At some point in a business’s life, diversification becomes an option. In many cases, it’s the only viable way to sustain enterprise growth. But the decision to introduce new product ranges or to spread out into new markets is seldom a light one to make. There’s always the risk that it could go wrong- and drag scarce resources down the drain with it.
But diversification does work, if it’s planned and executed intelligently and with care. Success stories abound in this respect: Microsoft, Google, Facebook, Apple, and perhaps some small store close to you. They began by offering one or a small number of products, and then reached into other domains as they got bigger.
When should you diversify?
Businesses are better off spreading their nets more broadly as they go along. Starting down this path early on is, in most cases, not advisable. They will need to find their footing in their space, build their strength in that niche, and accumulate enough resources to bear the burden of a diversification process (if or when they decide to initiate it).
Here’s another situation in which diversification could work. If a business is struggling in its current market, it might want to get into a different one. It could begin by gradually shifting its focus to its new market, while winding down operations in the former one. In this case, ‘diversification’ is really just a tactic for making the smooth transition away from one niche or industry to another.
Diversification is also a reasonable route to take when the market in which one operates has a diminishing prospect for significant growth. If you’re a business owner and you’re thinking about keeping your business growing in this sort of situation, you’ll be looking out for opportunities in high growth markets. Setting up a business in that space could open up a new growth frontier for your enterprise.
Steps to diversifying your business
These are the steps you should take to spread your business’s sphere of operations.
Study the market you’re looking to enter
Your new target market will almost certainly differ in some respects from the one you’re operating in at the moment. So you’ll have to study it closely to understand how it works, and if its worth venturing into.
Watch the customer demand levels. Find out how much the market has grown over time, and how it’s growing now (if it is in fact growing). Look at what your potential competitors are doing, and decide how (or if) you’re going to handle the challenge they’ll pose. And think about the kind of gains you could make from it, given what you’ve observed of it.
Access your business’s strengths
Examine your business’s processes, products and administration. Does it possess competencies required to set up in the new niches you’re looking to get into?
Let’s say your company designs websites. It’s grown considerably over the past few years, and you’d like to diversify into some other things, to increase its revenue sources. What are your options, given your company’s areas of expertise? Maybe you have a team of programmers with skills good enough to get you building apps for other businesses. Or it could be that your marketing is first rate, so you can start up a marketing consultancy and outsourcing service.
Weigh expected gains against possible losses
There are always costs attached to attempts at diversifying businesses. The question for people who run such businesses is whether those costs can be more than compensated for by the gains which its initiators expect from it.
A reasonable way to answer this question early on is to compare the possible costs of branching out into new products or markets with the expected benefits of such a move. If you perceive that there’s a big chance that the perils involved could weaken the worth of the profits to be made, you should not go ahead with diversification. But if the wins from it are reasonably certain to substantially outweigh the risks, you may proceed with spreading operations to the new space you’re considering.
Don’t try to build your business into a jack of many trades if you don’t have the funds to make it happen and to keep it alive until it attains sustainable profitability.
Go for a strategy that matches opportunity, strength and resources
The first three points we’ve made are good criteria for deciding what markets you should be expanding into. You have a good diversification strategy when it helps you expand into new lines of business that have high growth potential, and can be run with the resources and competencies you possess.
Work with people having relevant skill and experience
You may need to hire or partner with someone or a team that has training or experience relevant to the industry you’re reaching into. They’ll make up for whatever knowledge deficit that may be present at your business as far as the new venture is concerned.
It would also be great if there are persons already on your team who possess the right skills for the new arms of the business. You could redeploy them to the new frontier you’re creating, and have them put their skills to good use there.