Too many businesses stagnate, decline or fail because they are not adequately diversified. Diversification is one of the most challenging decisions a company can make, which is why most business owners do not do it.
It is called an unpredictable, high-stakes game for good reason. The risks are high, but so are the rewards. There is always the gamble that you could significantly increase the value of your company or severely damage it.
But, like any risk you take in life, there are things you can do to limit the downside and increase the upside. You can start by thoughtfully, wholly and honestly answering the following questions. This process will work only if you respond with facts – not feelings or guesses. If you do that you will make the risk in diversification, much less risky.
Figure out where you currently stand. Every company has assets and liabilities, including yours. The decision to branch out should be based on an analysis of what you can capitalize on and what needs to be fixed before you move forward.
If your business struggles with being competitive now, you are not in a position to make a good run at future competitors. Using diversification to fix a failing company seldom works; it requires a robust and stable company to be successful. An outside pair of eyes is helpful at this point. Owners are usually too close to the situation to evaluate it accurately.
What assets do I need to compete with future competitors successfully?
Determine what assets (i.e., money, time, people, skill, training, knowledge) you will need to compete in future markets. Success in one market does not mean you will be successful in another, especially since you will probably be competing with companies who are already established and have experience with diversification.
Develop a plan to match or beat them at their own game – merger/partnership, acquire/buy out, undercut pricing, aggressive sales/marketing plan, etc. You should not enter a high stakes game unless you have the resources required to win. You still may not win, but your chances are a lot better.
What do I want to accomplish and how do I do it?
It is vital to identify your objectives and make sure you have enough assets to achieve them. A common mistake owners make is not being clear about what they hope to achieve. You want to identify how much of a sustainable market share you can reasonably go after. There is no point in diversifying if you do not know exactly want you want and have a plan for getting it. Here is an example of how not to expand. While it is about a machine shop, every industry has it’s equivalent. A plasma cutter is an expensive machine that cuts plate steel. There is a market for its products, and it can be a reliable profit center. And yet many (yes, many) of these machines are gathering dust on shop floors because the owners did not identify their objectives, nor make sure they had enough resources to achieve them. These owners did not do the basics: have an employee available to program it, hire or train existing salesmen to sell to the capabilities/strengths of the machine, figure out the break-even and profit margins, identify a need for the product in the area by contacting possible customers, or line up potential contracts before purchase. Answering these questions is the place to start if you are thinking of diversifying, not the place to finish. In addition, you will need to do a detailed financial analysis; again, an outside pair of eyes is beneficial at this stage. Diversification is a great way to grow your company and meet all your goals. But, like any game of chance and skill, it is essential to know the ins and outs if you want to be a good player. The smart player knows when to leave with cab fare in his pocket and money to get in the game another day. The dumb one stays until he has to hitchhike home and borrow money to eat next week.