Diversification can provide a path to fast growth as you develop new products and expand into new markets and it can also safeguard your company against becoming over-reliant on any one market or product.
Many businesses experience exponential growth in the early years followed by a plateau. The main reason for this plateau is a lack of new customers. Diversification is path to achieve Financial Wellbeing by being a way to open up leads to new customers through development of new products and growth into new markets. There is, of course, risk associated with diversification but the potential reward can be substantial.
There are several different types of diversification; with the right research one of these options could be the key to growth beyond your existing markets.
Vertical Diversification
When you expand backwards or forwards along an existing supply chain. For example if an ice cream manufacturer opened their own store or if an electronics store opened a factory to manufacture their own goods
Horizontal Diversification
When you develop new products that are complementary to your existing product line which will appeal to their current customers. For example a notebook company which enters the pen market.
Concentric Diversification
When new products are developed that share technological or marketing synergies with existing products but appeal to new customers. For example if a computer manufacturer began to manufacture laptops
Conglomerate Diversification
When a company develops a new product or enters a new market that is completely unrelated to their existing product line. For example a food manufacturer entering the film industry.
Through diversification you can generate sales while increasing market share and finding new revenue streams but it also comes with development, sales, and marketing costs. It also requires additional resources, skills, and management. If the costs associated with diversification exceed the potential profits and gains, then your business could be at risk.
In general, diversifying with similar products for a familiar market carries less risk than developing a brand new product for an unknown market. This allows you to create a safety net which allows you to recover if one of your products or services fails.
A well prepared business plan can provide structure to your plans for growth and help you determine the best way forward. To help you get started we’ve designed a business plan template.
The information contained in this article is has been prepared by Bank of Ireland (“BOI”) for information purposes only. BOI believes any information contained in the article to be accurate and correct at the time of publishing.
