According to a press release, a new study from UW–Madison has found small businesses need to diversify to avoid risk and remain resilient during tough times, but that diversification must be in the right direction.
The study surveyed leaders of nearly 900 businesses — firms in agricultural production, food processing and manufacturing, grocery wholesaling, food and beverage retailing, and restaurant dining — in Wisconsin, California, Florida, and Minnesota during the spring of 2021 and sorted them by the extent and dimension of their diversification.
One hypothesis stated that diversification would fortify small businesses; the other was that diversification is dangerously inefficient, stretching resources and dragging down productivity. The study also compared the effects of vertical diversification and horizontal diversification.
Vertical diversification is participating in many different links of the supply chain — for example, working in both production and retail by operating a farm that grows vegetables and a shop that sells vegetables directly to customers. Horizontal diversification means spreading efforts across a single link in the supply chain, such as stocking your store with food and fresh-cut flowers and a selection of wine.
The vertically diversified firms that participated in the survey were roughly four times more likely to have closed during the first year of the pandemic than undiversified businesses. The horizontally diversified firms were only half as likely to have closed as undiversified companies and less likely to experience labor shortages.
While there were large differences in resiliency, neither the horizontally nor vertically diversified businesses were less likely to have laid off employees during the pandemic.
UW–Madison economist Andrew Stevens and graduate student Jim Teal examined how the shock of the COVID-19 pandemic affected the fortunes of more than 200 small companies in the agricultural and food sectors. They wanted to know whether diversification made the businesses more resilient in the face of supply and labor disruptions.
The differences in business approach and effects of the pandemic’s market disruption were easiest to compare among 221 small companies with, on average, annual revenue just under $2 million and about eight employees.
“Those qualities are relevant to a large piece of the agrifood economy — over half of the economic activity in that space,” said Stevens, whose work is supported by the U.S. Department of Agriculture. “The vast majority of businesses in the agriculture supply chain are of that size. Most farms are of that size.”
