Diversification means that extend business activities into disparate fields, or to distribute investments in order to average the risk of loss. Diversification can reduce the risk especially in financial crisis. Growth by creating new products or services to sell to existing or new customer bases is inherently risky, but handled well it can transform a business.
New market opportunities
Diversification may have a perceived market opportunity. If remodeling or light commercial construction is booming in your market, you may want to increase your profits by using your skills to meet the market need.
Reduce financial risk
Diversification may be protect your financial assets by spreading risk among several different investments. It's the old adage of "Do not keep all your eggs in one basket." And sometimes that's a smart idea.
Understand the risks
If you get it right, diversification could be your biggest driver to growth and profitability. Mishandled, it could damage your productivity and relationships with existing customers.
You will need to devote time and resources to research and development (R & D) – this will have implications for your cashflow. You will also have to ensure your customers still receive the levels of service that they used to while you are working on new projects.
Is it suitable?
Have you gotten enough financial and human resources to carry out the required R & D? If not, it may be better to increase your market share through other routes, eg joint ventures or informal partners.
Remember that you will also need to keep track of market trends in an unfamiliar sector. Will you be able to react to changes in the competitive environment?
Plan the process
Diversification is like setting up a new business. You will need to understand your new market, its customers, competitors and dynamics, just as you would for any new business. You'll also have to create a marketing plan specifically for your new business unit.
Key points to consider
Diversification is a big commitment and there are key issues you will need to consider and manage on both a day-to-day and strategic basis. These include:
o Market knowledge – make sure you understand your new market as well as your existing one.
o Sales skills – do you know how to sell effectively to this new and different customer base?
o Capacity – can you continue serving existing customers without alienating core customers?
o Finance – you will need to consider how you will fund the diversification. Will you need investment? You will also have to carefully plan sales and your return on investment.
o Risk management – are there any ways to minimize the risk to an acceptable level? For example, could you explore partnerships or distribution agreements to ease your entry into the new market?