Regardless of the sector or industry that you work in, or the products and services that you provide, you need to familiarise yourself with diversification strategies if you want to grow as a business. Luckily, Profici is here to help. In this blog, we have taken a look at the ins and outs of diversification strategies, the benefits of diversifying your business and the hurdles you might encounter along the way.
What is a Diversification Strategy?
A diversification strategy is an approach to business that’s designed to expand your operations beyond their current scope. Instead of sticking to what you know and are comfortable with, a diversification strategy pushes you to venture into new markets, introduce new products to customers or offer new services that differ from your existing activities. The main aim of diversification is to mitigate risk, become more resilient and unlock new growth opportunities, both of which will help your business to thrive in an increasingly competitive market.
Why Your Business Needs to Be Resilient
There’s no knowing what will happen in the world of business, so resilience is essential for survival and long-term business success. Being resilient as a business refers to your ability to adapt to changes, recover from setbacks and continue to thrive despite unforeseen challenges. Whether it’s economic downturns and technological disruptions, or changing market demands, resilience helps you to avoid being overwhelmed by these challenges. Without resilience, you run the risk of losing money, your customers going elsewhere and the business as a whole struggling to stay afloat.
A diversification strategy helps a business to be resilient. If one sector experiences a downturn, a diverse business has other revenue sources to maintain stability and continue running. This approach enables you to better manage economic fluctuations, industry issues or changes in consumer preferences.
Why is Diversification Important in Business?
There’s no denying the appeal of sticking to what you know in business, but this doesn’t always equate to long-term and sustainable growth. If you want to thrive in a competitive market, and continue to make more money, diversification is key. There are four main reasons as to why you should adopt a diversification strategy, and it’s not all about giving customers more of a selection. A diversification strategy is important if you want to boost your revenue, as it provides more streams of income. It’s also an important part of managing economic risk as a business. If something were to happen to the economy – and let’s face it, there’s no knowing when that will be – diversifying your offerings gives you a better chance of weathering the storm.
Think of diversification as spreading the risk of being in business across different areas. Instead of depending on a single market, product or service, you have multiple others to fall back on. It’s a good way to give your business a boost if your main offering is falling out of favour, or if there’s a gap in the market that you want to exploit.
The 4 Types of Diversification Strategies
There are four main types of diversification strategies, all of which we have explored below.
1. Concentric Diversification – This type of diversification happens when a business creates a brand new, enhanced version of one of its current products. For example, a company that sells hoovers might expand to also sell cordless hoovers. By using technology, concentric diversification centres around providing consumers with something new and exciting, without branching out into a completely different range of products.
2. Conglomerate Diversification – This type of diversification happens when a business expands its services into a new sector, one that isn’t related to its original ‘main’ industry. This often happens as a result of a business merger or after the acquisition of another company, but it can also happen if a business decides to branch out into a completely new product range by selling products that are unrelated to what it’s currently offering.
3. Horizontal Diversification – This approach to diversification involves adding new products to a business’ range, but purposely choosing products that are designed to meet the needs and wants of current customers. This could mean adding products that complement what’s already available, or by adding new versions of existing products. With horizontal diversification, it’s possible to meet the changing demands of customers and to continually provide them with more, without having to encourage them to become a customer for the first time.
4. Vertical Diversification – A lot of people assume that vertical diversification is the same as horizontal diversification, but that’s not the case. This strategy involves moving into different stages of the production or distribution process. It can be either backward integration – which means moving towards raw materials or suppliers – or forward integration, which focuses on end customers. An example of vertical diversification is a producer of coffee starting a chain of coffee shops.
The Benefits of Diversification
With so many benefits of diversification, it’s easy to see why businesses large and small use it as a way to boost resilience.
- It Mitigates Risks – Diversification helps you to mitigate the risk to your business, should something happen outside of your control. Instead of relying on a single revenue source or market, you have others to fall back on. This protects your business from economic downturns, market saturation and industry dips.
- It Boosts Revenue – By branching out into new markets or developing new products, you can increase your revenue and the profitability of your business. With more to offer, there’s more chances for customers to make a purchase.
- It Strengthens Market Position – It’s not easy to become the ‘go to’ business in a competitive market, but diversification can help. Diversification can strengthen your market position by adding new and exciting products, or by entering new industries that promise a lot of growth.
- It Uses Existing Assets – When you diversify your business, you can make use of your existing assets. You can utilise your existing technology, reputation, customer base and supply chains, and you don’t have the struggle of starting from scratch.
- It Gives a Competitive Advantage – By diversifying your business, you can create a competitive edge. If you already have a strong brand reputation or advanced technological capabilities, you can use them to develop new product lines or expand into new markets, without having to invest in new operations. This will help you to outpace competitors who may not have the same level of expertise or resources.
The Challenges of Diversification
There are a number of undeniable benefits of diversification, but that doesn’t mean it’s always smooth sailing. Here are some of the hurdles you might face when diversifying your business.
- It Can Be Complex – When you diversify your business, there’s a lot more for you to keep on top of. Managing operations across multiple sectors can add complexity to business processes and it can require a diverse set of skills. This is a jump that can be difficult, especially if you are already nearing max capacity.
- Less Focus on the ‘Main’ Business – Even once you have diversified, you are likely to still have a ‘main’ business focus. But, it’s hard to focus on this when diversification needs your time, money and attention. Maintaining a balance between new ventures and existing operations can be challenging.
- There’s a Financial Risk – More often than not, diversification requires a financial investment. There’s no guarantee that your diversification strategy will work, and so there’s a level of risk involved. There is a risk that your new venture may not perform as well as you thought, which could negatively impact the business’ overall financial stability.
At Profici, we understand the allure of diversifying your business, but we also know that there are risks involved. A strong diversification strategy can be highly beneficial if you want to reduce risk and pursue new growth opportunities, but it’s always helpful to have a team of experts guide you through the process.
To find out more about growing as a business, get in touch with our experts.
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