Growing a Diversified Business - Product Portfolio Analysis

Growing your business through diversification requires as much hard work and careful research and evaluation as you employed when you started out.  Like then, you will be faced with many unknowns and will be called upon to use skills that you may still need to develop.

The payoff could be very rewarding but it is important that you do it for the right reasons.

Businesses that have diversified successfully are those which:

• did it for the right reasons (grow the business; spread risk or improve overall profitability).
• planned each step meticulously
• acquired the necessary resources, and
• implemented their plan with a passion but with sufficient flexibility to meet changing circumstances.

What are your growth options?
There are a range of options.

Market penetration is simply, more of the same.

Market development refers to strategies to enter new markets with your existing product range.  This could be either similar markets in other geographic areas (including export) or it could mean new market segments in your current location.

Product development strategies imply the development of new products for your current market.

Market development and product development represents growth through expansion.

True Diversification strategies are those that lead the firm into totally new markets with new products. These can be into the use of new technologies in the same industry or into new industries.

Advantages and Disadvantages of Expansion & Diversification

1. Expansion 

Advantages

• Increased efficiency through larger throughput.
• Increased market share
• Improved leverage within the supply chain
• Potential for staff specialization

Disadvantages

• Reaction from competitors
• Management more complex
• Cost benefit of improving market share may not be positive/diminishing returns
• Limited export opportunities
• All one’s eggs in one basket

2. Diversification

Advantages

• More lucrative industries
• Less competition
• Growing market/s
• Easier access to supplies/markets
• Risk reduction on overall portfolio
• Strategic competitiveness
• Spreads risk of overall portfolio
• Possibly higher return on investment

Disadvantages

• Capital required to invest in both market development and market penetration
• Learning curve costs
• New skills and knowledge required

In which direction should I go?
This will largely depend upon:

• your ability to gather the resources, management capabilities and other skills needed
• how well your current operation can support your growth and,
•  the potential opportunities in the new industry.

Can my current business operation support my growth?
During their lifecycle products exhibit different characteristics in relation to profitability and cash generating capability, both of which affect the riskiness of your business and hence you’re potential to grow.

Will I be able to operate profitably in the new industry?
A useful model reviews the following to assess a firm’s ability to be competitive:

• Rivalry among existing firms
• Bargaining power of suppliers
• Bargaining power of buyers, and the threat of substitute products.

A more detailed description of this model is available in the On line fact sheet entitled “Strategic Positioning - Five Forces and Generic Strategies”.
 

© David Milstein & Associates 2005. David Milstein & Associates is a member of Synergy Partners.