How to diversify your business
Many strong businesses have diverse income streams, and the benefits of diversification have been well and truly reinforced by the recent pandemic shutdowns.
Now, as many business owners begin to re-emerge from the COVID-19 lockdown, questions around futureproofing are being raised. How can you get your business thriving again when borders are closed? Does your old offering still make sense in the 'new normal'? And, maybe most importantly, how can you be prepared if we're forced into lockdown again? The answer might lie in business diversification.
This is something John Cleghorn has seen play out over the first half of the unusual year that has been 2020. Cleghorn is co-founder and CEO of Prime Strategies Group, an Auckland-based business consultancy.
Business diversification, he says, is a strategic way to decrease your risk when operating within an unpredictable economy. It means you have a back-up plan should something go wrong.
Diversification protects you not just from unanticipated shocks like COVID-19, but also from more familiar problems like when new competitors crop up.
He believes there are plenty of diversification opportunities out there but says there’s plenty to keep in mind before deciding to dive in headfirst.
“I don't suggest to anybody that you go out and do something crazy – like invest lots of money on something you are just not familiar with,” he says. “But if people think about their current business space and expertise – there are always peripherals around that they’re not necessarily in, which are huge opportunities for them, because it’s still in their comfort space.”
Before starting your diversification journey, Cleghorn also stresses the importance of doing your homework.
"Know where you're going and who your competitors are – especially if you're going into a new market," he says.
"As an example, if you're producing machinery for the food industry, then a safe place to go to might be consumables. In a good economy, the machinery is selling, but in a not so good economy, like right now, people are still buying the consumables,” he says.
"If you don't have the knowledge of the market you're trying to enter then it's like driving down the highway with a blindfold on.”
Cleghorn also suggests sticking with what you know, especially if this is your first time dipping your toe in the diversification pool.
“If you're looking to diversify into a market that's outside your skillset or business knowledge, then you need to be smart about getting someone who does have that knowledge. We're all good at some things and not so good at others. So, hire people with the knowledge and skills that you need. If you don't have that, you're just adding to the risk."
Risks to consider
Cleghorn points out that diversifying your business also means diversifying your attention.
"Your objective is to satisfy your customer and grow your customer base. So, the issue when you diversify your business is that you're using manpower on your new offering. If you're not careful, you end up using all your manpower on the new opportunities and leave the current ones behind,” he says.
“It's incredibly important to make sure you're satisfying the customers you already have while growing your customer base."
He also warns about biting off more than you can chew.
"Be smart about taking your time to do this. I’ve seen thousands of businesses over the years who go broke by doing the wrong thing… even the big, smart ones," he says.
That’s the challenge of being a small business owner, he says. You have many of the same problems as the big corporations but less funds to react to and recover from your mistakes, so you need to be careful.
“I look at risk, and see it as good and bad risk,” Cleghorn says. “Any change in business or any investment in business is a risk, but you can get some really good risks and make some really smart moves, make yourself a lot of money and be successful… if you're smart about it.”
Scooping up opportunity
Diversification became a necessity for Nathan Meyer, director of Carello del Gelato, a Wellington-based gelato manufacturer who operates primarily as a wholesaler to restaurants and gelato sellers. But by February of this year, he had begun to see problems on the horizon.
“I didn’t really think it was going to affect us too much, seeing the news from overseas,” says Meyer.
But then one of his major customers, whose business relied heavily on overseas tourists, stopped making orders.
At this stage, New Zealand was one week into lockdown and Meyer realised he needed a diversification plan if he was going to survive.
“I started looking around for any other businesses that we could buy that might be complementary to what we do,” he says.
“I found another business that was actually supplying to supermarkets. I started working on buying part of that business over lockdown and ended up buying 50% of the business.”
That move didn’t just open up a new customer base; it also allowed him to take on new business.
“Their manufacturing was done by a third-party contractor. So, by us buying it, we've actually taken over their manufacturing contract,” he says.
“If we go into another lockdown or something happens, then we've still got the supermarket side of the business that will carry on.
It was the perfect example of a business taking a chance to build on a strength it already had.
Cleghorn acknowledges many small business owners might feel pressured to diversify their businesses right now. It can feel like a do-or-die scenario. But rushing into things could hurt you in the long run.
"Part of the issue is that when people get in trouble, they make the wrong decisions. Especially now with the impacts of COVID-19,” he says. “So, my advice is to get some non-emotional advice from someone who isn't tied to your business.
"If you're struggling emotionally or financially, and the stress is piling up, then go and get some help. Pick up the phone and talk to someone. There are lots of clever people out there who can help, so don't do it all yourself.”
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