You’ve probably heard bankers and businesspeople talking about diversifying their business. They all say that diversification is a key strategy to success, but wat does that actually mean? And what role does it play in the agricultural sector? On today’s episode of Food For Mzansi TV, we chat to MC Loock, senior manager of agribusiness at Standard Bank, about diversification and how it can benefit the agricultural sector, especially at farm level.
What’s so cool about having a diversification strategy?
One of the main reasons why a diversification strategy is important is that it reduces the risk in any portfolio. Diversification as a risk management strategy includes a range of assets and investments in a portfolio in order to reduce risks to lower than that of a single asset holder.
But what does that actually mean? In essence, it means that having multiple assets can reduce your risk, because you aren’t solely dependent on just one asset.
A diversification strategy will also improve your agribusiness’s adaptability. As the market changes, so will your consumers’ needs. If your business doesn’t adapt in order to meet those new needs, you’re leaving money on the table.
Keep this in mind when diversifying your business
Diversification is essentially about creating new income streams. A lot of African economies are heavily reliant on the primary sector of mining and agriculture. In South Africa, however, the secondary and tertiary sectors are much more developed than the primary sector which leaves the country less vulnerable to a downturn in the commodity market. That’s all well and good, but how do you start diversifying your business?
- Use the resources you have available to you: The best place to start is with your available resources. This includes the types of assets you’ve invested in, the potential of the land, the location of the property, the climatic conditions during production season, etc. Take a look at the resources you have at your disposal, and ask yourself “which of these resources can I use, and how?”
- Use your assets to shift towards multiple sources: The question you have to ask yourself is, how can you use your current assets to shift away from a single income source to multiple sources? (Tune into the episode of Food For Mzansi TV where Loock gives a good example of how to diversify, using livestock as an example). It is all about the way you grow your business and the partnerships you foster, and that all whilst reducing risk. Bear in mind that sometimes you might need additional skills and infrastructure for sufficient diversification.
Next time we’ll take a look at how to optimally leverage existing resources. We will also look at what role growth plays in diversification, as well as how to calculate risk.