Volume 9, Issue 2 - March/April/May 2007

Diversification
A look at the strategies, risks and rewards
by Donovan Trana

Is your business stalled due to declining profits or lackluster sales, or have you reached a market saturation plateau? Whatever the situation, carefully consider your options, motivations and current financial and emotional condition, and develop a diversification strategy that has a good chance of becoming successful.

I started an AGRR shop in a small midwestern town in 1981, right at the beginning of a recession. I thought diversification was the only way to get enough revenue to succeed. Through the years, I moved in and out of “fad” opportunities and was constantly on the prowl for the next new trend. In the ’90s, focusing on the core AGRR business seemed to be the best way to go. Higher customer expectations demanded specialization. But when centralized billing and third-party claims administration became the modus operandi, diversification offered the potential of a better future. 

I began to develop venture businesses that would allow me to transition from my dependency on my core AGRR business. Now, I manufacture and distribute auto glass replacement tools through one company and car wash and detail chemicals through another. Occasionally, I do some automotive window tinting as a hobby business. My wife and I also run a bed-and-breakfast from our home. 

While some may argue that it sounds too complex to be so diversified, it’s all in how one takes advantage of communication technology. You must tie the common features of each business together, maximizing utilization of assets and labor.

Diversification is simply the process of becoming varied and/or expanding. Don’t diversify just because it sounds cool; do it because it is a strategy that fulfills goals such as increasing profitability, economic stability and personal satisfaction.

The Final Four 
There are four reasons to diversify.
1. Growth. A companion venture to your core business can fortify and shore up profitability. Careful diversification can be an excellent strategy for business survival. Certainly, you need to build one business at a time and stay focused, but when you don’t put all your eggs in one basket, you’re better able to survive unexpected or tragic events. Diversifying is an excellent growth strategy, as it allows you to have multiple streams of income that can often fill seasonal voids, increasing sales and profit margins.
2. Creativity. If you’ve tried to drum up business doing the same things as always and it’s not working, try something new. You never know where your next great idea is going to come from. So, begin thinking of ways you can utilize diversity in your business. If you’re bored with your business and you have lost the spark that you had, find your passion and begin a plan to execute a new beginning.
3. Personal Growth. Diversification is not only a good strategy for your business; it’s also good for you personally. Diversity must be embraced to flourish. In order to compete in a global economy, it is vital that small business owners continually add to their competitive arsenal. This means moving outside of comfort zones, looking at opportunities in less obvious directions. Start out by trying something new in your existing business to expand your horizons and get your feet wet. It may not trigger a booming profit center, but it’s not meant to. The idea is to get used to doing something different. Once you have some small success, it begins to affect the way you view and ultimately shape your future.
4. Transition Strategy. Develop a diversification plan that allows you to transition your business into another entity. Your strategy may be to prepare your core business for sale, or gradually grow your new business venture into the dominant core business. In our changing economy, flexibility is the key to providing long-term financial security for any small business owner. You may be in for a big surprise if you plan on continuing in your current business until you retire. Employment counselors for corporate positions suggest workers be ready to change job descriptions up to nine times in their careers. Small business owners are not exempt from this type of change. Plan a transition strategy or market, economic and social events may take you by surprise.

The Right Mindset 
When you are ready to diversify and start a new venture, be ready to work long hard hours. It takes more time that you will ever plan for to ramp up your new venture, so be patient and don’t give up. Seek advice from other business owners who have successfully diversified. Search stores for books or Web sites for additional resources and information. Plan to take some classes or training at a local or online college.

Don’t forget to pay attention to the obvious. 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. Flow with these opportunities and don’t let them pass you by.

Risks and Rewards
As I mentioned, diversification can reduce the risk of business failure by creating new profit areas. However, it may or may not always reduce your risk. It could increase it. The riskiest time for any new business is the start-up phase; when the market is being established. Approximately three-quarters of all businesses fail in the first year, and about half of those that survive fail within the first five years. If you are starting a new business venture at a time when your core business is suffering a downturn, you may actually be increasing your risk. Therefore, for every opportunity you have to weigh the risks and rewards.

Because it takes time and money to diversify your business successfully, diversification may increase the risk of failure of your core business. A major cause of business failure is a lack of management focus on key objectives. By trying to run more than one business or lines at a time, management focus can be scattered and ineffective. Consider a strategy to ‘grow’ your employees through training, expanding their responsibilities so that you can safely focus on your diversification efforts. 

The outcome of a well-executed plan to diversify can lead to personal growth, financial success and a bright future. Think it through and plan for success. Like someone once said, “You’ll always miss 100 percent of the shots you don’t take.” 

Donovan Trana is the owner of AutoglasSolutions, Wilton, Iowa.

Guidelines for Discovering the Right Diversification Opportunity
Do what you know. Take an inventory of all your skills and assets, then consider opportunities that compliment your findings. 
Discover a venture that fits into your current business and use your existing facilities, employees, equipment, marketing and customer base for your new venture. Make sure it allows you to keep your same patterns of daily movement so that you can simultaneously grow your new business and keep control of your core business. 
Consider taking on a partner or ‘players.’ This includes people who can bring additional skill sets and talents into your venture. They may bring capital infusion, ideas, and, best of all, help share the load of starting and running your new venture. It’s a great way to get quality help and input without the need for upfront labor costs. Sweat equity is rewarded once your venture is profitable and running. 
Choose a venture that does not require huge outlays in capital, time and labor. Internet-based marketing businesses are a great way to inexpensively open new markets for certain products or services and many have few barriers to entry.
• What’s your hobby or dream? It may be a perfect match for your next venture, Do what you love, then passion will feed your success.
Look for consumable products or services with markets that are not limited by geography. If the nation or world is your market, you have a leg up on success.



AGRR
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