Let’s face it, no business is ever going to turn down the chance to earn extra money. But in the normal course of things, they’re not the sort of opportunities that just fall into your lap. You have to work (and plan) to make it happen.
Diversification is the term used when a business decides to look beyond its existing model in a bid to find new sources of revenue. More specifically, it usually refers to a business expanding into new products and services.
There are lots of good reasons to consider diversification. Reliance on too narrow a range of products or services can leave your business vulnerable should that particular market slump. The more markets you operate in, the more robust your business is likely to be.
At the present time, many companies are experiencing a sharp increase in operating costs. Along with cost saving exercises, increasing revenue is your main option for protecting your margins (or even staying solvent). But opportunities to increase revenue from your existing business model might be few and far between, not without putting up prices anyway. And that might risk alienating your customers. Again, diversification into new revenue streams gives you another option.
Finally, it might simply be the fact that, for whatever reason, your business in its current guise is on the decline. Rather than continue to flog a dead horse with an offer that is going nowhere, one of the best options for reviving an ailing brand is to diversify into a brand new area.
The history of commerce is littered with famous examples of successful diversification, from fashion brands launching best-selling fragrances (Calvin Klein) to what was originally a paper mill ending up becoming one of the world’s biggest mobile phone brands (Nokia). Some of the biggest tech corporations in the world today (think Amazon, Google, Apple) seem to build their entire strategy around near continuous diversification.
But just how easy is it to diversify your business and do it well?
You can learn a lot about how not to go about diversification by reading up on the catalogue of famous failures. The fact that so many businesses try to diversify and fail makes it sound as if it is a difficult thing to get right.
But when you look at many of those failures, such as those detailed in this article, you realise that the brands in question are often making basic business mistakes – failing to research the market appeal of their new product or service thoroughly enough, creating a sub-standard offer through lack of expertise, doing something which clashes with your existing brand identity and alienates existing customers.
Just like when you launch a brand new venture, the key to successful diversification is to identify and respond to a clear opportunity. You can’t manufacture demand for a product or service that isn’t there, or that is already satisfied by dominant incumbent players. You have to spot a niche, you have to have a strong value proposition. That takes research and creative thinking.
Diversification works best when you simplify things and take it step by step. Rather than leap straight into something that is wildly different to your existing offer, look initially for ways you can expand on what you already do. That way you get to use the expertise you already have, and you are more likely to create synergies between your existing and your new offer.
A simple example would be a restaurant that starts offering takeaway or curbside collection – something that tens of thousands of previously dine-in only establishments had little choice but do during the COVID-19 pandemic. Previously, many fine dining restaurants would never have dreamed of entering the takeaway market. But out of necessity, it kept many afloat in troubled times.
From that small step, you are now seeing many restaurants diversifying further still – delivering cook-at-home meal kits, and then from there curated grocery boxes. Each step opens up further opportunities to explore. The key is not to try to leap too far, too soon.