Search SMBresource

Business diversity, a strategy for success

For most of the eighties and nineties diversification was the buzz word. It didn't matter if you were a Fortune 500 company or a small business with just two or three employees, diversity was the goal. Now people aren't so sure anymore, and many of the so called experts that called for diversity in your product and service mix are now saying stick to your core. So which is it?

Does diversification really work to grow your business?
Instead of just pondering the issue and making a wild guess, we decided to take a little more scientific approach to the discussion and what we found was nothing short of amazing, on the surface. When we dug a little deeper we found that it in fact wasn't amazing at all, the failure and success of businesses diversifying was pretty much the same as those that concentrated on the core. Bad management and bad decisions lead to bad business.

One of the companies we'd held up as a model for structured business diversity went bust. They had a very solid strategy of diversification within their segment, and did quite well for about ten years. Then things fell apart. So what went wrong? The company was started by one man cutting grass. In the winter business was slow so he started repairing lawn mowers. Before long, he was selling lawn mowers, and other equipment. Business boomed and in short order he had twenty or more people working in the summer. But he was still in a seasonal business. All he had managed to do was grow his business during the spring and summer. When fall and winter came, the crash was harder, and the losses piled up.

So what did we learn? Your diversity strategy has to not only incorporate what you do, but when you do it, where you do it and how you do it. This approach is much more complex than just adding new products and services to an existing segment. It's much more difficult, takes longer, is more stressful and by the way, much more successful.

So what should our strategy be?
Be patient.
Your first step is to define two or three specific areas of diversification. These should be fairly tightly integrated with your current business model.
1. How do we define these new segment?
- What do we do now, that requires the assistance of a partner or another company?
-Of these segments, which offers the best chance for success for us, based on skills?
-Which offers the best chance for market growth?
-Which offers the best chance given our current cash flow and access to capital?
2. Do we have the foundation of expertise needed?
-If not, can we outsource this until we build it internally to save costs?
3. Do we have the sales and marketing expertise?
-Can we offer training to the existing sales and marketing staff? Or should we bring someone in from outside to lead this effort?

The vertical growth myth and its impact on your diversification strategy.
Let's first be clear about vertical growth. It can be successful, but it's not the panacea for business growth that many consultants preach. Vertical growth is appealing because in theory it is intended to reduce the sales cycle by targeting customers already in the bag. The problem is, if you diversify out of your zone of expertise, all you really have is a sales contact that you have some sort of relationship with. The buyer isn't going to switch vendors and start buying RFID software from you just because you sold them the warehouse shelves. Vertical marketing of integrated solutions (products or services that already fit well within your product mix) is a very small part of your strategy. It's the gravy, the meat will still come from expanding your market base. In fact, many businesses find that the new product or service will actually lead initially to more sales driven from your existing core business. .

Once you've put a plan together you should carefully consider an exit strategy and when to execute the exit strategy. This is one of the most important areas of the entire plan. Here's why. Suppose you diversify with a new product that requires support. You sell this new product to several of your biggest customers, and then realize it's not going to have the legs to sustain itself as a viable business unit. How do you get out of this without offending, or losing your customers? This can be a small business killer. If you make the decision to exit the segment you need to tell your customers, and then present them with a seamless plan for continuing the support of the product or service you sold.

In summary:

Start your diversification strategy by expanding at the core. Consider tightly integrated products and services.

The further the product or service from your core, the slower the rate of implementation. Walk before you run.

Build your sales and marketing expertise before concentrating on the necessary production expertise. Your sales staff will then be in a better position to determing the level of expertise, and alternate solutions to increasing head count.

Consider vertical growth as nothing more than icing on the cake.

Keep your core business at the fore front and use the diversification to complement and increase sales of existing products and services.

Develop a solid exit strategy. If one of the targeted segments falls, know exactly how you are going to disengage without disengaging your customers.

The John Galt approach to business.

Managing difficult People