Corporate Diversification: 6 Questions the Board Needs to Answer

When it's properly planned and executed, diversification can be the key to lifting your business to a new level of success and profitability. The results achieved by companies like Johnson & Johnson - which started out in 1886 as a manufacturer of medical supplies and steadily expanded into industries like pharmaceuticals and consumer products - are proof of this.

However, without the right strategy and effective evaluation of the potential disadvantages and threats, branching out into a new market or product type can be a major risk.

Before giving the green light to a diversification project, the board needs to ensure it has satisfactory answers to certain essential questions.

1.    Why are you diversifying?

To stand any chance of success, the business needs to be absolutely clear about what it hopes to achieve through diversification. Identifying these goals will give you the focus and clarity required to make the right decisions at various key stages along this journey.

Common objectives of diversification include:

• To access a larger customer base
• To enrich and strengthen your brand
• To mitigate the risk of being overly exposed to a single market
• To take advantage of a market niche or gap that competitors have failed to spot

The directors of the business need to feel confident they understand the rationale behind diversification and agree on the need for it before going ahead.

2.    Is the time right to diversify?

The ultimate fate of any business project often relies on timing. As far as diversification is concerned, making sure the time is right to take the leap can be the difference between success and failure.

One indication that the moment may have come to branch out is when your current market has reached saturation point. If revenue generation has plateaued and you're struggling to find opportunities for growth in your current segment, broadening your focus to other sectors or product lines could be the logical next step.

It's also important to consider macro factors that could have an important role to play in your mission, such as the health of the economy and current levels of customer confidence.

3.    Do you have the right talent and assets to succeed?

You need to have certain resources and strengths on your side if you want to get the best possible results out of diversification.

One of the first and most important considerations is the talent and capacity available in your workforce. Do you have not only the right number of people but the necessary skills and experience to lead the business through what will undoubtedly be a challenging time? If not, can these capabilities be acquired or developed from within?

The board will also need to ask if the company either owns or can procure assets - whether tangible or intangible - that’ll help it succeed. It's a mistake to assume that assets that have helped you thrive in one space will be sufficient to get the same results in a new market.

4.    Is the demand there?

No company can succeed if there isn't demand for the product or service it provides. Before expanding, you have to know that there’s sufficient need for what you're offering, whether it's an entirely new product, an established one being introduced to a new market or some other type of diversification.

One of the strongest indicators of this is feedback and requests from your current clientele. Speak to customer-facing staff to find out what people commonly ask about and show an interest in.

It's also important to track developments in your sector to predict future trends and fluctuations in customer demand. The global vegan food market, for example, was worth $12.7 billion in 2018 and is expected to grow to $24 billion by 2025. This sort of growth provides huge opportunities for businesses that spot the potential early and make their move at the right time.

5.    Can you keep up with competitors?

Failing to anticipate the ferocity of competition in a new market is a mistake that can prove fatal for a diversification project.

Before making your move, take the time to identify and study your competitors, and come up with a compelling case for what distinguishes your brand and unique selling points from theirs.

It's also important to be realistic about whether you can match the financial firepower of established businesses in a new market. This is something the Virgin Group learned when it launched Virgin Cola and tried to take on Coca-Cola in the US.

6.    Will your brand be protected?

A successful brand is the result of a lot of hard work and investment. It's also one of the most powerful tools you have to win new business, retain existing customers and generate revenue.

It's therefore vital that your efforts to diversify don't put your brand at risk. One of the board's main focuses when considering diversification should be brand perception, and whether there’s a risk of it being damaged by your attempts to branch out.

If maintaining brand loyalty among existing customers is a priority for your business, you need to think very carefully about whether diversification poses a threat to this. If it does, it might not be the wisest route to take.