If you had the opportunity to increase competitiveness, maximize profits, and gain greater market power – all while reducing business risk – should you go for it? Of course. Why on earth wouldn’t you.
During my 18 years of experience on Wall Street, I learned many valuable principles that helped make me a better entrepreneur, one of the most critical being diversification. In fact, the watchword investment bankers quickly learn on Wall Street is “diversify.” In layman’s terms, diversify simply means “Don’t put all your eggs in one basket.” In business, it might be translated to “Don’t put all your energy, effort, and resources into a single venture.” As an entrepreneur, you need all the help you can get to minimize risk. And while diversification will not absolutely guarantee against loss, the concept is a powerful strategy that offers many valuable benefits to your business. Some of the goals are listed below:
Increase Competitiveness
Diversification can make your company more competitive. One major way it does this is by decreasing competitor value. By offering multiple products, product lines, or services – in response to your competitor’s single, more-focused product or service offering – you can more easily outperform your competition and improve your company’s market positioning. In the process, you will build relationships with a wider variety of vendors, suppliers, and/or businesspeople, greatly expanding the resources available to you to strengthen your business and help you exert a greater influence in your markets.
Create Value
When diversification strategies are well conceived and carefully implemented, the company’s value increases. This increase in value can result from higher revenues gained through tapping new markets or entering new industries and/or lower costs achieved through shared resources such as equipment, personnel, and core business functions. You may prefer to start by reducing costs – a tactic that involves simplifying your business rather than adding more layers of complexity. Yet, as you progress further in your diversification strategy, you will most likely want to advance to adding new products, product lines, and/or services, entering new industries and expanding your customer markets. By having your finger in more than one entrepreneurial “pie,” you will create opportunities to increase your potential for profit.
Gain Market Power
Operating in a diversity of markets can help you gain greater power in each individual market – particularly if the markets are complementary or directly related to one another. Complementary markets are markets that offer products or services that enhance or lend specific advantages to your other ventures and can help make those ventures more successful. Related markets are markets within the same industry that involve different products or services. Pursuing complementary or related markets can help you create a powerful synergy that makes your business greater than the sum of its parts.
Reduce Risk
Risk-reduction is perhaps the greatest reason for diversification. By diversifying your business ventures, you spread the risk across all your properties, reducing the amount of risk each individual venture must bear. This can help you better handle the volatility and unpredictability of a given industry. If one industry suffers a setback, your other ventures will be unaffected or minimally affected, and the affected venture may more easily ride out the storm.
Protect Your Organization
One major advantage of implementing a diversification strategy is that in addition to protecting a company’s individual ventures, it also helps entrepreneurs minimize overall company risk. Not being dependent on any single revenue source can literally help your business survive. How? By providing a safety net that protects your company from the fluctuations that inevitably occur in any industry.