Types of diversification
The most common forms of diversification are where you: –
- Develop or acquire new products or services that complement your current main business, and which will likely appeal to your current customer base. For example, a restaurant may add a takeaway service or a tour company that specialised in skiing might merge with a tour company that specialises in summer holidays.
- This is known as horizontal diversification.
- Develop new products or services that are currently provided by someone in your supply or distribution chain. For example, if you produce wine or gin, you may decide to open a shop and sell this directly to the public or you may decide to grow your own juniper berries.
- This is known as vertical diversification.
- Develop your products or services so that they appeal to new customers. For example, you may have a camping site which is currently set up for tents and tourers, but you may decide to add some luxury self-catering lodges to the site.
- This is known as concentric diversification.
- Develop new products or services that are entirely unrelated to your core business. For example, if you own a farm and your core business is farming, but you decide to use some of your land and develop it for a fishing site or even a glamping site.
- This is known as conglomerate diversification.
Benefits and considerations to diversification
Businesses that are successful when diversifying will often experience one or more of the following outcomes: –
- Increased sales and revenue
- Increased market share
- New revenue streams (spreading risk and making the business more robust if the economic environment changes)
On the flip side, businesses that haven’t undertaken the appropriate research can experience the following outcomes: –
- Loss of or limit to potential growth in the core area of the business because funds and resources have been diverted into the secondary product or service
- Costly delays or mistakes if sufficient knowledge of the new target market, production processes or industry has been overlooked
- Inconsistency in service which leads to customer dissatisfaction with the whole brand and thus impacts the reputation of the original business
Steps to take before changing the direction of your business
Before making any change to a business, even where the change might seem minor, it’s important that you
- research the market to see who else might be delivering the same products or service in your new field.
- undertake a thorough assessment of your customer’s needs which will help you decide whether you need to tinker with an already successful product.
- assess how you will implement the changes needed without disrupting the product or service that you already provide.
How to find your ‘big idea’ for diversification
Sometimes coming up with the idea for diversification in the first place is the problem. After all, we are mostly so focussed on the product or service that we are known for and that we’ve taken time to develop that it’s hard to see what else we could offer in addition.
Often, the big idea is right under our noses, but sometimes we might need to do a little digging to come up with a solution.
Questions you can ask are: –
What do you have that other people want?
What your current customers want that you don’t currently provide?
What do you want that your supply chain doesn’t provide?
- Let’s take a farm that is looking to diversify. Typically, a farm will have outdoor, open spaces in beautiful settings that many people now choose for their holidays, getaways, retreats, team building activities, wedding receptions and parties.
- Or we could take a golf course, with a fantastic club house right on the 18th hole that would make a fantastic events venue during the winter months when the evenings are long, and the course is too wet to play.
- Or an accommodation provider that has problem after problem finding a reliable industrial laundry service and so sets up its own laundry service, which it also sells to other accommodation providers in the area.
- Or a restaurant that is renowned for the quality of its food and in particular its sauces and dressings. So, it decides to publish a cookbook as well as go into production with its own products and sell these to the public.
And if you’re struggling to see your business as anything other than you currently use it for, ask friends or family – or better still, ask a young child. Large consulting firms are known to take problems into primary schools
Once you’ve come up with your ideas then you will need to ask
- What skills and knowledge you will need to deliver this well?
- What technology, infrastructure, level of resource you will need to deliver this at all?
- What it will cost to deliver in time and money?
You should measure the additional cost in development, sales and marketing and operational resources needed if you do decide to diversify to ensure that these don’t exceed the potential revenue or gains from your new proposition, otherwise your whole business could be at risk.
The pandemic has highlighted how very simple changes to the way we look at our businesses can make the difference between success, survival, and failure. We only have to look at the gin providers who turned their production to hand sanitisers with relative ease. Craft beer producers who turned to home and on-line deliveries when they could no longer deliver to pubs. Restaurants that turned into gourmet takeaways. Experience providers that moved to on-line platforms. Many of these businesses have recognised the added resilience these extra products and services provide their businesses and will continue with the new additions even now we are back to near business as usual.
If you would like help to assess your business and see how you might be able to diversify your offer, please get in touch with the Business Lincolnshire team