When the automotive industry crashed a few years ago, suppliers that focused only on cars, sometimes with only one or two major products, were steered directly to the off-ramp. If you’re making only one or two products for only one or two major customers, your success depends on their success. And when you customers are no longer successful…
All of which explains why your mother used to tell you, “Don’t put all your eggs in one basket.”
Big corporations diversify to protect their overall financial health so an upswing in one market cancels out a downswing in another. The same strategy works for SMBs. If you’re thinking of moving your eggs into other baskets, here are a few things to consider about making the transition without cracking up anything in the process.
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Be Financially Stable Before Diversifying
Diversification will not fix pressing problems with your existing line of business. In most cases, it will just add to your problems. As Entrepreneur points out, don’t put time and energy into developing a new revenue source unless your primary source is already stable.
You need a reliable revenue stream to support the costs associated with entering new markets. If your core business is under stress, concentrate on fixing that first.
Build On, Don’t Compete With, Your Current Business
It’s best to build on an established brand reputation to develop associated products and services rather than attempt to go off on an entirely different tangent.
The Financial Post points to the classic example of Apple, which went from a computer company to a music and entertainment distribution company built on the development of complementary computer-related products (the iPod, iPhone and IPad, as well as the much anticipated Apple Watch).
Complement Your Capabilities
Ideally, you want to diversify into something that makes use of your existing infrastructure, or something you can make by adding another shift or utilizing unused capacity. Avoid starting a whole new business from scratch.
Diversify by Buying or Partnering with Another Business
In some cases, the quickest way to get into a new market is to buy a business that is already in it. The same questions apply: does the acquisition complement your existing business and capabilities? Moreover, can you afford the costs of acquisition?
If you can’t there are other options. You might take a minority stake in the company, though this may not provide the control you want. Another potential option is to contract with another manufacturer to make and/or distribute a product to your specifications under your branding.
Do Your Due Diligence
Above all, as the American Express Small Business Forum emphasizes, don’t rush into anything without doing thorough due diligence. Any diversification strategy must properly align with your business objectives, capabilities and finances. The last thing you want is to become the SMB version of Time/Warner/AOL.