Survival to growth
04 April 2011
Careful diversification will promote growth
Evolution should be key to all companies. Successful businesses will constantly seek out new markets and adapt to serve their core markets appropriately. Anna Mitchell argues the case for diversification to protect and grow your business.
The application of evolutionary theory to business is never more appropriate than during a recession. As markets contract and business becomes scare survival of the fittest becomes a reality. And, just as in evolution, species that can successfully diversify and adapt to their surroundings will not just survive but will thrive and grow to become increasingly powerful when good times return.
When to diversify?
Sometimes diversification will be forced due to market conditions but it’s wise to note a business must have a stable core before it branches out. For this reason effective forecasting and prediction is key. Ideally diversification should be undertaken before it is forced.
“Our TV business unit represents almost 50% of our total revenue,” explains Jun Joon, vice president of the public display department at LG Display. “But, today the professional display part of this business is very small. However, in professional display we see a lot of potential and are currently driving development activities to target this area.”
What is clear from LG Display’s activities is they have a strong business in consumer displays. But, looking at the growth opportunities in the professional display market the company is tailoring its development to fully exploit a relatively untapped market.
The company is undertaking this when its core business is strong. From this position it has the funds it needs for research and development activities, recruitment and marketing. Without this stability a new venture is unlikely to work.
A successful business will already have its eye on the next venture before the market they are in becomes saturated or shrinks.
Most reasons for diversification really come down to survival, growth or both.
One question a company should always ask themselves is “Do you make the bulk of your sales at one time of year?” This is often the case with rental companies that deal with specific markets, perhaps outdoor sporting events or music festivals that predominantly take place over the summer. A company experiencing this should look at its rental stock and when it’s not being used then consider a wider range of events that could support the business in quiet months.
Diversity also helps to spread business risk. Highly specialised companies are subject to the success of the markets they serve. Even if the market you serve is healthy it’s vital to make sure you are meeting its needs. Demands change and companies must change to meet them.
Businesses can grow by reaching out to new markets. Smart Technologies is a company commonly known for its education collaboration products but for the past 14 years it has been developing corporate versions of these products and last year embarked on a serious push to promote this side of its business.
“Currently around 80% of our business is in the education market and 20% in corporate,” explained Patrick Lelorieux, vice president of EMEA at Smart Technologies. “Clearly the corporate market is a target for growth and an area where we can increase our penetration.
But it’s not just about selling to new customers. Diversification can mean selling more to your existing customers. If you chart the growth of most successful distributors you will see this plan in action. For example, a company starts distributing projectors. They build up a range of clients and realise they have great contacts with people that don’t just need projectors; they need screens, video distribution systems, players and cabling. But why stop there? Why not try and build a portfolio that services all of a client’s AV requirements?
As the industry has matured this pattern has been followed throughout the region. Now what we’re facing are even more unified offerings were the lines between IT and AV are increasingly blurring. Last month’s issue of InAVate cited IT companies that had opened AV divisions or were targeting areas traditionally handled by AV integrators. This will become more and more common.
Get your facts right
Research is a must and companies should have a clear development strategy rather than “dipping their toe in the water”. It goes without saying that the more you know about you target markets and target customers the more successful any diversification attempt will be.
As LG Display ramps up its focus on the signage market it is still very careful which markets it targets its development to. “We see a lot of potential in retail,” explains Jun Joon. “When you look at airport signage around 90% of analogue displays have been transformed to digital. But, in retail we’re looking at under 10%.”
But, it’s not just about researching potential markets and potential customers. A surprising amount of companies operate without really knowing their customers. They work on past assumptions and are often out of touch and out of date with what their clients need. Although they may successfully be servicing specific needs there could be wider, untapped opportunities out there. Knowing your customer and your market will also allow you to offer and provide services and products that they didn’t even know they needed. If inspiration for this model is needed a quick look at display manufacturers and their drive to sell consumer 3D TV sets should suffice.
What are your options?
Look up and down the supply chain to see what else your customers need. It could be a service offering attached to the supply of product. This has the advantage of an ongoing revenue stream after the initial product sale and will often carry much better margins than the supply of equipment.
A quick way to launch effectively into a new market is by acquisition but, if the company is successful, this will come with a high price tag. Again research is so important here. Assuming you acquire a company that is operating effectively then you must understand their markets and customers if you want that company to continue productively.
Although acquisitions are a good way to diversify a common strategy is to buy companies that suit and complement a business’ existing portfolio. “We acquired Next Window to support our own investment in touch research and development,” offers Lelorieux by way of example. “You just have to find the right time to get into a particular market.
Consider the risks
If you feel you’re diversifying out of necessity it may be best to examine your own business first. Companies may fall into the “grass is greener” trap and jump into new areas before exploring whether there could be failings in their core business.
The decision to extend into other markets should not be taken lightly and opportunities and potential revenues should be fully explored. Diversification can be expensive and will often, at least initially, take its toll on company profits. If diversification is achieved through acquisition then that impact can be quite severe.
Lesser costs will include sales and marketing efforts, recruitment, increasing product inventory and research and development. The toll on existing staff should also be considered and handled carefully. If the right support, training and development is not provided existing staff may struggle to successfully diversify the business and loose focus on their original activities.
It would be hard to find an example of a successful business that hasn’t diversified its product offerings, the customers it serves or both at some point in its history. Rather than a concentrated push diversification needs to be part of any companies continual development.
But it needs to be handled carefully. The LG Display case shows you need to know your market, or your potential markets, before you make any moves. It is this market knowledge that is the key to successful diversification.