Summary of Unit 7 - Diversification for SMEs

It's the old adage of "Don't keep all your eggs in one basket." Diversification is a strategic approach for small business development. Wisely implemented, it can prove very useful. Diversification helps companies gain competitive advantage diversifying their production, services and/or markets. Successful implementation of the different forms of diversification enhances an SMEs competitiveness in a market, increases its market share and provides opportunities to penetrate new markets where the competition is not so strong or might be completely absent. This is especially useful in times of stagnation when economy downturn affects sales on the company's traditional markets. Diversification helps to use the non-simultaneous manifestation of unfavourable trends in the various industries and countries. Thus a business can survive during sharp economic downturn because it will sell different products and services on different markets. That is why diversification is already turning into a strong component of many company´s development strategies. However, at the same time diversification brings certain risks and requires investment. The decision to diversify has to be well-considered and planned. Preliminary thorough assessment, in addition to knowledge and experience are necessary when developing and implementing the company´s diversification strategy.

Depending on the business specifics, its human and financial resources, a variety of approaches can be used when diversifying products, services and/or markets.

Advantages of diversification:

  • Provides substantial potential for development and profits
  • Increases competitiveness on existing markets
  • Unveils new market opportunities
  • Reduces financial risk by spreading it across multiple investments
  • Protects against financial collapse in times of market stagnation
  • Offers opportunities for human resource development and attracts competent professionals.

Disadvantages of diversification:

  • A lot of time and funds are needed for initial research and development of first-class diversification strategy.
  • The implementation of each new project requires investment and human resources which diverts the focus from the main company business.
  • Some diversification types need significant capital costs, human resources, technologies, market research, etc.
  • Any new project often reduces performance. The company is no longer able to provide its old, loyal customers with its traditional products and services at the same level of quality. This may lead to dissatisfaction and sometimes to loss of key customers.

Diversification is a complicated process involving a lot of responsibility. Its successful implementation provides great competitive advantages and significant business growth. However, its failure can lead to quite unfavourable consequences. That is why a thorough assessment of company features and the market environment is necessary. Successful diversification is based on the company´s strengths and the successful selection of the right direction. It should not be done suddenly and hastily.

The portfolio of a company is a combination of products and/or services to be offered to the customers. The place and share of each in the overall company business, as well as the relation between them, define the portfolio structure. Successfully planned and maintained portfolio of products and/or services gives opportunities for synergy in the field of supply, production, marketing, distribution and human resource. This contributes to market expansion, achieving stable positions, penetration of new markets.