The myth of diversification is one of those that has stagnated and slowed the development of SMEs.
9 min read
The opinions expressed by employees are personal.
In recent years, this idea has spread that you have to diversify , that “you don't have to put all the eggs in a single basket.” The concept of diversification has been spreading both in the field of personal finance and in business and has created much confusion for not understanding the context in which it should be applied.
This is a small example of how the context can vary greatly the understanding and application of a concept: the majority of personal finance books that have been written speak of the generic recommendation that people should save at least 10% of their income. This is fine, but what if we want to apply this concept with people living in extreme poverty, with someone who has incomes of less than a dollar a day? Surely for this context I would not apply this recommendation.
Warren Buffet himself , one of the most famous investors in the world, has mentioned that if you really know and understand how and where to invest, your diversification should be very little. Who bets all horses in a race when they know for sure which one is good? Warren Buffet himself has commented that he only invests in traditional companies (the famous blue chip) because he does not dominate or understand the context and the technology industry. He has even commented that his investment fund has never even injected into the Microsoft company of one of his best friends and fellow philanthropist Bill Gates , to whom he donated the vast majority of his personal fortune to the Bill and Melinda Gates Foundation. That is, Warren Bufffet as an investor did not invest in the technology company of his friend Bill Gates because he acknowledges that he does not dominate that industry. However, when it comes to his personal fortune, he gave much of it to Bill Gates so that he will use it in his foundation, a context that Warren Buffet surely understands.
When we talk about diversification specifically speaking in the context and reality of small and medium-sized enterprises ( SMEs ) – which is a world totally different from that of large companies -, diversification can be one of the biggest causes that affect their development. I have had the opportunity to talk and help thousands of SMEs in Mexico and Latin America and I can corroborate this phenomenon every day.
This myth of over-diversification in SMEs is explained in a masterly way by author Mike Michalowicz in his book ( The Pumpkin Plan ), where he mentions that contrary to what many believe, specializing can be the key to conquering the market .
Here I will mention three points where he pointed out why diversification can stagnate your business and what advantages its opposite side has, specialization:
1. To be really good at something you have to specialize or you will end up being “good for nothing”
We can observe this both in people and in companies. Malcolm Gladwell in his book ( Outliers ) analyzes and gives overwhelming evidence about the time it takes for a person – regardless of their professional activity – to get to “master” their activity with a level of excellence. Gladwell speaks of a “magic” number of 10,000 hours of practice. That is why we are never going to see, for example, an athlete win the Super Bowl of football one year and the other year the European soccer championship and the other a tennis grand slam tournament.
The reason is very simple: to be very good at something you have to focus and specialize . In the case of entrepreneurs who own SMEs like you, it is normal for you to be presented with “business opportunities” that you want to take advantage of, but in reality they distract you from focusing and specializing in what you really are good at.
For example, we have the owner of a company that provides information technology services whose initial strength was the implementation of wireless networks. A good day after finishing a job, his client asks him if he does not sell computer equipment by chance because he is requiring 10 new computers. Then the entrepreneur opens his eyes and tells his client “Yes, of course. I can sell them to you. ” Inside the entrepreneur is seeing this as a business opportunity. He has never sold computer equipment, but he has a friend who is a distributor and then he can take advantage of the “opportunity”.
Now our entrepreneur friend no longer only installs wireless networks, he also sells computer equipment. While selling the computer equipment once or twice can be done by the entrepreneur, getting really good at this new business is something very different. If the entrepreneur had followed his focus on wireless networks, he would not have been distracted by selling computer equipment for which he stopped developing his initial specialty to start doing a little of everything and for everyone.
2. If you do not specialize you will end up losing your differentiation and you will become a commodity
Returning to the previous example, our entrepreneurial friend who initially specialized in installing wireless networks already sells computer equipment, but now he has to learn to run this business that is actually radically different from the one he was running. You must now have inventory, manage computer equipment suppliers, manage credits, etc. Imagine what will happen when our entrepreneur friend will offer his services to a new client and present himself as a company that “offers you all the system solutions your business needs.”
What if a new buyer asks what your company does? And the entrepreneur responds “Everything you need in terms of computer systems, I install wireless networks, I sell computer equipment, I give technical support, etc.” This particular client only needs to install a wireless network at this time. Check two or three suppliers together with the company of our entrepreneurial friend and they all offer basically the same, they all say that they offer “all the solutions in computer systems”, there is no difference. All offer good service, quality, experience. Then another company is presented to offer its services, but this time this company is called: Redes Inalámbricas Especializadas del Norte SA de CV The name calls the customer's attention and asks this other entrepreneur what he offers and he answers “we are specialized in wireless networks, we have worked in recent years with many companies of your business and industry and we know what they like. ” The client is very surprised and asks “Besides specializing in wireless networks, do they do anything else?” And entrepreneur replies: “No, we only do this. In this we specialize. ” In the case of the other companies that offer “everything”, the only form of differentiation will end up being the price.
However, in the case of the latter company, the differentiation is the specialty and then it could stop competing with price. I ask you, entrepreneur friend, if you had to have a delicate heart operation, would you go to the general practitioner or the cardiologist, to the specialist, even if you know that the latter will charge you more?
3. The specialization will make uniforming and professionalization of your company much easier and in addition your marketing efforts will be much more efficient and effective
Continuing with the specialization, as it is highly recommended to specialize in an activity it is equally important to focus on a niche market. As the Americans say “The riches are in the niches . “ The specialization will allow you to standardize your company much more easily because you will not have so many variants of services or business units that it manages. Focusing on a niche market will make you become better and better in that customer space, understand them better, better your services and also your marketing efforts are very focused and effective. Instead of being marketing for many markets with many services or products, which rarely give results, your marketing will be focused on a very specialized niche.
I've seen it again and again: SMEs that specialize do much better. Do not fall into the deception of the myth of “diversification” with examples of very exceptional cases.