Click to Print

Diversifying Your Business

Want to know one surefire method to keep your business growing? It's high time you diversified.
February 1, 2003
URL: http://www.entrepreneur.com/article/58806

Muscles. Endurance. Speed. Any fitness expert will tell you the way to make your physique bigger, stronger and faster is to cross-train. "Absolutely," says Jim Ferreri, a personal trainer at the Cincinnati Athletic Club, the nation's oldest athletic organization. "We have some runners here. Most people would say they must be in great shape; they can run forever. But," and now Ferreri sounds smug, "have them pick something up. They're not going to be able to pick up much weight." The treadmill alone can't do it. And you can't bench-press your way to total fitness. If you're going to be healthy and fit, you have to mix it up.

That philosophy makes sense for athletes, and cents for entrepreneurs-millions and billions of them. Which is why you should ask yourself an important question: Am I an entrepreneur who cross-trains, or am I stuck on a treadmill?

There's a reason farmers grow more than one crop, restaurants offer menus and cats have nine lives. In business and life, success is often a numbers game, where more is more, not less. If your business has only one or two ways it generates income, it is never going to be a muscle-bound jock. You'll eventually get sand kicked in your face.

Getting Started
Like wandering through a South American jungle, diversifying your company means you might fall into a snake pit or step on a crocodile. Make the wrong turn, and you may never be seen again. So the last thing you want to do is rush into the wilderness without a map or a guide.

But enough of our analogies and on to Joel G. Block's: The founder of management consultancy Growth-Logic Inc., based in Agoura Hills, California, Block advises clients to create a "revenue octopus" so your company is not dependent on one sole source of income. "You need around eight different revenue-generation streams," says Block. One sole successful revenue stream might bring in enough to support a company, admits Block, but depending on it as your only source is incredibly risky.

So where do you start when considering various areas of diversification? First, answer the question: What do you do best right now? Whether you've created an amazing product or mastered a certain service, start where you're most successful. Make sure your revenue streams are related, says Block, or you may not have enough money or energy to see new projects through. "If you have to spend an inordinate amount of time getting another part of your business up and running, then you're using up valuable resources," Block says. So if you manufacture umbrellas, it makes sense to start a line of galoshes, rain coats and then perhaps winter coats and gloves. But if you branch out into a travel agency that specializes in sending people to snow-covered mountains and rainforests, you've likely lost your way.

"Conquer your niche," agrees Jim Ziegler, a motivational speaker who practices what he preaches. Atlanta-based Ziegler Corp.has three distinct companies within one-publishing, speaking and consulting-but they all center around the automobile industry.

"Don't try to be everything to everybody," advises Ziegler. "Look for peripheral incomes within your niche. That sounds vague, and it is, because there are so many businesses out there, but that's what you have to do."

If you're not sure how to find a peripheral income within your business, Ziegler suggests forming a mastermind group. He belongs to several. "You have about 10 to 20 people in each group from your industry, and you get together every quarter or so to compare your best practices to everybody else's. People don't see their faults as well as competitors and friends do." Ziegler makes certain that there are no direct, local competitors in his group, but rather people in his industry from around the country.

No matter how you find it, it's out there. If your business has a successful product or service, you can diversify.

Diversification Offense & Defense

Michael Holigan dug ditches to support himself during college, but today the 35-year-old is master of his diverse domain as president of Holigan Family Holdings Ltd., a $15 million Dallas powerhouse-with emphasis on "house." Holigan is the host of Michael Holigan's Your New House, a syndicated television show on the Discovery Channel. Through his eponymous Web site, consumers can find contractors, realtors and mortgages; they can also buy everything from air compressors to water heaters. Holigan doesn't manufacture any of those products, of course-he's partnered with a number of companies-but the more services he can provide, the more customers will think of him when they buy or remodel a house.

Holigan admits there have been mistakes along the way. "I tried to get into the magazine business," says Holigan. "That wasn't bright. Terrible industry." (Hey, thanks a lot!)

Franchising was also an error, but one with a happy ending. "We [started] selling home-building franchises in the summer of 1999," says Holigan. "We probably had 60 franchises later that fall, and we noticed it was taking way too long to build the houses. Superintendents were spending more time doing paperwork than house-building." This led to the natural conclusion that what the world needed wasn't a franchised home-building company but a technology that would help all those beleaguered construction superintendents. That was the beginning of MH2 Technologies, which provides systems that allow construction superintendents to do time-intensive tasks such as scheduling crews, booking inspections, and ordering supplies from the job site and not the office. The technology has become the universal standard in the industry.

According to Holigan, the first thing any entrepreneur should do before plunging into new territory is "sit down with a piece of paper and figure out your upside and downside. Come up with worst-case and best-case scenarios. It's extremely likely that you can go under in any new business, and you really need to go in understanding the risk factor and how much liability you can afford to take. It's kind of like playing craps at Vegas. It can all be gone quickly."

The magazine attempt was foolish, says Holigan, if for no other reason than if the television component of his income had vanished, the magazine-a direct tie-in to the show-would have likely died as well.

"I think the main thing is to watch your customer base," Holigan adds. "Can you diversify with your existing customer base?" Holigan has turned down lucrative construction projects that had nothing to do with houses. "My customers either build homes, work for the builder, or they're buying them. I want to come up with products that support those people, so I know there are certain things I can do and other things I should never get into."

Diversification Defense
Tending to multiple revenue streams isn't just a strategy to help you grow; you should also use it to avoid shrinking.

In 1994, Mary Westheimer, now 47, founded BookZone Inc., an Internet portal that has survived the emergence of Amazon.com. The 15-employee Scottsdale, Arizona, company hosts, designs, develops and promotes Web sites for some 3,500 publishers and authors around the world. It sells books through its online catalogs and works with strategic partners to do things like print projects on demand and sell software to businesses. The company offers a dizzying array of choices for the publishing industry, and each brings in significant income: Hosting Web sites, for example, is 18 percent of the company's annual revenue, while strategic partnering generates 12 percent. "Diversification allows us to grow-and survive," says Westheimer.

The publishing industry is a difficult one-as Holigan knows-so Westheimer has had to continually consider what her company can do to bring in new revenue. Less than a year ago, she hired a new CEO, Bryan Pelligrini, who quickly linked up with five strategic partners. Pelligrini has an interesting way to think about diversification.

"You remember Dr. Scholl's foot pads?" asks Pelligrini, sounding amused. "Twenty years ago, they probably had 10 or 12 different products for feet. Now, they have something like over 100. They took the same materials, chopped 'em up, put 'em in different colors. We're essentially a software company who provides services to publishers, but we're finding more ways to deliver great services through the same vehicle and the same channel."

Breaking Out
If you don't diversify and expand your company's horizons, in a sense, you're creating your own little prison.

That's the logic offered by Vicki Sanderford-O'Connor, professional speaker, business coach, owner of a catering business, and president and founder of ClariQuest Consulting, a Fair Oaks, California, firm that specializes in helping companies through everything from workplace violence to managing change. She also spent 16 years in the California Department of Corrections working in a variety of jobs, from administrator to parole officer.

"It's the barriers that keep you from trying anything new," says O'Connor. "Most people blame external things, but you have to look within to discover what's holding you back. That's the key to unlocking anything."

Barriers holding you back, says O'Connor, might be:

"A lot of these are common-sense concerns," acknowledges O'Connor, who isn't advocating ignoring your worries. "But you have to ask yourself 'Is it that I can't really provide the service? Or am I just running scared?'"

Stretching Too Thin?

The nightmare scenario, of course, is that a diverse company can do too much and collapse under its own weight. At first glance, Strategic Workforce Solutionslooks like a poster child for that scenario. Kristin Vickery's New York City-based company is a $25 million employment agency with 60 employees and satellite offices in London and Chicago. When it opened in 1995, the company provided temporary and occasionally permanent help to law firms. Today, it provides placement in numerous fields, including human resources and accounting; it offers consulting services to law firms looking to merge; and it provides outsourcing for real estate securitization and IT projects.

"You do worry about stretching too thin," admits Vickery, 35, president and COO. "You have to flesh out your ideas and grapple with the question 'What are we?' In our case, we are a staffing company, and when we have a new idea, we have to make sure it fits with what we are."

At the same time, Vickery thinks diversification is key to the company's long-term success. "If we didn't diversify, we would never reach our goal of being a $50 million to $100 million company, which we don't intend to do by acquisitions." One way Strategic Workforce Solutions can offer projects like real estate securitization without imploding is to find-here it is again-strategic partners. "It's interesting how everything comes together," says Vickery. "We're not just trying every new idea. Everything we do can potentially fold into every other project."

But to get that synergy between revenue streams, you have to take a good, hard look at your business. Says Vickery, "You can only afford to diversify so much, so that you maintain your expertise and make sure you don't lose credibility--and not look like you have a hand in every pot."

Spoken by an entrepreneur who runs a company that could hold its own in any gym.

A Little Different
Not ready for the leap into diversification? Try these baby steps:

Geoff Williams is a freelance journalist in Loveland, Ohio. His treadmill has a cake of dust on it.