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Should You Pursue a Diversification Strategy for Your Business?

March 29, 2019

Diversification strategy

While it’s easy for managers to get caught up in everyday project oversight and execution, it is important to pay attention to how your company is evolving alongside internal and external forces. Internal forces include the maturation of your product line or services and a desire to enhance existing offerings (thus broadening market size) and accelerate revenue growth. External forces include new competitive pressures or a shift in market interests or needs.

As part of this evaluation, you must stay attuned to opportunities to diversify your business’s range of products and services or field of operation. Diversification through product enhancements, new offerings, or new market penetration provides a venue for continued revenue growth.

Evaluating the diversification option

An interesting exercise for managers who are considering diversification is to evaluate the company’s receptivity to such change. Senior management must be willing to invest time and money to move forward into new arenas and accept the risks involved. This cannot be a passive desire, but rather must translate into an active effort.

One indicator of a forward-thinking view is when management, historically, has spent time on field research, actively soliciting input from customers and vendors. Another technique is the “trial balloon” approach: Pick a plausible diversification candidate and note management’s reaction to the idea. The goal is to initiate a group discussion of this and other diversification options, opportunities, and risks.

This analysis should help determine whether to expand your business in line with your current model or embellish it through diversification. Here are some signs the time is right to at least investigate a diversification strategy or to develop and act on one:

  • Your rate of revenue growth has started to level off or decline.
  • Your sales team reports that it is increasingly difficult to identify new viable buying prospects for your major offerings.
  • Competitors are becoming more numerous or effective in invading your prime market. The more successful you are, the more likely you are to attract competitors.

These signs may also indicate that your market segment is maturing and thus no longer offering the evolutionary expansion opportunities formerly available. This is where diversification could come into play in the form of a significant revenue-building supplement to your marketing program, product/service offering, or target audience.

Tips on diversifying your business

If you choose to diversify, next steps would include carefully planning your diversification strategy and ultimately implementing it. Consider these comments that come from experience:

  • Solicit a wide range of ideas about diversification by querying employees, customers, vendors, and trade associates.
  • Identify the opportunities and potential risks of the most promising options.
  • Make sure all senior managers buy into the program.
  • Commit the strategy to paper in the form of a written business plan.
  • Select a suitably able person for developing and implementing the diversification strategy.
  • Make sure he or she is reasonably free from other corporate responsibilities, and compensate this person for the extra time.
  • Allow 1.5 to 2 times the budgeted time for implementation success. On a positive note, it will take your competitors equally long to react.

A final comment: take action. Or as my favorite saying goes, “If you rest, you rust.” Remind yourself that change is occurring at an ever-accelerating rate. You must evolve with it or risk being left behind.

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About The Author

Brooks Fenno is a speaker, a program moderator, and the author of the new book Corporate Diversification: Opportunities Created by the Winds of Change (Archway Publishing from Simon & Schuster, 2018), a reflection of his 50 years of work experience and strategies of diversification. A former professor in Babson College’s MBA program, Fenno has personally worked with 250 client firms worldwide. For more info, visit www.bfenno.com

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