How diversification can be the driving force behind business growth

7 min read

08 January 2014

Every business venture may start out with a sound idea and solid proposal, but that does not mean that they are safe from floundering and failing if growth is not achieved. After all, if you don’t have plans for how your business will expand, how can you expect it to survive?

The recession has hit business owners hard too – a recent investigation conducted by Harvard Business School estimates that three out of four new start-ups fail. It has been suggested that both capital and mentoring are major factors during business survival, with the research proving that businesses are more likely to find it difficult to survive if not supported by a venture capitalist, and that 70 per cent of small business that receive mentoring go on to survive for five years or more.

Aside from having a stack of cash and a shoulder to lean on, diversification can be a driving force behind the survival and future growth of a new enterprise.

What is diversification?

In laymen’s terms, diversification is the process of increasing revenue and/or sales volume byamending an existing marketing strategy or creating a completely newcampaign. This can mean extending a business’s reach within involved sectors, or broadening its remit with a new product orservice.

These two main types of diversification are known as concentric diversification and horizontal diversification.

Concentric diversification

A company enters an industry that is technologically similar to the area in which they currently operate, but choose to diversify to new customer groups with an existing product. An example would be if an industrial cleaning product supplier may want to diversify into the household market – essentially the technology behind the product remains the same but the marketing strategy needs to be adapted to suit the new target audience.

Horizontal diversification 

A company creates or sells a product or service that isn’t necessarily related to what they currently produce, but may still be of interest to their existing customer base. An example of this would be a company that sells paper to extend to supply pens too.

There is one more method of diversification known as conglomerate diversification, also known as lateral diversification. This is a less common form of diversification as it means a company branching out into products or an industry that they have not had involvement with before, so presents more risks.

An example of a company who have taken the risk of conglomerate diversification is Virgin, who started selling music and went on to expand into an airline, media provider and most recently venturing into space travel.

Continue to find out how it’s done…

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How can I diversify my business?

It is clear that diversification opens up many doors for businesses, but you must do your research before implementing it into a plan for future growth.

The first step towards diversification is identifying what you want to achieve – do you want to reach out to a new audience group with an existing product or expand what current services you offer to the existing customer base?

This will define how your marketing strategy and market research will need to be tailored and conducted – for example, you will want to know that your current audience is interested in a new range of products before investing in them if you choose to diversify horizontally.

This rule applies for each type of diversification – you have to measure the demand for your product and understand your target market before hand, otherwise you could be left making a loss, which is the exact opposite of what this growth strategy is aiming to do.

Talk to your customers and examine what your competitors are doing to get a feel for what diversification is suited to your business. Bear in mind the necessary risks, and set up a strategy to mitigate them if they present themselves. Prepare a marketing campaign to promote the change within the business and plan how best to reach a new client base or engage with current customers.

What are the benefits of diversifying my business?

Diversification opens up the opportunity to increase profitability of a business, by opening up new revenue streams and ensuring future growth.

Growth and sustainability are the key to maximising business value, as echoed by veteran start-up investor Marty Zwilling, who said that sustainability is one of the most important factors that potential business investors or buyers will first consider.

Diversity offers sustainability, as it puts in place a plan for future development and growth, giving a diverse business a competitive advantage which Zwilling stresses is of high importance. The Avondale Group, specialists in business sales and acquisitions, highlight diversification as a key step in increasing the value of your enterprise.

Virgin entrepreneur Richard Branson recalls that diversification was so important for his business, claiming that if Virgin had clung on to the original business model any longer, they would be looking at a dead enterprise. Thanks to diversification the company was able to leave dead-weight behind and continue to grow.

Although not every entrepreneurial idea will escalate to the great heights of Virgin, it doesn’t mean this isn’t something to aspire to. By following these steps and diversifying your own business, you could see a business not only survive but strive, during a time when small businesses are finding it tough.

Sarah Willis is a freelance journalist and writer working out of Brighton. Sarah writes on a selection of topics including business, marketing and finance.