It’s no secret that today’s economic climate, where decisions from the federal government are made, then adjusted, then reversed, and then sometimes reinstated, has led to a great deal of uncertainty among nonprofits and businesses alike. It’s unclear from one day to the next what the best course of action may be.
One core piece of advice I’ve offered to clients is that it’s important to have a sharp focus — a clear idea of which elements of their offer are critical and most valuable.
They should concentrate there, while being prepared to spend less time, money, and resources in areas of reduced strategic importance.
But, in a recent conversation with a former client, he suggested exactly the opposite: the importance of diversifying efforts. For example, an organization whose funding is heavily dependent on Medicaid — a source that is currently at significant risk — would be well served to develop alternative offerings and approaches with different payment sources.
So, which advice is best? Narrow your focus to a limited set of core activities… or reduce your risk through diversification?
You won’t be surprised to learn my answer: It depends. Different situations call for different strategies — there is no one-size-fits-all solution.
The Case for Focus
In working with a historic music venue facing significant financial challenges, we helped them see that many of their activities were distracting from their primary mission of connecting musicians and live audiences. These additional programs drew down precious financial and human resources for little benefit. We suggested they shut down the programs that were outside their core purpose.
The sharpened attention of management they achieved by shuttering those nonessential programs helped improve their core activities and build stronger relationships with their members and their donors. In time, they escaped from financial distress and have become more resilient overall.
There are plenty of examples like this in the for-profit world as well. Levis just announced it is selling off Dockers (known for khakis more than jeans) so it can focus on its core brands. Adidas (known for sneakers) sold off its Rockport Shoes division several years ago for the same reason.
The Case for Diversification
Diversification has benefits as well, the key one being that it acts as a hedge against an organization’s sole area of focus suddenly going south, whether a funding source, a promising technology, a target audience, or something else.
When the pandemic shut down live theatrical performances, a local opera company — largely focused on the quality and engagement of these live events — quickly shifted gears, created a video production capability, and launched a channel to stream prerecorded performances. This created a way to both keep the performers engaged and continue to generate some revenues. It also turned out to engage a new audience — some of whom could later be converted to audiences for their core live performances.
That said, not all diversification is created equal. For it to be successful, diversification needs to be smart and strategic — it’s not just about doing lots of different things.
For example, you could combine focus and diversification by developing a diverse set of programs that are focused on one specific audience. This is the situation for those offering services for individuals with intellectual and developmental disabilities (I/DD). Individuals living in their group homes often need supervised activities during daytime hours (AKA, adult day care). So diversifying into offering that service has been a natural fit. If cuts to Medicaid reduce available funding, perhaps these services could be extended to additional audiences, such as seniors with long-term care insurance who may be able to pay privately.
Contrast that with a much less effective approach: diversification that requires serving different audiences in different ways. One nonprofit I worked with years ago focused primarily on issues for women and girls. At one point, they took on a program focused on disadvantaged young men, which required a different set of skills and approach. In addition to making their operations less focused, their communication to key stakeholders and funders got more confusing and less effective. Eventually, they identified another organization — one focused on young men — to take on the program.
Focused diversification can also occur by leveraging existing core capabilities and/or resources. This may allow you to add services that enable new or more reliable sources of revenues without significant new investments. One common example of this is when museums or aquariums lease their space for special events, whether galas, weddings, or other celebrations.
Reflections
While it’s tempting to think of the choice between focus and diversification as a simple either/or question, the reality is far more nuanced. The truth lies in the context of each organization’s unique mission and challenges.
For most nonprofits, and while I acknowledge the “all your eggs in one basket” risk, I firmly believe maintaining focus is crucial. Clearly defining what you aim to achieve and who you serve not only improves your ability to deliver on your mission, but also enhances your impact.
At the same time, limited diversification can act as a safeguard against unforeseen setbacks, provided those efforts align closely with your core capabilities and support your primary mission. Straying too far from your organization’s strengths can lead to dilution of purpose, where the risks of being unfocused can become just as significant.
By thoughtfully navigating the trade-offs between focus and diversification, nonprofits can better position themselves to manage in times of great uncertainty.
