Diversifying your business is a familiar adage warning businesses about the dangers of stubbornly clinging to their core products or services, markets and revenue streams.
But the storms whipped up by Brexit and the Covid-19 pandemic have certainly reinforced the value of diversifying your business. As strategies go, it can mean the difference between prosperity and stagnation or even failure.
Witness, for instance, all those small businesses that pivoted quickly to manufacturing masks and other PPE equipment when the pandemic hit our shores, retailers who set up e-commerce sites, restaurants who sold produce from food trucks or exporters who found new markets in regions they wouldn’t have thought of entering not so long ago.
Indeed, according to Enterprise Ireland, Irish exporters have traditionally been heavily dependent on the UK and but in the last decade has reduced this dependency from 42% of exports to 31% – not by reducing exports to the UK but by increasing exports faster to other markets.
Types of Diversification Strategies
That said, like any major change to a business strategy, diversification can be a risky move, and much may depend on the type of diversification you choose. Generally speaking, there are four main types:
- Horizontal diversification is when you acquire or develop new products or services that are complementary to your core business and appeal to your current customers. For example, a cheese business adds a new type of cheese into its product line.
- Concentric diversification involves adding new products that have technological or marketing synergies with existing product lines or industries, but appeal to new customers. Like a maker of indoor furniture branching into garden furniture.
- Conglomerate diversification occurs when you add new products or services that are entirely different from and unrelated to your core business. For example, a gin distillery making hand sanitiser.
- Vertical diversification or integration is when you expand in a backward or forward direction along your product’s supply chain. In this approach, you may control more than one stage of the supply chain. For example, a film distributor that produces its own content, or a technology manufacturer that opens its own retail store.
Key Steps to Diversification
So, whichever type of diversification you choose, what are the key steps you should take?
1. Do Your Research
This is about finding out if diversifying is the right thing to do for your business. Do you have the resources to diversify?
Do you know much about the new markets you are aiming to break into? What can you do better than your competitors in your current or new markets? Have your customers suggested diversifying? What type of diversification would suit your business?
2. Assess The Risks
Diversification can help you in generating sales while increasing market share and finding new revenue, streams but there will be a trade-off against the extra costs associated with development, sales and marketing, not to mention the need for additional resources, skills and management.
The trick is finding that crucial balance between finding the time and resources to focus on the new venture and not neglecting your core business. If you don’t achieve this balance, you risk spreading yourself or your resources too thin to the point where you might lose everything.
Diversifying with similar products for a familiar market (horizontal diversification) may carry less risk than developing a brand new product for an unknown market (conglomerate diversification). This allows you to create a safety net which allows you to recover if one of your products or services fails.
3. Audit Your Resources
If we accept that a key factor in any diversification of your business is capacity, start by considering the resources you have at your disposal and what you’ll need to invest in. Will your current staff be able to handle the development of new products or services as well as look after the core business and customer base?
What financial assistance might be available for small businesses looking to diversify? For instance, Enterprise Ireland has a range of supports to help businesses become more diversified, including the Market Discovery Fund, a salary support scheme to help with hiring graduates with foreign language skills, and a consultancy service called the Strategic Marketing Review that can look at, among other things, risk assessment, contingency planning.
As well as reducing risk to your core business, forming an informal partnership or a joint venture with another company may also help in the search for resources and outside expertise.
4. Plan The Process
In many ways, diversification is like setting up a new business. You’ll need to understand your new market, its customers, competitors and dynamics, just as you would for any new business.
Source: Think Business