territory.

The Two Paths to Innovation Success

Companies that succeed in diversification follow one of two primary models:

• The Holding Company Model: Companies create independent subsidiaries with separate governance structures instead of integrating innovation into core operations. Example: Swiss retailer Migros created Sparrow Ventures as a standalone entity to incubate new businesses. However, when new management dissolved this autonomy, the entire portfolio collapsed. The lesson here is to protect the garden from the corporate forest.
• The Off-Balance Sheet Fund: This approach removes innovation entirely from corporate P&L, treating new ventures as independent investments. Example: Saudi Arabia’s Public Wealth Fund structures innovation as a capital investment rather than an operational cost. The fund ensures financial insulation and long-term commitment to growth.

Governance is crucial to the success of these models. Success depends on how well innovation efforts are protected from interference, such as leadership changes, shifting corporate priorities, or short-term financial pressures.

While some companies experiment with alternative models such as corporate venture capital, internal incubators, or spin-offs, Jan remains skeptical about their effectiveness. He acknowledges that his recommendations may seem “black and white” but adds, “There’s always some grey.” While certain alternative approaches may work in specific cases, they often fail to deliver scalable, lasting impact.

Corporate venture capital, for example, frequently results in misaligned incentives, where startups seek high-value exits rather than long-term integration with the corporate entity. Similarly, internal incubators often struggle under corporate bureaucracy, preventing them from operating with the speed and agility necessary for success. “Most of these approaches sound great in theory, but they lack the structural protection and long-term commitment needed to truly scale innovation within a corporation,” Jan explains.

Instead, he argues that companies must deliberately separate new ventures from their core business, ensuring they have the space, funding, and strategic independence required to thrive.

Portfolio Thinking & CEO Ownership

Successful diversification requires portfolio thinking. Corporations must begin by placing a broad set of small bets, knowing that the success rate of scaling startups is only 11%. This means that placing many bets is necessary to yield a single unicorn. Richard Branson embodies this approach, having built an empire spanning over 400 companies under the Virgin Group. As he famously put it, “Having many companies is a whole lot better than having just one. If you have one and anything goes wrong, you have no company. If you have 250 companies and something goes wrong, you still have 249 companies.”

However, the real challenge lies in scaling these ventures, often called the “Valley of Death.” Early-stage exploration is relatively cheap, but sustaining investment to ensure long-term viability is where most initiatives falter. “The moment you find something that works, the real battle begins. Too many companies hesitate to double down when it’s time to scale, and that’s where they lose their edge,” Jan says, adding, “If you measure a sapling like a full-grown tree, you’ll cut it down before it ever bears fruit.”

Innovation ownership cannot be handed off to Chief Innovation Officers or delegated to siloed departments. Jan emphasizes, “The CEO must be the chief forester and gardener, carefully balancing the protection of core assets with the nurturing of new ventures. Without executive ownership, these initiatives will never get the resources or patience they need to succeed.”

Waiting Is Not An Option

Kouni’s ultimate downfall wasn’t due to a lack of innovation but because it was too late. Ironically, an internal startup, VFS Global, became a unicorn, valued at over $2 billion. But by the time it scaled, Kouni itself had collapsed.

Jan notes that Netflix provides an example in stark contrast. Rather than transforming its DVD rental business, it diversified into streaming early enough to secure its next S-curve. Similarly, Chinese tech giant Baidu expanded beyond search by leveraging its strengths in AI, autonomous driving, and cloud computing, ensuring its growth remained rooted in its core capabilities.

The takeaway? Successful corporations diversify. They plant many seeds, protect the promising ones, and allow them to grow independently until maturity. Jan shares words of wisdom for any corporate innovator to take heed: “Start growing now because it takes time.”

Waiting is not an option for those leading corporate innovation. Future-proofing your business requires deliberate diversification, structural protection for innovation, and CEO-level commitment. Companies that master this approach will reap the diversification dividend, while those that don’t will fade into history.