10 questions to ask before diversifying your business
There are two main reasons to diversify your operations. The first is out of choice, because you’ve spotted a promising opportunity. For example, Johnson & Johnson expanded from home health products into medical devices, sports performance research, and more.
The second reason to diversify is out of necessity. Many businesses are currently considering this option, as a global pandemic upsets economies and drives down workplace productivity and consumer confidence.
If you’re weighing up entering a new market or launching new products, you’ll need to answer some important questions before taking the plunge.
1. Do you have the capacity to diversify?
Consider what resources you’ll need to dedicate to the new venture. Which teams’ efforts will need to increase to support the development, launch, marketing, and delivery of the new product or service? Has the slowdown caused by Covid-19 created extra capacity to expand your team’s remit?
2. What can you do better than competitors in your current market?
Pinpoint ways to add value and differentiate what you do. It could be free delivery, more sustainable or ethical materials, a stronger guarantee, or more informative marketing (e.g., explainer videos).
3. Have existing customers suggested the diversification route?
Collate and review feedback from customer reviews, seek specific guidance through surveys, and ask your customer-facing staff what suggestions they hear most often. If customers are always asking if your food manufacturing company offers gluten-free products, it could be time to consider broadening your range.
4. Is a physical presence necessary?
If your success is mostly thanks to the presence of your store, office, or warehouse, expanding your physical footprint could be the best way to grow. However, if you're considering diversifying into a new market or product line, it may be best to think of a different strategy.
Perhaps you’ve traditionally focused on face-to-face sales in retail stores or other physical locations. Given that global eCommerce sales continue to grow year-on-year (with Amazon, in particular, growing at above-market rates), is there a way to move some of your sales online?
5. How could you adapt or modify your existing product or service?
What’s the easiest way you could adapt what you currently offer to unlock sales from a new demographic? For example, a software developer could add a host of new features to a “Professional” version of its app. Or you might be able to offer a completely different product by modifying your production process.
Recently, gin distilleries have switched to the production of much-sought-after hand sanitiser, engineering firms have retooled to produce ventilators, and meat businesses have offered direct-to-consumer deliveries for the first time.
6. Could you acquire a competitor or form a partnership to decrease risk?
Buying a competitor or forming a partnership with another company can give you more resources, knowledge, and contacts from day one. Partnering with a complementary but non-competitive business can be a good idea.
For example, Starbucks and Barnes & Noble are different types of companies, but offering a famous coffee brand in well-known book stores created a win-win situation.
7. Can you find the talent you need to diversify?
Bold diversification strategies inevitably require fresh talent to execute them. If you plan to move into a different part of the supply chain (e.g., expanding your B2B manufacturing business into a consumer-facing online store), you’ll need a team with relevant experience to stay within budget and achieve your goals.
Consider who you need to hire as early in the process as possible, so you have enough time to attract high-quality candidates. If face-to-face interviews and in-person onboarding aren't ideal, finding reliable remote freelancers and specialised consultants could be a smarter move than focusing on full-time employees.
8. How will your brand perception be helped or harmed?
There’s a reason KFC doesn’t sell hamburgers – they’re the brand leader in chicken. Branching out could dilute the very thing that differentiates your brand.
Consider how you can protect brand loyalty among existing customers if your new venture struggles to gain traction. Trading under a separate business name that’s dedicated to the new product, service or market could insulate your current business from risk, although this could lead to a lack of brand awareness.
9. Will it be easier or harder to survive in the current business climate?
Going head-to-head with established businesses will require a dedicated effort to catch up with and eventually surpass them. The key question is whether your diversification plan is likely to give your business more stability in the short-, mid-, and long-term, or create more risk than is worth it in today’s tough economic climate.
It may depend on the scale and cost of your diversification plan. For instance, developing a new product from scratch or moving into a new part of the supply chain could involve significant time and investment. However, making relatively small adjustments could prove easier. For example, many gyms now live stream their fitness classes to clients who are at home.
10. Will the financial benefits outweigh the risks?
Predicting revenue growth can be harder when diversifying into new markets or through new products, so extensive competitor research is essential.
Of course, making these projections amid global business uncertainty might not be straightforward. For instance, businesses in many sectors are wondering how they can adapt to become more resilient to supply chain fragility.
Consider a UK car parts manufacturer who orders parts from China in small quantities so that they only need to hold 15 to 30 days of inventory. A major disruption to shipping times such as the one caused by the Covid-19 pandemic could make it extremely difficult to fulfil orders on time. In this case, diversification (e.g., sourcing additional suppliers in Europe, then modifying the end-product to offset the cost increase) could be an essential tactic for survival and growth.
If you’re considering diversifying to protect your cash flow, speak to your local HSBC relationship manager for further information and guidance.