The best businesses aren’t afraid to diversify. But expanding into unknown territory can be daunting for even established companies. When times are tough many businesses need to maintain a competitive edge and diversifying into new markets can be a great way to do this. However, it’s important to do your homework before you dive into a new market.
Why diversify?
First of all, look at why you want to diversify your business. There are a range of motivations for diversification, and each one carries a different risk. If, for instance, you’re simply looking for a new challenge because you’re bored, then diversification may actually increase the financial and operational risks to your business. If on the other hand you are successful at what you are doing, but feel you've saturated your existing market, diversification can be a good thing.
You can also diversify to spread financial risk to your business – a case of not putting your eggs into one basket. Here, it’s important to differentiate between spreading investments and diversifying your business activities.
Diversifying your investments means putting the profits from your primary business into other opportunities. This helps minimise the risk that a downturn in one area of your business will be economically fatal. In the wake of the credit crunch and falling property prices, though, diversifying your investments by buying stocks and shares or property is a far from low-risk strategy.
Diversifying into other lines of business can help you spread risk. It can also enable you to take advantage of new opportunities in the market. But remember that the start-up phase is the most risky time for any business, when you’re establishing your market. Three-quarters of all new businesses fail in the first year, and about half of those that survive will fail within the first five years. If you start a new business at a time when your core business is suffering a downturn, you may actually increase your risk. Lack of focus on key objectives is a major cause of business failure – so make sure that your new venture doesn’t distract you from keeping your existing business afloat.
The risks and the rewards
There are many examples of companies which have successfully diversified their business, sometimes radically. Investment house Berkshire Hathaway, for example, began as a paper mill. Walt Disney, which is still best-known for its animation work, makes vast amounts of money from its theme parks – something which requires a radically different business model from films. For companies like these, the rewards of diversifying have been very great.
But for every diversification success story, there are probably five failures. For example, the attempt by Xerox to move from office equipment into computers in the early 1980’s failed, despite the company having a great brand and offering a product into a similar market.
Even diversification experts like Virgin have struggled with some of their attempts. While Virgin Airlines has been a huge success, Virgin Cola has failed to disturb Coca-Cola or Pepsi.
The key to successful diversification is to ensure you keep things as simple as you can. Avoid taking too many risks. As Helen Cracknell of BusinessLink notes, “Generally speaking, diversifying with similar products or services and selling them to a familiar customer base is less risky than creating a product for a completely new market.”
Be prepared
Diversification is a massive step for a business, and shouldn’t be considered lightly. Research is everything, so before you diversify, do your homework. Ask yourself if you have the skills and resources necessary to succeed in your new business area. Draw up a clear business plan for your diversification, taking into account what diversification will cost and what returns you expect. You should research a diversification opportunity as thoroughly as a completely new business.
If you are diversifying vertically, providing a wider range of services to different levels of consumer in the same vertical market, make use of your existing knowledge, or buy in knowledge by acquiring new personnel or businesses. If you’re diversifying horizontally, you’ll be providing the same services to new consumers, possibly in new geographical areas. Make sure you research your new local markets – and don’t be afraid to seek partners that can help you with their local expertise.
Map out the process of diversification to determine how you will introduce the new product or service – and use market research to make sure there really is an appetite for what you want to sell.
William Chase, founder of premium crisp maker Tyrells, gives an idea of just how much preparation is involved. Initially a potato farmer, Chase spent six months researching the idea for his upmarket potato crisps, including time spent in Spain and the US looking at the business of potato fryers. This research has contributed to a real success story, and the company has now diversified further into Vodka.
Tyrells also illustrates one of the key points in making diversification a success: as Chase puts it, his company “has remained true to its roots.” Everything the company does begins with the farm, which means that everything is rooted in his values and skills. Notably, the company has opted to create a different brand for its vodka – Williams Chase Distillery – rather than use the Tyrells name.
Research your market
Getting to grips with your prospective market requires some detailed research – but fortunately, there are a number of places you can go for help. If you’re looking to diversify geographically, local business organisations such as the chamber of commerce provide a good opportunity to meet other local business people for networking, or to gain background information on the business climate in that area. Advice about all aspects of business diversification is available from the government’s free advice service for businesses, BusinessLink.
There’s also plenty of help available at the British Library’s Business & Intellectual Property Centre. Here, you’ll find search facilities, allowing you to check out company reports held in UK libraries. The centre also publishes a range of market research papers, covering many sectors of UK business. And if you’re looking to develop new products and services, the Business & IP centre will help you identify rival products and head off potential legal stumbling blocks over patents and trademarks.
Don’t forget more conventional sources for business information, too. If you’re planning to open a new retail outlet, scout out the high street to get a general impression of the local trading environment. Sources such as the Yellow Pages will help you find out how many rivals you’ll have in a particular market – and remember that e-commerce is a significant factor for many businesses these days, so take a look at what other businesses your potential customers will find by taking a look on Google.
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