3 Reasons Why Small Businesses Need To Be Diversified

Diversification is one of the top business growth strategies that most small businesses need to adopt in order to increase profitability and achieve higher sales volume from new products. It is a growth strategy that involves businesses entering into a new market or industry that your business does not currently operate in, while also creating a new product for that new market.

Diversification can come in form of either expanding into a new segment of an industry that the company is already operating in or expanding into a new industry that is beyond the scope of the company’s current business unit.

There are three types of diversification techniques:

1. Concentric diversification:

This form of diversification involves adding similar products or services that most times, have technological or marketing synergies with existing product lines or industries, but appeal to new customers. For example, a PC manufacturer starts producing mobile phones. However, in concentric diversification, you may be able to leverage your existing technologies, equipment and marketing to diversify in this way.

2. Horizontal diversification:

Horizontal diversification involves providing complementary products or services to existing consumers. For example, an ice-cream business adds pastries into its product line. You may require new technology, skills or marketing approach to diversify in this way and retain your customers.

3. Conglomerate diversification:

Conglomerate diversification involves adding new products or services that are significantly unrelated and with no technological similarities. It involves entering an entirely new market and selling products or services to a new consumer base.

As a small business, you need stability to thrive in your industry, and this is one of the reasons you should diversify your business, because it would help your company build stability. If you concentrate so much on a single industry or product, you risk volatility in revenue and resources as demand rises and falls, but if your business covers various industries or categories, you may have more predictability. In addition to building stability, diversifying your business can spur sustainable growth in your business. This is because, you could move into industries you are not currently involved in, form subsidiaries and introduce global marketing as part of your diversified strategy.

2. AVOIDING DOWNTURNS

One of the top and conservative reasons why small businesses need to diversify is to avoid major repercussions when an industry or sector suffers a downturn. Some single-business or single-product organizations could not survive a prolonged decline in their industry, as they would be seriously affected by a downturn and sometimes fold up eventually.

However, being diversified protects the company against sudden changes, because even as the economy changes, the spending patterns of the people change and diversifying into a number of industries or product line can help create a balance for your business during these ups and downs.

3. INCREASED SALES AND REVENUE

One of the obvious reasons for small business diversification includes increased sales and revenue. When a business has covered a particular portion of a marketplace, it is difficult to improve profitability, because there is little room for new customer acquisition. However, when a business diversifies by adding a new product or service or entering a new market segment, it provides the opportunity for exponential growth, profitability and brand recognition. Your company can gain financial advantages from diversifying its strategies. In addition, it is no news that sometimes, investments don’t always perform as expected, by diversifying, you’re not merely relying upon one source for income for your business.