What you need to know about diversification, a key growth strategy

In today’s economic climate, diversification is renowned for being an efficient strategy to fast corporate growth.

Big brands such as Apple and Tesla are successful diversification examples, having started with single product offerings but very quickly venturing into a series of products, bringing in different revenue streams and allowing the company to thrive.

As with any strategy, diversification has advantages and disadvantages, and might not be an option for your business at this time. Evaluating the risks and determining as to whether you should diversify is the first critical step. Proper due diligence must be done, especially given the unpredictability of the current economic climate and the fickleness of customers.

What is diversification?

Diversification is a growth strategy that involves entering into a new market or industry that your business does not currently operate in or creating new products or services, which your business does not currently offer. The aim of diversification is to spread the risk while generating income from multiple sources, thereby allowing your business to grow quickly but in a sustainable way.

Diversification is often a tried and tested business growth strategy embraced by businesses. Take Apple for example – if it had continued to make MP3 players and didn’t roll out iPhone in response to the market in the late 2000s, the company would probably not be as successful as it is right now.

How to diversify your business: Diversification strategies

Horizontal diversification: Attaining or creating new products or services, which are different from your core business, but will still appeal to your current customers. This strategy may entail new technology, skills and a revised marketing approach.

Concentric diversification: Producing new products or services which are in line with existing products or services and will appeal to new customers. You might be able to make use of existing technology and resources to implement this strategy.

Conglomerate diversification: Generating new products or services that are entirely different or unrelated to your current products or services. Growing your business with this strategy is considered risky as you are entering a new market.

Vertical diversification/integration: Expanding in a backward or forward direction along the production chain or your product. It may be possible for you to control more than one stage of the supply chain.

The advantages of diversification

With a practical and calculated implementation strategy, diversification can help to boost your business’s growth in more ways than one, including:

  • Grow your market share
  • Increase sales and revenue
  • Reduce the impact of changes in the market
  • Achieve higher margins compared to existing markets
  • Discover new revenue streams
  • Establish new challenges and growth opportunities
  • Minimise the risks of loss

The disadvantages of diversification

Diversification comes with its own set of risks, costs and additional resources. If these demands exceed your potential revenue and profit gains, this growth option could be too risky for your business.

An ineffective diversification strategy could result in:

  • Costly delays or mistakes
  • The dilution of core products or services
  • An inconsistent level of service or products leading customer dissatisfaction and loss
  • A limitation of potential growth in core areas of your business
  • Overextension of your business’s resources

Should I diversify my business?

The fact remains; even if the success of your business depends on diversification, timing is essentially everything. Understanding the market that your business is operating in is essential to the prosperity of your diversification strategy. Taking into account the financial and human resources required to carry out diversification is equally as important.

Only after you have taken the appropriate steps to determine whether or not your business is satisfactorily stable and profitable, should you consider diversification. Although seemingly simple, this is a lengthy and detailed process, one that can be made more efficient with the assistance of a dedicated accountant or a business growth expert like Berley. By avoiding a mismanaged or ill-advised diversification plan, your business can expand and prosper.

When should I diversify my business?

Before diversifying your business, it’s essential to do the following:

  • Detailed market research for your new product or service – understand your business’s customers and habits and identify new opportunities
  • A thorough assessment of your customer needs
  • A clear product development strategy and market testing
  • Determining if you have sufficient sales, marketing and supply chain operations to cope with added demands

How can we help diversify your business?

At Berley, our business growth specialists have a wealth of experience helping SMEs across London to diversify, grow and achieve success. Working closely with you, we will construct a tailored and detailed diversification plan that can effectively grow your business, maintaining its stability in an ever-increasing competitive market. Our personalised service will ensure the careful conduction of research into your financial and corporate structure, evaluating the risks and paving the way to a successful outcome.

Although diversification is a key growth strategy, it isn’t a silver bullet and consequently, it isn’t applicable to all businesses. Talking to us before you act can potentially save you time, effort and money later.

For more information on how we can help grow your business, call us on 020 7788 8261 or fill in our Online Contact Form.

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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.