Should you be pursuing a diversification strategy to help ride out the next twelve months?
There is no doubt that a well-balanced customer base can help stabilise your business. Relationships with existing customers can be deepened by diversifying how they engage with your products and services. Further, a redistribution of revenue streams across multiple market segments will help to safeguard financial stability.
A well-thought-out diversification strategy might be what you need to grow and develop your business. A company that operates in a single market or a single product/service family is constantly exposed to the risk of innovation and transformation. If your primary customers disappear or the market is saturated, diversifying your products or services can reduce that risk.
A horizontal (or product) diversification strategy means adding products or services that would likely appeal to your existing customer base. This strategy works with the customers or market segments you are most familiar with and carries the least risk. By diversifying your existing customers' needs and diversifying your business model, you can develop viable new business opportunities.
It offers the opportunity to grow your business by increasing sales to your existing customers.
Market diversification expands your existing business into new markets. Although the growth potential is enticing, you must make sure that you fully understand your business's market context and that it is consistent with your strategy.
Entering multiple geographical markets with a single new product or service line is still a risky diversification strategy that will pressure existing resources.
Existing sales strategies must be shifted by carefully considering the company's new market context. Analysis of your target market can support your sales strategy and identify risks and opportunities for market diversification.
When entering a new market, we recommend that you lead with services or products that are technologically consistent with your current products and opportunities. It is also important to make sure you have all the resources available to cover your existing products and services before shifting attention to new markets.
A riskier diversification strategy would be expanding the range of existing products and services in new markets.
While companies that operate in multiple sectors simultaneously and sell across vertical markets and geographical areas have a distributed revenue model, a new product or service is, by definition, one whose market coverage is unknown or one with a limited number of customers.
In which case, we recommend that you start with a small number of customers in a particular market or product group. Diversification may require you to develop new skills that you do not currently have in-house, including new technologies, new business models and new customer relationships. Additional sales and partnership capabilities are needed to help open new markets and new customer segments without overloading existing business lines.
Diversification will need effective implementation of new marketing activity and will therefore require rigorous planning and sales execution.
New product initiatives are different from established ones, and new capabilities are needed, especially for companies that have never sought to expand beyond their core product or service program. Diversification is an innovative strategy, so you need employees who are innovative and open to change.
Diversification can enable you to pursue growth by seizing new opportunities as demands grow. New products and services allow you to generate more revenue with existing customers or expand into new markets that would otherwise be closed to you and help create stability for a company in economically changing scenarios.
Poor revenue performance alone should not be a catalyst for a company to pursue a diversification path. The more different a new product or market initiative is from an established one, the more likely the company may, over time, begin to pull itself in two. Diversification can create potentially profitable opportunities, but it does not happen without risk.
Collaborations and fresh talent may allow you to close internal capacity gaps and reduce that risk.