Imagine you have an orchard, and in your orchard you have ten thousand apple trees. Your trees are planted in rows, spaced several feet apart, and having them all together in one place is very convenient. It allows you to harvest apples and conduct maintenance operations easily. The trees themselves are all identical — clones of the same parent tree, let’s say Red Delicious, and your clones are all grafted to rootstocks that are also genetically identical. Having identical trees is great; you know exactly what’s in your orchard, there’s no confusion as to how the trees need to be cared for because they’re all the same, and come harvest time, there’s no chance of the apples getting mixed up, because they’re all Red Delicious. This is how nearly all modern commercial agriculture is done — one, homogeneous crop, on the largest scale possible.

One day, one of your apple trees develops a fungal infection in its roots; there’s no way to know where it came from, but it’s an infection unique to apple trees, and as it turns out, the rootstock you used is especially susceptible to this particular fungus. The conditions this year were just right for the fungus to thrive, and since it’s in the soil, you can’t really remove it. There are treatments you can try, but none of them are 100% effective, and from that first tree that became infected, the fungus is now spreading, and trees are dying.

As more and more trees in your orchard become infected, you take drastic measures, and begin removing not only the infected trees, but the healthy trees around them, to try to put some distance between the spreading fungus and its potential new hosts. Unfortunately, it’s nearly impossible to remove the entire root system of an apple tree from the soil, and the roots stay alive for quite awhile, feeding the fungus, even when they’re detached from the rest of the tree. It’s also very difficult to keep wind and water from carrying contaminated soil throughout your orchard.

You battle the fungus for a few years, but in the end, you lose your entire orchard, all ten thousand trees, and with it, your livelihood. Naturally, you wonder what you might have done differently.

You could replant, maybe try a different cultivar, or a different rootstock, but that takes money and time that you no longer have. You haven’t turned a profit in a couple years, and you certainly don’t have time to wait for new trees to mature, especially when you don’t know if they’ll even survive. You have no choice but to file for bankruptcy and let the bank take your land.

You decide to go across the road and commiserate with your neighbor; she doesn’t have an orchard like yours, but she’s doing some kind of farming. You’re not really sure what she does with her property, because you’ve been so busy with your own orchard that you’ve barely spoken to her in all the years since she moved in.

As you walk up her long driveway, you notice something — apple trees.

Your neighbor’s trees aren’t planted in rows like yours were; she has them spread out all over her property, a few here, a few there, and she has about thirty different varieties. It must be a nightmare at harvest time, you think — so many different types of apples to get mixed up, and trees scattered around, with no discernible order to them. Still, it looks like the cultivars she planted weren’t as susceptible to the fungus that wiped out your orchard.

And then you see them — a couple trees loaded with Red Delicious apples. ‘Must be a different rootstock,’ you decide, but you don’t have long to think about it, because you’ve realized that your neighbor doesn’t just have apples. She’s growing pears, stone fruit, almonds, walnuts. She has a small plot of corn, another plot with pumpkins, a little hothouse full of tomatoes and peppers. Parts of the farm appear to have gone wild; they’re covered in brambles, but on closer inspection, you see that those brambles are loaded with blackberries.

There are animals, too — a dozen or so cattle in among some of the fruit trees; some goats penned up in a particularly overgrown area, munching away; a pig gathering great mouthfuls of tall grass and carrying them back to her house, where she appears to be building some kind of nest. A few geese are nibbling on the grass along the driveway as you approach the house, and somewhere a rooster just crowed.

As you round the last bend in the driveway, you find your neighbor getting ready to cut down a couple of dying apple trees. ‘Ah, there it is,’ you think to yourself, ‘her trees are infected too.’

But your neighbor seems a bit too cheerful for someone who’s about to lose her farm; when you ask her about the trees, she explains that while these were indeed infected, she has trees with several different rootstocks, and with her trees so scattered out around the farm, she doesn’t expect the fungus to spread. She’ll chip these up for the smoker, and plant something different in their place, or not. And if she does somehow end up losing all her apple trees, she won’t be happy, but she’ll still have all her peaches, plums, walnuts, and so on.

When you ask how she’s managed to sell such a variety of fruit, in such small, inconsistent quantities, she explains that a lot of the products go into ciders, jellies, or pies, which command a high sale price compared with what she’d get for the fruit that goes into them. She also allows people to come to the property and pick their own fruit for a fee, and anything that’s leftover or spoiled becomes animal feed. As she walks you through her operation you realize that she’s growing less, but she’s making more money per fruit tree than you ever did. Still, the labor must be back breaking, without the mechanization and standardization that modern farming requires. She laughs; most of the work is done by volunteers who come to learn about organic farming.

She points to a little house up the hill from her own. “I rent it out about four months out of the year,” she explains. “That pays the mortgage on the property, so the farm just has to break even, but if things ever get bad, I can rent it out more often, or maybe build a couple more of them.”

Next she shows you a little stand of young maple trees, and asks if you know what’s happening on this part of the farm. You assume she’s planning to clear the saplings for more cropland, or perhaps for a new outbuilding, but she explains that these trees are a long term investment; they’re not much now, but someday they’ll be worth a fortune to her grandchildren. “And they suck up a lot of CO2 in the meantime,” she says.

You now wonder if she’s hiring.

I’ve painted an idealized picture, but its intent is to illustrate a few of the key concepts that are critical to my business plan: economies of scale, scalability through replication, and diversification. I’ll take them one at a time.

Economy of Scale: Every business, whether it’s a farm or a retail store or a nonprofit organization, has an ideal scale at which it’s most agile and efficient. Too small and it lacks the resources it needs to succeed; too big and it becomes bloated and cumbersome. I’ll give you an example from the nonprofit world.

Several years ago I did some research on a bunch of local humane societies, to determine which ones made the best use of the money that was donated to them. Some of the organizations had small budgets, and some brought in millions of dollars every year. All of them had animal shelters, but the smaller organizations had old, drab facilities that were falling apart, while the better funded groups had big, beautiful, state of the art shelters with veterinary facilities, offices, training centers, etc. By all appearances, the bigger organizations were doing the best job — they had the most money, after all.

I determined that of all the services humane societies perform in their communities, two were far and away the most important: pet adoptions and spay/neuter programs. They also have outreach programs, education initiatives, pet food drives, advocacy programs, etc., but when it comes to the things that make a measurable difference in communities, adoption and spay/neuter were the two programs that most directly and effectively addressed our two, main, pet-related problems: homeless pets and pet overpopulation. They were also the two, primary activities of all of the humane societies I surveyed, and they were the only major activities that had quantifiable results: how many animals were adopted, and how many were spayed or neutered.

What I found was that humane societies with annual budgets of around $500,000 a year were operating the most efficiently and effectively. They had the most adoptions and the most spays and neuters per dollar raised. Smaller organizations were less able to produce results because they couldn’t afford the same level of facilities or staff, but what surprised me most was to see that as organizations grew larger, more and more of their money went into things other than sterilizing and finding new homes for pets. If those organizations had been in communities where they had successfully wiped out the problems of homeless pets and pet overpopulation, I might not have been concerned, but that was not the case.

As the organizations had grown, they had eventually plateaued in terms of their actual work with animals, and an increasing percentage of their resources had gone into administrative expenses, fundraising, outreach, and facilities — not for animals, but for people. Even though I liked some of these organizations and liked the people running them, I had to conclude that they’d do better work if they broke up into several, smaller animal shelters.

In the for-profit world, economy of scale impacts plays a different role; companies measure their success by their bottom line. Business owners tend to prioritize their own profits over the company’s efficiency; with growth, net profit can increase as the profit margin decreases, meaning owners make more money, but it takes increasingly more resources to produce a profit. For each business there is an ideal scale that generates the highest proportional output with the lowest input; below this ideal size, businesses struggle, and as they exceed it, they become proportionally more costly to operate and their management demands increasing complexity.

Say you own a small apartment complex with one full-time maintenance person and one manager. If you owned a smaller complex you might be able to manage it yourself, but you’d be working a lot harder to make about the same amount of money you make now. If you had a larger complex, your manager would need an assistant and your maintenance guy might get overloaded; contracting out the extra work would cost more, but to keep the work in-house you’d need to hire an assistant for him, and he’d have to divert some of his time to training and supervising. During times when there wasn’t a lot of work to be done, you could be paying someone to sit around. In all likelihood you’d be paying two people to do the work of one and a half.

You’d make more money from a larger apartment complex, but the business wouldn’t run as efficiently. If you wanted to increase the size of your business and keep your higher profit margin, it would be better to buy a second complex that ran independently of the first.

The ideal scale, in my opinion, is a business that is as small as it can possibly be without requiring its owner to work, but where the owner can step in and take over operations if necessarily. And instead of growing that business to make more and more profit, you replicate it.

Replication: On your neighbor’s farm, there were a lot of apple trees, but they weren’t planted in one, large orchard; instead they were in groups of a few trees each, placed throughout the farm. Your neighbor believed that by spacing the plantings out, she minimized the risk of fungal infections and other problems spreading between the trees, while still producing a viable crop. When one group of trees failed, the others weren’t affected and continued to bear fruit. Instead of one, giant orchard, she had smaller clusters replicated around the property.

I describe this as the choice between two models: modular or monolithic.

Using the apartment complex example, imagine there is a fire that wipes out the entire property; in that scenario, would it be better to own one, large property, or two smaller ones a few miles apart? Besides operating more efficiently due to both properties being the ideal size, having two complexes allows you to mitigate potential problems, and even outright failure. If your business is a monolith, a single problem can wipe out your whole company, but if it’s modular, unexpected issues can often be confined to a single module, instead of hurting the entire business.

Modular businesses are more agile and adaptable. Modules are easier to buy and sell than monoliths. They’re simpler and easier to manage. Implementing change is easier. Organized correctly, there should be less waste, and fewer superfluous job positions. Problems can be isolated, and what you learn from one module can help you manage the others better. But you can also mix things up more easily in a modular system.

Gong back to the apartment complex, let’s say you have several rental properties spread out around the county. All of them are doing well, and occupancy is high, but one of the properties is a bit of an outlier, because it’s a block from a popular beach. You charge higher rent there, but you also have higher tenant turnover. Your tenants typically fall into one of two groups — higher income people who end up buying their own homes and moving out, or middle income people who can’t justify paying the high rent over the long term. You still maintain high occupancy at this property, but you have to do a little more work to keep it rented; since it rents for more than your other places, that seems like a fair trade-off.

You learn that some of your neighbors are also renting out their properties, but not to long-term tenants; they’re running their places as vacation rentals. They charge about three times what you do, but they don’t have the security of long-term leases. Still, they seem to be doing pretty well, so you decided to offer one unit as a vacation rental and see what happens. Sure enough, you find that even with much lower occupancy, you still make more money renting short-term to tourists. As your long-term tenants move out, you transition the property to vacation rentals; this particular module, in this location, was better suited to that business.

Your other properties are spread out around the county. You have one near a college campus; one in an industrial area; one in a middle class neighborhood surrounded by single family homes and duplexes; one downtown in the middle of all the action. Should you convert all those properties to vacation rentals as well? After all, it worked at the beach property. Answer: of course not; maybe the downtown property, but not the others. In your rental properties, you have a bunch of similar modules, but they’re not exactly the same; their small size and the fact that they’re independent of each other made it easy to change the business model for one of them, but the point wasn’t to change all of them, it was to make each one function optimally for the unique conditions surrounding it. The result of this was a more diverse portfolio of rental properties.

Diversification: You hear about it from investors all the time — you have to diversify. Don’t keep all your eggs in one basket, as the saying goes. This applies to revenue in obvious ways. In the farm example from above, the neighbor’s farm succeeded because she didn’t have all her eggs in the Red Delicious apple basket; she grew fruit and sold it, but she also did U-pick, made ciders and pies, raised livestock, grew vegetables, had a vacation rental, and a long-term timber investment.

There are a lot of examples of having all your eggs in one basket, including literal eggs — I have poultry where I live now, and initially I was using the eggs just for myself and supplementing my dogs’ food, but as I started producing more eggs, I sold them, mainly to one person. He had a standing order for a dozen eggs a week, so every Friday, I took them to his store in town and dropped them off. This went on for a couple years, and he was happy, because in the past he’d tried to make the same deal with other farmers, and none of them were consistent, whereas I brought eggs every Friday without fail. But then he sold his store, retired, and hit the road in his RV. Suddenly I had no basket for my eggs.

If I’d been trying to make real money from selling eggs, I’d have needed to diversify my customer base — more buyers, obviously, but also more ways to sell. There’s a local co-op I could have sold through, where I’d have made less money, but had a consistent outlet for my product. I could have marketed my eggs more to locals — after all, they’re very high quality, farm fresh eggs. I could have sold them online as fertile hatching eggs, which is where I got some of the chickens laying eggs for me now.

Just to confuse things a little, in my case the literal eggs are also the metaphorical basket. When someone says not to keep all your eggs in one basket, that person typically means to not rely on a single source of income. In my case, I don’t want all my income to come from my egg business.

As it stands, I’m scaling back my poultry operation a bit, in anticipation of relocating sometime in the not too distant future, but my goal, when it comes to chickens, is to raise about twenty-five different breeds for eggs and meat. Why so many breeds? Because I don’t want all my eggs in one basket.

That’s a principle we all understand, but eggs/baskets metaphor also applies to links in the supply chain.

A few years ago I was looking at track saws; if you’re not a carpenter, a track saw is a circular saw that slides along grooves in an aluminum track, which acts as a straight edge to guide the saw. At the time I was making my own doors and windows; being able to make a perfectly straight, seven-foot cut would allow me to build my doors a little bit oversized and trim them down to my precise dimensions. The only problem was that good track saws are not cheap, and I was on a tight budget.

Then I found a company that had an alternative. They didn’t sell saws; instead they sold a composite track that worked with any circular saw the user already had. The track worked with a router, too — it looked like a great product that would address my needs at a price I could afford, so I ordered an eight-footer.

Weeks went by and the product never arrived. I put my doors on hold while I waited, and moved on to other projects. After awhile I forgot I had even ordered the track, but after several months, I started wanting to work on the doors again, and I was not happy. I wondered if the company had gone under right after taking my money; I emailed the business to see what was going on, and a bit to my surprise, I got a reply from the owner. He had not gone out of business — the Chinese company he ordered his materials from had.

The end result was the same, though. The owner said he was looking for a new supplier, but that he could refund my money. I decided to wait it out, and I forgot all about the order again, as more months went by. By the time a very long, skinny package arrived at my door, I had no idea what was inside. I opened it and found the track I’d ordered, along with a second one, a three-footer, to compensate me for the long wait. I’m glad to say the product works very well, but in the time I waited for it I could have saved up and just bought a top of the line track saw.

This was a guy with all his eggs in one basket, hopefully not when it came to his personal income, but certainly when it came to sourcing the material for his product. The fact that said basket was slow on the other side of the world didn’t help the situation. Unfortunately he may have had no other option for his specific product, but the damage his supply chain problem did to his business is highly illustrative. If he’d had a backup supplier or a more readily available material, he wouldn’t have had to halt production for a year and give customers extra items to compensate them for delays.

There might be some irony in the fact that my post on scale is pushing 4,000 words, but hopefully I’ve made my case. When it comes to my own business, the goal is to stay agile, to be highly replicable, and to continually diversify. If that seems like a strange set of criteria for a farm, keep checking back for more details.