Diversification: An Investment in the Unknown Future
Published on May 8, 2020
Early into 2020, the world was met with a major medical scare as we learned the news of the Coronavirus outbreak. The outbreak has already led to over 900 deaths, and it has had a major impact on Chinese business.
The government required citizens (read: employees) to stay home as a preventative measure to cease the spread of the virus, leaving business owners with no choice but to temporarily close their doors. And even now, as the law officially allows the reopening of businesses, many have chosen to extend shutdowns in fear of a premature decision on behalf of the government to resume business as usual. Additionally, many local governments have acted against the state council. It has been reported by the Financial Times that “the country’s supreme decision-making body, the state council, is pushing to get the world’s second-largest economy back to work and avoid prolonging the shutdown, which started more than three weeks ago. But many local governments continued to restrict the movement of their workers.”
Since the shutdown, the global supply chain has faced turmoil. Within the auto industry, major players have been struggling to continue daily operations with the restrictions imposed on some of their Asian assets. Nissan recently announced the shutdown of its Japanese plant, a move that follows just a week behind Hyundai announcing the shutdown of all its South Korean car factories. Fiat Chrysler warned that similar issues may force halted production at one of its European plants in the coming weeks. The tech industry has seen the negative effects of this disruption as well. Apple announced just this week that it will be cutting earnings and missing this quarter’s revenue forecast due to store closings in China, as well as insufficient supply to satisfy global demand resulting from closed Chinese factories.
So, the question stands — could any (or all) of this have been avoided? Is there a lesson for business leaders in the wake of the chaos the Coronavirus has created for the global supply chain?
And the answer? Diversification! Every business should be dedicated to effectively managing risk, and a critical aspect of any risk management strategy is diversification. From a financial standpoint, there is no way to ensure long-term financial success and sustainability using a strategy that does not consider the need for diversification.
When our team meets with business leaders and owners, we help them explore ways in which diversification is possible and beneficial — diversification among clients, physical assets such as plants and employees, and intangible assets such as knowledge and critical info. Taking a non-diversified approach to the dissemination of these resources could mean that a single loss has the ability to be a major and devastating loss. If Hyundai had a more diversified strategy for component production that included factories spanning plants across a wider range of geographic locations, they would not be finding themselves in the predicament they’re in now. Hyundai isn’t magic — they couldn’t have predicted the Coronavirus outbreak. But what they could have done was implement a more diversified, thought-out risk management strategy that preemptively mitigated these unpredictable events.
I was at the JCON e-commerce event last week where I spoke with Amazon business owners. One owner mentioned that he was looking to reduce his existing retail relationships and distribute primarily on Amazon because the returns on Amazon sales were higher. What he failed to realize was that even if he has lower returns on his other distribution channels, it is still a good idea to maintain those relationships. Imagine this: Amazon shuts his account down for a few weeks. How will he offload millions in inventory with no other retail relationships? Will he be forced to leave his debt-financed inventory in his bill-by-the-day warehouse until Amazon decides to let him back on the platform?
It’s cliché, but it’s an adage for a reason: don’t put all your eggs in one basket. If you do and that basket breaks, you’re left with no eggs. And no eggs means no business.
Business leaders must assess how a lack of diversification can lead to major financial losses if a downturn were to occur and think strategically. Spread your eggs among multiple baskets.