Diversification, simply put, is a risk management strategy. I won't dive into all the reasons that businesses struggled around 2008, but what we do know is that companies that were more diversified fared much better.
What does this look like? As we've stated in the past, your specific level of tolerance for risk (i.e. does this keep you up at night) is highly individual to each and every company. Therefore, every company has to decide what amount of risk they are ok with accepting, but here are a few points to consider:
- As we stated earlier, while there will be bad seasons in business that keep you up at night, in general your strategy should not keep you up at night. Some people disagree with this, however, not sleeping isn't a very sustainable practice.
- Diversification has to make sense for your company. This isn't a question of whether or not you should, but rather choosing a product/widget/idea that makes sense for the company to add. i.e. is this an off shoot of what you do and therefore have some experience or are you just shooting in the dark hoping to hit something?
- Diversification is a long-term strategy not something that you do for a season or a year. It's meant to both protect the company (the safe bets, cash cows, etc.) and help to push profits (the riskier options that help balance the company's stability and growth options)
What to remember: A company's diversification strategy should make sense for the individual company while also not causing the team to stress out or lose sleep.