Interviews

The engine behind business growth? Diversification

5 min read

20 May 2013

The desire to grow and develop a business is something that never leaves an entrepreneur. That start-up spirit is hard to extinguish and remains evident in many organisations that have achieved scale - Dyson, Gu, Figleaves to name but a few.

For the large majority of SMEs, however, growth to this extent is a dream that goes unrealised, despite the continued drive and ambition of the business founder. So how do SMEs cross the magic line?

I attended an event, organised by Santander’s Breakthrough programme, and hosted by McLaren at the McLaren Technology Centre in Woking, which answered this very question. It was designed to inspire and drive SMEs into new growth areas specifically via diversification. 

Here’s what I learned from it.

1. Concentric diversification

Firstly, it’s important to understand where existing strengths and expertise can take the business. Look at other industries where your activities can also be applied. Concentric diversification enables businesses to tap into new customer markets largely through product marketing or product development. 

This should reduce costs normally associated with creating a new product, as the infrastructure to develop said products is already in place. Any extras will be from additional marketing and PR spend, new resources and other necessary additions. At TextLocal, we provide services for businesses looking to communicate via mobile using SMS and email. This understanding of mobile has helped us to add mobile website design to our list of services – a perfect example of concentric diversification at work.

This strategy can make a business a specialist in its sector (mobile for us), thanks to an expansion of its product offerings. Whilst becoming a specialist may appear to be the opposite of diversification, it allows a company to establish a reputation within an industry, opening up opportunities to a wider customer base. For example, McLaren’s expertise in vehicle electronics has resulted in them supplying Engine Control Units to every Formula One racing team, not just their own. This helps to lessen dependence on a small range of customers, increasing the company’s revenue security.

2. Lateral diversification

In order to access wider markets, partnerships can come in very handy. Concentric diversification requires existing skill sets within a business in order to diversify, yet partnering with another business can provide a route into a market in which a business currently doesn’t have the skills to succeed. 

Here’s a type of growth that goes even further than specialising your business, as it reaches out to markets completely removed from one’s own. This not only improves a company’s security but also its flexibility. However, ensure you research any potential partnerships very carefully. They must be with those that share the same values, ethos and ambitions if it is to benefit both businesses.

3. Horizontal diversification

Adapting to a new sector requires a great deal of internal innovation, with creativity at the heart of the strategy – by its very nature, diversification requires a leap of faith and a new outlook. This can help businesses to radically alter their output to such a degree that new products can be completely unrelated to an existing business. This “horizontal” diversification aims to sell new products to its existing customers. Whilst this can lead to a reliance on one audience, it can also help foster loyalty and create a strong customer-brand bond.

Diversification can be a consideration for any business, small or large. With growth comes an expanding of opportunities and in the current economic climate, these should be taken advantage of. 

A wide range of customers, a loyal fan base, an expanded product offering – all of these help a business to defend against unforeseen financial problems. So make sure that any opportunities to grow and diversify are considered. They may well appear expensive, unrelated or just plain daft, but they present a real chance to expand a business beyond current horizons, open up potentially lucrative markets and, most importantly, help to satisfy those entrepreneurial desires that spur business leaders towards professional success.

Alastair Shortland is CEO and founder of Textlocal.