Posts tagged with: diversify

6 Reasons Not To Diversify

Diversification is a sound financial planning strategy, but does it work for company building?

There are good reasons to diversify to achieve your objectives. There are also really good reasons not to diversify when you are growing a business to maximize value.

 

 One Big Bet

How does Vitamix get away with charging $700 for a blender when reputable companies like Cuisinart and Breville make blenders for less than half the price?

It’s because Vitamix does just one thing, and they do it better than anyone else.

WhatsApp was just a messaging platform before Facebook acquired them for $19 billion US. Go Pro makes the best helmet mounted video cameras in the world.

These companies stand out because they poured all of their limited resources into one big bet.

 

Balanced Portfolio

The typical business school of thought is to diversify and cross sell your way to a “safe” business with a balanced portfolio of products – so when one product category tanks, another line of your business will hopefully boom.  But the problem with selling too many things – especially for a young company – is that you water down everything you do to the point of mediocrity.

 

Start Specializing

Here are six reasons to stop being a jack-of-all-trades and start specializing in doing one thing better than anyone else:

 

  1. It will increase the value of your business

When you sell one thing, you can differentiate yourself by pouring all of your marketing dollars into setting your one product apart, which will boost your company’s value. How do we know? In one study analyzing an assessment of more than 13,000 businesses, they found that companies which have a monopoly on what they sell get acquisition offers 42 % higher than the average business.

What one product/service you offer will set you apart creating a monopoly where you can command a higher offer?

 

  1. You can create a brand

Big multinationals can dump millions into each of their brands, which enable them to sell more than one thing. Kellogg can own the Corn Flakes brand and also peddle Pringles because they have enough cash to support both brands independently, but with every new product comes a dilution of your marketing dollars. It’s hard enough for smaller businesses to build one household name and virtually impossible to create two without gobs of equity-diluting outside money.

What will you focus your marketing dollars on to create brand recognition?

 

  1. You’ll be findable on Google

When you Google “helmet camera,” Go Pro is featured in just about every listing, despite the fact that there are hundreds of video camera manufacturers. It’s easy for Go Pro to optimize their website for the keywords that matter when they are focused on selling only one product.

What keyword(s) will make you, your product/service, or your business ‘findable’ on Google?

 

  1. Nobody cheered for Goliath

Small companies with the courage to make a single bet get a bump in popularity because we’re naturally inclined to want the underdog – willing to bet it all – to win. When Google launched its simple search engine with its endearing two search choices “I’m feeling lucky” vs. “Google search,” we all kicked Yahoo to the curb. Now that Google is all grown up and offering all sorts of stuff, we respect them as a company but do we love them quite as much?

Leverage what you do best to win. What do you do best, to bet the house and win?

 

  1. Every staff member will be able to deliver

When you do one thing and you do it well, you can train your staff to execute, unlike when you offer dozens or hundreds of products and services that go well beyond the competence level of your junior staff. Having employees who can deliver means you can let them focus and get the work done, freeing up your time to think more about the big picture.

How can you streamline your offering so your staff can execute without your day-to-day oversight?

 

  1. It will make you irresistible to an acquirer

The more you specialize in a single product, the more you will be attractive to an acquirer when the time comes to sell your business. Acquirers buy things they cannot easily replicate themselves.

Go Pro (NASDAQ: GPRO) is rumored to be a takeover target for a consumer electronics manufacturer or a content company that wants a beachhead in the action sports video market. Most consumer electronics companies could manufacturer their own helmet mounted cameras, but Go Pro is so far out in front of their competitors – they are the #1 brand channel on You Tube – that it would be easier to just buy the company rather than trying to claw market share away from a leader with such a dominant head start.

What will make your business irresistible to a potential acquirer?

 

Diversification is a great approach for your stock portfolio, but when it comes to your business, it may be a sure-fire road to mediocrity. Mediocrity does not maximize value or make your business attractive to potential buyers or acquirers.

 

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