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The opinions of the employees of You are personal.
In recent years this idea has spread that you have to diversifythat you don’t have to put all your eggs in one basket. This concept of Diversification It has spread in both personal finance and business and has caused a lot of confusion due to the misunderstanding of the context in which you are trying to apply the concept.
As they say out there, context is everything. If we do not understand the context in which this concept is being used, we can fall into the error of not applying it properly, and this is the case for thousands of small and medium-sized businesses (SMEs).
A small example of how context can vary greatly in understanding and applying a concept: Most personal finance books that have been written say that the general recommendation is that people should save at least 10% of their income. This is all very good, but what if we want to apply this concept to people who live in extreme poverty, to someone who has an income of less than a dollar a day? This recommendation would certainly not apply in this context.
Warren Buffett himself, one of the most famous investors in the world, mentioned that if you really know and understand how and where to invest, your diversification should be very low. Who will bet on all the horses in a race when they know for sure which one is the best? Buffett himself has commented that he only invests in traditional companies (the famous blue chip) because he does not have a good command or understanding of the context and the tech industry. He’s even commented that his mutual fund has never invested in the Microsoft firm of one of his best friends and fellow philanthropists, Bill Gates, to whom he donated most of his personal fortune to the Bill and Melinda Gates Foundation. This means, Warren Buffet As an investor, you haven’t invested in your friend’s tech company Bill Gates because he realizes that he is not dominating this industry. Yet when it comes to his personal fortune, he gave much of it to Bill Gates to use in his creation, a context Buffett certainly understands well.
When we talk about diversification, especially in the context and reality of SMEs – a world completely different from that of large corporations – diversification can be one of the main drivers influencing the development of companies. I have had the opportunity to speak to and help thousands of SMEs in Mexico and Latin America and I can confirm this phenomenon every day. This myth of diversification in SMEs is masterfully explained by author Mike Michalowicz in his book The pumpkin plan (The Pumpkin Plan). Here I would like to mention a few points why diversification can stagnate your business and what advantages the other side, specialization, has:
1. To be really good at something you have to specialize, otherwise you will be “good for nothing”.
We can see this in both people and companies. Malcolm Gladwell in his book Of the series ((Runaway) analyzes and provides conclusive evidence of the time it takes a person, regardless of their professional activity (musician, programmer, athlete, financial analyst, etc.) to “master” their activity with a level of excellence and speaks of a number of “magic” 10,000 hours of exercise. For this reason, for example, we will never see an athlete win the American Football Super Bowl one year, the Eurocup the other year and a football tournament the other year. Grand Slam Tennis.
The reason is very simple: to be very good at something, you have to concentrate and specialize. s who own SMEs like you are usually presented with business opportunities that you want to take advantage of. In reality, however, you are distracting them from focusing and specializing in what you really can do. For example, we have the owner of a company that provides information technology services (systems) whose strength originally was the implementation of wireless networks. One fine day after completing a job, his customer asks him if he happens to not be selling any equipment. Calculate because 10 new computers are required. Then the entrepreneur’s eyes are opened and he says to his customer: “Yes, of course. I can sell them to you. “Inside, the entrepreneur sees this as a business opportunity, he has never sold computer equipment, but he has a friend who is a dealer and then he can take the“ opportunity ”. Now our entrepreneurial friend not only installs wireless networks but also sells computer equipment. While the entrepreneur may sell computing devices once or twice, getting really good at this new business is a whole different thing. If he’d followed his approach to wireless networking, he wouldn’t have been distracted by selling computer equipment. Now he has stopped developing his initial specialty and is starting to do a little of everything and for everyone.
2. If you don’t specialize, you end up losing differentiation and becoming one Would
Going back to the previous example, our entrepreneur friend, who originally specialized in installing wireless networks, is now selling computer equipment and now needs to learn to manage this business, which is fundamentally different from installing wireless networks. You need to have inventory, manage computer equipment suppliers, manage credits, etc. Imagine what will happen when our entrepreneur friend offers his services to a new customer and presents itself as a company that “gives you all the systems solutions your business needs”. And the customer asks: “What is your company doing?” and he replies, “Of anything you need related to computer systems, I install wireless networks, sell computer equipment, give technical support, etc.”
That particular customer only needs to install a wireless network at this point. Look at two or three vendors in connection with our business friend’s company and they all offer basically the same thing, they all say they offer “all solutions in computer systems”, there is no difference. They all offer good service, quality and experience. There is no differentiation. Then another company seems to offer its services, but this time this company is called: Redes Inalámbricas Especializadas del Norte S.A. de CV. The name catches the customer’s attention and he asks this other entrepreneur, “What do you offer?” And the entrepreneur replies, “We specialize in wireless networks. We have worked with many companies over the past few years, including companies and industries like yours, and we know they love networks.” The customer is very surprised and asks: “Do you do anything besides specializing in wireless networks? And one entrepreneur answers: “No, we just do it, we specialize in it.”
For the other companies that offer “everything”, the only differentiation method is price. In the latter case, however, differentiation is the specialty and could then stop competing on price.
I ask you, entrepreneurial friend, if you were to undergo delicate heart surgery, would you go to your GP or a specialist cardiologist knowing they’ll charge you more?
3. Specialization makes the standardization and professionalization of your company much easier and your marketing efforts become more efficient and effective
Just as it is highly recommended that you specialize in one activity, it is also important to focus on a niche market. As the Americans say, “The riches are in the niches”. Specialization makes it much easier for you to standardize your business because you don’t have as many flavors of services or lines of business to standardize and focus on in a niche market. This will help you get better at that niche, understand it better, improve your services, and in addition, your marketing efforts will be very focused and effective. Rather than market in many markets with many services or products (which rarely pay off), focus your investments in a very specialized niche.
I’ve seen it over and over again, SMEs that specialize do a lot better. Don’t fall in love with the myth of “diversification” with very rare case studies.