Small Business Diversification: When to Bet and When to Fold

Diversification. We hear this term a lot. It’s a word primarily associated with finance that has managed to sneak its way into marketing, politics, education, art, and everyday life. Like so many other buzzwords—synergy, globalization, sustainability—the term has begun to lose its punch. So, is diversification—more importantly, small business diversification—a worthwhile technique that business owners should be employing? Or is it merely a trendy turn of phrase used to impress laymen?

So, What is Diversification?

Diversification, in its financial context, is simply a risk management technique in which capital is invested across a wide variety of areas. Much like not putting all your eggs in one basket, diversification ensures that major events will not affect all your investments the same way.

As a business strategy, diversification is a little less ‘play it safe,’ and a little more ‘fortune favors the bold’. As a general principle, corporate diversification involves entering into a whole new market in which a business has no current experience, and creating a new product (or service) for that market. That means new skills, new research, and likely a new or expanded customer base—a whole different ball game. It can be disastrous. Or it can be really profitable.

Small Businesses Can, Too

Once a strategy often practiced among large corporations, as they can usually afford the gamble, it’s now commonplace advice for businesses like a small retailer all the way up to automotive aftermarket manufacturers. Consider the local truck accessories shop that now offers crossover products in the powersports market. i.e., small business diversification.

And when larger corporations get in the diversification mix, they go big or go home. Apple made its name in PCs and then developed the smartphone—a product many of us couldn’t imagine living without. Turner Classic Movies curates classic films on its cable channel. But the network also sells memorabilia, issues a magazine, hosts a film festival, and even distributes its own line of whimsically-named wines. Heck, “If you asked Amazon 20 years ago what they sell, the answer likely would have been books—lots and lots of books,” said Federick Gonzalez, digital marketing specialist and contributing writer at Zalutko Business Services. Today, their online presence has had a mega impact on consumer behavior and e-commerce at large.

Obviously, some of these examples of diversification are less risky when you have the name cachet to draw in customers. But there are many different ways to diversify, and not all of them need to be that drastic.

How Can Small Businesses Diversify?

While branching into an entirely new market might not be the wisest of decisions, generally speaking, there are many diversification strategies that you can employ as a small business owner to help safely grow your market share.

Diversify Your Offerings

For example, you can diversify your product or service offerings by expanding into related fields. It makes sense for a dairy farm to sell ice cream, or a sports store to offer team monogramming services. Similarly, if you sell homemade beauty products, why not offer eco-friendly makeup brushes, too? If you own an online stationary company, you might be interested in acquiring a smaller business that designs premium pens, or in retaining the services of professional calligraphers. Think about how you can branch out from your safe zone in ways that make sense. Consider product or service requests you’ve had from customers or interested parties in the past.

Diversify Your Methods

You can also diversify the way you sell your products. If you make jewelry, you could maximize profits by selling items at a brick-and-mortar store, at festivals and fairs, through a personal website, over social media, and through sites like Amazon, Etsy, and eBay. If everyone loves the homemade salad dressing at your cafe, why not sell it through local grocery stores? And if you sell construction equipment, why not also offer rental services or training consultation? Again, think back to inquiries potential customers have made in the past. Say several shoppers have asked about purchasing from your web store, and you don’t have one. Perhaps it’s time to set one up.

Diversify Your Customers

Small businesses should also consider expanding their customer base. Much like financial risk management, if too large a portion of your business relies on one client, or if your customers are too similar, you run the risk of being negatively affected by any changes in that market or industry. What if that big client declares bankruptcy? Or what if you deal primarily with customers abroad and there is a sudden change in government, exchange rates, or trade laws? It’s good to have variety. Not only does it offer security, but it keeps you competitive and interesting.

So, set some realistic goals of what you can take on and what kind of new customer you’d like to attract. Then take advantage of networking events in your area, try making a fun offer or contest on social media, or just pick up the phone and make some cold calls. You won’t know until you try.

How Does a Small Business Know if Diversification is the Right Move?

Now that you have a general idea of how to approach small business diversification, the question remains—should you? Well, it depends. In an article written for the Harvard Business Review back in 1997, called “To Diversify or Not To Diversify,” author Constantinos C. Markides offered some sage advice that still rings true. He said, “When facing the decision to diversify … managers need to think not about what their company does but about what it does better than its competitors.”

While he’s referring mainly to corporate diversification, the thought process applies to small biz as well. What is it that your business excels at? The decision to diversify must be made on “the basis of a realistic identification of strategic assets,” continued Markides. In short, decide what it is you do best and determine if that product or skill will add anything to a new venture.

And if you do decide that diversification is right for your business, don’t stretch yourself too thin. Like most things in life, balance is key. Why sacrifice what it is that you do well just to obtain new customers or open new channels? And if you can’t handle diversifying without bringing on new hires, seriously consider if now is the right time.

Regardless of your decision, stay organized and try to think ahead. Pay attention to any changes happening in your industry and see how you can capitalize on them. Who knows? A diversification opportunity may just find you.

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