Is Diversification relevant to your business?
Nothing stays the same. There are many previously successful businesses who have failed because they have not recognised a change in consumer demand or buying habits. One minute business is booming, the next it’s plummeted!
How do you maximise your business opportunities to ensure you don’t have all your eggs in one basket? By diversifying…
We call it 'taking what you have and turning it into what you need'. But it’s not as simple as that – it has to be planned and researched to give the best outcome.
The benefits of diversifying
The business is in control of its actions and therefore can manage the ‘journey’.
It does produce sustainable growth and equally focusses the business on being effective.
Failing to react to the market demand is a sure fired route to business failure.
If we outline some of the benefits:
- Sales to existing customers or new customers increase
- Your ability to invest is against a clear structure therefore maintaining a competitive edge.
- Your team are further engaged and the performance is certainly measurable and focussed
- Your ability to add value to your customer offer will be appreciated by your customers old and new and further strengthen your ability to resist competitor encroachment.
- It is a sensible way of dealing with the often cyclical nature of business, as a consequence eases the cash pressures and can and should result in better supplier relationships.
- By presenting new options it opens new revenue streams and learnings that in turn lead to further diversification and growth. It may mean that growth through acquisition becomes a real possibility.
We can also make a strong case for longer term business stability as diversification reduces the risk of volatility in sector demand with its subsequent pressure on revenues. This in turn protects the investment in skilled associates and reduces uncertainty.
Risks – of course, there are many; but being aware helps you to deal with them
An often overlooked ‘high risk’ is that your ‘team’ is not able to deliver what is needed.
This can have far reaching consequences with your customers and internal team particularly if the problem is at the ‘top table’.
As a business evolves, it often loses essential focus and as a consequence the required financial return is diluted. This can be particularly problematic if this focus loss is in the area of ‘golden opportunities’ that will quickly become ‘cash cows’!
Failing to both research the opportunities and structure the commercial arrangements properly. This creates lack of trust and reduced revenue (to plan) just at the time when it is least affordable. This is particular relevant if any investment funding is borrowed against performance increments being met.
It is essential to engage the help of experts to help the business understand itself and its capabilities quickly. This should be part of the ‘business case’ as failure to deliver will undermine the whole business strategy and subsequent failure may just be terminal.
Why is Diversification relevant to your business?
No business ever stands still – but there are a number of options open for consideration.
In our opinion all options should be examined if only to dismiss on a structured basis.
As Businesses should always look forward to ensure their offer is relevant and will generate the required financial return. Often the senior team become committed to maintaining the status quo.
However, if a business examines its performance and most importantly its ongoing opportunities and revenue streams this often highlights serious risk going forward.
Sounds simple? Read on…
Considered and strategic business change is essential to avoid stagnation and real risk of long term failure.
This is often referred to as being ‘market led’ an essential consideration for any business type. A positive consideration is look at moving into either complimentary, different products or services (diversifying) that the ‘market has created a demand’ for or research suggests will do.
By examining the types of diversification available it is essential to understand the options in detail as one size does not fit all.
The types are:
- Horizontal Diversification – the action is to identify and supply new products or offering new services that could appeal to the company´s current customer groups. In this case the company relies on sales and technological relations to the existing product lines.
As an example, a supplier of electrical product could supply a range of consumable parts that derive from the primary product.
- Vertical Diversification - An interesting approach and one that is often very successful but relies on clear market research and accurate appraisal of needs. To expand; it is something that you can identify as a linked need in either your internal process or your supply chain.
As an example, a car manufacturer may choose to take control of a key component as this both adds resilience and controls the costs and weakens competition.
- Concentric diversification - a clear strategy of enlarging the current portfolio or adding new products / services that better utilise the existing marketing and operational and technological structures. This is often viewed as the most financially attractive strategy as investment is in support of a known area with potentially less risk.
As an example of this smaller businesses often add something that further utilises facilities but serves a known need, e.g. A bakery offers a specialist range of cakes or pastries or delivery companies collect product returns when delivering a new item.
- Conglomerate Diversification – Often described as the nuclear option. To expand research is suggesting that your existing market is either changing negatively due to changing technology or consumer demand. The need to invest heavily to become more efficient may just not make financial sense so a change is essential. Relationships that on the face of it; have no synergy are not uncommon.
As an example of this a business may have an existing transport fleet so seeking a partnership with a business that needs this function is a sensible match. This also may affect business with other useful assets such as warehouse space unused next to a major route.
In summary, no business can stand still even when successful. There is no quick route and market demand has to be at the forefront. Once you have identified and created a relevant value proposition, your business is ready to progress with a well-researched sustainable business growth plan.
How do we help you?
Here at u-look-i-c Ltd we help you to understand and demonstrate your benefits in relation to what your customer(s) need and value.
The results help us to identify and guide you through next steps. We are your professional partner to business growth.
Contact us for more information or to set up an initial conversation.