Diversification is about building new products, exploring new markets, and taking new risks. It can present significant opportunity to enable companies to continue to grow. For example, it can pay to broaden your company’s horizons and pursue new opportunities – no matter how confident you may be in your existing offerings. The cost of ignoring this can be severe especially for sectors where technology is driving change e.g. the demise of Thomas Cook.
How can past events help us to understand if this may present an opportunity for growth?
Essentially, diversification can be highly lucrative but also can be incredibly risky as can be seen by the following examples of Virgin and Tesco.
To understand the way in which Richard Branson has built the Virgin empire goes at the heart of understanding diversification – and its successes and failures. Consider a thriving music industry mogul that suddenly wants to diversify into the airline business. From this base he has dabbled with forays into the mortgage and insurance sector and even cola – the latter being disastrous. It is clear that at this stage Virgin lost how the brand could profitably expand.
Conditions were not conducive to Virgin’s entry due to the existing players’ ability (Coke and Pepsi) to block access to widespread distribution and a backlash in advertising spend – which ultimately limited Virgin Cola to just a 3% market share on its home UK turf before exiting.
Tesco has invested a lot of money in recent years trying to sell us things other than groceries. The idea was to get into higher growth business and in some cases, such as cafes and restaurants, open outlets in its own superstores. Tesco also attempted to break into international markets.
Tesco bought Giraffe restaurants in 2013 for £48.6m. The idea was to get into a high growth business and fill excess space in stores with branches of the family-friendly restaurant.
The chain has lost money, mainly due to the cost of expanding to around 60 stores across the UK.
After a lengthy battle, Tesco won full control of Dobbies Garden Centres in 2008, at a cost of around £150m. But last year the company lost £48m and reports say that it's now up for sale.
With these clear failures in diversification – Is Diversification Necessary?
The short answer is no. The world is full of companies that found their speciality early on, built a market around that product, and decided to make it their focus. However, it may present significant opportunity if new business sectors offer growth potential that your business can profitably exploit.
The key to successful growth is to examine where your potential lies in terms of your ability to secure profitable new business. This may lie resolutely in your existing market sector or via development on new product ranges. A recent client who had many years’ experience of running a convenience store thought that opening a coffee shop would provide significant potential. After initial investment in a site, the operation was closed as the business owner he had no expertise to develop this area of business.
Diversification is not a cure-all for the struggling business, nor a sure way to cement your lead if you’re already thriving. But it’s one potential answer if you want to remain competitive.
The critical success factor is to ensure you are able to identify potential growth areas for your business and then examine and evaluate the capability of your business to profitably capture these sectors. In short, the key is to continue planning and make sure you can timetable review processes to track these opportunities