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Diversification in business: The pros and cons by Neil Debenham

Neil Debenham

Your business is set up, it’s going really well, and you’ve got a broad customer base. Now and again a customer will approach and ask you if you have a certain something available. You don’t. But you start to notice a pattern of the same query.

Is it a good product and could it be time to diversify? What exactly would be involved in? Would you need better technology? More staff? More funds?

Business guru Neil Debenham takes us through the pros and cons of diversification in business:

Why diversify?

Businesses may choose to diversify for various reasons – but the main one is to stay afloat! If you only have a small number of products, you inevitably have a finite number of customers, for example, wedding dresses or pies.

If the market is big it can accommodate lots of businesses in similar fields but if there are only a small number of customers, the cost of running it when there are so many competitors can be damaging, pulling revenue for everyone. In these circumstances, diversification into new product lines may be crucial if you are to keep the business going.

Increased sales

One benefit of diversification is the additional income it brings through extra sales and revenue. Adding a new product or service to the mix could allow you to enter a new section of the market which may open your business up to brand recognition and growth, which is fantastic.

However, you’re likely to face more start-up costs and added overheads to allow you to meet your sales goals.

Pressured operations

In order to produce the new product or carry out the new service, you need staff who can do this.

Neil Debenham says: “You’ve got to be careful, especially following the Coronavirus outbreak and all the restrictions with it. Your staff may already be under pressure from being on furlough and worrying if they have a job to come back to. Employees may find they have to multi-task or learn new skills quickly. They might meet this with resistance and so you’ll have to consider training opportunities, which many also come at a cost.”

If it’s a product, you’ll need to check your current suppliers can deal with the extra load. You also need to consider your HR department and whether you have the IT that can deal with the extra procedures. And don’t forget about marketing for the new additions…

Balancing act

When you diversify, you can reduce the risk in your business. Each new investment carries a chance of it being a great success or failure. Spreading your money out can limit this chance and give you a chance to see how it goes.

Investing all your money into diversification of a new product could mean you lose all your cash. But by only putting in 20 per cent, you can always add more if you need it. If it doesn’t work out, you haven’t lost your entire savings!

Jack of all trades

Neil Debenham says: “If you diversify that much it may damage the brand you have made for yourself and that people have started to recognise you for. If you sell birthday cakes and want to diversify to sell pastries it may confuse customers, as while they’re still cakes they don’t quite fit for those who have come to you as a specialist in your field. It could also mean you’re no longer as widely acknowledged in the market.”

Final thoughts

Are you really prepared to take on a new industry? Can you come up with the funding? And what if it fails? Diversification is a huge risk and if you don’t do all of your research, you could be in for a tough time.  On the other hand, it could make your company and grow it substantially. Look at all the facts above and make your decision. Don’t be afraid to ask friends who are business owners, for their thoughts.

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