Diversify or Die
It seems like people really love to say the word “diversify”. It’s been said so much that it has kind of become one of those words that doesn’t mean much anymore, kind of like a buzzword. At first, everyone is using them because they think it will communicate that you are smart, savvy, and in the know. Then after a while the words start losing their impact and when you use them you start to look like you are trying to sound smart, savvy, and in the know. The thing about diversification in business is that, while it has gotten kind of tired, it’s still true. If you don’t have a diverse business range, you are at great risk for economic hardship and possibly failure.
I bet you didn’t know…
I would just about bet that most people don’t know the following: many fortune 500 companies require that their suppliers be diversified. Let me give you an example. Lets say our fortune 500 company is Acme Hammers and the potential supplier is Super Steel. Super Steel approaches Acme Hammers and says, “Hey, I want to sell you steel.” Acme Hammers is going to say “Okay, your price, quality and service are better than our current supplier, so we will switch to you. First, though, you have to show us that after we switch to you, we will only account for no more than 30% of your business.” If Acme Hammers is ready to buy $10 million worth of steel a year, I sure hope Super Steel has a broad customer base. You may find yourself asking why Acme Hammers is demanding that Super Steel has so much more business.
The reason is simple: stability. If Super Steel sets up their company structure, invests in equipment and personnel, and maybe even buys a whole new facility all for Acme Hammers, then Super Steel’s entire future is based on the success or failure of that Acme Hammers. If Acme Hammers falls on hard times, their steel needs are going to decrease and along with it, their spend at Super Steel. If Super Steel is too heavily leveraged with Acme Hammers, the drop in business could put them under. Then you not only have a failed business and people out of work, but Acme Hammers is left looking for a steel supplier in the middle of production. Whether production is down or not, it’s not gone and Acme is going to need some steel. This tends to be a lose-lose proposition for everyone. If you’re having trouble imagining why it’s so hard to find a decent steel supplier, or any other supplier, just imagine how hard it is to find a contractor you trust to work on your home. Now multiply that by a factor of about twenty and add in a ton of paperwork and processes roughly to the tune of buying a home. Also bear in mind: you need this steel tomorrow.
We want you to be diverse…as long as it’s not with our competition…
While the benefits of diversity are generally good for everyone, it tends to only be large customers who really demand it and want proof of it. These are usually fortune 500 and larger companies, but they could be smaller than that as well. It likely depends on the specialty and ready availability of what you’re supplying for a product or service. The issue with fortune 500 companies is that they tend to want it all. However, in about 99.9999999999999% of cases, the individuals you are working with weren’t even born when the company was started. These people have no idea what other businesses look like outside of their own walls. They didn’t have to build their customer base from the ground up, encourage people to buy an unknown product, or really cut out a place in the market. They inherited the full weight and measure of Acme Hammers when they took the job, now they swing a pretty bat…well, hammer. They kind of get used to getting what they want without having a solid realization of what they’re really asking. It’s not uncommon for one of those requests to be that they want you to be really diversified while not doing much business with their competition. As these elements come together, a troubling pictures begins to take shape.
See, fortune 500 companies spend a lot of money. If you run a business which is heavily leveraged with a company like Acme Hammers doing, say, $900,000 a year against a total revenue stream of $1 million, you’re in quite a pickle. Acme Hammers isn’t just the bulk of your business, they’re keeping everyone at your business employed. You need to keep that $900,000 coming in while trying to make it less than half of your normal income. The other $100,000 of your income is likely generated by many smaller customers. You’d have to get hundreds or more on board in order to essentially double your business. This isn’t the course most companies will pursue. Generally, this means that in order to make Acme Hammers a smaller part of your business you need to have other clients who spend a lot of money. Well, there’s kind of a small pool of people who spend that much money and they tend to be, you guessed it, other fortune 500 companies. If the product you supply has any kind of specialty at all, then your best option for diversification – with any magnitude anyways – is going to be a competitor to Acme Hammers who is likely also a fortune 500 company. It’s quite the circle.
Why the competition shouldn’t matter
You may yourself worrying that Acme Hammers is going to get nervous that you’re doing work for their competition. Here’s how you get around that whole objection. Diversification is good for everyone, including Acme Hammers. See, if your company is only doing work for Acme Hammers, and at the margins that a company that size tends to work you down to, you probably can’t afford to bring much innovation to the table for them. You mostly end up following their work stream and doing the jobs they send you, adapting as needed. The key word there is “following”. Your business is becomes based solely on their business. This creates an atmosphere of innovation stagnation, where you’re only doing something smart when they ask for it. You’re a great source for them to get product, but you’re not really bringing a personality of your own to the table, ya know? Diversification forces you to get smart. When you’re working with different clients in different environments, your internal processes and personnel get exposed to different types of needs ways of doing things. These needs and challenges act like a grindstone to sharpen and hone your own processes, making your whole business more effective. Once you start getting some of that synergy, you have a new value to bring back to Acme Hammers. By going into the world and sharpening yourself against a diverse range of needs and perspectives, you now offer them the chance to do business with a company that has been optimized and refined by the trials of fire. Instead of following their business, now you’re adding innovation and market expertise the value the get from working with you. You’re not just a company that supplies Acme Hammers, you’re the premier steel supplier in the county, they’d be crazy to work with anyone else. Plus, now Acme Hammers gets to brag that they are working with your product. And what just happened there? You just added a huge chunk of value to your services with Acme Hammer, and anyone else you’re doing business with. That’s what diversification is all about.