Diversifying with Bytes and Atoms

Dangote plans to invest billions of dollars outside Africa to have a geographical diversification.  When you have most of your assets in one region, you open up yourself to risks. Sure, Dangote knows that Africa is not blowing apart, but he does not want to take the risk. Besides, when he does that diversification, most investing models will remove geographical risk as they evaluate his stocks. The end game is possible positive movement of the stocks.

The Dangote Group plans to invest up to $50 billion in U.S. and Europe in coming years, according to Bloomberg.

Africa’s richest man, Aliko Dangote, plans to invest $20 billion to $50 billion in the U.S. and Europe by 2025, in industries including renewable energy and petrochemicals. The 60-year-old Nigerian cement tycoon aims to move into these territories for the first time in 2020 after completing almost $5 billion of agricultural projects and an $11 billion oil refinery in his home country, he said in an interview with Bloomberg Markets Magazine this month.

But diversification goes beyond geography.  Most times, firms build multi-product lines with defenses that deliver assured survival. If Samsung does not have a semiconductor unit, it might have collapsed under the weight of its mobile devices catching fire. But with the semiconductor business, it overcame that problem and returned with record profits.

The same can be said of IBM which saw its hardware business shrank within years. But with its services and consulting, IBM had the opportunity to remain as a business while it worked on fixing anything that was broken. The company continues to find that path, and new businesses anchored on its Watson AI solution will play a major role.

One company that went through the wilderness, lost focus and was internationally beaten down was Sony, the Japanese electronics giant. The camera business was decimated when the world moved from thin film to digital photography, reducing margins. The smartphone unit was an also-ran in the age of iPhone and Samsung Galaxy.  But Sony relied on other products and businesses to remain relevant while it turned itself around.  The revival seems near: products like high-end TV, image sensors, Spiderman, and PlayStation are doing well in markets. The market has responded, pushing the shares to its highest in nine years. From Fortune Newsletter:

As Reuters explains, Sony predicts its profits will mark a peak for the first time since 1998, when its PlayStation first appeared and when its film unit struck gold with Men in Black. Like much of corporate Japan generally, Sony, its home country’s global champion, went into a multi-year tailspin. Sony’s problems were many: brutal competition for its once-dominant television group; being bested by Apple’s iPod, a humiliation for the Walkman pioneer; high-cost manufacturing in Japan; a failure to seize the music-streaming initiative despite years of trying

Sony did many things to get to this level: it restructured the business and redesigned its operations. It also fired many workers in Japan which is not always common. Above all, it refocused by killing many multiple product lines. Today, the revival is evident: “Sony reported a blow-out quarter and said it was on track to post its highest-ever annual operating profit. Its share price has more than doubled in the past three years.”

But most times, you do not even need to be in trouble to redesign a business. Even Samsung Electronics thinks it needs new ideas. It wants a diversified insight into the future of competition.

… the resignation l…of Kwon Oh-hyun, the influential CEO of the semiconductor business of Samsung Electronics. Kwon is 64 and did a couple of unusual things on his way out the door. He stepped down unexpectedly, and he also fired a public warning shot across his own company’s bow, saying the company “needs a new leader more than ever,” given the imprisonment of third-generation scion Jay Y. Lee. Kwon also said: “We are hard-pressed to find new growth areas right now from reading the future trends.” This a shocking admission that even as Samsung racks up impressive profits based on its past innovations, one of its top leaders doesn’t think the company is well positioned for the future.

Offline Diversification

I will be leading a Board strategy session for a client next week. My job is to shape the company’s strategy. In the brief I prepared last week, every Board member called me back: they were interested that I asked them to diversify by going offline in some synergistic ways to the online business. The digital business, from the performance numbers, has been on stasis. I did note that it would be a fatal mistake to give up on the digital-first strategy of the company. While digital-first strategy is sound, digital-only strategy in Africa is really an illusion unless you run a blog or facilitate payments online. To unlock growth, in monetary terms, not just clicks and user base, on time, we need to think beyond digital.

Sure, we will deepen our capabilities in the web, but we will find new markets offline to make money as that is where the money is at the moment in Africa. Digital is for the future, but today, the money is offline. We need that diversification. But we will not leave the web properties. Investment will be smarter but synergies with meatspace must be clearly established. I want atoms to fuse with bytes to provide possible revenue growth.

Also, I am a big believer that meatspace will continue to drive businesses in Africa. For all the talks of leapfrogging, the percentage activity online will be less than 10% of all trade even by 2030. Take a boat to Orom (Akwa Ibom) and explain to me how internet will help you buy crayfish better with no physical access to the market. The infrastructure challenges will keep commerce offline, for long. But yes, the digital ecosystem will grow, nevertheless. The Western world with infrastructure will make a faster digital redesign because infrastructures exist to close the physical elements of trade when they are finalized digitally.

Besides, if the structure of the web is redesigned with technologies like blockchain, most frictions on commerce will disappear. I do believe that most things online will become free in near future and if that happens, making money online will become harder, unless you are running a big platform with advertisers. The British company Circle, a remittance firm, facilitates remittance between U.S. and UK at zero cost. It uses blockchain and Goldman Sacks has invested in it. If that scales, simply, remittance will become free. This same trajectory will apply in other areas.

All Together

As the story of Sony shows, diversification is strategic. While geographical diversification has been moving to other countries and continents, today, it could be as simple as having web and offline businesses. The web is a continent of itself and it is important to understand that. A company that is digital-first could diversify by investing in complementary meatspace business that offers synergy online. For example, an ecommerce firm can invest in a logistics firm as part of business diversification. Your diversification needs the atoms and bytes to be balanced in this age.

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