Thinking of diversifying your business? John Cradden looks at the how and why of diversification and what resources are available to support your plans.
Recently we looked at diversification, including the different types of diversification and at the first steps you can take to diversifying your own business.
Whether you opt to engage in a vertical, horizontal, concentric or conglomerate diversification, it’s a pathway to new products, services, markets and revenue streams.
“Diversifying your potential revenue streams also helps improve income security”
But even if you’ve begun to look at the what and the how of diversification, it’s also crucial to look closely at the why.
What are the benefits of diversification?
Diversification is being touted as something that all Irish businesses should be focusing on in 2023 as a way of reducing economic risk – or even just to survive – amid domestic and international hurdles like rising interest rates, high inflation, spiralling energy bills, supply chain disruptions and a shortage of talent.
So what benefit is diversification as a way to help businesses address these and other challenges?
For a start, it can safeguard your company against becoming over-reliant on any one market or product. A company may experience significant growth in its early years but often levels off because of a lack of new customers. Diversification is a way to open up leads to new customers through development of new products and new markets.
Diversifying into new products may enable you to achieve higher margins compared to existing products. At the very least, you can lower production costs thanks to what’s called economies of scope, which is the theory that the production of one good reduces the costs of producing a similar product. Economies of scope allow SMEs to diversify their stock and increase their revenues without needing to invest in new manufacturing machinery.
If you have a cyclical or seasonal business, diversification can help regulate cashflow and demand throughout the year. For instance, a business that supplies heating equipment may sell the bulk of its products during the autumn and winter, with lower demand during the summer. If the company remains focused on heating it will need to sell enough during the high period to make up for the dip in revenue during the quieter months – or else diversify into products like air conditioning, for example.
Diversifying your potential revenue streams also helps improve income security, such as by reducing your potential exposure to bad debt, which can often be due to customers going out of business. PwC’s Q1 2023 Insolvency Barometer estimates there was €1.8bn of debt owing from businesses that failed in 2022.
If you export to the UK, you may have experienced a drop in sales as a result of the negative impacts of negative impacts of Brexit, but diversification is one way to overcome them. Earlier this year, the Department of Enterprise, Trade and Employment unveiled the ‘Post-Brexit Market Growth and Diversification Grant’ aimed at helping Enterprise Ireland and Bord Bia client companies develop strategies to enter and grow new markets outside of the UK.
The Irish Exporters Association also runs a series of courses on export diversification that was specifically developed in response to the demand for more information about branching out into non-UK markets.
In an age where brand recognition is central to success, successful diversification can also be used as a marketing tool to boost your brand, improving its visibility and reach simply by launching a range of new products or services.
Of course, diversification may not make sense for your company. You may have already found your specialty, built a market around that product and continue to make it your focus.
Furthermore, diversification may be a bigger ask for a small business than a large corporate in terms of demands on finite resources, the risk of other parts of the business being ignored or neglected, and a lack of expertise.
So even if you’re predisposed to the idea of diversifying your business, make sure you do your research, assess the risks, audit your resources before you start planning.