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Factors to keep in mind when diversifying your business

Published: April 27, 2021 12:07

Diversification aims to reduce risk and maximize returns by spreading money across new ventures that are not correlated. It is a corporate strategy to reduce portfolio risk, whereby a company enters into the production of a new service or product that is different from the area the company deals currently. It is the expansion of the business into a completely new segment.

If the demand for one type of product vanishes, the company can rely on the second product. The logic is that if one business does not perform well, the other will average out the return. If not done rightly, the strategy can also work against you. A lot of deliberations need to done by the management before they decide on adding a new product to the lineup.

Some of the factors that need to be considered before diversification are:

Financial backing

Diversification involves additional finance and one needs to conduct a thorough analysis of the financial aspects of the strategy. You need to ascertain the financial conditions of your business to know whether you can support the new venture throughout. Financial planning on the amount of investment and working capital have to be done for smoother operations of the business activities.

Core competencies

Make an honest assessment of your company’s core competencies or business strengths as you expand for opportunities. What gives you an edge in your current market might click for another, so you can co-create value. The company’s core strengths could be in design, engineering, supply-chain, marketing prowess, vendor relationships or even manufacturing capabilities.

The right market

You need to ascertain whether a demand for the new products exists in the current market you serve or would you need to tap into new market segments. If you are eyeing international markets to launch your product then undertake a research on the lifestyle, tastes and preference to assess the projects’ feasibility. If chances to penetrate the market are low, then look for other fertile markets.

In-depth expertise and talent

Bold diversification strategies certainly call for new talent to execute them. If you plan set-up a different distribution channel such as direct marketing with online stores, you need to recruit a team with relevant expertise and experience to execute the new strategy. Having the right minds early on the project will assure you of the end-results.

Asset’s evaluation

Evaluate if your new venture can tap the assets utilized for your current business operations. If same fleet of vehicles, machinery or raw materials can be re-purposed, then the business can generate additional income without heavy initial investments. In such a case, the company should go ahead with diversification as this will save a lot of money to the company which can be utilized for brand building or marketing.

Diversification is a necessity in uncertain times

The reason to diversify is out of necessity to keep up with changing times. As business grapple with the pandemic globally, many companies are currently contemplating a diversification strategy to keep their business thriving. If done rightly, diversification can tap new territories, build a wider reach and increase long-term profits. Do your due diligence to assess if the new endeavor is workable for your business and do not rush the decision.

If your business is looking to sow seeds in new markets you can take help from expert consultants at Qadi by sending an email to contact@qadi.ae or calling us on 971 4 3298344 . We can help you devise a diversification solution to tap your company’s maximum potential.

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