Are All of Your Eggs in One Basket?

If felt like déjà vu all over again.  Last month I was sitting with a group of aerospace executives who were trying to figure out how they would manage their massive backlog. It reminded me of a time that I was in North Dakota, hearing about how hot the energy sector had been. Of course today, the energy sector has contracted as a result of $45 a barrel oil prices, and is facing a wave of bankruptcies and discontent.

In the shadow of the Great Recession, those companies who have all of their eggs in one basket may need to pause and reflect.  It is pretty easy to focus on the volume that is right in front of you. But to do so at the expense of long term growth can be a trap.

Consider the plight of the construction industry. Some have waited out the storm, only to experience a slow housing recovery. Many waited too long and didn’t make it. One can live and die by concentration in a singular industry life cycle.  The construction companies that maintained financial health in the downturn were the ones who had identified new opportunities to exploit and were able to adapt well before the market bottomed out.

To be a one trick pony is inherently dangerous (I am all out of clichés). The problem is that businesses that sell a single product or service into a single sector often do not see the business risks until it is too late. Once a sector contracts, all competitors look to expand into the same ancillary services at the same time.

Consider a sampling of some of the major industry indexes tracked by the U.S. government and their 2014 GNP Growth[i]:

• Agriculture, forestry, fishing and hunting -7.2%
• Mining -1.7%
• Utilities 5.5%
• Construction 6.0%
• Manufacturing -0.2%%
• Professional and Business Services 4.9%
• Wholesale Trade 1.3%
• Transportation and Wholesaling 3.7%

Clearly, it was a bad year for agriculture, given the drought in California and inclement weather around the country. Conversely, construction is back on the rise. The point is that industries do not always move in lock step with the economy. Leveraging a core competency in multiple verticals is the easiest way to mitigate concentration risk.

Naturally, diversification comes with its own risks, primarily the ability to execute in unfamiliar terrain. But we shouldn’t let execution risk hamper our ability to explore new markets and exploit new opportunities.

So if all of your eggs are in one basket, get out of your comfort zone. Jump in, the water is warm.

[i] Bureau of Economic Analysis

Marc Emmer is President of Optimize Inc., a management consulting firm, specializing in Strategic Planning. Marc can be reached at marc@optimizeinc.net.

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