A 2015 Forbes article suggests ‘Diversification is about building new products, exploring new markets, and taking new risks.’
I think diversification could be a subset of this definition. For instance, you might take a product or service that you already offer to a particular market and looking at other markets where you can offer it.
Most of the work I’ve done on diversification has been with oil and gas companies that see an opportunity to provide an existing product into a new industry. A lot of the time, the product doesn’t need extensive modification.
However, companies must ensure that they have done market research into the industry, sector or country before launching into a new market. This is just one of the considerations for a diversification strategy. In this blog, I will discuss diversification strategies and the key considerations for companies who seek to grow their business in this way.
Why consider diversification strategy?
There are several reasons why a company might consider diversification. You could consider diversification if:
- You want to grow your business
- You see an opportunity or gap in another industry
- You are exploring ways to maintain a level of stability and security for your business
The recent downturn in the oil and gas industry led to many companies diversifying. It is a good way to de-risk your business by not putting all your eggs in one basket.
What must you consider before you diversify?
One of the first steps in planning diversification is to understand the market that you want to enter. Like I mentioned in the introduction of this blog, market research is crucial so that you thoroughly understand the idiosyncrasies in the new market that you’re entering.
Another area to consider is the resources that you will need to successfully enter a new market. When I say, “Resources”, I mean time, personnel and investment. You have to ask yourself where the market pull is coming from and how long it will take to get traction.
In the end, it boils down to research. Research about your market and research into your own capabilities as a company.
How can you get help with market research?
Because market research is an area that many companies are under-resourced to do well or at all, I’ll briefly highlight how you can get help with it.
Scotland’s enterprise agencies are a fantastic source of research support. Such agencies include SDI (Scottish Development International), DIT (Department of International Trade) if you are in England & Wales and Scottish Enterprise. Also, ONE (Opportunity North East) is a private sector-led and funded to support growth in the North East of Scotland.
As part of your research, talk to potential customers in the industry that you want to serve. Speak to significant industry bodies within the industry. For instance, if you are looking to diversify into the offshore renewable sector, talk to ORE Catapult, a leading innovation and research centre for the industry.
How will you resource diversification?
Let’s say that you do market research and there’s, in fact, an opportunity to launch your product or service into a new market. The next thing to consider is how you will resource the implementation of your plan.
If it is a manufactured product, you will need to think about where you will manufacture the product i.e. in-country or export into the new market.
This is important, particularly when you have local content laws to adhere to. For instance, how do you ensure the quality of your product stays as it should if you need to manufacture in a different location?
You can get support from Scottish Enterprise through its Manager for Hire programme. Scottish Enterprise is able to fund a percentage of the salary of a manager if you are expanding or exporting your products and services. Here is an example of how Scottish Enterprise supported Jas P Wilson during its expansion.
What do you need for different types of diversification?
The Ansoff Matrix shows four different ways to grow a business. They are market penetration, market development, product development and diversification. For the purpose of this blog, I use diversification loosely, describing market development and product development (along with diversification strategy) as potential ways a company might diversify its business.
It is often true that to get to the bottom right side of this matrix from the top left, you need to move across or down. Incremental improvements to your product might be enough to keep up with your market but staying in the top left too long could mean that you’re stagnating. I’ll highlight a few things to keep in my mind for each type of diversification in addition to what I’ve mentioned already.
Existing Product, New Market
Your marketing efforts need to be strong when ente**ring a market that is not familiar with your company or brand. Ensure your message is clear and relevant to the new market. This might require amendments to the existing messaging on your website, brochure and other marketing collateral.
Use case studies and testimonials to build your credibility. You are likely to be stretched for resources (e.g personnel and budget) to launch in a new market so consider how you will resolve this.
New Product, Existing Market
Product development requires a sound feasibility study and business case. With an existing market, you have access to a network of people who already know you and use your other products.
Use your existing customers to get feedback about your plans for a new product. Also, engage oil and gas operators early on to get an understanding of whether your new product addresses burning issues in the industry. Oil and gas servicing companies often won’t take on new technology if there is little buy-in from operators (their customers).
New Product, New Market
In addition to the above points, when established companies diversify into new markets with a new product, it takes a lot of research and marketing effort from the onset.
Consider having a separate brand for your products. For instance, a Well Co. might have five products with their own branding. This allows the company to drive several products into the market that can stand alone.
Diversification is an option for companies looking to grow or to create more security for the long-term. There are different ways to diversify as enumerated in this blog. It’s OK to take incremental steps towards diversification if that’s your current capability.
Don’t underestimate how long it takes to successfully diversify. Consider timeline and resources from the outset. It’s realistic to expect it to take at least 18-24 months.
Develop a solid strategy and keep focused on what you want to achieve. Avoid pushing into too many markets at the same time. Access the support available through enterprise agencies in the UK. There are many ways to get more resources to get diversification right!
If you’d like to have an informal chat about your business and opportunities to grow or create stability through diversification, let me know.