There are many reasons why a company chooses to diversify. However, in the current economic climate, many businesses are looking to adopt a diversification strategy as a means of business survival. In this post, we will define diversification, consider when to do it and identify the potential risks involved.
What is Diversification?
Diversification does not always mean breaking into new markets, it can also be used as a method of consolidating your position or increasing market share .For example, if your company’s core business is women’s jewellery, extending your product portfolio to include a male range is an obvious progression – allowing you to attract new customers and sell more products to existing ones, under the same brand umbrella.
At what point should you diversify?
Diversification can play a huge role in a company’s growth strategy. Mobilising your existing brand to break into a new market and extending your existing product portfolio can help you to sell to new markets and also sell more to your existing consumer base, therefore maximising profitability. Though it is tempting to diversify at the point when your existing product or service is not successful or profitable, it is not advisable to consider diversification until your core business is stable.
There are numerous potential advantages of a well executed diversification strategy; maximum profitability, increased efficiency, fast growth and increased brand longevity. However, it is not without substantial risk. If you choose to diversify new market, you run the risk that your brand will not enjoy the same success. Without careful planning diversification can fail, resulting in increased cost that could potentially jeopardise not only your future growth but also your core business.
If you are looking to diversify, you should evaluate your existing business – do you have the right managerial infrastructure in place to cope with extending your brand? It is also vital that you extensively research the market you are planning to enter.