First, a true story.
It’s late afternoon on a west coast mainline train. With Manchester only a few minutes away, an airliner comes into land at the local airport, framed by the train window. In the seat opposite a teenager talks excitedly into a mobile phone while her friend cracks open a can of cola and takes a long drink. Normally, none of these things would seem remarkable – except in this case there is a unifying factor. The train, plane, mobile phone and soft drink can all bear the Virgin brand. Sometimes it seems that Richard Branson is the unofficial ruler of the world.
The Virgin Group is one of those organisations where diversification has almost become a brand value in itself. Few people expect Branson to rest on his laurels and the result has been an empire of often-disparate ventures, united under the familiar red and white V logo. And while not all of the group’s businesses succeed, the sheer volume of its revenues provide illustration of just how effective a diversification strategy can be in driving growth.
Not that you necessarily have to follow the example of the Virgins and Easy Groups of the world in stretching a single, over-arching brand into new business areas. Many companies diversify under a range of trading names, with each being tailored for the market in question. And while in some cases the diversification strategy will be carried out within a single company, many entrepreneurs prefer to ring-fence new businesses as separate corporate entities or proceed through joint ventures with others. In short, there are plenty of options to consider and while the growth prospects of your current business may be limited by factors such as the size of the customer base, by diversifying you can shake off the revenue inhibitors.
But launching new products or business units will require management time – your time. And if the new venture doesn’t work out as planned, you could well find your pre-existing business has been damaged by the lack of attention. Diversification certainly shouldn’t be entered into lightly and there may be times when it’s better to stick to your knitting. So what are the ground rules? How will you know when the time is right to branch out or if you’re better off sticking with your existing business?
Why diversify?
Often a decision to diversify is a direct result of an opportunity presenting itself. As your business develops, there will undoubtedly be times when widening your product offering or range of services is a natural progression. For instance, Charlie Osmond, co-founder and joint MD of Freshminds recalls how his company’s expansion into the recruitment market was the result of a single client inquiry. “We started off supplying graduates for temporary research work,” he says. “Then one of our clients asked if we could help them find permanent staff.”
As Osmond points out, the fit between research and recruitment was next to perfect. The client who wants a highly educated part-time researcher in March could well want a full time member of staff, drawn from the same graduate talent pool, in June. Equally, the graduate seeking temporary research work before a world trip might return from the said gap year in search of a good career. In both cases Freshminds is a natural point of contact. “As soon as we got the request we knew it would be an easy add-on – we knew that it would integrate with what we were doing,” says Osmond. “Now it is hard to imagine one side of Freshminds’ business being so successful without the other.”
Toby Stephenson, small and growing business partner at accountancy firm PKF agrees that one of the most compelling reasons to diversify is a complementary and strategic ‘fit’ between one business and the next. “A good example is a business buying into its own supply chain,” he says. “For instance, we worked with a business that used a lot of fabricated steel. So it bought a fabricated steel manufacturer.”
Alternatively the fit may be directly related to seasonal business cycles. If you happen to sell ice cream for a living then finding a balancing ‘cold weather’ business will help you escape the tyranny of summer peaks followed by winter troughs. Richard Downs of Iglu.com – a travel website business that began by supplying ski holidays before moving into areas such as villas and tropical holidays – knows that situation well. “We were operating at 120% during the peak winter months but during the summer we were operating well below capacity. We had built up a strong customer base and many of those customers were asking us what we did in the summer. We launched villa holidays and moved on from there.”
Alternatively, diversification can be a means to raise revenues while maintaining a more or less fixed-cost base in areas such as HR, payroll and invoicing. Or it could be driven by a desire to use up spare factory capacity or space in an office that you’re paying for but not using.
The pitfalls
Which is not to say that if you can tick one or more of the above boxes, you should run headlong into new business ventures. “I wouldn’t advise anyone to diversify until the core business is stable,” says Simon Franks, chief executive and founder of Redbus Films. “We didn’t think of doing anything other than the core business until we’d been making a profit for three years.”
The logic here is pretty compelling. While an existing business requires significant amounts of management time and energy, diluting that executive bandwidth by launching something new could result in a situation where both ventures suffer. “There are plenty of examples of people launching a new business with the result that everything goes to pot in the core business,” says Stephenson. And it’s not just a problem that afflicts those who branch out to pastures new too soon. Even a well-established business can suffer if management is spread too thin.
So how do you avoid this? A good starting point is the management structure. “You need to create a situation where the entrepreneur or owner-manager oversees everything that is happening within a group, while setting up teams to run the day-to-day,” offers Stephenson.
Certainly, that was the approach taken by Iglu.com. Downes says the company delayed its expansion from ski holidays to villas until he was certain that “the management pillars were in place” in key areas such as sales, marketing and customer care. Once they were, he was freed up to focus on the launch of new businesses.