Diversify to survive

It is nigh on impossible to protect a business from the failure of critical suppliers or major customers, but that doesn't mean firms should not prepare themselves for this kind of scenario so that when it does happen they don't go down with their former ally. Diversification is the key.

In February 2008 music chain Zavvi shut up shop, leaving more than 3,000 staff out of work and another hole in the already beleaguered High Street. The chain, which was born out of a management buy-out of the Virgin Megastores business in 2007, had made no significant mistakes. It was simply critically wounded by the collapse of fellow retailer Woolworths in the run up to Christmas. EUK, a subsidiary of Woolworths which supplied CDs and DVDs to Zavvi as well as supermarkets like Asda, went down with its parent company and left Zavvi with empty shelves in its key trading period.

Could Zavvi and other businesses like it protect themselves against such a devastating turn of events? Possibly not. However, many in the business community are rapidly coming to the conclusion that diversification might be an important answer to some of the worst ravages of the recession.

The Confederation of British Industry (CBI), for example, has long been warning that over-specialisation meant businesses could suffer in a recession and a good way to combat this is to diversify in order to generate additional income.

Business Link too says expanding the core business model could help a business through tough times.

"I think there is a lot of things a business can do to help themselves survive at the moment in this particular climate," said business link account manager Chris Simpson.
"[They should be] looking at diversification, looking to improve processes and manage costs. Diversification can really help a business grow."

Few people would argue with the fact that the economic downturn has changed the way that businesses need to operate. This is not the time to carry on operating the same way as before - a firm has to adapt to the changing conditions.

In any business, at any time, there are two obvious ways to boost revenues; sell more products or expand the range. The former is clearly tougher in a shrinking economy, so the later is the key to survival and finding new markets might just be the key.

The secret to successful diversification is to choose areas that are closely linked to, or complementary to, the existing business. It doesn't have to be a dramatically different business model.

Blackburn-based Granby Marketing, for example, has recently begun offering a new service; a dedicated, outsourced call centre called Granby Talk. It was originally part of the firm's marketing offering, but it was felt it might do better with its own identity.

"If you have got something strong, build on that," said Stephen Bentley, chief executive of Granby Marketing.

"You've already got your accounts, human resources and other departments in place to cope with the new business. You don't need to put in all the administration like you do when you are getting a new business up and running."

At its simplest level, it may mean a restaurant considers offering a take-away service to supplement its standard income as less customers choose to eat out. This route is much more cost-effective because it extends what the business already has on offer, but marketing costs don't increase significantly. Customer data - and hopefully loyalty - is already there. The business would be selling more to its known audience, rather than having to spend to increase the size of the customer base. Diversifying the product range, rather than people range is less risky.

But, do spare a thought for employees, who may find diversification unsettling if it is handled badly. They will be concerned what it will mean for them and whether the old business is in trouble. Stop the rumour mill churning by communicating the reasons and objectives for the diversification.

Other areas that often get overlooked too are tax and insurance. It is important to inform the Inland Revenue of any changes to a business model because the new venture may result in a change to a company's tax status. Similarly, existing insurance policies may not necessarily cover the activities of the new venture.

For those that do decide to take the plunge, the key is to spend time researching and planning the next phase, because a botched effort won't just mean the new company is a failure, it will impact on the existing business too.

Mitchell Charlesworth, a chartered accountancy practice with five offices in the North West, launched a specialist small business development service two years ago to keep its competitive edge in a tough market.

Greg Harris, the company's business development manager says it is vital to do as much research as possible among competitors and customers, and make sure that the business can cope with the increased demand that might be generated.

"Even a well-established business like ours has to evolve," said Harris. "The first step in developing a new service was consulting our existing clients. Through listening to feedback, we identified a market for a trusted business development service that leveraged the chartered accountancy brand."

It is important too, he adds, to allocate sufficient resources to launching and marketing the new product, as there is little point in diversifying if customers don't know about it.

Of course, there are risks that the new venture will act as a distraction from the core business, which is clearly not a good thing during tough times when every decision is crucial. But, if comes down to a choice between uncertainty and survival, diversification should be an important consideration in any business strategy.

A business that diversifies might not just survive the current economic crisis, but may even emerge stronger than when it went into it.