Diversification Types and Examples

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Anthony Jackson
Professor, Korea (South)

Diversification Types and Examples

A business and marketing strategy that has been overlooked by some small businesses is diversification. Due to the Corona virus many SMEs are closed down and the probability of opening soon seems low. In some cases they may never open again. I have researched and read about businesses stating that if the economy doesn't open up soon they may lose their entire business and livelihood. Yet other small businesses and some fast-food chains have flipped the script. Instead of waiting for government relief money to survive, they have come up with innovative ways to not only survive, but position themselves and rebranding their name as well as changing their products and services.

According to the NDP Group, a marketing research company asserted that 97% of restaurants in the United States have been affected by coronavirus-related-linked restrictions, this, in turn, has caused transactions to fall by 42% for the week of 29 March 2020 as compared to last year this time.

So to survive and raise revenue small businesses, especially restaurants, are using their creativity.
For example, independent restaurants have started selling groceries along with their usual food, and in some localities, they have been easing laws to help make the transition easier. It's not just the small independent businesses doing this, large chains like California Pizza Kitchen, Subway, and Panera Bread have also taken advantage of this opportunity by offering the sale of grocery-style items.

Successful business leaders have always known that if you want to grow and advance your business for the long-run then you can't rely on the same old thing but a different day. As a business owner, you must find ways of connecting with new customers and increase profits. So how do you achieve this? One particular strategy that stands out is diversification.

Diversification is an expansion strategy to add products, services, and markets to your company's core business. Not putting all your corporate eggs in one basket is one major way to reduce business risk.

PURPOSES OF DIVERSIFICATION
Actually diversification can be done for various reasons, including
  • DIVERSIFY TO ENDURE
    Diversification for the survival of the business that you put hard work into can help stabilize your cash flow in tough times. If you are a one-trick horse business than you are very vulnerable to conditions over which you have limited or no control such as new competitors, rising material prices, crisis, and customer tastes. Now if you diversify you can spread your business out over different areas so you won't be defenseless if one area of your business starts tanking.
    An example would be if you had a seasonal business selling ice cream from a truck than the bulk of your sales will be in the summer and if you are committed to selling ice cream than you would have to sell enough to cash reserves during the fall and winter months. Now if you diversified you would be selling a product that would appeal to customers during the fall months like coffee and hot chocolate.
  • DIVERSIFY TO THRIVE
    Diversification is not just concerning continued existence. It can also be a proactive growth method. Adding new products and services to your existing line can earn you access to an appealing new business full of new customers and great sales potential. It can restart growth again, especially if you know how to utilize the momentum in the market.
    Take for instance when the economy starts to reopen people will be very cautious of others and personal attention in retail stores (big box and dept. stores). The best alternative could be to train the sales staff to man the computers for online sales and then offer the customer local delivery, your store delivery, or pick-up service for the products they ordered.
  • VERTICAL INTEGRATION
    It can be where you take control of any additional production or distribution steps and it can be forward or backward vertical integration. For example, your favorite restaurant that you go to get a good steak or BBQ instead of preparing it for you like they would if you eat in, instead they could sell the steak already seasoned or whatever you and then you cook it at home. By using vertical integration a business can leverage its existing abilities thereby reducing costs and remaining true to its core values.
  • E-COMMERCE
    If you haven't been thinking about selling over the internet, now is a good time. You can develop an e-commerce website for as little as $5.00 a month and it's very simple. Think about what items you want to sell and what services you can offer. As I said earlier, restaurants can have food delivery or offer grocery items that you source from your supply chain or a popular item from your menu that is a big seller either prepared or for the customer to cook at home other types of retail shops can offer their specialty. But whatever it is, get the site up and running because people won't be moving around like they use to and if you don't have one, they will seek other stores out that do.
  • LATERAL DIVERSIFICATION
    When you expand into an entirely new business that you don't operate in that is called "lateral diversification" (or also "conglomerate diversification")
    An example would be a coffee shop expanding into selling a line of clothing. If you look at some of the top rap stars like Jay Z or Diddy they are very successful in lateral diversification. In lateral diversification, there is no connection between the core business and the new market.
Although these ideas might be new to you, business owners facing a lot of uncertainty have to start somewhere. Although people may not want huge amounts of steak or whatever else you sell as a restaurant, just think about what reach your brand or shop may have over traditional grocery stores or other restaurants.

All businesses make every effort for growth. But the roads they take to get there differ and the vehicles they utilize can take many diverse forms.

References:
Pomranz, M. (2020), "Even Chain Restaurants Are Selling Groceries to Stay in Business", Food & Wine.
Sherman, F. (2010), "How to Diversify a Company's Portfolio of Businesses", The Chron.
Taylor, K. (2020), "Chains like Subway and Panera are selling groceries", Business Insider.
Thompson, J. (2019), "Diversification as a Marketing Strategy", The Chron.

  Graham Williams
Management Consultant, South Africa
 

Also Consider the Adverse Consequences of Diversification

This is valuable thinking Anthony! I would suggest (...)

  Graham Williams
Management Consultant, South Africa
 

Diversification Types and Examples

This important topic deserves much more discussion (...)

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