Diversifying and entering new markets: How to plan for success

Deciding whether or not to diversify, even from the outset, poses a big question for businesses of any kind. Do you choose to stay in your lane and put all your effort into one project? Or do you attempt to reap the benefits of entering different markets by introducing new products and services? In our digital age, where customers and their opinions can change quickly and unexpectedly, it’s an important thing to consider.

If a business opts to diversify, then it must be aware of the need to focus on the new venture without neglecting their core business. Offering a broader range of products/services might run the risk of spreading their resources too thinly. There’s a balance to be achieved in diversification; it’s an easy idea in theory, but can be another thing entirely in reality. However, there are ways and means of minimising the risk of diversification which can help business owners reach a decision over whether or not to introduce a new product offering.

For businesses looking to sow seeds in new markets, we’ve written up a handy guide, touching on best practice, the risks to consider and the diversification matrixes you can use to make it happen.

The benefits of diversification 

• Increased sales and revenue: One of the most appealing benefits of diversification is the increase in sales and revenue a new market can provide. This is especially beneficial if a business is strong in a certain marketplace and is finding it difficult to improve profitability and acquire new customers. A new product or service can bring with it a new opportunity for growth.

• Less vulnerability: If a small business is reliant on one or two large clients for their revenue, it leaves them in a vulnerable position should one of these clients leave. As diversification has the potential to tap into a larger customer base, even without significant growth, it can provide an opportunity to cushion the blow from losing a key customer.

The risks of diversification 

• Operational stress: Keep in mind the operational requirements in order to diversify. The need for short-term capital, as well as a multitasking workforce, might leave you spread too thin. Consider the effects it may have on your team, production, finances and marketing and whether or not it is worth the strain it might put on your other offerings.

• Brand damage: Even if you are in a strong position to diversify, it might not be worth diluting your brand or confusing your customers by introducing a range of new products or offerings. If you no longer specialise in a certain product or service, it might bring doubt to your position as a leader in your particular field.

Best practices for diversification 

• Understand your market

Conduct as much research as possible. Read up on your potential competition, new means of distribution, and the skillset you’ll need in place to realise your product and bring it to market. And be mindful of the timing, too; if your market is performing poorly, then maybe now isn’t the time for a new product.

• Don’t undersell yourself

Say you’ve generated some interest and a potential client wants to work with you. You’re excited and you impulsively quote the lowest price just to get them onboard. Here’s where market research is important; if you offer a potential client a price that is much lower than the market average, then you’ve already got yourself off to a bad start. Look at your new competitors and put yourself in a position where you can ask for a higher price when it’s time to do business.

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• Be savvy with financial partnerships

If you’re seeking capital to diversify, then be aware that the majority of lending terms are built to benefit investors. Before you open communication channels, make sure you know what you’re giving them compared to what they’re giving to you in return.

Here are a few alternative financing options you could consider before assigning cash to a diversification project. 

Diversification matrixes: How do they differ? 

• Ansoff Matrix

Sometimes called the Product/Market Expansion Grid, the Ansoff Matrix shows four strategies you can use to grow: Market Development, Market Penetration, Product Development and Diversification. The idea is that each time you move into a new quadrant, horizontally or vertically, the risk increases.

Diversification is in the matrix’s upper right quadrant and is the riskiest of the four options. Why? Since it involves a business developing a new product and targeting new, unfamiliar markets, it requires a combination of strategies, meaning it’s riskier. In adopting a diversification strategy, a business must have a clear idea about what it expects to gain from the strategy, and must carry out an honest assessment of the risks. However, by achieving the right balance between risk and reward, this kind of strategy can be highly successful.  

• Boston Matrix

The Boston Matrix can be used to analyse a business’ portfolio of products in order to allocate investment across the portfolio. Based on market share and market growth, the Boston Matrix characterises products into one of four different areas:

1. Stars: The high growth products that compete in markets and are comparatively strong against the competition, they need heavy investment to sustain growth. When the growth slows – and they sustain market share – stars will become cash cows.

2. Cash cows: Low growth products with a high market share, they’re mature and successful products with little need for investment. However, they need to be managed for continued profit, where they’ll continue to generate the strong cash flows that the company needs for Stars.

3. Question Marks: Products with low market share operating in high growth markets, these have potential but may need large amounts of investment to grow market share at the expense of competitors. As their name suggests, managers have to consider which ones they should invest in, and which should be allowed to fail.

4. Dogs: Low market share, low growth products that may just generate enough cash to break-even but are rarely worth investing in. Usually sold or closed as a result.

This model helps businesses reach a decision, while its use of market share is an adequate measure of a product’s ability to generate money. However, it is only a picture of a business’ current position and as such has little predictive value.

Of course, like all diversification projects, risk and reward is a difficult balancing act to achieve – but can be central to true success.

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