To Grow or not to – the Diversification Question
Entrepreneurs get restless and entrepreneurs get bored. In a bid to get their adrenal juices going, business owners might succumb to the temptation of taking up another new business. Or the prospect of taking advantage of the opportunities presented by a sunrise industry may be too tempting. Whatever the motivation, diversification is great under certain circumstances, and there are a number of examples to prove it. But, do it before its time and your existing business might pay the price.
When should you look at diversifying (and by that we don’t mean merely expanding) your business? What could it bring, and more importantly, what might it take away? A few arguments are presented here.
It’s great in the long term…. Sure, every business will eventually have to diversify in order to survive once their industry stops growing. But we’re not talking about that scenario just yet. Experience shows that when businesses grow by venturing into other “non-core” areas, it takes a reasonable length of time before the benefits start to pour in. The question is, does your company have the lasting power to take the inevitable swings that accompany any diversification?
If you’re looking to making it big in the short term, business diversification is certainly not the way to do it. Try organic growth and market expansion instead.
Only that business which has matured and is adequately buffered by strong fundamentals (including cash flow), should consider diversifying - that too, when the market for its existing product or service can grow no more. Should diversification seem inevitable, the first option should be to venture into a field that is at least in some way related to the current line of business.
A diversified business might help hedge risks in times of uncertainty. That being said, investors (including those on the stock market) look at conglomerates with caution. Current wisdom prescribes specialising in one’s area of core competence. If you’re hoping to raise external finance in the near future, diversifying your business will not help your case.
A complex business model can also be an operational challenge. Different sets of accounts, diverse compliance issues, different work cultures and so on – you would need a very reliable second level of leadership to manage this well. A diversified business will also test your ability as a leader; so don’t jump in at the deep end unless you’re absolutely sure of surfacing!
Diversification, Refocusing, and Economic Performance (Hardcover)
by Constantinos C. Markides (Author)
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