Diversification – growing out when you can’t grow up!
“Dream, diversify and never miss an angle” – Walt Disney
Diversification is the act of increasing the range of products you offer in the same or different fields. You may do this to increase profit, test new markets or new interests – to spice things up, or to protect your current business – not putting all your eggs in one basket!
The advantages of diversification are many and varied. If may be impossible to sustain growth with the existing product so growth only becomes possible with new products. It could be that you feel your current product may have a limited life expectancy or is in decline even if it’s not terminal. Maybe you have surplus resources – too much cash, too much time – which you would like to use to try something new, different, interesting. Variety is the spice of life but whatever your reason to diversify, it doesn’t come without risk.
The disadvantages of diversification may include losing focus of your core product. You may find you are trending on peoples toes and damaging existing relationships. If resources need to be borrowed, will you spread yourself too thin? A serious question you need to ask is – can my existing business continue to operate effectively with some my time and/or capital being used elsewhere?
The main business benefit from diversification is multiple revenue streams. Should one product or service wain, there are others to bring in the bacon. In big business, diversification usually means hedging – a form of insurance – where if your business suffers under certain conditions, your investment was planned to flourish under those conditions. New revenue streams usually spread out from your core business. For example, let’s say you’re a photographer. You may work with graphic designers, hair stylists, videographers, wedding planners, etc. What if you branched into these businesses? You needn’t do the work yourself, you could outsource it and take a cut. Now your customer has only one person to deal with for all their needs – you. Unfortunately, should this go awry, those you previously worked with may be wary in dealing with you again. However, if a florist diversified by stocking up on gift cards, chocolates, confectionary, vases, balloons, ribbons, and delivering there are benefits for your customers by being that one-stop shop. It doesn’t mean they will take advantage of your extra services but you are dealing with things and not people. The question, as always, is – is the upside worth the risk?
The golden rule or diversification seems to – add one extra string to your bow at a time. Be careful not to spread yourself too thin. Concentrate on your core business, your trunk as it were, before growing branches. And the second rule is – work on one branch at a time and only work on the next once the first is implemented or culled. Too many irons in the fire generates stress and distraction – stay focused! Chances are your core product is where your passion and purpose lie not to mention your expertise and experience. Grow from what you know. You know your industry, you therefore probably understand the risk vs reward calculation more than you would in a new field.
Diversification is applicable to suppliers and customers too! There’s a risk relying on whoever you currently buy from or sell to. Avoid complacency – seek alternatives. Can you source stock or attract customers through different avenues; online, offline, locally, overseas, or with an environmental, ethical, or social advantage?
If your business is going gang-busters, make hay while the sunshines. If not, look around for opportunities to branch out into new fields, without getting too far away from your expertise. You can do anything but we cannot do everything.