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Daily Leadership Thought #111 – Diversify Your Product/Service/Market Risk

March 24, 2011

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Risk management requires that you learn how to properly diversify your business model.

We’ve all heard the saying that “…you shouldn’t put all your eggs in one basket.”   The same thing could be said about betting everything on one major product/service line or depending too much on a small group of clients.  Just as diversification is essential to managing financial investment risk, business leaders need to hedge their bets and manage their financial vulnerabilities.  This doesn’t mean you venture into markets or embrace technologies you don’t understand, but instead you look at what you are already doing and identify natural market synergies and product line extensions. In addition, it is best to be ahead of the curve on market trends and changes rather than lagging behind them.

There is no perfect diversification strategy.  It is more of an art than a science.  The important thing is to protect your margins and stabilize your cash flow while growing your top line.  For example, you may have some parts of the business that are in a fast growth mode and churn through cash.  In this case it would be helpful to have other areas of the business that are growing more incrementally, generating surplus cash flow and steady margins.   You may also have become too dependent upon one client and need to have a marketing strategy that pushes you to identify multiple new prospects that have the potential to grow with you in the same way.  You may have penetrated one market as much as you can and need to expand to other geographies.  Never rest on your marketing laurels or get too complacent.

I realize that business size does come into play here.  However, regardless of how big you are, don’t become a “one trick pony.”    Anticipate that your business will have up and down periods and then think of creative ways to smooth out this curve.  All good leaders understand and embrace the importance of diversification.   To the greatest degree possible, put your fate in your own hands instead of being subject to vagaries of the marketplace.  Be proactive with your business risk management and diversify.