Tips for Expanding your Business

Most everyone that starts a business begins with a vision, a mental picture of where you are when starting and, more importantly, what you expect your business to develop into and where you want to be at some point in the future. Projecting into the future is based on your aspirations and the long-term business goals you have set, and how you expect to reach them. Developing some kind of vision will give your business a clear focus, and can stop you heading in the wrong direction. In the beginning it is best to focus on what you do best, and then aiming all of your energies to perfect that service. For example, septic tanks may be your specialty, and so you may design a business plan around everything septic—servicing, pumping, repairing, etc.—and next making sure you have the appropriate staff, trucks, and equipment in place to be the best septic tank servicing business you can be. However, putting all your eggs in one basket, so to speak, can make your company vulnerable to a variety of factors, including changing trends in your market, having one or more of your major clients no longer requesting your services, or even seasonal issues. Those in the septic tank business operating in areas where winters are harsh can attest to this fact. We have heard from numerous contractors who lament winters, when the ground may stay frozen for months, or blizzards and heavy snowfalls creating drifts so high that accessing septic tanks is almost impossible. You don’t want cyclical or seasonal fluctuations having a negative impact on your business. For many, the answer is diversification, but it’s an answer that is much more easily offered than implemented.

Diversification
Diversification is defined as a “risk-reduction strategy that involves adding product, services, location, customers and markets to your company’s portfolio” (www.businessdictionary.com). For example, once you established a core of loyal, repeat clients with your septic tank servicing business, you might want to diversify your services. A liquid waste management company that starts out singly focusing on septic tank servicing may diversify by adding septic tank inspections, tank installations, power jetting, or camera inspections, etc. to its portfolio of offerings. Diversification can help your business weather tough times by providing alternate sources of revenue in the event that your original market dries up, stops growing or is hit by new competition. Most companies that survive for long periods of time find that they have to develop new sources of revenue as markets change and opportunities evolve. Growth through diversification can help your company have options in place when they are needed. The keys to a successful diversification strategy is to have a well-established core business, doing thorough research of potential new markets, and ensuring that you have the right people to help manage the diversification process.

Vertical and Horizontal Diversification
There are different diversification strategies a company may employ. We’ll take a look two of the primary strategies, called “vertical” and “horizontal” diversification. Think of vertical diversification acting along the “same” line of diversifying your business, like a vertical line moves straight up and down. Think of horizontal diversification acting along “different” lines that intersect a horizontal line that stretches across different segments of businesses and products. A company may decide to diversify vertically its business opportunities by expanding into markets or products that are related to its current business. Diversifying vertically helps you improve your brand image among specific groups related to your core services or products, which might allow you to increase your prices or sell more items in a smaller marketplace. One major advantage to vertical diversification is the synergy that can be created due to the complementary products and markets. Additionally, expansion can be relatively easy because the skills and knowledge to operate the added services are similar to those the company already possesses. This means that there is a technological similarity among your offerings, which means that the business is able to leverage its technical know-how to gain some advantage. The above example of diversifying your septic tank services is a good example. You are already an expert in certain aspects of septic tank business. Expanding that vertical line of business offerings means you become an expert in other aspects of the same core service; i.e., septic tank operations of all kinds.
One thing to keep in mind when diversifying is that it often requires the purchase of new equipment so there must be steady and successful revenue streams in place to fund the purchasing of sometimes very expensive equipment. For example, a liquid waste management company might expand its service offerings by getting into high water pressure cleaning of roads, and other paved surfaces, perhaps airports, or taking on a contract for an entire municipality. Horizontal diversification, on the other hand, requires getting involved with services or businesses that are different than your main core business, although they can be related. That is, horizontal versification focuses expanding into services and/or products that spread across different and varied businesses or industries, and which are sold to a broad range of different customers. Horizontal diversification means selling a product or different products to a wide spectrum of consumers. For example, a successful liquid waste management company who owns and services a large number of portable toilets units and has relied on various or a chosen vendor or supplier of holding tank odor and biomaterial enzyme digestion products, decides to buy the company that manufactures and sells the holding tank product. Then, in a process of horizontal diversification, the company starts manufacturing a line of soap products in addition to the odor-enzyme product and sells those soaps in different markets and to different kinds of customers like commercial outlet stores or supermarkets, for example.
With horizontal diversification the focus is on attracting new customers in different markets, unlike vertical diversification, which involves offering a broader range of goods and services to an already established loyal customer base. A horizontal market, by comparison, is able to sell its goods and services in more than one industry, and is therefore focused on a wider range of business opportunities and practices. The company adds new products or services that are often technologically or commercially unrelated to current products but that may appeal to current customers. Horizontal diversification is desirable if the present customers are loyal to the current products and if the new products have a good quality and are well promoted and priced.

Risk Reduction Can Be Risky
Diversification has the highest level of risk of all major business changes and so it requires the most careful investigation, research and planning. Going into an unknown market with an unfamiliar product offering means typically a lack of experience in the new skills and techniques required. Therefore, the company puts itself in a potentially substantial state of uncertainty. Moreover, diversification might necessitate significant expansion of human and financial resources, which may detract focus, commitment, and sustained investments in your core services or products. For these and other reasons, many companies that have tried to diversify with insufficient planning, can end up in dire circumstances or even business failure and bankruptcy court. If customers want your new product or service, the requirements to fulfill those sales might strain your ability to operate, making the diversification unwise. You might reduce productivity among employees who must now multitask. Short-term capital needs and debt expense to fund the diversification might be too high. When you consider a diversification opportunity, analyze the affects it will have on your human resources, technology and equipment, services, finances, and marketing in order to measure the chances of success.

Financial Planning for Business Expansion
Business growth more often than not involves capital investment, so once you have decided that it is time to diversify, the next step is to analyze your financial situation to see if you have adequate funds to start your expansion efforts, and also to support ongoing expansion expenditures, such as the cost of new trucks, equipment, and hiring and maintaining additional qualified employees. In addition to the typical options for getting a small business loan to support your expansion such as credit unions and banks, the government promotes small business development in a variety of ways, one of them being filling out an application for financing from the U.S. Small Business Administration (SBA). The SBA is committed to helping small businesses thrive and has developed a number of financial programs that address the various needs of small businesses. It is at least worth checking out.

Story by Mark Joseph Manion

RESOURCES:
www.more-for-small-business.com
www.theguardian.com
www.inc.com
www.smallbiztrends.com

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