Anything you read about growing a business is guaranteed to mention diversification as a key strategy, but can small businesses afford the risks involved? The answer is yes, but only if they weigh up the pros carefully against the cons and work from a solid financial core.
Here’s a quick overview of what you need to know about business diversification.
When to diversify your company
When your core business is stable and your company profitable, you may feel like you no longer need to keep all of your eggs in one basket. This is when you can start thinking about taking advantage of your situation in an industry and choosing diversification as your next step. Companies diversify by developing new products and services for new markets, which, especially in an uncertain economic climate, can not only bring in more money but help them overcome their dependence on just one source of income.
There are two types of diversification strategies in the context of business growth:
- Concentric diversification, or related diversification, is when you create new products and services in an existing market. These compliment your existing products and services by being closely related to them. For example, a restaurant can choose to diversify by offering cooking classes. This service uses the restaurant’s existing resources and customer base, and adds something different but related to the core activity of the business. This, in return, attracts new customers. Another example can be a cleaning business that has focused on offering services to households, diversifying to offer services to commercial properties as well. A producer of smartphones can decide to also make phone accessories, or a designer store for children’s clothing starting to design toys too.
- Conglomerate diversification, or unrelated diversification, is when you enter an untapped market where you do not have a presence yet, but where research has indicated that there is an opportunity for your new products. In the case of this type of diversification, there will be no relationship whatsoever between your products. Since you’re basically starting from scratch in a completely new line of business, conglomerate diversification is risky by nature. General Electric was a lighting business before diversifying into household appliances, for example.
Berley Small Business Accountants
Take time to draw up a detailed diversification plan with Berley Chartered Accounts that’s the best fit for your business. We have the expertise to help SMEs in London diversify the right way.
We’re devoted to helping entrepreneurs scale their businesses, so give us a call today to ask about our experiences and to discuss your specific business strategy and how we can help you grow your business.