Diversification in Business – will a decision not to diversify cost you?
When business is good, it can be tempting to think that you’ve nailed it. Just carry on doing what you’re doing and you’ll keep achieving the same success but unfortunately, it doesn’t work like that. The decision around whether or not to diversify your business will likely come up along the way at some point and diversification in business is definitely a subject worth exploring.
So should you diversify and if so, in which way?
Here are some things favour of diversification and some points on how you can go about doing it:-
Why should you look at diversification in business?
There are a number of reasons why diversifying your business is a good idea. You just need to make sure you can focus on your new venture without neglecting your core business.
Consider diversification in order to:
Avoid becoming too dependent on a single customer
For small businesses in particular, this can be a big issue. Perhaps all or nearly all of your business is coming from one customer? If something happened to them and orders from them dried up, ask yourself: “could my business survive?”
Avoid becoming too dependent on one supplier
A supplier too could also have problems sourcing the quality raw materials you need. They may suffer a fire or financial trouble that results in them closing down. Alternatively, your supplier may be doing so well that they win new customers and as a result can’t maintain the same level of service as before.
Reduce financial risk
If your business is solely producing and selling black caps, you will be in big trouble if people stop wearing black caps. If you were to diversify and also produce straw hats (horizontal diversification) for example, you will still have a revenue stream for when the black caps aren’t selling.
Break into a new market
Not only will introducing new products or services allow you to increase your revenue from additional sales to your existing customers, it will also put your business in the spotlight for a new market segment.
Anticipate future trends
Don’t fall foul of ignoring future trends.
Kodak ignored digital technology and as a result fell out of the photography market with a crash. In fashion there is now a growing trend for clothes to come in both adult and children’s’ sizes, so parents can wear the exact same T-short as their mini-me.
Were you to be making cupcakes for example, you might want to keep an eye on the latest sweet treat craze so you can offer those to your customers too.
Reach more of your target audience
Geographical diversification could mean opening a new shop to be closer to more of your target market. Perhaps you want to open another office because it’s near to other businesses in the same industry as you.
You might decide to sell internationally to limit the amount of pressure on UK sales or perhaps people in Spain are desperate for your designer doggy accessories.
Ultimately, it’s about not putting all of your eggs in one basket.
A “how to” guide on diversification in business
If you want a diversification strategy to be successful, you need to make sure that your core business is well established. You also need to have the right people around you and you need to do your research.
Do any new products or services add value for your clients?
If your business starts out as a garden design service for example, you could diversify and offer garden maintenance. It enables you to get more on-going work and it offers people a service to keep their new garden looking tip top.
Be an expert in the market that your company is expanding in to
It’s one thing doing your research and knowing there’s a need for a certain product or service but if you can’t fulfil that need at a high level, it’s going to impact negatively on your business.
Let’s say, for example, you own a tanning company and you know all there is to know about tanning. You find out people would happily get their nails done in the same place as their tanning. So, you offer the service but don’t really invest in training for your staff. Customers are disappointed with the result and they then question your ability to provide tanning services as well.
Before you know it, customers are going elsewhere for both.
Build on your strengths as a company
One reason to diversify would be to spread the risk for a business. However, if your business is all about environmentally friendly cleaning products, it might be a bit of a stretch to begin selling children’s toys. You have a great understanding of the cleaning industry and environmentally friendly products, so why not concentrate on that?
Have the right people in place
Before extending a business in any direction, a company needs to prepare its team completely for the transition.
Not only will you have to train your existing staff but you may also need to consider hiring people who have the experience to guide your business through.
It can be a risk to expand or change but by playing it too safe, you’re limiting your chance for success.
Accounting advice when looking at diversification in business
Before you branch out into new markets or with new products, make sure that your finances are strong.
Your accountants can also help you to decide which markets to look into.
They have a lot of business knowledge and may be able to suggest something which you hadn’t previously considered.
About Kirsty Demeza
With a portfolio that ranges from startups to companies with a £10 million turnover, Kirsty’s talent for working closely with her clients ensures her services remain in strong demand.
“The most rewarding part of my role is seeing clients succeed,” she says. “When you help a new business and watch it expand into new premises and secure big contracts, it’s a great feeling.” Kirsty never finds two days are the same.
As well as providing accounting services that range from self-assessment tax planning and VAT to audit and accounts, she’s part of THP’s sales team and closely involved in helping our trainees to develop their skills.