How to diversify your business
The unpredictable nature of 2020 means diversifying your business might be a smart thing to do.
When the COVID-19 pandemic began to shut down economies around the world, businesses were forced to deal with unimagined challenges. This was bad news for businesses that liked the certainty of having all their eggs in one basket. But as so many of us worked our way through the first stages of a world that was adapting rapidly to phrases like “lockdown”, “quarantine” and “social distancing”, diverse income streams became more than a smart strategy – they started to seem necessary for survival.
This is something Joe Tawfik has seen play out over the first half of the unusual year that has been 2020. Tawfik is founder and CEO of Kinetik Consulting Australia, a Sydney-based business and customer-experience consultancy.
“Diversification helps de-risk a business from multiple aspects. It enables the business to de-risk loss of profit, loss of market share and loss of customers.”
This is important for businesses to understand at any time, but perhaps more so these days. It can protect you not just from unanticipated shocks like COVID-19, but also from more familiar problems such as when a new competitor crops up.
"The primary goal with diversification is to overcome the reliance on your existing business and the revenue loss that can occur as a result of an economic downturn, like we're seeing now,” Tawfik says.
“We always say leverage your strengths and minimise your weaknesses. That's the best approach when you're looking at diversification.”
The planning stages are the most important. Tawfik says start by asking yourself if you have the resources to pull it off and, where possible, avoid being overly ambitious.
“Does your existing team have the experience and expertise that you need? Do you need to hire a consultant to help establish your new business offering?” he says. If the answer is yes, Tawfik’s next piece of advice is not to underestimate the time it will take to get the right people on board.
Next, consider if you’re going to diversify with a complementary service to your existing business or branch out into something new? Whichever path you choose, he suggests treating it as if you were starting a new business from scratch.
"Don't take shortcuts on things like research, evaluating competitors, SWOT analysis, business planning and budgeting. This will give you confidence about the approach you're going to take.
"Take the time to understand what's happening in the micro-environments around you that could potentially derail you or require you to make modifications to your offering so it can be successful."
Consider the risks
Not only should you think of diversification like creating a new business, sometimes it even makes sense to think of it as a completely new brand, Tawfik says. This way you avoid confusing your existing customer.
"For example, if your brand is renowned for providing low-cost or good value items, then you end up diversifying into a higher-end luxury or prestigious line of business, if you retain the same brand you're going to compromise it and your consumer will be incredibly confused.”
"Your brand reputation needs to be a top consideration," he adds.
Other common risks Tawfik has seen include under budgeting and the risks of “diversifying your attention”.
"The big risk some businesses face when they diversify is taking their eye off the ball of their bread and butter business then both end up failing. That's where proper planning and budgeting can save you."
When life gives you lemons
Diversification recently became a necessity for Allie’s Pressed Juices, a small business that specialises in beverage manufacture and distribution. Because its model revolved so heavily around supplying juice to cafes, it found itself vulnerable once COVID-19-imposed lockdowns forced those cafes to close.
“It was devastating,” says co-owner Braian Szwarcberg-Poch. “We dropped about 90% of our weekly revenue from one week to the next."
And it wasn’t just the loss of revenue that caused problems.
“Because manufacturing takes time, you typically hold about three to five weeks' worth of stock in cold storage, ready to go so you can always service your client needs,” he says.
“When lockdown hit, we had an enormous amount of juice in storage that we'd usually get through in three to four weeks.”
The company was looking at spoilage, cash flow problems and profitability concerns – a daunting future. But diversifying their presence to digital channels allowed them to serve a new customer base: the end-consumer.
“We never really had a business in e-commerce, although we had the set-up on our website,” Szwarcberg-Poch says. “What started happening was a lot of our friends ordering online to support us.”
And things grew from there. Media reports about the juice company owners whose e-commerce business was actually expanding during the downturn attracted fresh attention to the company. Before too long, it was servicing 300 online orders in two days – up from around two per week.
The key innovation, however, was taking their wholesale food-service product – a five-litre bag of juice, jazzing up the packaging and adding a tap to it, so it could be sold as a consumer product.
“Everyone was really into it because it was a goon sack. It was very Aussie,” he laughs. “It just kind of took off.” “That got us out of all of that trouble around excess stock, cash flow and profitability, and got us through a very, very, very tough moment. Now we've rebalanced because the normal trade has picked up again.”
For those small business owners who might be panicking about having to diversify quickly in order to make it through the pandemic unscathed, Tawfik has some simple advice.
"Take a breath and don't act until you do your planning. The biggest danger is panicking and doing a knee-jerk pivot into an area that's not aligned with what your customers expect and the brand you've built. If things go wrong, you could find it very difficult to build up your brand name again.”
In the short term, small businesses might have to do a "quick and dirty" pivot to remain viable, but for longer-term diversification plans, it's incredibly important to take your time, Tawfik says.
"Also, ask yourself where your capital is going to come from. It's not just about having access to capital, you need access to sufficient capital. This question needs to be answered adequately before you begin the process,” he says.
“Think about what it is that you're good at. What do you do that your customers love and you do better than your competitors, and how can you provide an additional service or enter a new market with that asset?”
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