Diversification: The Key to Reducing Risk and Increasing Profitability?

Newsletter #14

Said it before and I will say it again; Twitter is great.

The doors it opens are just amazing.

For example, this week it resulted in an invite from a gentleman to “the Farmers Club” (a private club across the London Eye). Not a bad experience:

Start posting online!! 🌷

This week, I want to go on the attack.

Because over these last 2 months, I’ve realised something: too many businesses are plagued by indecision.

On the one hand, it’s expected. Since many don’t track enough data to have the right information available to make difficult decisions.

But on the other, there is something called paralysis by analysis. This has resulted in many businesses simply becoming stagnant. Always dreaming. Never acting.

And one thing that’s often at the heart of this shilly-shallying:

Diversification.

Picture this: a dairy farm feeling the pressure of falling milk prices and rising production costs. What could be the way forward? Diversification?

Let's consider a couple of options: cheese-making and agri-tourism. Sounds like a no-brainer? But it's never that simple.

The questions start with curdling milk and managing guest accommodations. And then you have to think about new pricing strategies and regulations. Moreover, the financial load can be quite hefty.

It’s never easy.

Why even consider diversifying?

The textbook answer: diversification is a key strategy for reducing risk and increasing revenue (and profits). It reduces your reliance on a single crop or livestock and ultimately results in a more resilient business.

Like the example above, there are many ways to go about this:

• Starting a farm shop or CSA program

• Offering educational tours or workshop

• Producing renewable energy

• Entering into partnerships with other businesses

• Investing in real estate

However, it’s not all sunshine and rainbows:

Doing it right takes a lot of planning and research (more than you’d think). It will require more capital upfront (which you likely already want to use for something else). And when you do it, it requires even more management (of even more people!)

But here’s the deal:

Diversification is a buzzword. There’s nothing special about it.

What you are doing is just adding a separate business unit, but now you can benefit from your existing experience, capital, processes and reputation.

This gives you two options:

1. Use your experience to build something from scratch (cheap and slow)

2. Use your capital/leverage to buy an existing business (expensive and fast)

Not an easy task. But I find that this quote sums it up perfectly:

So to bring it back to the shilly-shallying, take a long walk and ask yourself if you are “diversified enough”. If not, take action. If doing more would make it even harder to survive, improve what you have first.

How to diversify the right way:

1. Market Research: Start with a deep dive into the market you are trying to attack. Uncover everything about your competitors and customer preferences.

2. Financial Analysis: Use methods such as cash flow analysis, break-even analysis, and return on investment (ROI) to evaluate if the potential profits justify the investment.

3. SWOT Analysis: This can provide a holistic overview of both the external and internal factors that could influence the outcome.

4. Risk Assessment: Dive deep into all of the weaknesses and threats that are identified. And how to mitigate them.

5. Scenario Analysis: This involves creating different future scenarios (e.g., high market demand, low market demand, changes in cost) and assessing how the new venture would perform in each.

But remember: it’s a very fine line between making data-driven decisions, and becoming paralysed by over-analysing!

Food for Thought

New section! From now on I’ll end the newsletter with something I read during the week that made me think.

This time it’s from the legend Girdley.

I try to be educative, but man, entertainment is important. Something to work on.

If you’re still with me - cheers!

This week I’m actually just curious about your take on this.

Would love to hear your take on diversification and if it’s something you’ve already tried or are considering.

As always, till next week 🌷

Joey