How to Walk the Smart Path When Diversifying Your Business

How to Walk the Smart Path When Diversifying Your Business

You either adapt or die. The saying is almost as old as business itself. Companies don’t survive and thrive unless they’re constantly exploring new ways to grow. And growth boils down to one word: diversification.

Whether you’re exploring new products, services, geographies or lines of business, you’re diversifying. You’re taking eggs out of that one basket you have and putting them in different baskets, with the idea that if one product line, division or geography hits choppy waters, the other areas of the business won’t be affected.

Diversification is a great thing, if you know the smart way to do it. And while there’s no textbook definition of “smart” as it pertains to diversifying, there are some time-tested principles to keep in mind when you’re considering expanding into new territory.

SWOT it

The first place you, as a company, should look is in the mirror. You won’t be able to develop an effective diversification strategy unless you know the sum total of where your company stands — what you do well, what you don’t so well and how to leverage the strengths while neutralizing the weaknesses. In short, you need to do an analysis of your strengths, weaknesses, opportunities and threats. 

A SWOT analysis should give you a clear picture of what products your company is most effective and efficient at producing and, if geographic expansion is in play, where you might be able to distribute and sell at the highest profit margin. A SWOT analysis should point your company in the direction of using its existing expertise and competencies in new ways. For example, a lawnmower manufacturer might take a look at launching new products in the lawn and garden space, as opposed to something completely off the map, like computers.

Everybody who makes key decisions should be involved in performing the SWOT — the C-suite, board of directors, department heads and anyone else you consider critical to the decision-making process.

Look outside

Now that you understand what your company does well, the next step is figuring out who in the market needs that expertise.

A detailed market analysis should tell you exactly that. It will also tell you if you have the capacity to meet demands and get the products to your customers with your existing infrastructure. A market analysis will show you where you need to invest to make your plan feasible. For example, a smaller manufacturer in Ohio might not be ready to sell and distribute to a large customer base in California. To do so might require a production facility, or a warehouse, on the West Coast.

Think before you spend 

Do you have the money? It’s such a simple question, but you’d be surprised (or appalled) by how many business owners don’t ask that question soon enough. Growth and diversification require investment on a number of fronts. These efforts also need to bear fruit at some point.

Delve deep into the finances of the diversification plan and come out armed with detailed financial projections based on solid data. How much revenue can you expect from your new product line or service once it’s up and running? How much revenue will it produce in six months, a year, two years? Will it not only sustain itself but also make the company more profitable?

If the answer is yes, where will the seed money come from? To make any diversification project a reality, you’ll need to pull money from inside the business, or seek another form of funding, such as outside investors or a business loan. And make sure that money is in place before any plan gets off the drawing board.

Buy in

A SWOT analysis, market analysis and funding plan are essential steps to any diversification initiative. 

But there’s one more thing — your people. 

Once the management team is done gathering and analyzing data, you’ll need to get buy-in from all of your frontline people – the ones who will be executing the plan on a daily basis. And how do you achieve buy-in? You can’t demand it, you have to earn it through rounds of gaining their input on the project and developing a high level of trust. All the planning in the world won’t yield a cent of revenue if your frontline people can’t or won’t execute the plan.

After all that?

You’re still not done. Ongoing status checkups are essential once the diversification initiative is under way so you know how you’re achieving against the initial benchmarks you created as part of the SWOT analysis.

And — this is important — don’t neglect your existing business to chase the shiny new growth opportunity. A business isn’t healthy unless every part of it is well maintained.