When do you want to diversify your company?

Entrepreneurs sometimes think that business diversification is the best choice for their startups. Although entrepreneurs diversify for a host of reasons, a common reason is for survival. Companies commonly diversify, as a survival strategy focused on extending brand reputation in new or existing markets to increase business success.

Is this the right strategy an entrepreneur should use?

Not always. When a startup company is in it’s early stages, it is best a company not diversify. As an early stage startup company core business can be unstable and limited in profitability. If winning orders and building a sales team for the core product is a big challenge, and you decide to diversify, you are at risk of loosing your focus taking your eye of the ball.[i] While diversification serves as a strategy responsible for many companies’ success, it prevents the success of many early stage startups.

If you are an entrepreneur whose company has passed it early stage, then diversification is strategy best adopted through a natural progression.  More specifically, your product offerings should be within the same product family. For example, “if you sell men’s shirts, adding ties and cufflinks to the range is an obvious next step.”[ii]

Many established entrepreneurs use the popular “look backwards and forward”[iii] method of diversification. By looking backwards and forwards, entrepreneurs are able to examine areas along the supply chain that need to be enhanced in order to tighten their company’s grip on the market. Moreover, the look backwards and forwards method, enables entrepreneurs to better understand what there growth areas are, and most importantly what their customers want.

Diversification can be beneficial, but this strategy can also be the downfall for many startup companies. Diversification can put your startup on a fast track to growth, but burn up a lot of your cash. Diversifying can increase product turnover, through product expansion, but increase costs and slump profits. Diversification that involves expanding your product into new markets puts your startup at risk of not attracting new target customer, because of the challenges associated with early adopters. Thus, harming the company and profits.

Diversification is not the enemy, but it is a tool. And if this tool is used appropriately companies can escape many threats.  

Have experience with diversification; please share below in the comments section.

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[i] Is Business Diversification the right strategy for your business? Growing Business: The Startups Team. November 26, 2013. 

[ii] Is Business Diversification the right strategy for your business? Growing Business: The Startups Team. November 26, 2013. 

[iii] Is Business Diversification the right strategy for your business? Growing Business: The Startups Team. November 26, 2013.