Should you diversify your business ?
A key challenge facing any business is to constantly grow and keep developing its competitive edge at the same time. Constant evolution is the key to long term successful businesses. One theme is to diversify into new and emerging fields that can possibly offer higher rates of return and/or better growth prospects. However, diversification also involves getting up a steep learning curve and also allocation of often scarce resources to a new avenue of activity that may or may not pay off and sometimes could even bring down the core business.
As a business owner, I struggle with this issue all the time and all I can conclude is that one has to take a broader definition of diversification as not just diversification of the business itself but also a wider and more open mindset, hiring various backgrounds of employees and also taking in lessons from other businesses from sometimes totally unrelated fields. In effect, we have to create the correct environment and mindset for successful diversification.Some observations that I have noted on this basis are ;
1. Diversification into new markets with existing products: This is probably the most natural progression to take existing product lines and expand into new markets thereby increasing growth opportunities in areas of existing competencies. We deal with a leading New Zealand based supplier of premium bakery ingredients that initially was totally focussed on exports to the Korean Market but now has built a highly successful export business into other Asian markets like China, Singapore and Taiwan by being able to transfer the knowledge into other similiar markets.
2. Diversification into new products in same market : Ideally if one can introduce new but related products into the same supply chain it can be a successful strategy. One successful importer of wines in China I have known for years built his business and reputation on French wines initially but just when new world wines took off, he was quick to expand into becoming a major importer of Australian and Chilean wines thereby keeping himself relevant to his customers like hotels and supermarkets that wanted a wider range of products at different price points. With the recent rise in demand for fine wine in China he is now educating himself in the fine wine business and I am sure he will be a success in this field too.
3. Diversification into an unrelated business : This is the one to be very careful about as the classic trap of the grass being greener on the other side applies. All businesses more or less have to revert to similiar levels of profitability in their field as competitors catch up and costs increase or prices subsequently collapse. But for a small period of time it seems like the glory days are going to last forever whether the case of the fantastic success of the Iphone today or the Palm Pilot ( does anyone even remember ?) or the great era of the Dotcoms fantasyland in 2000. Hong Kong Stock exchange listed companies offer one of the most reliable indicators of the bubble of the season flavour. In the Dotcom bubble textile companies were becoming technology providers and internet portals, in the recent China investment boom XYZ technology would become China XYZ investment technology and in the resources bubble the same XYZ China Investment technology company would change its name and supposedly its business into XYZ coal Mining Resources or better yet XYZ China coal Mining resources ( Get 2 bubbles for the price of one special deal )
That said there is something to be said in all seriousness to genuinely look at other emerging business sectors and markets with an objective eye and seriously ask if we have the resources to get into potentially a more profitable or faster growing business. Another friend of mine runs a graphic arts company and in the process of buying and renovating a large warehouse space into a studio discovered a niche in the property business that was overlooked of converting older factory buildings into more ' new economy' type space for artists, smaller tech companies and photo studios and he has now made more money in 4 years than what he made in over 15 years of being in the graphic arts business.
Finally whether we do make the decision to diversify our business or not should be taken very carefully and conservatively but the key is to keep an open mind and not be afraid to accept that there could be better ways of doing exactly the same things we have done for years or maybe even better things to do than what we have done for years by inertia or compulsion rather than choice.
