Factors to Consider before Diversifying your Business

by Zaara 31, Aug 2021

Factors to Consider before Diversifying your Business

Business growth, in its simplest form, is an increase in what you already do. If you are a writer who writes social commentary, you write more social commentary, in more places, for more readers. If you're a CPA who specializes in small-business taxes, you hire an assistant or two and handle more tax work for more clients.

Business growth is not diversification. Diversifying is a different kind of business growth.

Before diving deep, let us understand the reasons to diversify your business.

Reasons to Diversify your Business

There are a number of reasons why a small business could consider diversification as an option:

  • To create additional income streams, instead of being reliant on a particular product or service. This is particularly important if anything more than about 35% of your revenue is generated by one offering.
  • Establish new challenges and growth opportunities. It’s easy to get so locked into the day-to-day operation of your business that you lose out on good opportunities for expansion.
  • Manage revenue to balance seasonal or cyclical products. If your products and services only generate income at certain times of the year, you’re open to having a slump during the off-season – every time it comes around.
  • Give existing customers a wider range to choose from. This works well if your products are related enough to appeal to the same target market. For example, if you offer IT support services, you might find benefit in expanding to provide IT training for employees.
  • Attract a new market segment of potential customers. If your customer base is small and exclusive, you run the risk of losing half of your income if one goes out of business. By adding new product lines, you can draw a completely new target audience, which decreases your reliance on the select few.

Advantages and Disadvantages of Diversification

  • It costs money. Whether the capital outlay for infrastructure and raw materials or simply the loss of existing income while you step back from providing your existing services to explore the new avenues, you must be able to absorb the cost without repercussion.
  • Risk of failure. Yes, this applies to almost everything you do anyway, but the risk increases when you “fund” new ventures with existing ones—even if you aren’t doing so financially.
  • Resource readiness. Do you have the necessary resources in terms of the human capital, knowledge base, information technology and core competencies (including your own)?
  • Competition. A foray into a new market brings new competitors as well as customers. Determine the risk of competition to both your new and existing ventures and whether you’re able to respond to it.

Factors to Consider

1. Review all Facts

Understand the ramification completely and don’t just consider the potential upsides

2. Be Realistic

It is normally very hard to move into unfamiliar territory without proper knowledge and experience in a particular field

3. Be Contractually Aware

Get help if you are unsure. For example - large mining companies have specific and usually extremely complex, penalty-driven contracts that, if not fully understood, can quickly bring a business to its knees

4. Ask Questions to Yourself

Does the business change fit with your future goals? In how many ways does it actually compliment it? Can you cross-utilise resources?

Diversification doesn’t always require you to make drastic changes to your business plans. Sometimes, a small step will be sufficient to diversify the business. For example, if you run a training company, you can include new courses, and in the case of catering business, new categories or cuisine can be added. This way, the risk factor can be reduced as it does not involve any significant changes.

Diversification might sound little risky and painful, but if done correctly, the results will be worth the effort.

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