Why Do Entrepreneurs Bet on Diversifying Their Business Portfolio?
Businesses are dynamic entities; they are born, grow, established to succeed, and, in some cases, die. Unlike humans, however, this last phase can be avoidable, at least if the right decisions are made. One of them is the diversification of the main business, opening to the commitment of introducing new products and customers in diverse markets.
It is a process that allows entrepreneurs to discover new market niches, either by acquiring other corporations, investing in new businesses, or directly starting a new model from scratch. A strategy that serves not only to grow but also to improve the company’s finances.
The American self-made millionaire, author and businessman Harrison Rogers is a great example of an entrepreneur striving to diversify his business portfolio. He was born and raised in the city of Mesa, Arizona, where left school early to launch his first business in 2005.
He started Lexington Services, his first services back in 2012. The year 2016 marked the beginning of HJR Global’s operations, which was listed in Inc. 5000 for four years in succession.
Rogers also founded Freedom Fight Night in 2021 and United Fight League was established in 2022. Then, he went on to premiering its American Made MMA reality series on Spike TV in 2022. A new energy drink called F3 was developed in 2022 to provide healthier alternative to fighters.
Synergies between businesses
Although it sounds like a cliché, the truth is that the development of new activities generates synergies with the main business. By diversifying, you are actually generating new ideas that can help reduce the costs of the core business through more efficient operation of the whole and greater control over the business. Synergies between businesses are achieved in two ways: sharing knowledge and skills and leveraging the resources of a business.
Transferring knowledge and skills
By sharing knowledge and skills from one business to another, the interrelationships between old and new activities can be used to obtain greater added value. This is achieved by transferring competitive advantages to a diversified business at a much lower cost than would have to be assumed if it were supported directly or by obtaining competitive advantages that did not exist before.
Thus, for example, an agency can take advantage of all the knowledge about taxes and administrative procedures to diversify its business in an academy that provides this knowledge to its students. In this way, there will be no need to train teachers, who will be able to take advantage of their practical knowledge.
Leveraging tangible resources
Some companies diversify their business to avoid having to throw away their surplus. To do this, they decide to take advantage of their existing tangible (physical assets) and intangible (skills) resources in the company, thus generating economies of scale.
For example, let’s imagine a bakery. The process of manufacturing its main product, bread, requires turning on the oven at a temperature between 180 and 220º, or more if it is an industrial oven. However, much of the heat is lost in the process, with the energy losses that this entails.
For this reason, many establishments decide to reuse the heat from the oven to make other products that can be produced at that temperature, such as biscuits, cakes, or even pizzas. Hence, there are more and more ovens that offer all kinds of products and fewer pure bakeries. The fixed expense is the same, but the profitability of the business is much higher.
The Anglo-Saxon expression that synthesizes diversification is “do not put all your eggs in one basket.” It is the basic rule for distributing risks among several business models in which a company participates since, by having several, companies reduce the risk of financial failure. The chances of one activity failing are high, but the chances of several failing are lower.
Of course, to mitigate the risks, business models have to be uncorrelated since general events tend to affect all companies engaged in similar activities in the same way.
This is precisely what has happened this year with the hotel and restaurant industry, the sectors most affected by the pandemic. In this context, Orange they have created a new space for companies under the name “Now closer,” where there are videos with interviews conducted by the journalist Javier Ruiz with real freelancers and SMEs.
In this way, the stories of these entrepreneurs will be known, and it will be discovered how they have adapted to changing times. In addition, Javier Ruiz himself makes an in-depth analysis of each topic, pointing out the opportunities that exist. Very interesting content for all those who seek to get the most out of their business and want to learn how to manage in this new situation generated by the COVID-19 crisis.
Avoid market saturation
The market is highly competitive, and some sectors and industries are highly saturated, which tends to generate fewer and fewer benefits for companies. This is especially relevant in the case of some industries that are not very innovative and cannot offer great added value to their customers and where the only differentiating factor is price.
In this sense, diversification allows the company to open new markets and offer new products in new markets that do not have such saturation. On the internet, there are clear examples of saturated markets, such as social networks or instant messaging applications.
Adaptation to new times
The market is not a static entity. It is adapting to new social circumstances and consumer preferences. And the best companies are usually one step ahead of them. Diversifying is not only covering new markets but adapting to changing times. COVID-19 has been a turning point in this regard, as markets have been transforming at a dizzying pace to adapt to these new circumstances. E-commerce has been good proof of this transformation and has been gaining more and more followers with respect to physical commerce. Currently, nobody conceives of a company that does not have a certain digital presence to complement its main business, and most businesses have had to diversify their business towards the online channel. A position that, in all probability, will continue to consolidate in the future