Risks associated with not diversifying and relying on the 80/20 rule where 80% of profits come from 20% of customers. Step-by-step theoretical guide on how to go about this. There are tonnes of resources out there. Bring this article to the next level by reaching out to and getting a case study from a GRENKE manufacturing customer that has successfully completed a diversification exercise.
The Pareto Principle in terms of business is very simple – 80% of your profits come from 20% of your customers. Although this can work very well for many companies, for smaller businesses it can prove risky. The private sector is unpredictable at best, and customer budgets and demands can change at a minutes notice so it can pay to broaden your company's horizons, reducing your reliance on a handful of clients.
Diversification is about developing new products, exploring new markets and taking new risks. Indeed, this Irish Independent article suggests that Irish companies need to strongly consider diversifying into new markets given the economic implications of Brexit. In this piece, we identify some of the critical considerations for plotting a company diversification strategy and the steps to take to remain competitive.
Why should you diversify?
Before you begin planning a diversification strategy, consider your reasons for doing so. You might have excess capital you can't put into your existing business with a reasonable return on this reinvestment. Your company might be too dependent on one product or a handful of customers, which could have devastating consequences if you see new competition or one or two customers leave you. You might have built business relationships or a customer base that make it easy to enter a new market.
Once you know exactly why you are considering diversifying, you can better look at the specific advantages and disadvantages of doing so.
What strategies can you implement?
When choosing diversification strategies, look at your current customer base to determine if you can sell them different items or if you can add new customers by selling them a similar product at a different price or under a different name. Calculate the ongoing operating costs and stress on your company of a diversification strategy and determine if you can support multiple different businesses or product lines. Potential strategies that have worked well for other businesses include:
1. Diversify your product line-up. Tweak your product so it appeals to a new group of consumers. If you have a high-end product, consider a less expensive version that will appeal to a wider audience. Be careful not to undercut yourself.
2. Find related products. Are there products that go along with what you sell, or that your customers buy from a different vendor? The most aggressive version of this strategy is to buy a company that makes a product related to yours – you can diversify your line-up while removing a competitor from the playing field.
3. Offer an integrated solution. The basic question you need to ask is "can we do more?". This could be anything – training, apps, additional gear, monitoring, servicing. The possibilities are endless.
4. Find out what's next. Are technological changes beginning to erode your business? Don't be the last in your industry to sense where things are heading.
5. Go abroad. Not every small business has the wherewithal to launch an overseas operation. Look at where your customers want to go and you might find a project where your company fits in.
How can you limit the risk of diversification?
Limiting the risk of a diversification is all about asking yourself the right questions.
Find your limits. Look at what you have to invest, both financially and in terms of resources:
- What can you afford to invest in an acquisition or new product line?
- What are the initial and ongoing financial requirements?
- What resources do you currently have and how can you use them to support new growth?
Find your possibilities. Start where you are and think horizontally and vertically:
- Vertically – how can you go deeper into what you're doing? What is the next step-up in your industry?
- Horizontally – what are your competitors offering that you aren't? What product or service offers a complementary fit?
Figure out what fits your company best. The first two steps should leave you with a list of options meeting two requirements: they fit within your limits and are related to what you currently do. Don't start from scratch – diversification is about growing in a new direction.
Balance growth with maintenance. Enjoy the thrill of the new direction, but don't lose sight of the ongoing attention your existing business needs. Make sure you have the right people in place to manage your new growth and your foundational work.
Which companies have successfully diversified?
We all know of the big companies who haven't diversified and have been left behind – Kodak, Nokia and Blockbuster to name a few. But what about the Irish companies who've gone from strength to strength following a redirection? Ryanair offer so much more than just flights, many sports gyms offer mind and body wellness programmes, physio, diet and nutrition classes, indeed our own clients Voya started out just as the seaweed baths in Sligo and diversified into beauty and skincare products that can be used at home.
Smart business owners place a high value on diversification. Take the time to draw up a good game plan for your company. Talk to GRENKE today about how we can help you with your diversification plans with our smart leasing and finance options.