This article first appeared in Finweek, 12 December 2013
Very often I meet entrepreneurs who, after achieving some success in their businesses, start to pursue opportunities outside of their core area of expertise. They proudly tell me they are “diversifying”. Unless you are in the business of managing stock portfolios, entrepreneurs ought to be very careful about ‘diversification’, particularly those in the early stages of their business journeys.
When you start managing multiple business interests in multiple industries you lose a key ingredient critical to success: FOCUS. You are suddenly expected to become knowledgeable about various industries with their own unique revenue and cost drivers, competitors, dependencies and peculiar risks. You are the most valuable asset in your business; you need to protect your utilisation.
Diversification can easily lead to taking your eye off the ball as you try to be a Jack of all trades and master of none, as they say. Others often get so excited by their new ventures and bored of their core business that they start falling in love with being called ‘serial entrepreneurs’.
Be careful that this excitement isn’t infatuation – otherwise known as umlilo wamaphepha in my home language. There was a time when conglomerates were fashionable, but even the largest conglomerates soon realised there was more value in perfecting one’s core business than holding equity interests in different sectors.
In January 1999, South African Breweries announced: “As part of SAB’s strategy to refocus on its core beverage businesses and hotel and gaming interests, the company has already disposed of a number of its diversified investments, namely Amalgamated Retail Limited, Associated Furniture Companies Limited, Conshu Holdings Limited, Da Gama Textile Company Limited, The Lion Match Company Limited, OK Bazaars (1929) Limited, and SAB’s clothing and footwear division. In order for SAB to further its strategy of focusing on its core operations, and for SAB shareholders to benefit directly from Edgars completing its own repositioning programme, the board of directors of SAB believe it to be in the best interest of SAB shareholders to undertake the unbundling.”
This was an announcement to dispose of SAB’s share in Edgars, after a series of other exits from ‘non-core’ businesses. The SABMiller that we know today is the world’s second-largest brewer, with operations spanning six continents including brewers in the US and China. This is after a number of hefty acquisitions in the past 15 years or so – all of which were in its core business of brewing and distributing beer. Other than a 40% share in Tsogo Sun, SABMiller has very little outside its core.
That’s partly why it is the best in the business. Bill Gates, Steve Jobs, Oprah Winfrey, Larry Page, Mark Zuckerberg, Aliko Dangote and Elon Musk are all internationally renowned for very specific products and services, in very specific markets and industries.
Even when they expand their operations, it is often within a very similar market segment, consumer market or product range. They don’t diversify, they intensify. Take Elon Musk, CEO of Tesla Motors, for instance. He has started PayPal (later sold to eBay), Tesla, SpaceX, and Hyperloop. His current businesses have a common thread: revolutionary transport solutions. Tesla Motors makes the coolest electric cars in the world, SpaceX flies cargo to NASA’s International Space Station some 400km above earth and wants to eventually transport humans from Earth to other planets, while the Hyperloop, though still an idea, is a mode of high-speed transportation that Musk believes could revolutionise travel as we know it.
Like many other successful entrepreneurs before him, what Musk has done is intensify, not diversify. He has taken his passion, added his very special skill, and applied it to a very specific industry and opened a new world of transport and travel. Take a leaf from the best. Explore strategies that extend your core business into new innovations, new markets, new products, brand extensions and all that helps intensify your business; and be sure to take this advice from arguably the most successful investor of our time, Warren Buffett: “Stay in your circle of competence.”