"Don't put all your eggs in one basket." - Here's why this proverb is important in the business world…

From the desk of Miles Everson: Welcome to today’s edition of “Return Driven Strategy (RDS)!” I hope you’re all having a great week so far. Every Tuesday, I talk about my friend and colleague, Professor Joel Litman’s insights on RDS as written in the book, “Driven.” For those of you who are not yet familiar with this, RDS is a pyramid-shaped framework with 11 tenets and 3 foundations. By properly applying these principles, you can achieve your professional and/or organizational objectives. Today, let's delve deeper into the 10th tenet of RDS: Balance focus and options. Are you ready? Keep reading below to know the significance of having options in your business or investment.

"Don't put all your eggs in one basket." - Here's why this proverb is important in the business world… Are you familiar with the saying, “Don’t put all your eggs in one basket”? This is usually applied in the context of one’s investment strategies. The proverb simply means that you should not concentrate all your efforts and resources in just one area as you could risk losing everything. That’s why you should diversify your portfolio instead of “putting all your eggs in one basket.” How does that apply in the context of business strategy? We’ll take a look at that in today’s article… The Beauty of Options Some of the highest value creators in the world are venture capital firms (VCs). These are the ones that provide funding to “risky” business opportunities in hopes of the business succeeding with extremely high returns. In other words, VCs are experts in start-up businesses and diligent in evaluating business plans and entrepreneurial management teams. A VC portfolio can contain 20 to 30 companies at one time, though the VC firm has fairly no idea which one of these investments will pay off. … but that’s okay. After all, no investment is certain, no matter how great the business opportunity. Even if everything about the business seems ideal, little is still absolutely certain. Perceptions are regularly wrong, and forecasts are always wrong by some amount. So, where do VC firms get their confidence despite all of these? It’s in having 20 to 30 REAL options in owning 20 to 30 or more separate businesses, which enables VC firms to both reduce their risk and increase their opportunity at the same time. As long as any one of a VC firm’s investments is gauged to pay off by 10 times or more, only 3 out of 30 ventures need to succeed. That’s because the return on a single VC investment can be 30 times or more, justifying the other failed yet similarly promising investments. See the point here? Through a portfolio of options, a business can both reduce risk and increase opportunities. However, this will only be possible as long as each option is handpicked and managed well. Think about this: One BIG, risky investment could be too much for a single firm. So, what’s a solution to such an issue? One recipe for longer-term success is having about 20 smaller risky investments, allocated in stages with adequate but limited amounts of capital and resources at each stage. Success is Almost NEVER a Straight Line Do you believe that the shortest path from point A to point B is a straight line? Well, despite what you may have learned in school, the shortest path from these two points is almost NEVER a straight line. This is especially true when “shortest” is defined by the least time, effort, or resistance. Allow us to explain further through a simple demonstration… Have you ever seen a straight bolt of lightning? We doubt any of you have. That’s because lightning represents a high amount of electrical power, which seeks the path of least resistance. No one ever sees a straight bolt of lightning because a straight line is never the least-resistant path. From the sky to the ground, the lightning follows a number of potential paths with different branches and forks. Some branches are dead ends and never reach the ground. The lightning never flows in a straight line because the variables that cause resistance in the air and in the weather simply make a quickly shifting and bending pattern the most efficient, just as every picture of a lightning bolt shows. See? In just about anything in nature—plants, trees, migration patterns, rivers, etc.—a straight line simply does not happen naturally. Sure, plants still grow towards the sun, birds fly north and south seasonally, and rivers meander. The goals are still achieved, but the paths in between are flexible, bending, and shifting as the other variables demand. How should you see this in light of Return Driven Strategy’s (RDS) Tenet 10: Balance focus and options? According to Professor Joel Litman and Dr. Mark L. Frigo in their book, “Driven”: “There is uncertainty in all business. We cannot know ahead of time what the shortest path will be to any objective. To manage through uncertainty, managers need to plan for forks, for branches, for dead ends. If a lightning bolt ‘decided’ ahead of time to go one particular branch without shifting as the elements would suggest, regardless of how much power is in the bolt, it may never reach its destination.” In other words, there’s no one or fixed formula to success. Managers and businesses should be flexible enough to handle whatever changes need to be applied to the company. What worked yesterday might not work today… and what worked today might not work again tomorrow. Time and again, successful firms would tell you that their path to success comprises different strategies to tackle different signs of the times. The bottom line? It would be extremely difficult to assume that a business environment can somehow violate nature’s laws to fabricate a straight path. It's okay to aim for high returns and wealth creation, but you must be flexible enough to change your chosen path if necessary. — If you’re looking to gain a better understanding of Return Driven Strategy and Career Driven Strategy, we highly recommend checking out “Driven” by Professor Litman and Dr. Frigo. Click here to get your copy and learn how this framework can help you in your business strategies and ultimately, in ethically maximizing wealth for your firm. Hope you’ve found this week’s insights interesting and helpful. EXCITING NEWS AHEAD The world of work has shifted, and there’s no going back. 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Let this book help you future-proof your career and organization in the new world of work.     Stay tuned for next Tuesday’s Return Driven Strategy! Cable television was considered as the undisputed king of home entertainment for decades. Learn more about the death of cable television through the lens of RDS in next week’s article!