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3 tips you should read before diversifying your business

You must do it with intelligence, because as the saying goes, "he who covers a lot, little squeezes".

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This article was translated from our Spanish edition using AI technologies. Errors may exist due to this process. Opinions expressed by Entrepreneur contributors are their own.

Today I want to put on the table a reflection on a crossroads in which all businesses will find themselves sooner or later: diversification. It is so important, that on many occasions financial success and business continuity depend on it, my conclusion to diversify is good and necessary, the only constant in business should be change.

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Diversify is defined by the Royal Spanish Academy (RAE) as "Making what was uniform and unique into multiple and diverse ", and although the definition speaks for itself, I think it lacks a vital ingredient: Do it with intelligence, as it says the saying: he who covers a lot, little squeezes .

There are two different ways to approach the decision to diversify: from the Financial perspective and for Diversification in the business world. Let's start with the financial one:

Speaking of money "putting your eggs in the same basket" can be a fatal decision for your pocket. That is why speaking of finances, clearly the bet should be to diversify. Putting some money in the short term (such as an emergency fund) and another portion in the long term, such as savings for retirement or any other savings objective for more than 10 years makes all the sense and within Long-term savings you put something in fixed income, another in variable income and perhaps another part in passive investments such as real estate (here you will get a mix of rates, because you will have the capital gain rate and the rate associated with an income) .

As far as investments are concerned, the diversification objective should be based on two basic principles: reduce risk and increase the rate of return, finding a balance “adequate” for your investor profile.

Now, diversification in the business world is different and much more complex than the financial one, and I say this because finally, when diversifying in your business, the first thing you should take care of is that you do not lose your essence or your specialty. You must be very jealous of the business where you are clearly a successful, consolidated and different person.

This reflection on what to do - and what not to do - when deciding to diversify in your business, stems from a conversation I recently had with a good client and best friend about what he wants to do to diversify; and his position led me to suggest these 3 tips that now I want to share with you.

1. Only diversify into businesses COMPATIBLE with your CORE BUSINESS (in marketing that is called Extended Core ): Expand your portfolio of products and services only in things in which you already know that you are different from others, and in what you genuinely already are a crack!

Let me explain: imagine that you have a consolidated Mexican food restaurant and for “diversifying” and reaching another audience in the same place you offer sushi. INCOMPATIBLE!!! Following the restaurant's example, you can consider other diversification alternatives, such as prepackaging your star sauce for sale in other consumption centers, or setting up event service, or opening small branches with reduced menus similar to a food court .

Do not mix unknown things, with things in which your performance is already clearly SUPERIOR. And if you were determined to open a line of business completely different from your experience. Don't skimp on delegating and hiring someone who does.

Some success stories that better explain this "Shoemaker to your shoe" theory are those of Coca-Cola and Pepsi; Coca has a strategy of diversification in Beverages (they are market leaders) soft drinks, water, milk, coffee, yogurt, etc.… On the contrary, Pepsi apparently violates this logic by diversifying with foods such as Quacker or Sabritas, but in reality the Core Pepsi Business is distribution logistics. So much so that they provide “share services” to brands such as Jumex, Hershey's or Sonrics. They diversified in what they know how to do; Coca in drinks and Pepsi in distribution.

2. Take care of the time to invest jealously. Exploring new businesses can result in you spending your valuable time and money outside of your core business. Before deciding to undertake something that you do not know, think that the time dedicated to the new venture you will be taking away from the one that already "makes a profit."

This premise is reinforced by the history of General Electric. Over the years, he started making lights, turbines and engines, medical equipment and, in general, everything in industrial and consumer manufacturing; Imagine that he had in his portfolio even television networks and a financial division for mortgages and consumer credit. One of the great successes of the multi-named CEO Jack Welch was precisely the sale of the unprofitable divisions or that were not in the top three of their sector, they contracted and concentrated in their core business, manufacturing.

I would like to suggest you a metric. If it is going to take more than a third of the time, I would recommend that instead of taking the reins of the new business, you consider simply investing in a similar one as a shareholder, and thus you will give it the sense of a financial diversification strategy Vs. a diversification strategy in business.

3. Seriously consider those diversifications that, although what you know how to do are totally different, add “commercially” to your main business . To give you an example, supermarket chains such as Whole Foods or Walmart in the US and Mercadona in Spain “buy” suppliers to exclusively manufacture their own brands, this helps them to have diversity on the shelf and also to use those shelves to sell their own products. Clearly their business is not manufacturing but sales, but they are using their brands to generate more profitability per square meter in their sales floors, not counting the natural utility of that product.

Another very current example of how it is possible to diversify into things that have NOTHING to do with the main business would be the “influencers”. Their main business is sponsorship ( views , clicks or mentions), but prominent "influencers" are evolving to give conferences, make books, release records, do merchandising (from selling their mugs and jackets, passing through their own brand of wine or tequila) or collect royalties "brand" products related to their field of influence, absolutely nothing to do with the main business. However, although they are different, they all nurture the influencer's positioning and reinforce their essence.

We will surely agree that any diversification effort will have to do with an objective of generating more profitability, a bit my point of view is that you can put your money to work in other ways that do not necessarily mean that you work more and worse still in something that perhaps not you know how to do just as well as your competition.

The key in diversification is that the new venture does not absorb your agenda, or your main business. Do not lose sight of the fact that the principal is the one who pays the expenses!

The day only has 24 hours, use them to the fullest and do not waste them in an undertaking that does not "commune" with what you already do wonderfully well.

Thank you for reading me and sharing my opinions, I will love to discuss them with you on my Instagram @Federico_Brunet and you can also find my Podcast on Spotify or Apple as “A date with your wool”.