Strategy & Finance

Diversify or Die?

There are many myths about the role and power of diversification. Businesses might be tempted to change direction when their present offer is failing, but changing tack when your stock is low can be a recipe for disaster, leaving you ill-prepared for challenges and fresh investment costs. 

“People say ‘don’t put all your eggs in one basket’, but I say – just watch that basket!”

Henry Ford

There is no doubt that many seasoned entrepreneurs – and a good many leading consultancies – take the view that diversification is a in itself a good thing. Fundamentally, it spreads risk, which can be very helpful when you are still a relatively young and small business, with limited cashflow. Moreover, another attraction is the fact that in the digital era, there is no doubt that customer tastes are changing more rapidly and product life cycles are reducing. Being in more than one market protects against the impact of changing customer sensibilities and the risk that they’ll make your product offer redundant. 

Having said that, there is actually no statistical proof that diversification is the key to success. If we look at Fortune 500 businesses, they are almost exactly split between single-business models and diversified portfolios. Note as well that the only three companies who have ever occupied the No. spot – General Motors, Wal-Mart and Exxon Mobil -are all single activity models.

Generally, when people speak about diversification; in the context of the SME sector, they are actually talking about exploring fresh markets and broadening the market offer, rather than, eg, your cleaning business also opening a bakery or your recruitment firm extending into an accountancy practice. The fact is, it’s vital to spread risk in some shape or form, and there can be some fairly cost-effective ways of doing this without completely re-inventing the wheel and having to bring dramatically new skillsets into your business. The following templates are some of the best and most practical options to consider if you’re an SME and feel that current business performance is generally lackustre or just ‘missing a trick’.

Diversify your product portfolio

  • First things first. Try simply adapting what you already do. Put a spin on your product or service so it appeals to a new group of consumers or users. If you have a ‘high end’ product or service, consider a less-expensive version. Or if you have a lower-end product, add value and extra features to it. Remember the General Motors model here, in that a few extra features can add massive perceived value – a Cadillac, for example, only costs USD15,000 more to make than a Chevrolet, but the perception commands multiples on the retail price.

The art is to add features that will make your product or service appealing to a fresh group of consumers. They may already know your reputation with a different demographic and be delighted to hear that you are now addressing their needs too.

  • Find related products. Are there products that go along with your core offer but which your customers currently purchase from a different supplier? Perhaps there are training materials that you can offer to support a particular product? Or you can accompany seminars and events with online follow-up and course tuition? The most aggressive version of this strategy is to buy a company that makes products related to yours. If you can identify such a business and have the required cash reserves, this can be a very astute strategy. It means that you diversify your lineup and remove a potential competitor from the playing field. This is a classic approach used by companies like Facebook and Amazon.
  • Offer an integrated solution. The key here is to offer something that uses skills your business already has, but which is perceived as highly valuable. So if you are an app developer, offer your customers training in using app messaging as a core communications platform; or if you are providing telecoms hardware, for example, offer cloud and broadband feasibility training. 
  • Find out what’s next and disrupt the market. Are technological changes or better quality standards beginning to erode your core business? Don’t be the last in your industry to identify where things are going. The best strategy here is to take things one step at a time, and divert just a part of your resources to investigating the new market opportunity. Dedicate part of your business to meeting the needs of the ‘early adopters’ – then you’ll be ready if a major shift occurs.
  • Sell online. If you don’t offer your products over the Internet, add an e-commerce element to your website. If you already sell online, sell online more. Look at the various ‘marketplace’programmesfeatured by major e-tailers like Amazon. Consider opening an eBay-style store, especially if you have miscellaneous overstock items on your inventory. Rather than marking them down to next to nothing and undercutting new products, sell them on popular prime-offer websites.
  • Open another location. If you’re exclusively online, consider a physical location. If you have one physical location, consider opening a second. This is an important opportunity to build and finalise your brand identity: verify the essential elements (design, packaging, service, etc.) about your brand and crystallize these into the highly-recognisable traits that will be your ‘Golden Arches’ in the years to come. Expansion can be the most powerful form of diversification, enabling you to ‘tweak’ your offer until you find a perfect fit for regional variations.
  • Expand overseas or to a new national market. The best way to go about this is to network in your community, and see if any businesses are exploring overseas ventures. You might find a project where your company fits in, and you might also like to buy into these initiatives and make an investment in future growth. Two good regional options for SMEs are Oman and Egypt, for example. Oman offers strong possibilities for professional service businesses, due to exceptional Government development programmes, opening up a whole new market of ‘first adopters’. While Egypt offers highly developed markets and good opportunities for volume business if yours is a strong and developed SME.
  • Follow the growth, not the decline. This is true both in physical terms and in product offer itself. If you’re operating in an area of town where your target customers are becoming hard to .reach, change neighbourhoods at once – don’t wait for things to get even worse. If you have risk concentration around one or two huge clients, and one of these is looking precarious, find a cluster of medium-sized clients to broaden your risk potential. If your clients are drifting away to competitors because they offer something you don’t – reinvent your capabilities now and start offering something even better than they do!

Always remember that a strong successful business isn’t built in a day. It may be that these small steps to diversification aren’t necessary now, but will help you navigate testing times in the years to come. Conversely, they may also be the stepping stones to discovering real market strengths and capabilities that your present offer doesn’t properly manifest.

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