A business that offers diverse products/services is almost always doing business

A business that offers diverse products/services is almost always doing business

After successfully steering your small business from existence and through survival, you are now at the success stage. It is now beyond doubt that your business idea was a winner right from inception –the naysayers are now eating lots of humble pie.

You are now thinking about the next stage of growth for your business enterprise and are considering two options:

  1. Whether you should take the current business to the next level OR
  2. Whether you should venture out in a new direction while using the current business as your support.

If no.2 is what’s on your mind then you are basically planning to diversify your business.

Business diversification does make a lot of sense. After all, we all concur with the old adage “Don’t put all your eggs in one basket”.

Like for many other critical business decisions, you need to approach and implement diversification from an informed point of view. Whatever the proposed implementation will involve, there is a single rule: Your core business should remain as it is.

Why does diversification make so much business sense today?

Even if you are living in a utopia you most certainly have a clue about today’s state of affairs. The need to always expect the unexpected can hardly be overstated.

What does this imply for small business owners?

It’s quite simple.

However much your business may be thriving currently, there is always need to ask “what if”.

Business diversification will in this context help you to:

1. Avoid becoming too dependent on a single customer

There are many small (and large) businesses whose entire operations are more or less based on serving a single very profitable customer.

Things are typically very smooth for as long as this symbiotic business relationship exists, so much so that these business hardly see the need to source for other clients.

What will you do if your only client is suddenly no longer available for business?

What will you do if your only client is suddenly no longer available for business?

If your business fits this description you need to start imagining what would happen if for some reason your client is no longer available for business. You would definitely need to find new clients, the failure of which would likely compel you to wind down your operations.

Start making hay while the sun shines. Seek out alternative clients or make sure that substantial sums of your income are being saved for the proverbial rainy day.

2. Avoid becoming too dependent on a single supplier

Similar to having a single customer, there are many positives that come with having a single supplier, more so when the business relationship is mutually beneficial.

Likewise, the negatives of such a relationship can have a crippling effect on your business.

What will happen if the only source of your raw material is shut down?

What will happen if the only source of your raw material is shut down?

What happens if your supplier can no longer provide the raw material you need for production? In case you can’t find an alternative supplier you’ll have no choice but to halt operations and think about introducing a new product altogether.

3. Ensure you have multiple revenue streams

Ideally, if ¾ of your current business revenue is generated by a single product/service, you should start thinking about additional revenue streams.

Why, you ask?

Well, if your cash cow takes a hit, your revenues will most likely dip severely, at least in the short-term. In the worst case scenario you may have to start an entirely new business.

Multiple sources of income will add more stability to your business...

Multiple sources of income will add more stability to your business…

Diversification in this case can be done through the introduction of new products/services that are complementary to your cash cow.

For example, if you run a bread bakery, you may want to introduce complements like superior quality peanut butter, jams or honey etc.

Doing this will also help you to have an extra edge on the competition.

4. Avoid depending on a single distribution channel

If your business has just a single channel of getting things to the marketplace, or a single way of making sales, you need to start thinking fast.

What will happen if your current distributor is suddenly acquired? What if your door-to-door sales technique is blacklisted by the government in the wake of terror threats?

What if the authorities start enforcing this ban strictly?

What if the authorities start enforcing this ban strictly?

In both scenarios it is likely that a completely new approach will have to be thought up and implemented. Knowing just how much time such new approaches may require before becoming effective (if ever) these are scenarios you don’t want for your small business.

What are the motivations for small business diversification?

5. The need to reduce financial risk

Some of these will most likely break or crack...

Some of these will most likely break or at the very least crack…

Many business owners resort to diversification in order to secure their financial assets.

Borrowing from “Don’t put all your eggs in one basket” you may find it prudent to put your money into different pursuits. This is done in the hope that should some pursuits flop, others will thrive.

6. The need to harness new market opportunities 

If your idea feels viable then go ahead and test it...who knows what may come of it?

If your idea feels viable then go ahead and test it…who knows what may come of it?

Every once in a while you may discover a new market opportunity that you feel is potentially profitable and therefore worth exploring.

Whether or not this proves worthwhile, your focus should always be on your core business. Ensure that the distractions of your new pursuit won’t result in the demise of your primary source of revenue.

7. To create more appeal amongst current and potential customers

Business diversification results in customer base diversification.

Introducing new products/services into your business portfolio will firstly allow you to earn more revenue from additional sales to your current clientele. Secondly, the new products/services will help you to break into a new market segment thus adding to your overall customer base.

Expanding on an original idea will most likely make your business more relevant to your target market...

Expanding on an original idea will most likely make your business more relevant to your target market…

There is immense risk in undertaking such diversification; a sober-minded approach is required considering that a new product/service may either do well or flop. In case it flops you will have to contend with the effects of losing substantial cash flow.

8. To improve your business’ profile and appeal for potential buyers

A diversified business makes for a more valuable proposition for potential buyers

A diversified business makes for a more valuable proposition for potential buyers

Perhaps you are considering selling off your business at some point in the future. Businesses that have diversified portfolios tend to have an edge with regards to potential buyers.

Such buyers would love to know that their financial risk will be spread out across multiple market segments. You will therefore have additional bargaining clout when a buyout arrangement materializes.

What should you consider before embarking on business diversification?

9. Ensure that your new product/service has a value proposition for the customer

How about this for a new business idea?

How about this for a new business idea?

Your diversification efforts are guaranteed to achieve success if customers perceive the new product/service you are offering to be relevant and valuable.

Creating a new product/service that customers need to use very regularly is a good way to approach diversification.

10. Have expertise in your proposed area of diversification

Success will almost certainly be guaranteed if you have the expertise and know-how required for providing the new product/service. Ensure that the relevant systems and personnel required to deliver your new product/service to customers are in place.

It’s also a good idea if your new business direction is a fit with your overall business model thereby ensuring that you won’t be entering into completely uncharted territory. This way it will be easier for you to penetrate and expand within the new market segment.

Diversification tends to be more successful if the entrepreneur is knowledgeable about the proposed idea...

Diversification tends to be more successful if the entrepreneur is knowledgeable about the proposed idea…

11. Leverage on your business’ strengths

If you are thinking about diversification it means that you already have a successful business model in place.

Using this as the scaffolding for your next stage of business growth will make it easier to explore and implement the new ideas you have in mind. Of course you must be thoroughly knowledgeable about the ins and outs of the proposed business field.

Indeed, according to Peter Drucker, “attempts to diversify without either a foundation in common market or in common technology are doomed to frustration.”

12. Find the right people for the job

You must ensure that you have a competent team in place before you implement the proposed transition.

You’ll most likely be required to hire personnel that have the required skills, as well as train the current team to ensure that everyone is on board with the new direction the business will be taking.

Introducing a new offering may require you to engage a skilled team - ensure that everyone is competent

Introducing a new offering may require you to engage a skilled team – ensure that everyone is competent

Creating passion about the new direction amongst your employees is guaranteed to make implementation far much easier and more successful.

What types of diversification can you consider for your current product/service?

13. Adaptation

Adaptation will involve tweaking and/or adjusting your product/service so that it can become useful to a new type of clients.

The same product or service can be adapted to suit new and different types of clients

The same product or service can be adapted to suit new and different types of clients

For example, if you create top-notch premium-priced anti-virus software you may think of introducing two new versions of the software, say basic and advanced, that will cost cheaper and attract two new categories of consumers. This is an example of a diversified sales strategy.

14. Introducing complementary products/services

Here you will be introducing a new line of product/service that is related to what you offer, but that your customers currently have to purchase from a different vendor or competitor.

For example, if you manufacture pencils, you may decide to introduce erasers and pencil sharpeners. This is an example of related and/or concentric diversification.

You can diversify your business by offering a portfolio of related products or services...

You can diversify your business by offering a portfolio of related products or services…

Some of these approaches may require you to purchase a company that produces the sort of product/service you wish to introduce. This typically results in a diversified business portfolio and the elimination of a potential competitor from the market.

15. Introducing an integrated product/service lineup

Quite similar to the previous strategy, this is about finding out what more your business can offer the market with regards to its current offerings.

The pencil manufacturer can think about adding color pencils, crayons, ballpoint pens and fountain pens to its product portfolio. This is an example of horizontal diversification.

...or by offering an integrated portfolio of products or services

…or by offering an integrated portfolio of products or services

16. Strategic partnerships

It may be the case that there are viable opportunities to be accrued by partnering with another company that has little or no synergy with your business.

The pencil manufacturer can perhaps partner with a toiletries manufacturer resulting in a win-win alliance.

This is an example of unrelated and/or conglomerate diversification.

17. Anticipating future market requirements

The last thing you would want for your business is to be rendered obscure as a result of failing to keep up with industry advancements.

As a proactive business owner you always want to be among the early adopters as this will allow you to earn significant returns on investment before the rest of the market catches up.

18. Launching new stores

This is the conventional way of reaching more of your target customers. You can invest in opening a new store/s in another town(s) or state(s). This is described as geographical diversification.

It doesn’t have to stop there. Venturing to neighboring countries and other continents is a possibility you can pursue in future.

Establishing new stores and venturing into e-commerce is an effective way to reach more of your target customers

Establishing new stores and venturing into e-commerce is an effective way to reach more of your target customers

19. Embracing e-commerce

The online marketplace is where big and small players are doing splendid business. Make a point of taking your product/service online if you aren’t there yet.

Considering that people are increasingly embracing the conveniences of online shopping, your business will definitely expand its reach by targeting a global audience.

Again, considering how expansive the online marketplace is, who says you can’t open multiple stores?

This is a good example of market diversification.

In conclusion:

While you may as a small business owner feel the natural inclination to maintain your business’ current status quo (and enjoy the risk-free and safety advantages of doing so), it is worth appreciating that sudden events can result in the stalling or complete demise of your enterprise.

Business diversification is a proactive way to forestall such eventualities. It is also an effective way of growing your business and adding to your revenue.

In what ways have you diversified your operations? If you haven’t done this yet, what are some of the ideas you may consider implementing?

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Comments
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  2. […] such a business, a slump in demand and sales has an almost crippling effect on operations and the owner may be at a […]

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  3. […] the growth of a new business, whilst using the current business as a support. This is the business diversification […]

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  4. […] love to have more clients, secure much more business, and perhaps expand operations or venture into other lines of business, […]

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