How to diversify to achieve business growth
The fundamentals of diversifying a business.
Successful diversification uses change as an engine of growth, while spreading the business’ exposure to risk by channelling activity into a number of different market sectors.
However, diversification in itself can be risky because it means funding new product or service lines and entering unfamiliar markets, as well as acquiring extra skills and technical resources.
The importance of an eye for opportunity
All the same, the potential for fast and powerful growth often justifies the risks.
An effective diversification strategy involves an entrepreneurial and fleet-footed management team redeploying revenue to exploit opportunities, and shifting quickly into gaps in various markets.
The challenges of managing a diverse business
The main challenge is the need to identify and interpret market changes, then realign the business to benefit from them. This skillset requires a sharp eye on a diverse business landscape and an appetite for risk when opportunities are spotted.
The main disadvantage of diversification is that businesses must buy in expertise from areas outside of their core competencies. This often means substantial investment in human and technical capital. In addition, you need to make certain your competitive position in your original market doesn’t deteriorate as a result.
The power of a strong brand to drive diversity
Notwithstanding the inherent risks of diversification, it can – and does – deliver enormous rewards, if the brand is strong. Take, for example Richard Branson, whose Virgin business has moved into sectors as diverse as music, air travel, rail transport, mobile phones, cable television and fashion.
In summary, diversification requires the ability to spot and exploit opportunities, the determination and focus to make it happen, and sound strategic and financial planning. A good checklist for diversification is:
• Ensure your core business is stable and profitable
• Look for areas of natural progression in terms of products and services you offer
• Look backwards and forwards along your supply chain for opportunities to strengthen your grip on the market
• Thoroughly research new markets before diversifying
• Ensure you have the cash and resources to make diversification work
• Do you have the right people and expertise in place to diversify
• Think about where a diversified business would fit into the overall picture. Would it be part of the existing business, or would it need to be ring-fenced as a separate business?