Diversification: it's not just for your investments. You've undoubtedly heard of the word before, and you understand why it's important to do in your investing and retirement plan, but you're not too sure what to do with that advice when it comes to business. Well, fortunately, it's not all that difficult to do, though it may require you to think outside the box a bit.
Diversity Through Acquisition
If your business is doing fine right now, that's an opportunity for you to acquire more businesses either related to your core business or complimentary to it, but still unrelated. Most small businesses, and even medium-sized businesses, make a huge mistake when they're financially well-off. They spend all of their capital on building the business with no concern for future growth prospects.
They never consider that they may hit a brick wall due to uncontrollable economic or political factors. When your company is flush with cash, it's time to consider putting at least part of that money towards a reserve for future use or a new business venture.
Buying out companies that are related to your own company can help you broaden your reach and solidify your position in the industry. Likewise, buying unrelated companies diversifies your risk. For example, if you owned a company like ISO Stainless, you would generally have two choices: buy up a steel producer, mining company, or something else in the supply chain or buy companies that make signs or other related materials, but that are both non-competitive and unrelated to the core business.
Diversify Your Product Line
Do you sell just one product or service? It might be time to expand your product line. If you build gas valves, for example, maybe it's time to also control the piping and extrusion part of the industry. That will help pay the bills if the valve portion of the business starts to lag.
Find New Customers
If you run a consulting business, and you only cater to large corporations, it might be time to think about working with small business owners - or at least medium-sized businesses. Why? Because having more or different customers diversifies your company and solidifies its profit and revenue sources.
If you sell primarily to businesses, can you modify your commercial offering for consumer use? That will widen your market, allow you to tap into an entirely different industry, and stabilize earnings during times when the B2B revenues slow down. Many businesses are cyclical, yet consumer spending doesn't always mirror those cycles. That means your revenue sources are more even throughout the year. Or, if your'e like Apple, Inc., you create your own revenue cycles through product release dates and continued R&D (so you can come up with newer and better versions of your product).
Risks and Benefits
While diversifying can strengthen your company, there is a danger in it. Remember the conglomerates of the 1950s? Where are they today? Only a handful of businesses have succeeded at owning multiple niches or industries. Usually, a company that tries to venture outside of its core competencies too far ends up bankrupt. That's why it's important to diversify into either directly related or unrelated but complementary industries. You don't want to end up like Starbucks after all - building out your sandwich line, only to have to close stores and retool the entire business.
There's an entire graveyard dedicated to companies who were taken over in the '80s, only to be stripped down and leaned out. And, while many senior executives remember those days, many young entrepreneurs were still in grade school when it all went down. Learn from history. At the same time, don't become a slave to your current business model.