There’s quote in the 1994 film Forrest Gump: “…life is like a box of chocolates; you never know what you’re going to get.” Business is like that too. Company founders and executives plan and strategize around every aspect of their business and sometimes, the chocolate square is only filled with gooey strawberry fluff, instead of a sweet caramel filling.
Business leaders constantly evaluate risks vs reward strategies. One such strategy is diversification, also like a box of chocolates.
Diversification means expansion either through operating in multiple industries simultaneously, which is product diversification, or diving into multiple geographic markets, which is geographic market diversification, or starting an entirely new business in the same industry.
There’s another quote that comes to mind, “don’t put all of your eggs in one basket.”
Diversification of either the product, service lines or territory enables a business to essentially add a layer of protection to their business on one hand and develop what could be a major revenue driver on the other.
Consider a household brand name like Coca-Cola. When the first glass of the syrup and carbonated water was poured in 1886 in downtown Atlanta, it was an instant hit. Stakeholders would have continued to do well to sell the drink in drugstores, but they decided to grow the business in multiple ways. This expansion has allowed them to amass revenues of over $37 billion dollars.
Coca-Cola has an expansive product portfolio. The company added different flavors to the base to create flavor profiles, like vanilla coke and cherry coke. They’ve expanded to non-cola drinks too, including Sprite, Fanta, Fuse Tea, and Schweppes drinks. This is diversification, but so is location.
Coca-Cola moved from the soda fountains of drug stores in towns and cities, to restaurants, sporting arenas and stadiums, grocery stores, and vending machines worldwide.
At its core, diversification is about developing new products to meet a need or desire, marketing it to a target audience, and taking risk. Risk is an expected factor in any business. However, risks can be mitigated by working with consultants and coaches. These outside authorities help to facilitate discussions, focus groups, and research groups through the data necessary to intelligently launch any new offering or venture into any new territory.
So what are the risks? Here are a few:
· Loss of focus on primary product
· Dilution of the company brand
· Confusing the customer base
· Investment required to research, market and launch new offering
· Disruption to the status quo
By contrast, here are the rewards or benefits:
· Expansion of brand
· Ability to move into new markets
· Offset losses of primary product or service offering
· Attracting new customer base
· Diversification process forces innovative thought
· Disruption to the status quo
Many companies diversify through acquisitions. They purchase not only the product, brand and/or service, many times they acquire the talent as well. Talent acquisition can make all the difference in the success of the launch. Additionally, a diverse group of talented individuals can challenge the status quo and push innovation in a way that legacy staff are unable to do.
The surviving company develops a strategy to roll the offering out either under the same brand and name or their brand and name.
Others develop or acquire a similar product. This is beneficial, because they already have a share of the market and experience that lends itself to a smoother transition.
There are many successful big name companies that have done this well. General Electric (GE) is one of the most well-known success stories. GE began with a merger between two electric companies in 1892 and is now an international, multi-billion-dollar company. GE is also the 26th largest firm in the United States and has transformed and expanded into a variety of industries including power and water, transportation, oil and gas, aviation, healthcare, and more.
Does a business have to diversify to survive? Absolutely not, but remember, where there is demand, there will be supply, and the supplier may just be a competitor, who eats your lunch, drinks your Coke, and devours the entire box of chocolates.