One of the most common mistakes I see in successful businesses is diversification so far away from core competencies that the business then loses its competitive advantage.
A common example is when a small business wants to buy their own building. Any business should be aiming for a return on their business investment of at least 20 percent. Once you buy your building, you have just become a landlord, and landlords are happy with 8 percent. Why settle for such a drop in income? You can also inhibit growth and flexibility.
I know one professional firm that started with two partners, and they bought their own building. As they took on more partners and staff, they outgrew the building. They needed to move to a larger building, but the two original partners wanted to stay in the building since they were good tenants for themselves. Now the lines were blurred between business expansion and keeping a good tenant. In the end, the original partners extended (and overdeveloped) the original building, which was not perfect for either party.
There is another very old business tale that demonstrates the point. There used to be a company called Pail Worth that made the best timber pails in all the land. People travelled from afar to inspect and purchase these pails.
Then (dark, dramatic music please) some idiot started making plastic buckets that were cheap and reliable. These buckets were more reliable and cheaper than the pails from Pail Worth. Pail Worth tried to combat plastic buckets by making stronger and lighter wooden pails and cutting prices. In the process of trying to mass-produce pails at cheaper prices, they eventually paled into insignificance. Pail Worth lost focus on what they were. They thought they were a manufacturer of water carrying devices. They weren’t. They were timber craftsmen. They happened to build wooden pails as a result of being timber craftsmen, but buckets were not their core focus. They needed to realise that the market no longer needed wooden pails, but they still needed quality timber products. They needed to stick to their knitting.