What is diversification?
For SMEs, diversification really means moving into new areas of business. Most commonly it will mean selling or offering a new product or service – sometimes in a completely new sector. Richard Branson famously diversified in several directions with his Virgin Group. Originally Virgin Records, the company now operates in numerous sectors including banking, aviation, telecoms travel and much more. Essentially, diversification is a way of growing and expanding your business.
Why would I do it?
The rewards can be huge. If you get it right then you will increase your revenue streams, expand into new markets, and spread your company’s risks. Reasons for doing it could be that you want to compete in new ways, take advantage of gaps in the market, attract new business, become suitable for different geographies, and so on. Most people like to diversify for the benefits that it can bring in profits and stability. The wider your reach, the more money you can bring in, and the less a problem it is if one part of the business struggles.
What are the drawbacks?
While the rewards can be big, so can the risks. Get it wrong and you have lost a lot of money, your reputation has suffered, and your plans have been thrown into disarray. There will always be an element of uncertainty, so you have to do your homework before diving in. You will need to ensure you don’t spread yourself too thinly – diversifying doesn’t mean putting less focus on what you’re already doing – you have to be an expert in more than one thing, not average in few things. Overextension is always a risk, as is lack of expertise, and the inevitable costs involved.
How do I start diversifying?
First, do your research. What are you doing at the moment, and what might be a natural progression? What are you doing better than any of your competitors, and how might you be able to use that strength? Do you have a good reason to diversify? Is the timing right? If you’re ready to go for it then make sure you know your limits (financially and otherwise), put together a business plan and marketing plan that gives consideration to your new and existing parts of the business, look at hiring the right people, including managers, and rely on the extensive market research you will surely have already done.
What happens if it goes wrong?
You don’t have many choices, to be honest: Quit or keep going. If you quit, you have to work out whether you quit the entire business, or whether you cut off the part of the business that isn’t working out and renew your focus on the part that is working. This is costly and drastic, but sometimes you have to do it. Alternatively you can keep going, tweak your business plan, figure out the stumbling block and figure out way to improve the situation. Either way your time, effort and funds will be stretched, and you will need to find ways to keep your reputation intact.
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