Tag Archives: diversification

6 Reasons Not To Diversify

Republished with permission from Built to Sell Inc.

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

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.

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.

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? After analyzing more than 13,000 businesses using The Sellability Score, we found companies that have a monopoly on what they sell get acquisition offers that are 42 percent higher than the average business.

2. 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 a start-up to build one household name and virtually impossible to create two without gobs of equity-diluting outside money.

3. 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.

4. 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?

5. Every staff member will be able to deliver

When you do one thing, 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 get on with their work, freeing up your time to think more about the big picture.

6. 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.

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.

Sellability Score

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Important Steps To Financial Freedom: Expenses, Debt and Diversification

In order to come up with a solid financial plan that focuses on your financial freedom you need to get clear on where you stand right now so you can determine whether or not your current financial state will support your lifestyle after you leave the work force.

Paying particular close attention to your expenses and your debt levels and gaining clarity on what it will take to clear those debts as quickly as possible is paramount to a successful transition. Transitioning from working to not working with debt can be challenging unless you have a clear plan on how to manage your debt requirements.

You also need to look at what your revenue streams will be during your post-working years and how diversified they are. Taking a look at these items will not only help you transition with confidence but will also protect you by ensuring you are not reliant on a limited number of cash flow sources during your retirement years.

Get clear on your current financial position (your assets and all your liabilities/debts). In my previous post I listed the nine things you need to know before you can experience financial freedom. It is important to go through this list so you can gain a clear understanding of what you need your financial picture to look like.

When you go through this exercise it’s going to allow you to say to yourself one of two things.

You’re either going to say, “yeah, my revenue sources are going to be quite varied and so I’ve got a safer diversified revenue stream”…

Or, you are going to find that your revenue sources are not diversified and all of your revenue is going to come from one or a limited number of sources.

Having limited sources of revenue puts a lot of reliance on those sources to make sure they can keep up with your current and future cash flow needs. (Don’t forget the negative effects of inflation – also known as the “silent killer” to financial plans). Knowing how your revenue streams stand up is important and allows you to take action and make changes if you need to. Your financial advisor can help you with this.

Are you clear on your current financial position? Where does your money go right now? Do you have debts you are making payments on? What are your expenses? You want to get very clear as to what your expenses are now, what they’re going to be going forward and whether or not those expenses are going to continue with you all the way through until after you leave work.

Are you going to be carrying debt into retirement? Having complete financial freedom does not involve debt but if you do have some it is all about getting focused and getting a plan in place.

So here’s the thing. If you have a long time between now and when you leave the workforce, put a plan in place to get those debts paid off by the time you stop working.

I have no doubt there are certain people who will go into retirement with debts and that happens. It really just means that at that point you need to be very, very clear as to what the plan is for getting rid of those debts. Obviously getting those monkeys off your back during retirement would just allow for a much more solid financial footing.

So getting clear on what your expenses are going to be, what your fixed expenses are, what expenses are going to stop is going to allow you to truly live a life that is financial free.

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Also read:

Retirement Plan

Why Your Financial Plan is Missing the Mark (And How You Can Fix It)

Financial Goals VS. Financial Objectives

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Get a retirement income plan in place so you can see what your future holds. This will provide you with a tremendous amount of confidence going into retirement.

In my previous post, I asked the question “What kind of planning you are doing?” to help you gain clarity on what you need to see in your financial plan. Developing a base plan simply tells you whether or not what you’re trying to accomplish is financially doable. This also answers the most important question, which is, can I find financial freedom with the lifestyle I’ve become used to?

Having a financial planner is an important part of your overall plan and finding the right one for you takes time. To help you in this process, I encourage you to read How to Choose and Work with a Financial Planner You Can Trust. This is a free Consumer Awareness Guide that you can download instantly.