16 Nov Business Growth (Diversification vs Development)
GROWING YOUR BUSINESS BEYOND PHASE 1
When businesses are formed, they are based around an initial idea and there is a lot of focus and drive around this idea. Lots of businesses are successful in this initial period (I call this Phase 1) as they have drive and direction. They soon reach a plateau and are faced with the challenge; how do we now grow the business? The conversion of this idea into a sustainable commercial enterprise is what I refer to as Phase 2 in their lives.
Growth can only be in a few simple ways, most commonly you will do some form of Diversification or Development. Let’s get the definition’s agreed for this discussion, before we get into the debate.
I define Business Development as;
Developing your existing customers, markets and relationships to increase/improve your current market position.
I define Business Diversification as;
Looking to enter into new markets, industries or relationships to increase/improve your current market position. I include here a second definition; Diversification also includes the capability to Innovate or decide on new ways of doing things.
The next challenge or Phase 2 that you will need to overcome is how to take the business further forward. At this stage, unless you have a range of good ideas in the cupboard you will often be faced with the question of whether to Develop your existing business or Diversify slightly.
Let’s talk first about Business Development, as this should be easy enough to understand. Here you can look to your existing customer base or product base and see how you can increase your revenues from there. This can happen in different ways;
- You can look to sell more of the same product to new customers
- You can look to sell the same product to more people
For instance if you have a Coffee Shop, with regular customer’s who buy Coffee and Cakes, you can consider also starting up a line of sandwiches maybe or a delivery service … either would a great way of developing your existing business. Many people are comfortable with this approach and so it makes a lot of sense to them. There is a danger with only Development though, in that you are working with the same product, or same technology and the external environment may have moved on.
I remember back to the time in the late-1990’s when I had a PDA, a mobile phone and a camera. My Palm PDA was great for getting emails, but very clunky as a phone. PDA companies continued to develop their products, whereas Phone companies innovated and diversified. They saw that they could bring the PDA functionality into their phones and so invented the Smart Phone. Companies like Palm were probably really happy that they were able to grow revenues by Business Development, but not realising the massive change in the market that was coming up.
The other growth approach is to Diversify, look to something different or new. Lego is a great example of someone who diversified when at a low point in their history with fantastic results by generating new revenues (through Lego Films) as well as increasing the sales of their toys by making Movie Character toys. I am pretty positive that had lego not done that, they would have disappeared from the shelves of toy shops. If you look at Apple, the would appear to be perpetual Innovators, they have on-going programmes of development for the years ahead. This is not so the case, Apple have a good approach to Diversification and tend to work in related or complementary products to where they currently have skills, experience and success.
The challenge with Diversification, you can get into a trap of too much change. Constantly re-inventing yourself can lead to customers being confused of your identify. As an aside, I am a firm believer that this should not be the job of your innovation or product development department, it should be part of your company culture and so people should look to innovate as much as possible.
So what’s the best way to grow? should we do Diversify or Develop? I would say the right thing to do for every company is a mixture of both, you should be looking to Develop your existing business at the same time as Diversifying where viable. Now it could be that you run different campaigns, but you should not be looking at only 1 of these strategies, as you struggle.
Retailers Marks & Spencer’s have famously fallen into the trap of just focussing on Developing on their success and have fallen by the wayside this millennium. In stark contrast, the Retailer Next is a great example of someone who has grown its business by a combination of Development and Diversification. Hepworth & Sons, Gentlemen’s Tailors, as they were originally known were formed in 1864. In 1981, they bought some retail stores and launched the Next Womenswear brand, followed by Next Menswear in 1984. 1985 saw Next Interiors and in 1987 they launched Next for Kids. They have continued to grow by adding other Product Lines strategically, but in each instance they have built on things their current Customer bases would look to buy. They have both implemented both Development and Diversification strategies and have probably taken the marketspace that BHS and M&S used to hold. Not every company can enjoy the success that Next has had, so I would again advise to have both approaches on your agenda but maybe run specific campaigns for some Development and some Diversification.
If you are in Phase 2 of your business and want to go to the next level, remember to pick growth strategies that cover both Development and Diversification campaigns; it’s the best way to ensure long term growth and success.
Finally the right time to be thinking about this is when you are strong, you should not wait till your sales or products are peaking or on the decline. As you are growing, whilst you are hot, your customers will look to you to see what’s next. The challenge that CEO’s have is to understand their own the product lifecycle curve and also understand where the future state of the art of going.
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