Business Diversification: The Pros and Cons

 

 

One of the biggest challenges that any company may face is whether to consider diversifying. Business diversification involves trying new products to invest with, targeting a different market, and creating considerable risk strategies. There comes the point in time when a company would think of diversifying their business for various reasons. And it is something that should be really thought about.

Is it necessary to diversify? The answer is no. Just think how some companies may have been established for so many years. How would you compete with their success when you know that they can sell even without having to advertise too much about their products? It is risky to involve yourself in another venture, but then again, for some companies, it might be a risk they would like to take. It may not be necessary, but it may save your business (assuming that you chose the right company).

However, not all companies would consider diversifying because of how much it would cost them if they failed to choose the right kind of business. But nevertheless, some would still want to try. But why do companies consider diversifying?

• There are certain lean months for companies. And we are all aware of the possibility of how some products may just be producing salable things for just a specific season. Remember when Crazy Loom was the latest craze among little girls? That was just two years ago. There may have been a decline in sales when imitation of this product came out. And because the business owner did not foresee the possibility of some obstacles that may come along the way, the company no longer produces as much. So there was a need to develop/create other exciting toys for the children to enjoy.

A company should keep on moving to sustain the business, and to do that, diversification may be the solution. Shareholders may not be too happy if they are given this idea of business diversification because of the risk that goes along with it. But exponential growth for the company is the main goal and nothing more.

• Shareholders’ value may increase when the company brings different businesses under one corporate umbrella. You may be able to allocate resources of the company so that the needs of each of the companies may be appropriately addressed. The company can save a lot by letting corporate employees share responsibilities for different roles needed on each business, such as human resource management, marketing, IT, etc.

The pitfalls of business diversification

• A company may see an excellent opportunity to venture into another business, thinking it can be profitable. However, leaders in the company may have their expertise, planning abilities, and leadership qualities limited to a specific industry. That being said, aiming too high but with such low capabilities of the leaders may not produce a positive outcome.
• Unrelated diversification may do more harm than good. There should be a line drawn between the different philosophies, principles, and strategies that these new businesses otherwise, there would be confusion on maintaining a specific brand image. When the business has related diversity, it is much easier to integrate everything. The mother company believes in and adheres to all the other new companies created.
• Like any other start-up business, you are unsure whether your business would survive for at least 5 years. There may be a considerable investment risk. Business diversification is spelled out as R-I-S-K.

Before planning for business diversification, the questions below may help you decide on whether to pursue or not:

• What is your edge over your competitors based on its current market? It is not merely saying that the company may have enough funds to sustain a new business. But instead, to focus on its abilities, knowledge, and strategies in doing their business in mind, they can start with it.

For example, Company X is currently into real estate. The best business that it may venture into is by supplying cement, bricks, etc., that are related to building homes and condominiums.

• How vital are the strategic assets to assure your shareholders that venturing into a specific business can be a good move? It is not enough that you have a good number of consumers that patronize your product. They may be all in for the good, quality orange juice you have provided them for the past 20 years. And if, for example, you decide on trying to add wine or beer as one of your new products, do you have the necessary knowledge in making beer or wine?
• Can the business catch up with its competitors? As previously mentioned, some specific standards and principles need to be followed in every industry. Let’s say your company may have chosen to develop a new product. How can you make any difference? Sharp was first known for manufacturing and retailing radios. When they thought of diversifying into making televisions and microwaves, they intensified their technology to succeed with their new products.
• Are the identified strategic assets enough to sustain the business? When a company adopts a new technology (taking the example mentioned from the second question), other strategic investments may have made it obsolete when combined with the mother company. It is the manager’s responsibility to determine what works for the company’s best interest.
• How much work are you willing to put into this diversification? When a company decides on this, there should be a clear vision of how you want things to be. Is it just introducing a new product under your wing? or will you be trying to win the top spot among all other companies. Who offers the same new product as yours? The company should be able to develop something unique to sustain the business. That would interest the clients. Shareholders would only want one thing –to be on the winning end. So it is up to the managers to distinguish if the strategic assets they have at hand would make it possible for the company to succeed with the new venture.

Diversification is never an easy move. However, suppose managers know how to play their cards well. In that case, they should foresee the benefits. That diversification can do to the company and take a step back if they feel that the risk they are taking may be too high for the company to face.

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You may contact Armando “Butz” Bartolome for questions and more information.

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