Don't put all your eggs in one basket.
This is a saying most of us have heard and followed as good advice.
So why don't businesses follow it?
Join us to find out on this edition of the Inside BS Show.
Hey, now I'm Nicki G. This is the Inside BS Show,
and I am here this morning with my partner Dave Lorenzo. How are you Dave?
Hey, now Nicki G I'm fantastic. How are you today?
I am fantastic as well. Thank you for asking.
We are talking about today, key value driver for your business. Number eight,
diversification of your business strategy.
So oftentimes we think about diversification in all different areas of our
personal lives but not our business. So what am I talking about?
Think about your financial portfolio for example,
I'm sure you have heard and applied this term when you are diversifying your
assets to make sure that you're fully protected in the event there's a
fluctuation in the stock market or something happens with your retirement plan.
So we need to think about it importantly for our business as well.
So how do we do this?
Think about the different areas in which your business is operating markets,
industries, suppliers,
and practice diversifying within those different aspects of your business
that's going to help you achieve a few things. First,
it's going to reduce the risk of your business being hurt by
something that is happening in any one of those areas.
If you are not diversified and you have all your eggs in one basket,
something happens to a market,
to an industry that can force your business to collapse,
you also will benefit greatly from this. So if you are diversified,
you can enjoy additional revenue streams for your business,
you can increase the growth of your business and the long-term value
things that we talk about a lot in the context of exit planning.
Hey Nicki G, did you know you can also get our show as an audio podcast?
Of course, I know you can get the show as an audio podcast. I'm on it,
but does our audience.
I don't know. So those of you who are watching on YouTube,
you can find us wherever you get your podcast.
Just search up the Inside BS show with the Godfather and Nicki G and
you'll find us right there.
Click the follow button so that you never miss a show. Now,
there's a couple of reasons why you're going to want to do that. Nicki G,
tell 'em what the first reason is.
You get to ask us questions that is exclusive to our podcast
listeners.
Yeah, we only answer listener questions on the audio version of the podcast.
We don't do it on video.
So if you want to hear what everyone's thinking or if you want to ask us a
question, you got to download the audio podcast. The second reason,
and my favorite reason is because you can take us with you.
You can have a little Nicki g in your pocket while you're working out in the
gym, washing the dishes or walking the dog.
I love me some Nicki G in my pocket when I'm walking the dogs.
I don't know about you Nicola, but that's one of my favorite things to do.
Absolutely. Take us with you.
After you watch this episode here on YouTube,
go to wherever you get your podcast,
click the follow button so we can go with you on your journey and you can ask us
questions. We will see you or more like hear you there.
So let's dig into some of these different areas where you can diversify your
business and talk about how and give you some examples to do that.
The first area I mentioned was diversifying your markets.
So you are operating in particular markets and you want to think about how can I
expand those to better reduce that risk and increase my growth and value?
A good example of this, and an easy one we all can think about is Amazon.
Amazon originally started selling books in the online market space.
That's what they were known for.
Now we think about Amazon for pretty much everything that we want to order
online.
I'm not to what Amazon doesn't provide until I search and find something which
is not often. You can buy clothes on Amazon,
you can still buy books on Amazon,
you can buy houseware on Amazon.
So that is a great example of a company that thought about what different
markets can we enter into in case one of these particular markets should
collapse online books.
Maybe that will change just like we did with bookstores and retail stores
and that became online books.
So if you have an area of a particular market where it could be exposed to
weaknesses,
now your business will be able to continue generating revenue from these other
markets so that you are not wholly dependent upon a single market in the event
something happens to that particular market. What do you think about that, Dave?
Yeah, I think you're right about that for sure. And when I think about markets,
you know what I think of, I think about geographic markets.
So think for example about us.
You have a law firm that is based in South Florida.
What happens if there's a hurricane here in south Florida and there's no power
in Miami-Dade County for 10 days? Guess what? Your law firm,
you're basically sitting on your hands for 10 days probably with a battery
operated fan blowing in your face as you wait for the power to come back on.
You need to diversify and have some work that you do outside of the state of
Florida because we have an ever increasing risk associated
with storms that could potentially take your business
offline for a period of time.
Now you can diversify that risk by having an offsite place where you can
work. So maybe you can go to a family's house and
work out of Pennsylvania if there's a storm coming,
and that's a legitimate option for you.
You can still do Florida based legal work in Pennsylvania because there's
internet access there. But think about a dry cleaner.
We talk about the dry cleaning example all the time.
Dry cleaners got four stores and they're Miami-Dade County and Broward County,
Florida,
and a storm like Irma blows up the center of the state and what happens?
Miami-Dade County, Broward County, no power for six or seven days.
That dry cleaner has got no revenue, no cashflow for six or seven days.
So diversification of a specific
market.
Also geography needs to be taken into consideration as
well.
If you are located in a specific geography and there
are inherent legal risks with doing business in a specific geography,
think about the pandemic and gyms like workout
facilities here in south Florida or here in the state of Florida,
gyms were able to be open almost the entire time they were closed for two weeks.
If you owned a gym in New York state or in the state of California,
you're out of business. That's it. Two years, you were closed for two years.
So geographic risk,
market risk is real as your business is
maturing and you're starting to think about how much your business is worth,
a buyer is going to price in any type of market-based
risk. That's just a fact. So when you and I,
Nicola are looking at business and we're talking to a business owner and we're
looking at market industry and suppliers,
we're going to point to any market risk that exists.
And if they don't want to open up a location outside of where there's
geographic risk, they don't want to diversify.
There are other ways to mitigate that risk perhaps through insurance or perhaps
through having a contingency plan like we talked about with your law firm for
you going out to western Pennsylvania to operate your firm for the two weeks
when there's no power after a hurricane. So when I think about market,
in addition to along the lines of product line,
I also think of geographic markets as well.
Yeah, a great example.
I'm really glad that you used the law firm because I lived through that.
So I worked for a firm that had offices in other geographic locations and we
were hit by hurricanes and most of us had to just park our work. I mean,
you worked as long as your laptop was able to operate until that battery died,
but you didn't have internet access.
So we were able to shift that work to other markets to allow there to be no
downtime of what was happening. So great example of being able to do that. Now,
we talked about market diversification, Dave,
but now let's focus on industry diversification. Talk to us about that a little.
Bit. So when it comes to industry diversification,
I'm not talking about your business,
I'm talking about the industries your clients are in.
So if your clients are all in healthcare
and a recession hits the healthcare industry, you've got a big problem.
Nobody who's going to spend money on your products or your services.
If your clients are all in oil and gas and there's a huge shift to
alternative energy and everybody's into solar and wind and the
oil and gas industry takes a 30% hit or a 40% hit and your
services, your products are considered discretionary spending,
nobody's going to be spending money on you. My rule of thumb is this,
you want to take the approach that you don't want any
one industry to be more than 25%
to be responsible for more than 25% of your revenue.
I saw this firsthand in 2008.
I got a call from a lawyer whose number one client was
General Motors and General Motors in 2008 had a huge
credit issue and they filed for bankruptcy protection. And this guy called me
and he said, I need you to help me find some business like tomorrow. And I said,
you should have focused on this 18 years ago. He's in practice for 20 years,
and General Motors had been his biggest client for 18 years and they were
90%, 90% of his business came from this one client.
It would've been a big problem if more than 25% of his business came from the
automotive sector. I was just three weeks ago, I was just down in Toledo,
Ohio and I was speaking to a room full of CEOs and in that room there was
the c e O of a robotics company and he made
robotics for assembly lines for cars.
And his top three customers were companies that made cars
in the United States.
And he was talking to me about a particular challenge he had and I said,
it strikes me that what you're mentioning to me is a challenge,
but I don't think it's your biggest challenge right now. And he said,
what do you think my biggest challenge right now is? I said,
your biggest challenge right now is the US economy.
If the US economy goes in the tank,
people are not going to buy American cars and they're not going to be making as
many American cars on assembly lines and stuff is not going to break down and
they're not going to need your robotics. So if I were you,
I would be looking at foreign car manufacturers like go up to Canada,
go to Europe,
go to Asia and offer your robotics to people in
other countries. So he's heavily focused on that industry,
but he can diversify that industry risk by spreading the risk out
over different geographies. So a big rule of thumb for me, Nicola,
is no more than 25% of your business coming from any specific
industry.
Now if you're like this guy and your entire business is focused on making a
specific thing for the automotive industry,
I would say long-term,
if you're really serious about maximizing the value of your company,
and this is not a popular recommendation, but it's a sound one,
you have to figure out what else you can manufacture for
someone else in another industry with the material have on hand or with
the process you have on hand. And he said to me,
what do you mean what else could I do? I said,
maybe you could be a consultant to help people set up factories to build
robots,
and you could work with people in other industries as a consultant to build
factories for robotics in other industries.
You've got to come up with some other type of revenue stream outside of what
you're currently doing. And he pushed back and he said, this is all I know.
This is the only industry I've ever worked in. And I said, look,
I completely get it. I completely appreciate that,
but that doesn't mean that it's not a problem.
It is what it is, but that doesn't mean it's not a problem.
And I can give you another example. There's an agriculture,
an ag company that I work with here. The guy makes one plant,
he raises one type of plant, he grows one type of plant.
He's very well known. And so I don't want to out him,
but he only grows one type of plant and he ships these plants
all over the southeast.
He's even shipped them outside of the southeast to southern California.
He's the number one provider of these types of plants to the
entire, basically to the entire nation, maybe even to the world. I don't know.
There's a huge amount of risk in that because he grows 'em here in the Redlands
in South Florida. So a storm big problem. So he's,
he's got specific geographic market risk, and then he's also got industry risk,
one type of plant. That's it.
Now he sells 'em to specific types of developers who
develop different types,
different types of commercial developments. These plants are really expensive,
but they go really well in commercial developments.
So he has diversified his risk when it comes to the different
types of places he sells them to,
but it's just this one type of plant grown in this one space,
huge amount of risk there.
So in both of your examples, it requires some flexibility.
So you may think that there's no other option, but in both of those,
there's a core competency you mentioned with a robotics person. It's robotics.
And yes, while you're used to only working in the automotive industry,
you could still take that skillset and apply that to another industry.
Same thing with a plant. That's one type of plant.
You could think about growing another type of plant and use something that is
maybe a little bit similar so that you can extend those core competencies to
another type of plant to provide that.
So it's going to require some thought by use some additional development of
strategy and flexibility to make that happen. But in the end,
you're much more protected in the event something happens to the market or the
industry as we've now.
Mentioned my go-to for those folks, Nicola, is I say to them, okay,
let's pretend you sold your business today. What would you do?
And almost always they say, well, some sort of consulting, well,
what would you consult on?
I would teach people how to set up a farm just like I did. And then I say, okay,
how about we start doing that? Now
how about we make that 15% of your revenue now so that you
could make it 45% of your revenue if your farm gets wiped out,
or you could make it 45% of your revenue if all of a sudden there's a
disease that runs through the farm and the plants all die. You know what I mean?
So that question,
what would you do if you sold this business usually prompts a different type of
thinking. And I want to make something really, really clear, Nicola,
before you move on to the final element of this. That is that these
folks were highly successful because they only focused on one thing,
right? So this niche focus, or if you're fancy,
you want to say niche focused focus
is what leads you to be successful when you're a startup.
But at some point you have to think about balancing
the risk of only doing one thing in one place or having one type
of customer with the health of your business overall as a startup. Go for it.
Pound away at that. In fact, the guy who's the farmer,
the guy who grows the plants, he's the person who told me,
he told me this 12 years ago. He said,
I'm successful because I know what business I'm in.
I'm in the business of growing this one plant and I sell it to commercial
developers all over the place. They know me as the guy who sells this plant,
and I'm the guy who can get it to 'em.
They tell me a season ahead of time how many they need. That's how many I get.
That's why I'm successful because I know what business I'm in. So I get it,
I get it. But at some point when you're moving from startup phase into
enterprise phase,
you got to start looking at this risk and you got to assess it,
and you have to realize that your business would be more valuable if this risk
was diversified.
Yeah, absolutely. So the third area,
let me jump into that one that we haven't talked about yet is diversity with
respect to your suppliers and your supply chain.
So let me use an example to discuss this subject area.
So you've got a coffee roaster for example, and let's use Seattle.
Seattle is a huge,
huge area for coffee roasters achieved much notoriety in that space for
producing coffee.
So you've got your supplier who's going to provide the cups for your coffee.
What if you're only using one supplier? Well, let's think about that.
What if the factory where the cups are coming from has a fire in the factory and
now there's no cups that could immediately shut down your business when you've
got demand, you're open every day. You only have so much supply.
You don't have a warehouse where you're storing cups.
If you are dependent upon only one supplier,
that can be a significant risk for your business if anything happens to that
supplier. So need to have other ones that are already lined up,
not ones that you're looking for in the moment, something happens,
but other ones who maybe you use them from time to time or you already have them
arranged, set up so that if something happens, you've got them there,
you know that they can provide immediately to I meet your needs so that your
business does not have to shut down. So using that same example,
let's think about the supply chain aspect of it.
Where are your coffee beans coming from?
So oftentimes you're relying on a supply chain to deliver the coffee beans that
you are using to where you are in Seattle,
so you can then roast them and provide the coffee. We all love,
we all saw this during the pandemic.
The supply chain was absolutely crushed by the pandemic.
And so many companies out there had to be flexible and resilient and figure out
what they were going to do to get through that period of time. And there weren't
many options. And what some of those roasters did in Seattle was great.
So they were able to work directly with farmers and importers to get their
coffee beans.
So just one way to be flexible and to find another avenue to still get what they
needed.
But having that plan in place to be able to look somewhere else and
adjust is going to reduce your risk and help you move forward.
Also, thinking about where those beans are coming from,
what if you're sourcing only from one country? We all love Colombian coffee,
but what if all of your coffee supplies dependent upon beans coming from
Colombia?
What if there's a major weather event in the country that destroys the
crops that are going to result in the coffee beans for your business?
You ought to think about diversifying into another country where you would be
able to have some other type of stream for your product so that you're not
wholly dependent upon a particular source.
So that's just a few examples of how you can use your diversification with
suppliers and your supply chain. What do you think, Dave?
I am going to pick up on your coffee example.
I had a client that had two specific issues related to this that'll highlight
other supply chain risks.
Coffee manufacturer getting their coffee from Africa,
somebody most likely a competitor, went to the media,
did a little bit of an investigation and found out who was helping harvest the
coffee beans. Slaves not good for business,
all of a sudden they couldn't use that vendor anymore,
could not use them because they were using slaves,
literally using waves to harvest the beans they
were using in their coffee. They had to pivot on their supply chain,
on their supplier immediately,
and it was not without downtime and it was not without tremendous,
tremendous expense.
And the fact that they didn't vet the supplier in the first place,
their brand took a huge hit, same company years later,
had a bribery issue with being able to do business in the
country they were doing business with,
caused a transnational torts issue when it was revealed
that they used a pay-to-play model to be the company that had
access to the fields to be able to harvest the coffee.
So there are all sorts of, and by the way,
that deal with the government was brokered by the place where they were sourcing
the coffee beans. So I mean,
there are all sorts of supply chain risks.
You need to,
I don't care if it's the best beans coming from this one location with wine,
it's the best vineyard making this type of wine,
and it's because of the geographic makeup and you have to use this one vineyard
if there's a risk of anything happening.
And we saw this happen in Napa Valley a couple of years ago with the fires,
right? If that's the only place you're getting your wine,
you've got big problems. So
you don't have to be like 50 50 with these suppliers.
It can be 80 20, it could be 90 10.
You just need to know that that 10% can be ramped up to 60 or
70% if they have to. And if it can't,
then you should have 50, 25,
25 or 50, 30, 20.
You should have multiple suppliers that could handle the situation for you.
There is a huge advantage,
and in business they call it favored nation pricing when you're buying all your
stuff from one particular vendor.
But the inherent risk in that is so great that what a lot of people will
do is when they have a favorite nation pricing deal with somebody,
they also reserve the right to start their own line of production for that
thing that's being supplied so that if they had to, they could do it.
They could do it themselves.
We did this when I was at Marriott with the executive state brand in New York
City.
We had a huge problem with outside vendors who are cleaning our apartments.
So we started our own housekeeping business and we were using our
own housekeeping business to do 50% of the apartments,
and we had six vendors we were using for the other 50%.
And eventually it just worked so well that we ended up taking it all over,
but it started as a hedge so that we wouldn't have supply chain issues. I mean,
that is a risk that nobody thinks about.
And in the day and age where we're only a year out from massive c o issues,
you got to be thinking about that because there were massive,
massive supply chain issues all throughout Covid that rippled through the system
for a year afterward. So supplier diversity is a huge,
huge deal.
Yeah, absolutely.
There are only a few companies that really weathered that storm flawlessly
whenever those issues hit. And if anything,
the pandemic taught us so many lessons about not just supply chain,
but how to really be flexible with our business,
how to think about it in advance so that we're not caught in the big thing that
might happen, whether it's a pandemic, I know that's an extreme example,
or it's some sort of market impact like nine 11.
So we're already prepared for those types of events that might hit us.
Think of it this way,
if you were sourcing parts of your product from China and you were selling to
China during the pandemic,
you got crushed because you couldn't manufacture and then you couldn't sell to
the largest market on the planet because all of China was shut down for a really
long time.
So sometimes we're victims of our own success and we keep pouring
gas into the engine to go as fast as we can in one direction,
and that's fine,
as long as you understand that without that supplier
diversity, the market diversity, the industry diversity,
it's going to have an impact on your business because a sophisticated buyer is
going to discount the value of your business because of the lack of
diversity. Even a lender,
I've seen people have trouble getting credit because there was a lack of
diversity,
particularly among clients or I haven't seen it because of vendors,
but clients or market,
especially geographic diversity lenders are really hesitant.
They won't lend into an environment where there's not enough diversity because
they don't want their interest rates being paid.
They don't want to not get distributions for a period of time because of some
sort of an event that stops production or an event that stops people from being
able to sell.
So you've heard in here,
diversify your business strategy to protect it against risk
of events happening that can harm your market, industry,
and your suppliers and supply chain.
This is key value driver number eight on the inside p s show.
If you enjoyed today's show, watch another episode.
We'll be back here tomorrow. I'm Nicki G, and you are.
Dave Lorenzo, the godfather of Growth. Tell your friends, watch more shows.
See you tomorrow.