Diversify to grow success

Diversification can be a solution for businesses facing seasonal peaks and troughs in demand, says Neville Stein

Primroses to me herald the arrival of spring, the promise of warmer days ahead and, of course, the happy and melodious sound of the cash till ringing. These ubiquitous flowers remind me that we operate in a very seasonal business - one that is characterised by peaks and troughs in demand, often resulting in cash flow challenges for most business owners in our sector.

Along with this challenge of cash flow, variations in seasonal demand also mean that each year success is dependent on a short selling window, and in all the conditions during this time meeting to create the perfect market - or, if not, the perfect storm. Should the weather be good for gardening, then business owners might be able to afford a two-week cruise at the end of the season. However, should it be bad, then it is a week's camping in the New Forest.

Faced with many challenges including the peaks and troughs in demand that are driven by the weather, it is no wonder then that many garden retailers have sought to identify new ways of growing their businesses. From a marketing perspective the classic "Ansoff Matrix" provides clear identification of the growth strategies available to business owners. Ansoff determines four strategies:

1. Market penetration Selling existing products into the same market.

2. Market development Selling existing products into new markets.

3. Product development Selling new products to an existing marketing.

4. Diversification Marketing new products into new markets.

Diversification is arguably the one with the best proven track record for addressing seasonality, enabling a business to achieve good year-round sales and cash flow. But there are other benefits. Most notably, diversifying a product portfolio enables you to either sell more products to your existing market or to reach out to new markets, which in turn helps reduce the risk of overexposure to one market.

Reason and method

Of course, diversification is nothing new in our sector, but reason and method are all-important to understand to be fully successful. Do you want a big change to a robust and sustained new market or to diversify in small ways and change regularly? The latter can bring instant rewards but also be a drain on energy and finance. Also, how important to you is your core business history and identity?

The textbook definition of diversification involves taking the organisation away from its present market and products at the same time, while "related diversification" refers to the development of an organisation beyond the present product and market but still within the broad confines of the "industry".

So, as an example, related diversification would be a landscape company specialising in small private gardens diversifying into commercial hard landscaping projects. On the other hand, unrelated diversification is where the organisation moves beyond the confines of its current industry. For example, a hardy nursery stock producer might diversify by developing a touring caravan site on part of its nursery land. In farming we have all witnessed examples of unrelated diversification - the farmer who has converted farm buildings into holiday lets.

Sustainably profitable

Unrelated diversification builds on my last feature, regarding how to exit your business (HW, 4 March). It might be that your business is not profitable but you still want to keep running it. One of your options to make the business sustainably profitable might be to consider some form of unrelated diversification.

In the agricultural sector unrelated diversification is an excellent way to exploit underutilised resources and skills, and there will be less risk here if you already own the assets, compared with a scenario where you have to invest in something entirely new to sell. For example, you might have a delivery vehicle that is only operating half of the time. Unrelated diversification would be selling your services as a haulier to an organisation in another industry.

Farmers using fields for festivals or offering fishing lakes are other good examples. This might help even out cyclical effects of a seasonal business - opening up a small touring caravan park on your retail nursery will bring in much needed cash in the summer when plant sales are traditionally very low and also perhaps bring a new market for a farm shop on site. It might be that demand for your products is in terminal decline and that all attempts to stimulate demand have failed. Well, if this is the case then unrelated diversification is for you and it might present the only possible means of escape.

Even if demand for your products is not falling then it is still worth considering whether you have some assets that could be put to better use. Maybe you have spare office space that could be rented out to a local company. Perhaps you are not utilising all your space in the business. Could you diversify into totally new product offerings?

Spreading the risk

As with all strategies, there is risk, but one could suggest that a non-diversification business model is very risky, with all your eggs in one basket. Diversifying then will help spread the risk and can be implemented with less risk by choosing to sell new products or skills to your existing market and customers (related diversification).

Unrelated diversification involving some major financial investment is a more risky strategy because it is a tough call to sell totally new products to a totally new market. It is probably one of the highest-risk business strategies there is but, of course, along with a roller coaster of a ride there are huge rewards and profits to be gained.

So how do you minimise the risk of diversification? The process begins with screening all your options and selecting those that build on your existing resources and competencies. Once you have chosen your diversification project you will need a robust, timed and costed business plan that clearly takes into account the critical success factors - those things that need to be in place if the project is going to succeed. Get a clear idea about what you expect to gain and an honest assessment of the risks.

In today's world, businesses have to evolve and change on a regular basis to keep ahead of the competition, and customers expect something new on a regular basis. Therefore, the risk of doing nothing has consequences. Rather than should you diversify, the question is can you afford not to?

Neville Stein is managing director of business consultancy Ovation

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