From Computers to Music Players
Handled properly, diversification can reduce financial risk and improve cash flow – for example, when Steve Jobs arrived for his second stint at Apple, urban legend has it that he got everyone together and asked them what Apple did.
“We make computers.” was the reply.
“Well, we’d best shut the doors then as we have less than 10% of the market.”
And so came the iPod. Sure there were better MP3 players, with bigger memory at the time, but the diversified and gave us a reason to buy from the because of their one stop shop on iTunes. They diversified into the music business.
But an unsuccessful diversification can drain cash and divert a business from its mission. What exactly does it mean to diversify?
There are four common flavours:
Sell a new related product or service.
Example: Zappos, known for selling shoes, began selling apparel and accessories.
Adopt existing products or technology.
Example: The makers of Arm & Hammer baking soda expanded into Arm & Hammer Baking Soda Tooth Powder before launching a full line of toothpaste, deodorant and other personal care products.
Offer a new unrelated product or service.
Example: Originally a record store, the Virgin retail chain expanded into the airline and mobile phone businesses, among others.
Offer products or services that compete with your suppliers or customers.
Example: Armani opened retail stores; Amazon began publishing books and ebooks.
So in the current climate, if you’re going to seek a diversified source of revenue stream from different products, then these products should be central and complementary to the business. The diversification needs to have logic.
A plumbing service might very well do heating and a car dealership might stock 4×4 trucks but they may or may not stock delivery vans.
It really depends on what the business can handle. A concentration in one area can leave you vulnerable. At the same time diversification should not be the cause of a product glut. Simply having a proliferation of products is not the answer.
Diversify with Online Advertising
Diversification of revenue may also include advertising revenue. For example, many companies who have established an online presence have learned that additional revenue can be generated by including Google ads, affiliate programs (where the company gets paid when someone buys another company’s product or service), or the use of banner ads.
Not everyone is a fan of diversification. “It can get you in trouble by leading you away from your vision and goals and it can cause mounting costs,” says business owner Charles Christiansen. “Find what you’re good at and stay within that. If you’re in the furniture business, don’t start selling snow cones unless it will keep the kids occupied while you’re selling the parents some furniture.”
Before You Diversify
Before you diversify, consider the following questions.
Do you have a good reason for diversifying? You should have a reason – for example, seasonal sales – that justifies taking time away from your primary products or services.
Is the timing right? Are you diversifying at a time when you (and your management) need to remain focused on the core business?
Do you have the skills and knowledge? Do you have what it takes to successfully promote a new service or product? Without the ability to promote a diversified line, you’re headed for a dilemma.
Have you considered the effects? The rewards from diversity should offset some weakness in your current business. For example, a diversified line should provide you with income during an otherwise slow period.
Have you projected the potential for failure? If a worst-case scenario shows that diversification will sink your business, you may not want to take the risk.
Is diversification a logical extension for your company? If you are a retailer, can you diversify by offering related services—for example, if you sell knitting supplies, can you provide knitting lessons?
Is it wise to be a ‘jack-of-all trades’ and a master of none? Consider the implications of people not actually knowing what you ‘do’. You could well miss out on strong and profitable sales because you spent your time trying to be the person for everyone and everywhere.
So those are a few reasons why you should and you shouldn’t diversify. Granted things are tough out there and the simple fact is that most market places will be flooded by new products, services and experts in the coming months. Maybe, just maybe spending more time at doing what you do with excellence and standing out of the crowd could be money better spent…