De-Risk & Diversify
Expecting stability in today’s world is a risky delusion.
Here is an insight on what’s shifting in the world, and how it can shape the way you think, act, and lead for sustained global success.
To state the obvious: Expecting stability in today’s world is a risky delusion.
The past five years have confirmed the interconnectivity of global systems, with disruptions impacting supply chains, trade policies, and economies on a large scale. Events like the COVID-19 pandemic, Russia’s invasion of Ukraine, ongoing conflicts in Asia, the Middle East, and Africa, as well as rising tariffs, have demonstrated the vulnerability of businesses that focus solely on local markets or a limited set of international markets.
Long-term resilience requires more than just looking beyond borders; it demands diversification beyond traditional business models.
In simple terms:
Where you are now is not where you have to remain focused.
What you have always done is not what you must keep doing.
Who you know and work with can expand, unlocking new possibilities (and foreign currencies).
This is not groundbreaking, yet many business leaders still overlook these insights.
Could one more major election outcome in a key economy, a further unexpected war, or another pandemic be the tipping point?
It might be for some.
For others, there’s no need to wait.
Benefits of Diversification
Peter Drucker, Austrian-American management consultant, said:
“The greatest danger in times of turbulence is not the turbulence - it is to act with yesterday’s logic.”
For any company, with one employee or 100,000 employees, expanding with a diversification strategy means working with an updated logic. Benefits are many, and include:
Risk Reduction: Diversification enables businesses to pool unsystematic risk, reducing volatility in cash flows and providing competitive advantages. By entering new markets or product lines, companies can decrease their dependence on single revenue streams, enhancing resilience to market fluctuations.
Improved Financial Performance: Research indicates that diversified companies often outperform undiversified ones, as highlighted in The Effect of Diversification Strategy on Organizational Performance by Moruff Sanjo Oladimeji and Itohowo Udosen1:
Related diversified organizations report a 26.8% return on assets (ROA), surpassing hybrid (22.4%) and unrelated (10.2%) diversification strategies.
Hybrid diversified entities see an 81.71% return on equity (ROE), outpacing related (14.22%) and unrelated (20.58%) strategies.
Diversification strategies have led to 20% growth and profitability, with a 26% improvement in capital structure.
Market Expansion and Growth: Diversification helps businesses reach new customer segments and markets, creating sustainable revenue streams and broadening their growth potential.
Increased Company Valuation: A diverse product portfolio across markets signals to investors that a company is robust and adaptable to shifting market conditions.
Innovation and Competitive Edge: Diversification can drive innovation and tends to encourage companies to explore new products or services that can give them a competitive advantage.
Types of Diversification Strategies
There are three main diversification strategies:
Concentric (Related) Diversification: Expanding into related products or markets, leveraging existing capabilities and supply chains.
Conglomerate Diversification: Venturing into unrelated business areas to boost revenue and mitigate risk.
Horizontal Diversification: Adding new, unrelated products to an existing product line to attract different demographics or meet unmet needs of existing customers.
The Strategy of Diversification
Diversification across these strategies mitigates risks and unlocks growth. Previously, successful diversification required significant capital, expertise, and long-term strategic partnerships. Today, a strategic approach focuses on leveraging a company’s intangible assets - such as intellectual property, expertise, and partnerships - to create new offerings and establish a new multi-market presence cost-effectively.
Capitalizing on stronger foreign currencies is a practical strategy. Companies that diversify into regions with robust currencies, or charge internationally in a strong foreign currency, can maintain profitability during economic downturns, offering both protection and growth potential.
The Shift? Tangible to Intangible
In a digital age with 5.55 billion active internet users, businesses can explore new markets without travel, time, or much financial commitment. Simple strategies, like launching online offerings spread across a range of products and services, provide a low-risk way to test and establish market presence. This shift from tangible to intangible, through the use of digital platforms, allows for scalable growth and diversification while minimizing upfront investment and operational risks.
The Greatest Driver to De-Risk: Expanding Who You Know
Building a global network, or a global inner circle, is crucial. These relationships provide business leaders with valuable insights into geopolitical trends, market opportunities, and investment prospects. This network acts as a sounding board can validate innovative ideas before significant resource commitment. It is the easiest and most impactful way to avoid working blindly.
This approach is essential as the world’s most significant trends, technologies, and threats increasingly emerge far from where we live and work. And, it is through people-to-people relationships and strengthened understanding that we can create a better world.
Practical Steps for Implementation
Here’s how to plan for success within the first quarter of 2025:
Leverage Intangible Assets: Evaluate current knowledge, experience, and expertise to identify low-cost, intangible, ways to unlock new revenue streams and reduce the risk of entering new markets.
Expand Strategically: Adopt a phased approach to international expansion, focusing on regions where existing assets can be maximized. Look beyond traditional markets to high-growth, low- and middle-income countries that may be less saturated with competition and show higher demand. Prioritize testing in markets where competition is not at its peak.
Engage Global Partners: Begin or continue nurturing relationships with international peers, strategic leaders, and influential figures for valuable insights, collaboration, and strategic connections.
Resilience and Opportunity
To succeed, it pays to proactively de-risk and diversify. Global disruptions - be they climate-related, conflict-based, or geopolitical-driven - areIf y inevitable. Those who anticipate and prepare for these shifts stand a greater chance to secure long-term success.
A global strategy that emphasizes de-risking and diversification protects against shocks and disruptions and it opens the door to growth and positive-sum innovation. By understanding global changes, leveraging resources wisely, and building cross-border relationships, its possible to create robust strategies that strengthen and future-proof organizations of all sizes.
There is more to the world than what we see.
The next big opportunity may be a few degrees away from your current focus.
See the world. Set smarter strategic priorities. Secure sustained success.
If you don’t have a diversification strategy to de-risk your business, what would it take to develop one before the start of 2025?
https://www.cjournal.cz/files/349.pdf