The risks and rewards of diversification

To create different forms of; to vary in order to spread risk; to expand. These are some of the most commonly accepted definitions of risk and for most organisations and business owners, they can inspire both motivation and dread, writes Sarah Megginson.
 
Motivation, because to change is to realise new opportunities. When you diversify, you are essentially “adding depth or breath to your service or product suite”, explains Daniel Garnsey, commercial manager and partner at Amstarsat, a West Australian satellite communications business – and this has the potential to seriously improve your bottom line. 

“The key is always profit. If something is profitable today or it is going to be in the near future, it should be considered. If you look ahead two years, the market is probably going to be very different,” Garnsey explains.
 
“In our case, we provide internet and phone services to mining camps and mining is not what it was in the last 10 years, it’s in a slump. People are starting to now understand we’re in a bust and we’ll start to see mining companies failing. So my take on that two years ago was to consider diversification strategies then that would prepare us for this market.”
 

In Garnsey’s view, there are three different types of diversification that business leaders should focus on, and all three need to be considered every time a decision is made about your business.
 
“Most people don’t think about diversification enough,” Garnsey warns. “They tend to work in the business day-to-day too much, and they don’t look at the macroeconomy and the likelihood of change.”
 
The many faces of diversification
Diversifying can be about the process of evolving in many different areas of business, whether it’s reviewing your income stream, the people you employ or partner with, the way you do business in terms of policy and procedure, or the markets you operate within.
 
To some business owners, diversification comes naturally. For online entrepreneur Daniel Brady, for instance, the willingness and ability to diversify and change directions is central of his success. 

“I run around 10 websites, which I buy on Flippa.com at cheap valuations. I focus my bidding on sites that don't rely on Google for income, as I have diversified away from a very Google-focused marketing strategy and even [avoid websites that rely on] revenue through Google Adsense too,” he says.

“This helps with both traffic source diversification and revenue source diversification. I also started importing products from China and for my e-commerce business, Heavenly Hammocks Australia, for revenue diversification. With these two strategies in play, I have doubled my previous income and around 20 per cent of the total income is now from new revenue sources.”
 
For other businesses, however, diversifying can represent ‘the great unknown’. This plays into that sense of dread referenced earlier.
 
One of the “truisms of human interaction” is that humans are not very good at coping with change, says Lindsay Spencer-Matthews, psychologist and author of Why Clever People Do Dumb Things (www.greatchangemaker.com.au).
 
“If a business manager either develops, or is perceived by customers and staff to be engaging in, overly radical change, the customers and staff may try to  ‘escape’ to their normal mode of operation,” Spencer-Matthews says.
 
“If your competitor is demonstrating that they’re not engaging in radical change, they might consider that it’
s more comfortable to go with them. So as a psychologist, in general I would advocate against radical change.”
 
The challenges of radical change
Instead, he advises business owners and managers to adopt a big picture outlook that is deconstructed into phases of incremental change.
 
“You might decide that over the next five years, you will gradually diversity in a series of incremental changes, in a way that your staff and customers will get accustomed to,” he says. 

Nathan Schokker, director of Talio, a commercial facilities management company that diversified into concierge services, agrees that it’s sometimes the smaller, subtler strategies that generate the best returns.
 
This is particularly important for small businesses and sole operators, who can get stale when using the same systems, processes, business models and thought processes without other partners and stakeholders to generate ideas.

 “One thing that I’ve done is to really encourage a diversity of thought by leveraging my support network. Most of them are fellow business owners – some have been in business a lot longer, and some less – and we tend to bounce ideas off each,” Schokker says.

 “I was just talking to one just last week who owns a transport and logistics business. She’s trying to set the trend in the industry by being much more tech advanced and ahead of the curve, and she was interested in the fact that from a director’s point of view, I run my entire business from an iPhone and iPad.”
 
Schokker’s colleague wanted advice and insights on overcoming the challenges of not having a desk and operating with mobile resources.
 
“I told her my experiences and we shared some stories. I love to bounce ideas off similar people; it’s imperative as a business owner, you’d be surprised how much confidence it gives you,” Schokker says.
 
Encouraging diversity of thought can generate successful outcomes in a range of ways, adds Spencer-Matthews.
 
“When I’ve employed staff, I’ve always encouraged them to think creatively, and instead of me being the one who says ‘yes lets do it’ or ‘no let’s not’, I let the group decide on the outcome,” he says.
 
“I’ve also always been an advocate of profit-share with staff, by allocating a proportion of net profits to be distributed amongst the staff. Many businesses pay ad-hoc bonuses, but I don’t know many that allocate a portion of profits to staff. That’s diversification of income and it can be very effective.”
 
Ultimately, Spencer-Matthews says, diversity is another word for ‘change’, which when executed well can deliver substantial benefits to your business.
 
“If we engage in this thought process, we start to question our own status quo, allows us to have diverse thinking, manage in diverse ways and have diversity in business cycle,” he says.
 
“I truly believe that if we don’t identify the gap between where we are and where we want to be, we’re just going to stay where we are.”

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