Moving into different business areas can increase your sales and revenue but might stress your business more than the move is worth. Before you enter uncharted territories, even based on proven benefits, perform an “if so/then what” analysis to determine if the downsides will outweigh your benefits or if any damage to your current business model won’t justify diversification.
A company can diversify in several ways, including acquiring a new business, adding a new market segment or selling new products or services. A floral shop owner might add photography services, capitalizing on the needs of wedding planners who use both services. A website developer might add SEO consulting services for businesses with existing websites who want to improve search results and increase traffic. A business can diversify by providing the same product or service for a different market segment, such as a marketing company that specializes in working with law firms creating a department that specializes in nonprofit marketing. This is known as horizontal market segmentation.
Obvious benefits of diversification include increased sales and revenue. If a business has captured a significant portion of a marketplace, it’s difficult to improve profitability because there is little room for new customer acquisition. Adding a new product or service or entering a new market segment offers the opportunity for exponential growth.
Many small businesses rely on only one or two large clients for most of their revenue, making the company extremely vulnerable to failure if one client leaves. Even if diversification does not increase your profits exponentially, it can provide you with enough of a cushion to withstand losing a key customer while you seek a replacement.
If customers want your new product or service, the requirements to fulfill those sales might strain your ability to operate, making the diversification unwise. You might reduce productivity among employees who must now multitask. Short-term capital needs and debt expense to fund the diversification might be too high. If you produce, store and ship products, your supply chain might not be able to handle the burden. When you consider a diversification opportunity, analyze the affects it will have on your human resources, information technology, production, finances and marketing.
KFC has resisted selling hamburgers, fish and tacos, even though it might be able to sell those products, because it would damage its brand message of being a leader in fast-food chicken. Diversifying into new areas using the same brand name can confuse your customers or convince them you are no longer a leader in your area because you don’t specialize.
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