Warning: Don’t even think about diversification until you’ve read this

Illustration by Rachel Revilla

I spent a part of my university education at one of the best business schools in the world, Wharton School of Business, following the footsteps of former alumni such as Warren Buffet, the current Google CEO Sundar Pichai and Elon Musk. But even at Wharton, “diversification” was taught to be an almost universal remedy at the time.

Yet diversification has cost a lot of businesses their survival. It needs to be done correctly. I have seen again and again that the fallacy of “diversification for the sake of diversification” cuts profits dry and creates a host of other problems.

The opportunity that was not

One of our Asian clients correctly analyzed trends and predicted a sharp rise in e-commerce and a growing need for environment-friendly products. So far so good. They planned to repurpose one of their businesses away from its core strengths into producing these products. This was the mistake.

After the family that owns the group got me and my team on board, we sat down with the owners and the top management. We did the math. The numbers simply did not add up. What looked like a good plan at the outset, namely to “predict growing trends and reposition the business to take advantage of them,” would have cost them millions of dollars.

What does that mean for you and your business?

“Diworsification”

First, you need to change the way you think about diversification. It is an option, not a must. It can be your best friend but it can also be the one you thought was your best friend only to find out later that he stabbed you in the back. In this case, it becomes more of a “diworsification.”

Some of the most successful entrepreneurs in the world today from Peter Thiel to Mark Cuban, and from Warren Buffett to Elon Musk, talk more about the fallacy and myth of diversification than its benefits. And so do I. You have to be careful.

Do the math

Second, do the math. Plan everything out in detail. See if the numbers hold up. History is full of people who were extremely successful in one area and then thought they were infallible and went into areas they had no clue of or no prior experience or expertise in and then lost a lot of money.

Third, we are all smart in spots. Stay around those spots. This is why all great business leaders, Fortune 500 CEOs, and famous entrepreneurs I have had the pleasure of working with, consulting, or advising, share one trait: humility. It comes from knowing what they are good at, and what they are not good at. And then stay within their circle of strength. Arrogance is rare among the giants.

Do not bend reality

Fourth, plan your entire strategy out in detail. Be especially careful not to fall in love with an idea because it looks good on the surface before you have analyzed it diligently and planned out the entire strategy from start to finish. Here, a lot of business leaders go wrong because they jump to conclusions far too early. They get very excited about an idea for diversification. Then they “bend” reality, the numbers and the data to fit their idea.

Fifth, think of diversification like a kung fu fighter. I was talking in another column about the famous horse stance, something I learned while earning my black belt in Korean kung fu. It is called a horse stance because you assume a position as if you were riding a horse. This keeps you firmly grounded and makes it easier for you to keep your balance when your opponent throws punches and kicks at you.

Ask yourself these questions

That is the idea behind diversification when it makes sense and is done correctly. Does it make your business stronger, more balanced and less prone to attacks? Does it give you a definite advantage over your competitors while not diluting your energies? Does it take you a giant step toward making your business future-proof?

If you cannot answer any of these questions with a resounding “yes,” then drop the diversification path you are on and focus instead on becoming world-class at what you are doing already. If you constantly improve the cycle of setting goals, overcoming challenges, and analyzing mistakes, it will reward you with exponential returns over time. This means: your business will grow stronger and more resilient the longer you keep going at it.

Hope is not a strategy

Sixth, don’t put your head in the sand and run away from challenges in your core business. A lot of times, entrepreneurs, business leaders or CEOs resort to “diversification” when they are actually afraid or not persistent enough to tackle the biggest challenges in their already existing business. They do not want to fight their way through the jungle to come out on the other side. That is the wrong motivation to diversify.

Seventh, hope is not a strategy. Take a neutral, calm approach. Only get excited once the data and strategy all add up and you see a clear path to profitability. Not before. Otherwise, your excitement makes you blind to the real facts and you only wake up after you or your business has lost a ton of money.

The business owners who fell in love with illusion

Two more examples from our clients are worth sharing. Before the owners of a media group got me and my company on board, they had diversified into a new business that looked like a good fit on the surface because it was in an adjacent industry.

But they had not created a clear strategy from start to finish, in all detail, like a movie script that develops through time. The owners had fallen in love with the idea and had a distorted perception of reality to fit their excitement. In short, they did not see reality but what they wanted it to be like. That is a cardinal sin. The results? Losses they still try to recover from years later.

Another example is the owner of a food manufacturing conglomerate. He blindly followed the directive of the company’s founder to launch a minimum number of new products every year. That strategy had made sense when the company started, but not many decades later. However, the current owner never questioned it. That was his blind spot.

The results? Distribution, product development and marketing were all overwhelmed with too many products. Hundreds of unprofitable products flooded the market and diluted the effectiveness and profitability of the entire group. The solution? We abolished the directive, identified the cash cows and let go of all other products.

Key takeaways and next steps

• Change the way you think about diversification. It is an option, not a must. It can become your worst nightmare.
• Do the math. Plan everything out in detail. If the numbers do not add up, don’t do it.
• We are all smart in spots. Stay around those spots.
• Plan your entire strategy out in detail from start to finish.
• Think of diversification like a kung fu fighter in a horse stance. Its purpose is to keep your balance.
• Don’t put your head in the sand and run away from challenges in your core business.
• Hope is not a strategy. Take a neutral, calm approach. Do not let excitement blind you from the real facts. INQ

Tom Oliver, a “global management guru” (Bloomberg), is the chair of The Tom Oliver Group, the trusted advisor and counselor to many of the world’s most influential family businesses, medium-sized enterprises, market leaders and global conglomerates. For more information and inquiries: www.TomOliverGroup.com or email [email protected].