Diversification: Pandora's Box or New Profits?

December 10, 2009
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“An alternative definition of diversification: ‘If we are failing at one thing lets search for something else to fail at.’”
- Martin S. King

In Greek mythology, the curious (and very bored) Pandora ignores repeated warnings and opens a forbidden box given to her by the Greek god Zeus. Unfortunately, along with the fateful box, Zeus had given Pandora the “gift” of curiosity!

Immediately, new ills, diseases and problems for mankind poured out and, due to Pandora, we have been afflicted with these tragic issues ever since. Thanks a lot, Pandora!

So what has been a “Pandora’s Box” for far too many carpet cleaners? An ill-timed and poorly planned diversifications into other business areas.

On the face of it, diversifying your current company’s efforts offers you many advantages: a more consistent income stream, higher net profits, making better use of an existing infrastructure and avoiding the dreaded all-your-eggs-in-one-basket syndrome.

All of these reasons to grow and diversify are valid. Plus, it is just plain fun and exciting to venture off into new areas!

But far too often, we justify a business expansion or diversification when, in reality, it makes absolutely no sense financially or strategically.

Instead, we are just plain bored with our current business model! So here are some “Before You Take the Leap” questions for your consideration:

Is This Diversification "Synergistic"?

Will it complement and draw from what I already do? Will my customers view it as a logical progression for my company and appreciate the additional services I provide, or will they be puzzled?

Will this expansion be able to piggyback on to my existing customer base, my past and current marketing and the image I have cultivated over the years?

Will I be able to use my current business infrastructure without having to hire additional non-production personnel, or is my fixed overhead going to increase because of this additional service?

Can I Personally "Make the Jump"?

In 1969 a British economist, Laurence J. Peter, introduced his “Peter Principle,” which states that in business, “everyone tends to rise to their level of incompetence.”

So sad because, at this “level of incompetence,” the entrepreneur is drowning mentally and emotionally under business overload – many times brought about by growing beyond his or her current management capacity.

So ask yourself, “Will this diversification take me beyond my ‘comfort level’ in business?” If your honest answer is “Yes,” why would you want to search for something else to fail at?

Speaking of making the jump, it isn’t just all about you! Your employees very likely will need to wear other hats, learn new procedures and very possibly learn a completely different business that just happens to be masquerading under your business name. Can your people do it? Will they?

Do I Have My "Ducks in a Row"?

In these challenging times simply keeping your business afloat can be a difficult juggling act. Cash flow, accounts receivable, employee “issues,” tight credit, difficult customers all make for some real ongoing headaches.

But there is an even bigger challenge for you based on one simple question: “Am I managing my business ‘by crisis’?”

If this anarchy and chaos management theory is running rampant in your company think long and hard before introducing more stress into this volatile mixture. Instead, focus on building a business infrastructure with the goal of taking you out of the middle.

A business infrastructure takes the owner or manager out of the hub by empowering capable staff to make their own decisions based on written procedures and a solid company culture.

Implementing and institutionalizing a business infrastructure in your company will be one of the hardest things you have ever done, and yet likely the very best long-term investment you will ever make.

However, at this critical point in the growth of your company you probably don’t need the distraction of even a very lucrative diversification.

Remember that implementing systems and procedures in your company is not only a logistical challenge. The bigger issue is emotional!

None of us like giving up control of our baby and inevitably a true, working business infrastructure takes away control from you. This is a terribly traumatic step for the typically obsessive/compulsive/controlling company founder (Don’t ask me how I know this!).

But putting an organized business infrastructure in place is an absolutely essential step for your company’s continued growth, health and profitability! Which leads logically to my next diversification question…

Will My Business Expansion be Wildly Profitable?

Remember, the purpose of business is to make money, and make lots of it! If you are not positive that this diversification will provide a fantastic return on investment, don’t go there!

Once again, just like Pandora with her fateful decision to open her box, most cleaners expand into other areas because they are bored! This is the very worst reason to go off jousting at new windmills, because another key question for you is …

Will It Distract Me From My "Core" Business?

What is it that “brings home the bacon” in your company? Or, when your business name comes up conversation what pops into your customers minds?

Maybe this business area is what you should focus on. How to decide? Simple. Do you totally dominate your defined market area in your “core” business?

If not, you much may be better to focus like with laser-like intensity on marketing your current company (and building and developing the business infrastructure) instead of launching new business ventures.

Is It Part of Your Long-Range Life Goals?

This industry offers a freedom that can be either a blessing or a curse. You see, your company can take you anywhere you want to go in this life if you know your desired destination!

(For some general guidelines on avoiding the “Ready-Fire-Aim” syndrome, see last month’s column, Are You a “Loose Cannon” or a “Creative Initiator”?)

All too often, a cleaner careens through life investing – wasting? – huge amounts of time, energy and other resources without ever really getting anywhere.

Now if all you want out of this life is to “hang out,” so be it. Reduce your work and cut back your business expansion plans, chill out and enjoy life (sounds good to me!). But more often, an entrepreneur will work themselves into exhaustion for an elusive and unknown goal that they have never bothered to identify! Crazy, huh?

So go ahead and grow your company. After all, there are few things more satisfying than leading a team of quality people all focused on a common goal and vision.

Helping your employees as they help others will also help you achieve your goals. But do grow carefully, constantly evaluating your future expansion plans.

How to do this? Just always analyze these six diversification questions before you pull the business-expansion trigger to avoid opening your very own “Pandora’s Box”!

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