I hope you had a most enjoyable St. Patrick’s Day weekend. The weather held up well and it was great to see so all the wonderful floats in the parades around the country. It was also nice to see some dealers entering and showing off their dressed up tractors in the parades. We need that bit of cheer to take us away from the realities of business life.
I would like to touch on the topic of diversification and correlation in business. This might sound boring for some, but when you delve into it a bit more it can be a fascinating topic.
When investing in financial investment funds, brokers or fund managers will ask their clients what level of risk they want to take. The risk level is based on a scale of 1 to 7, with 7 being the highest risk. For investors that want to opt for the middle to low risk category range, they will be given safer options. To spread the investment risk, fund managers will create a portfolio that has different types of funds in it, usually around four or five, depending on the amount invested. This is known as diversification.
Diversification avoids putting all your eggs in one basket. This is seen in our own industry where dealers are not depending on just one type of product to make a profit. At the moment there is a fall in demand for large powered tractors. This is mainly due to the extra costs and legislation that is being forced on farmers. With that in mind it is important for those dealers that sell the high end range of tractors to have other sales options. Selling smaller or compact tractors to the sportsturf or landscape industry might be an alternative option perhaps? Keeping an eye on market trends is important. So too is being able to adjust to these trend changes.
Another term that is often used in investment language is ‘correlation’. This describes the relationship that different markets have with each other. There are positive and negative correlations. Positive correlation is when one fund increases in value another fund will also increase. Negative correlation is when one investment fund falls in value, another fund will increase its value, which can, in some situations, also minimise the risk level.
Dealers can apply this principal of correlation to their business. Many do this without realising it. For example, with the changing of the seasons, sales of leaf blowers will fall from Spring onwards, while lawnmower and hedgecutter sales will increase during this time (negative correlation).
Understanding the correlation between different factors in your business can benefit your marketing campaigns. For example, if the more you spend on advertising and promotion results in stronger sales then that is a positive correlation. An example of a negative correlation would be if you increase the number of customer service employees, the number of complaints will decrease, which may, over the long term, save you money.
Correlation in business can be quite complicated and it would take a lot more writing in this blog to explain it fully. It involves using formulas, which are on Excel spreadsheets, and collecting lots of data such as customer habits and marketing trends. Knowing how to analyse and use this information for correlation would involve some time but the more information and data you can collect the more it will help you make better business decisions.
Correlation in business is worth looking into. There are many articles that can be found online to help with your understanding of this topic. In the meantime, spread your eggs among many baskets.
