Small business growth can be achieved through strategic diversification. Why are many businesses not fully leveraging the advantages of diversification? Primarily because the business owners don’t understand the benefits. Increasing profitability and business growth are the two drivers for diversification.
The advantages of diversification can include:
- Economies of scale: for example, in purchasing, in producing, in supplying;
- Minimizing sales peaks and valleys: for example, while one product’s seasonality results in slow sales; the other product’s seasonality results in high sales;
- Production capacity utilization: for example, if your production facility is under-utilized, then adding new products through a diversified strategy can help you fill production capacity;
- Overall efficiency improvement can be expected: through synergy efforts;
- Reduction of costs: by sharing resource costs amongst the diversified products, services or markets;
- Improved labor utilization: by being able to deploy your human resources in a more efficient work flow cycle;
- Increased opportunities and sales;
- Competitive advantage: by being able to bundle products or services together that provides unique value and unique differentiation.
There are three key diversification strategies: Concentric Diversification, Horizontal Diversification and Conglomerate Diversification.
- Related diversification and/or concentric diversification. Related products or services, where sales, marketing, pricing, distribution, inventory and/or production can be shared. This works with closely related products or services, such as car sales, the extended warranty and the add-ons (e.g. upgraded stereo system, anti-theft devices, roof racks, etc.). Concentric diversification, where new products or services are added to the business to gain new customers.
- Horizontal diversification. Adding new products and services to sell to existing customers and markets; the focus is on specific market segments. For example, the book seller who adds coffee services to the store.
- Unrelated diversification and/or conglomerate diversification. Products or services that have no relationship to each other however through the addition of new products or services, the business spreads its risk. By diversifying into different products, services or markets, if one product is experiencing slow sales or a soft market than the unrelated product is more likely not to be experiencing the same issue. Conglomerate diversification is somewhat more than unrelated diversification; it is focused on acquiring competitors and growing through that process (with unrelated products and services).
The advantages of diversification in your small business are significant to business growth and success. Diversification can reduce your business risk and it can also maximize your opportunities by growing business operations while leveraging resources, materials, and fixed costs.
Diversification costs are typically funded through capital investment in your business. To invest effectively in diversification strategies you need to identify and focus on your expected outcomes and build business performance measures in place to assess successful strategies.
Some costs associated with diversification are new equipment, inventory, new systems, new staff, new distribution, new marketing programs, and more. Some of the benefits associated with diversification are improved productivity, improved workflow, improved customer services, labor and production cost savings, and more.
Your capital investment needs to leverage diversification, and vice versa. If you invest in new product development ensure that the integrated benefits results in an overall stronger unique value proposition. Develop business performance measures to ensure that your return on investment for diversification meets your expectations and supports your business.