Diversification involves looking for new opportunities outside of your current products and existing customers.
It’s a more challenging route for growth than expansion which offers 'more of the same'. If you decide to grow your social business through diversification, you will need to develop and deliver products or services outside your existing 'comfort zone'.
Why do businesses diversify?
The easiest form of business is 'repeat business' – selling an existing product to existing customers. At the opposite end of the spectrum is marketing and delivering something new to a market not familiar with your organisation. So why would you choose the more challenging route?
Businesses diversify for a number of reasons. Most crucially, if your market or offering is relatively small you will face pressures from competitors. Diversifying your products or customers is a way to ensure the survival of your business. Diversification also helps businesses spread out their cash flow throughout the calendar year, where a niche offering might limit you to a couple of months with high demand.
Business diversification strategies
Diversification is considered safest when it is incremental. It works best in one of two ways:
- Market diversification - choose a product or service you’re confident in and introduce it to a new market which has a lot in common with your existing market.
- Product diversification - offer additional products and services to your existing customer base.
The latter provides for easier market research, a strong relationship with the market is already in place thanks to the satisfactory delivery of existing services. This uses the argument 'you know us, you trust us, now you can get this from us'.
Don’t rule out the more daring 'new product in a new market' idea either. After all, any social business start-up had to handle a 'new product in a new market' when it was originally established, so it’s an experience you can draw on.
Introducing diversification in your social business
Whichever strategy you are considering, the only way to be sure that it meets the positive social impact and profitability needs of your social business is to treat it as a new business within the business. The next step is to create an implementation plan and financial projections for it.
Estimate all associated costs such as product development and testing, systems development, accreditation, recruitment and marketing. Then compare the projected social return, financial contribution and profit to the associated costs.
It may turn out that you will require an injection of working capital alongside the up-front investment costs to achieve a higher level of activity and turnover.
Consider also any risks and vulnerabilities that may require an increase in contingency reserves. Key to the credibility of your projections will be the quality of your market research.
Your resulting plan and projections will showcase:
- The total capitalisation diversification will require
- The proportion available internally
- The amount needed from the social business’ financial backers
- How long it would take for the generated profits to repay that finance
- The likely social return on the investment
Once you’ve have worked through the above points, you’ll be ready to diversify your social business.