There are any number of reasons a business may want to diversify. Many consider diversification because they want (or need) to increase market share, growth, and turnover. In some areas, diversification can be a (relatively) problem-free operation. In others; greater planning, consultation, and risk analysis are required. Nonetheless, if undertaken correctly, the potential benefits and recompense are well worth the effort.
Diversification can increase the possibility of faster company growth. The simple practise of just adding new product lines, is often all that is needed to increase turnover and profitability from an existing customer base. However, in other situations, the answer may require more thought. If the chosen market is already saturated, one may have to look a little further. Often, considering complimentary products that are aligned to, but not the same as existing products, may be enough to increase client spend, and attract new customers.
All the eggs in one basket – not good
By definition, niche means specialist, which in turn means a small customer base. Not good if there’s a recession around the corner. In the service sector, a small plumbing business can benefit from including a qualified electrician on the staff, making it possible to quote for additional work.
A seamstress specialising in bridal gowns, may increase her chances of success by adding handmade office attire or prom gowns to her portfolio. Or a small engineering company may benefit from adding additional engineering services such as milling, CNC machining, or shot-blasting to its expertise.
Iron out the peaks and troughs
Within a short trading period, many businesses notice a time of peaks (where business is brisk), and troughs (where business is slack). Diversifying in this situation will often not only smooth out the waves, but help increase turnover and improve margins.
For example, if the business involves retailing or installing boilers and heaters, one could expect the bulk of business to come during the colder autumn/winter months, and the summer period to be relatively dry. Consider diversifying, by selling air-con units and/or electric fans through the warmer months. The increased summer business will reduce the troughs, and improve company cash-flow. Accepted forms of diversification include:
Increasing your product base with complimentary products, to increase existing customer spend while gaining additional footfall. For example a confectionery shop that adds homemade cakes to its range. A stationery outlet that adds specialist artist materials. Or a ladies hair salon that adds a nail bar. For the small retailer, it is the easiest and most risk- free way to expand business and increase turnover.
Concentric diversification involves adding new, but complimentary products to your existing range. For instance, a fire alarm company adding surveillance/security equipment to its portfolio, or a PC/laptop manufacturer producing smartphones.
Examples of vertical diversification includes a manufacturer or wholesaler opening its own retail outlets. Or a retailer of digital devices manufacturing its own-brand range of products.
Acquiring or ‘buying-out’ is a practice that has been around since the dawn of business. In most instances it was carried out to either increase company size and market-share, or to remove competition from the marketplace. However, in the last fifteen or so years, it has become one of the favourite ways to expand business and increase growth. Primarily in the digital market, there’s hardly a day goes by that the likes of Amazon, Apple, Microsoft, or Google, aren’t snapping up the latest software and app start-up businesses, that are showing major product potential.
Corporate or Conglomerate Diversification
This type of diversification involves the highest risk. It entails total diversion from your current business market. Examples include film production companies expanding into the theme-park leisure sector. Or a manufacturer of processed food stuffs expanding into the kitchen appliance industry.
Make sure your business plans have a solid foundation
As with all things in business, diversification can be a risk, but often a risk worth taking. Draw up an effective business plan. Do your market research. Take your employees into confidence. And bounce a few product ideas off existing customers. Most importantly, ensure adequate funding is in place, to get over those early trading days. With careful planning and forethought, diversification can speed company growth, and leave the competition in the dust.
About the Author
Conor O’Flynn is Managing Director of O’Flynn Medical, Ireland’s leading supplier of medical supplies. They specialise in the supply of medical equipment like hospital beds to some of the biggest healthcare facilities in Ireland. Recently, with the outbreak of Covid-19, they were quick to offer equipment for disinfection in hospitals.