How does the blender manufacturer Vitamix get away with charging $700 for a blender when reputable companies such as KitchenAid make blenders for less than half of that?
It is because Vitamix specializes in one thing, and they do it better than anyone else.
WhatsApp was just a messaging platform before Facebook acquired them for $19 billion US. Go Pro produces the best helmet mounted video cameras in the world. These companies stand out because they poured all of their limited resources into one big bet.
In portfolio management, especially if preservation of capital is the main objective, the school of thought is to diversify a balanced portfolio of products – so if one asset class tanks, another will hopefully boom. But the problem in business with diversifying and selling too many items – especially for a young company – is that you water down everything you do to the point of mediocrity.
Below are six reasons to stop diversifying and start specializing in doing one thing better than anyone else:
- It will increase the value of your business
When you make and sell only one product, you can differentiate yourself by pouring all of your marketing dollars into setting your one product apart, which will boost your company’s value.
- You can create a brand
Big multinationals can spend millions into each of their brands, which enable them to sell more than one thing. Kraft can own the Cheez Whiz brand and also sell Philadelphia Cream Cheese because they have enough cash to support both brands independently, but with every new product comes a dilution of your marketing dollars. It’s hard enough for a start-up to build one household name and virtually impossible to create two without massive amounts of cash.
- You’ll be findable on Google
When you Google “helmet camera,” Go Pro is generally listed at or near the top, despite the fact that there are hundreds of video camera manufacturers. It’s easy for Go Pro to optimize their website for the keywords that matter when they are focused on selling only one product.
- Nobody cheered for Goliath
Small companies with the courage to make a single bet get a bump in popularity because we’re naturally inclined to want the underdog – willing to bet it all – to win. When Google launched its simple search engine with its two search choices “I’m feeling lucky” vs. “Google search,” most kicked Yahoo to the curb. Now that Google is all grown up and offering all sorts of stuff, we respect them as a company but do we love them quite as much?
- Every staff member will be able to deliver
When you specialize in one product, you can train your staff to execute, unlike when you offer dozens of products and services that go well beyond the competence level of your junior staff. Having employees who can deliver means you can let them get on with their work, freeing up your time to think more about the big picture.
- It will make your business a more desirable acquisition target
The more you specialize, the more you will be attractive to an acquirer when the time comes to sell your business. Acquirers buy things they cannot easily replicate themselves.
Diversification is a great approach for your investment portfolio, but when it comes to your business, it may be a road to mediocrity.