Building up a business over time means it grows in spurts. While it may start with a few people in a small office, soon you are up to twenty employees and dealing with exponentially more daily complications with staffing issues, client problems, and a host of other matters.
When considering expansion vs diversification, it’s useful to understand the major differences. Expansion revolves around sticking with growth in existing or similar lines of business. Diversification is partly about reducing risk in the medium-term by doing business in different categories to make the business less vulnerable to a downturn in asingle market.
You always must look ahead to the future for your business. Have you reached the maximum size in the category that you’re trading in? Failing to recognise this can lead to a business that stagnates for years.
For instance, many web studios developing websites either stay as solopreneurs with some outsourcing or have a five-person team that rarely gets larger. Scaling up massively only happens with a few web design studios because they’re mostly dealing in their local market; not nationally or globally.
Most owners want to grow the profits and the underlying value of the business, whether to increase their salary, the profitability, or what they can eventually sell the business for when they retire.
Expansion often means increasing the sales and number of customers/clients with your existing business venture. If you offer website development, you now aim to sell more deals to new clients. When the company produces a product, you want to sell three times more units of that product.
Scaling up the staff using a temporary staffing agency like Staff Heroeshelps bring in the right people to fill a position in just a few hours. When the business expands too quickly, you cannot recruit full-time employees fast enough. In this situation, a temporary worker fills the gap nicely.
Diversify the Business?
If you’re faced with a business that cannot realistically grow much more than it is now or is treading on water. And these are the best-case scenarios available at this point, then you must look at diversifying the business into other areas.
What’s the best way to diversify? It’s usually to move into an adjacent business category rather than something completely new where there’s no applicable skillset or experience. This has a much greater likelihood of success.
Diversification Should Protect the Business
With a software company, when producing reservation software for the front desk of hotels and hostels,a golf course reservation booking system doesn’t offer any diversification or protective benefits. It may seem like an obvious choice, but should the need for custom booking software disappear, the sales of both booking software products will die in the same trading year.
Diversification should provide benefits for the business as a whole. While one type of software sees sales slowing down, a different software package serving another market is having a banner year. The company might consider cornering the lucrative task management software SaaS marketas a third way to diversify, which offers even greater protection. This avoids being a one trick pony.
There’s the old saying that, “if you’re not growing, you’re shrinking”. That’s certainly true in terms of inflationary pressures. Beyond that, the life cycle of a product or service isn’t forever. Products or services that were useful a few years ago sometimes don’t have a ready market today. A company must always be looking to expand their existing product line and diversify by moving into new markets to avoid shrinkage and eventual shutdown. Owners must push ahead confidently to stay on the growth path.