Diversification , Do I and When?

Companies diversify for a host of reasons. In some cases, it’s a survival strategy. For instance, if your company makes the bulk of its sales at a particular time of year, it makes sense to consider diversification. By extending your portfolio of products or services you can ensure a regular revenue stream from January through to December. In other words, the canny ice cream seller will turn purveyor of hot soup come winter.

However, there are plenty of other good reasons for diversification, not least by extending your range of goods or services you can either sell more products to your existing customers or reach out to new markets. This can supercharge your growth prospects. And perhaps the biggest reason for doing it is to extend a brand reputation into other markets, with the knowledge that one ‘winner’ could be the drop of snow that starts the avalanche, making your business bigger than you ever imagined.

WHEN TO DIVERSIFY

A note of caution though. History tells us it’s not advisable to consider diversification until your core business is stable and profitable. If you’re still struggling to win orders and build a sales time for the core product, there is a real danger that diversification will take your eye of the ball.

The catalyst is often the realisation that growth in the core business is either slowing or set to slow, often because the market for a particular product is becoming saturated.

DIVERSIFICATION STRATEGY

You can diversify by natural progression. For instance, if you sell men’s shirts, adding ties and cufflinks to the range is an obvious next step. More radically, you extend the brand by offering a much wider range of products that will nonetheless appeal to the same customers. Alternatively, you can use the strength of brand to move into new markets. As Richard Branson’s Virgin and Stelios Haji Ioannou’s easy Group have demonstrated, strong brands can be extended into very diverse business areas.

Another popular business diversification strategy is to look backwards and forwards along the supply chain for opportunities to tighten your grip on the market. For instance, in the recent past we’ve seen building societies buying estate agents and computer manufacturers buying resellers. In the US Google has busily acquired the leading web data analysis tools (Urchin and Measure Map), online advertising companies (DoubleClick), and the social networks and sites that deliver what they unerringly know their users want (YouTube).

THE CONS

Diversification can put you on the fast track to growth but if the strategy fails it can also burn up money. Expand your product range and even if turnover increases, the increase in costs could result in a slump in profits. Extend your brand into new markets and there is a danger that it will have no resonance with the newly targeted customers. Thus it’s vital to research new markets before diversifying.

You should also look carefully at your existing business. Do you have the right managers to cope with a divaricating strategy? Should you integrate the diversified business into one company or ring fence the new operation as a business in its own right? And is your organisation strong enough to be an umbrella brand where your core values resonate across the group? Think hard before you commit your finances and precious time.