Business diversification - how to get more out of your business
Many small businesses are increasingly looking at the option of diversification in order to grow and keep up with their customers’ needs.1 Diversification is a strategy where a business enters into a new market or industry in which the business doesn't currently operate, while also creating a new product for that new market. Some of the best known examples are Apple adapting from computers into mobile phones, Disney moving from film into amusement parks or Virgin as a music company to travel and mobile phones. Obviously, the average business cannot compete on the same level, but the examples can be scaled to match a smaller to medium sized business.
In most cases, businesses will build upon an existing brand or existing knowledge which makes it easier to be successful in expanding. Although there are definite risks, the potential cannot be ignored.
What are the benefits of diversification to your business?
- Increased revenue – This is the most obvious attraction of growing a business. It is reasonable to expect that by offering a new product or service, you will grow your profits.
- Security – This effectively hedges your business’ bets. Especially in seasonal businesses, if one arm of a business is struggling, then the other can prop it up in off peak times.
- Added value to your customers – Diversification will be most successful when you offer something that your customers need. Growth in SME markets is often best achieved when ‘value-added’ services are offered, in a scenario where you can apply your existing expertise to develop the amount of products or services offered.
What are the risks of diversification?
- Uncertainty – It may not always work out. Take McDonald’s for example. The franchise once tried to get into the pizza business in the 1990s, only for it to fail. Not only did people not associate McDonald’s with being a quality provider of pizza, they also didn’t take the risk by leaving the pizza chains they were accustomed to buying from.2
- Capacity – In order to grow, you may need to hire more people to handle the workload. This creates extra overhead costs which will become a burden if the venture fails.
- Added demand - This also applies in a scenario where you cannot meet demand from customers.
- Saturated markets – It may be that someone else offers the same product or service in your area already. Make sure you do your research before considering it. Businesses that expand into a busy market tend to struggle the most.3
What do you need to consider?
Although there are many pros and cons to weigh up before your business ventures into new waters, there is no doubt that diversification can be beneficial. This can best be achieved by applying existing experience to a different segment of your market, and making sure your business does not overreach itself. Excellence in your chosen field is a more likely avenue to growth than entering a complete new market.4
If your business does enter a new market, make sure to consult with your small business insurance broker to check your new activities do not fall outside what you are covered for.5 It’s important that your business description is accurate as this dictates the warranties and conditions of the policy. When speaking to your broker ensure that you divulge all relevant information about your business to them. Your broker should ask probing questions to gather all information, but don’t be afraid to volunteer things you may think irrelevant. Not mentioning something you do as a business could have disastrous consequences when making a claim. This includes higher margins to cover stock, cover for new premises, protection for new staff etc. Even something as simple an extending opening hours will mean that operating hours will need to be changed in your liability insurance policy.
For more information or advice on the above issues, please speak to our experts today.