Business diversification
Norman Halls
In East Cannan, Connecticut there is a dairy farm the family owns 275 acres, and rents about 3000 additional acres for cropping, to support a herd of 910 cows. The family began composting three years ago as part of the farm’s nutrient management plan, as well as to diversify the cost of farming. “The price for milk is set by the market, and has been declining in recent years. With composting, we’ll be able to charge a tip fee for incoming materials, and produce a valuable soil amendment.” It was natural to include the new composting operation, with the material already there.
We all know of someone who had to diversify their holdings or business. The drug store business has changed it no longer just provides drugs and greeting cards. They changed to draw-in customers. Drug stores will carry just about anything; it’s not the normal pharmacy of years ago. Food stores have had to diversify as well. The grocery store carry’s a number of different products; they also have banks, florist, hair salons and pharmacy’s in house.
Why diversify your business? If you don’t diversify your business will your competitors have an advantage? There are plenty of other good reasons for diversification. By extending your range of goods or services, you can either sell more products to your existing customers or reach out to new markets. This can change your growth prospects and the business model that you have. It’s important that you layout a strategic plan before moving forward.
Diversification is a form of growth strategy. Growth strategies involve a significant increase in performance objectives beyond past levels of performance. Many organizations pursue one or more types of growth strategies. One of the primary reasons is the view held by many investors and executives that “bigger is better.” Growth in sales is often used as a measure of performance. Even if profits remain stable or decline, an increase in sales satisfies many people. The assumption is often made that if sales increase, profits will eventually follow.
Many small businesses grow by taking opportunities to diversify, although there are risks because of limited resources on all fronts. Businesses should weigh up the risks and costs of opting for growth carefully against the benefits. You’ll need to be clear about development costs and what your alternatives are if any delay occurs in development. Wherever possible, try to control risk by securing orders or commitments up front.
Business diversification is a strategy used to reduce risk by adding products, services, locations and customers to a company to limit losses in the event a market or industry experiences decline. Obviously, startups should concentrate on becoming great at their core business before attempting to diversify. However, once the core business has been perfected, diversification should be considered. By Carlee McCullough | Published 09/2/2010 | Business & Economics
Preparing for diversification is not dissimilar to starting a new business. It is necessary to adequately research the new market, its customers, competition and dynamics which is just what you do for a new business, as well as to develop your marketing plan. Diversification is a big responsibility and commitment and you have to be careful in studying the new business (industry) and planning the diversification process. This will be necessary to develop the correct strategy for project development, as well as your everyday operation. According to Small Enterprise Strategic Development Training.
That is why you have:
- To know the market – make sure you know the new market and your new competitors;
- To update your selling skills – you need to know how to sell efficiently on this new and different market;
- To make sure you have enough capacity left to continue servicing your existing customers without driving them away and loosing key customers after putting your new project into practice;
- Service, safe working environment, marketing and advertising. Develop a clear plan for financing the diversification.
- To manage the risk – analyze the opportunities to reduce risk to acceptable levels. Check carefully for all opportunities and adopt these – for example spreading the risk using partnerships or alliances, to make your initial steps into the new market easier.
- To develop clear and measurable indicators for project implementation which will help you trace costs and measure benefits. Create an orderly system to report indicators even if you only have simple processes and give everyone responsibility for achieving the planned results.
Bear in mind your investment criteria, when you make your final decision:
- Is it important for you to remain in your industrial sector or invest in new technologies or products and services? Make sure you have taken into consideration the life cycle of your product or service when planning your diversification strategy.
- Do not give up capital investment just because your competitor has stopped doing so. Follow closely your company’s business plan but make sure to keep it updated. And: if you have the resources buy out your competitor’s company – do not give up the conglomerate diversification.
Your requirements towards business, capabilities, operating capital, business strategy and business planning are only part of the determining factors when making decisions to invest in diversification. New Business Assessment & Process Planning, Small Enterprise Strategic Development Training.
Be aware of the necessary investments in new equipment, workers and their training, up-to-date production organization, improved your customer base. Individually you may have to look at your own offerings and how does diversification fit into my life, family and earnings. We have seen many obstacles with investing personal property while diversifying in their business. They have the will to diversify, but they do not have the knowledge to make it happen. You should build on what you know and then diversity you skills into the business plan to move forward.
While diversification can pose a certain risk. Diversify your business, if you don’t it may die.
Norman Halls is with Madsen Group LLC, a provider of workplace solutions with offices in Southwick. He is a former teacher in high schools and professor at the college level, specializing in industrial psychology. Reach him at [email protected].
