The Importance of Diversifying
June 22, 2017
By Eduardo Landeros
One of the first lessons I learned as a business owner was the importance of diversifying.
In all business aspects, be it clients, products, markets, or employees, it is crucial to the survival of any company and its success.
As a company, you cannot depend too much on one thing. Some companies put all their eggs in one basket and that’s just wrong. I’ve seen too many companies fail because they ignored the need to diversify. But, I’ve also seen many businesses succeed because they diversified well.
As a business owner, you want to have many clients and your sources of income should come from various channels.
For example, if you have a shoe company and one of your biggest customers is Wal-Mart or Costco, what would happen if either of these companies closed or decided to go with another company? If a single company represents more than 20 percent of your sales than you’re in trouble.
Even banks get worried. If your sales to a certain client represent 20 percent or more, the probabilities of you getting a loan with that bank decreases; it’s a red flag and banks don’t like that.
A successful business should always be well diversified and have many clients and sources of income. Why depend on Wal-Mart or Costco? Why not have other clients, other distributions channels, online sales, or international markets.
The market where you operate is also important. I attended a business conference a long time ago in Mexico and had an opportunity to hear Lorenzo Zambrano, CEO of CEMEX, speak to the importance of diversifying.
Zambrano talked about how they were asked to leave Venezuela when Venezuela’s President nationalized the industry and how it affected his business in general. He also mentioned the need to expand to other international markets to absorb extraordinary events like what happened to his company in Venezuela, which affected the company did not shut it down. At the time, CEMEX also depending too much on the U.S. market and they started exploring other markets like Asia, Europe, Latin America etc.
One of the first mistakes I made as a business owner was to depend too much on one product too. At one time, I owned a candy factory and we were concentrated in making one or two types of products.
When approaching potential clients, they would always ask me: “are those the only products you make?” If I was making more products, I could’ve sold more. Looking back, if one of those two products would’ve made someone sick my business would’ve gone under. Luckily that didn’t happen.
Another mistake that business owners make all the time is depend too much on one employee or two. In business you also need to diversify your workforce. What if one or two of your top employees leaves? What if they take your most valuable clients? You should always diversify and have a few people you can trust so that if one leaves, you can depend on others to continue operating smoothly.
Many large conglomerates in the world diversify all the time by expanding their product line or by purchasing other businesses or competitors in the industry and by expanding their products and territories in the world. For example, Amazon just announced the purchase of Whole Foods and experts say it was because they want to compete with Wal-Mart as Wal-Mart already started to compete with Amazon in the online market.
Even entertainers do this. There are some that may already have a good career as singers, but in an effort to grow, they come up with their own apparel lines or fragrances to take advantage of their fame. Many entertainers start acting in movies and some actors go further and even start to produce their own films.
Diversifying is important and it could mean the difference between being successful and failing at business. Look at your clients, territories, employees and products. If you need to diversify, start brainstorming. You want to be prepared if something happens.