You may already be diversifying without realising it. I apologise if I’m teaching you to suck eggs here but let’s just clarify what I mean by diversification in business:
Expansion into a new area of business. This could be an adaptation of an existing product, the development of a new product or a move into a new a new market entirely.
Different ways of diversifying in business
Diversification usually happens in one of four ways:
1 Existing market demand drives adaptation of an existing product
2 Existing market demand drives development of a new product
3 New market demand drives adaptation of an existing product
4 Entering into a new market with a new product
Moving into a new market and creating a new product sounds the most risk strategy. But, buy choosing wisely you can protect your existing business from an economic downturn.
For example, consider Coca Cola and their development of other drinks like cherry, diet, zero and, at the beginning of this year Ginger Lime, Feisty Cherry, Zesty Blood Orange and Twisted Mango. They took what had been a successful existing product and adapted it to the new consumer demand for healthier drinks.
This strategy also drove their purchase of Innocent in April 2009. They had the foresight to realise that the demand for fizzy, high sugar drinks was going into decline. At the same time, the demand for what appeared to be more natural, healthy drinks was going to increase. The innocent brand was just that. Clean, natural, healthy and (at that time) untouched by corporate giants.
Also, think about an estate agent that just sells houses. Why do you think that they all decided to have lettings departments too? It’s not just because it’s another part of the property industry. It’s because, in a turbulent sales market, a rental market usually booms. This means when one part of the business isn’t performing, the other part will.
Virgin, on the other hand, are great at unrelated diversification. Music, travel, finance, tv, gyms. But let’s not forget about the ideas that have fallen by the wayside: Virgin Cola, Virgin Wines, Virgin Vie, Virginware…the list goes on!
Q: How do you diversify without risk?
There’s always a risk. But there’s probably more of a risk continuing to do what you’re doing now in the same way that you’ve always done it, then there is of adapting and diversifying.
A1: Model It
Ansoff’s Growth Matrix is one of my favourite models for helping to illustrate how risky the road to diversification is.
The four alternative marketing strategies are:
- Market penetration – increasing market share within existing markets. This can be achieved by selling more products/services to established customers or by finding new customers within existing markets.
- Product development – developing new products for existing markets. Involves thinking about how new products can meet customer needs more closely and outperform the products of competitors.
- Market development – finding new markets for existing products. Market research and further segmentation of markets helps to identify new groups of customers.
- Diversification – moving new products into new markets at the same time. This is the riskiest strategy. The more an organisation moves away from what it has done in the past the more uncertainties are created. However, if existing activities are threatened, diversification helps to spread risk.
A2: Stabilise the core
And I don’t mean squeeze your stomach muscles! If you’re going to stretch into new products or markets, you need to look carefully at your existing business. Will your existing managers cope with the new strategy? Should you integrate the diversified business into one company or run it as a business in its own right? Is your brand strong enough to be an umbrella brand or would you benefit from a new, separate one?
If you’re short of inspiration for diversification or are unsure about the stability and strength of your business as usual, try using the model below. This table helps you list the resources of a business, what capability they provide and how they already are, or where they can be, turned into competitive advantages. The extended SWOT analysis is also useful here, if you aren’t familiar with SWOT TOWS click here.