Factors to keep in Mind before Business Diversification
15

Sep 2020

Most businesses focus on only a single product or service, which has a plus point that the complete focus of the management is on the production of the product or service. Still, the negative factor is that if the works emend gets low, then the business will have to reduce its production, and it may lead to the company’s liquidation in the end.

This can be seen in the current business environment as a pandemic that has currently affected many businesses. Businesses have nothing to fall back on, and this means the end of the company.

There is a simple solution to such a predicament, which is the diversification of the business.

What is Business Diversification?

Business diversification means that the business deals in producing, manufacturing, or selling more than one product. It can be defined as the corporate strategy in which the company enters into the production of a new service or product that requires different technologies and skills compared to the work in which the company deals previously.

It can also be understood as the expansion of the business as the business is now dealing with a completely new segment. If the demand for one type of product diminishes, the company can fall back on the second product. This will reduce the risk faced by the company.

Factors to consider before Business Diversification

Business diversification is not a piece of cake, and a lot of thought needs to be put in by the management before they try to diversify the business. Some of the factor which needs to be kept in mind before diversification is:

1.The Financial Health of the Business

Checking the financial health of the business is of tremendous importance. It is not feasible for smaller businesses to straightaway try to diversify their business. This is because each of the business requires some investment and also to maintain some working capital for day to day business activities.

If a company is unable to maintain the preferred liquidity ratio, then the company may have to liquidate. Before going through with the diversification of the business, the management should first do a thorough check of the business’s finances. This will require financial planning on the part of the management.

2.The Core Competency of the Business

A Core Competency is described as the capability of a business that will provide the business with a strategic advantage when compared to others. This means that if a company is good at producing the product ‘X’ and can produce it with the minimum resources, it is the core competency of the business.

In order to diversify into a different set of products or services, a company must gain a core competency. This means it needs to gain knowledge and should be able to replicate or produce the product or services using the minimum resources required. In this way, a business will be profitable in the secondary product.

3.Business Environment in the Jurisdiction

A business should choose the location of conducting the business with great caution. There are many offshore locations suitable for various business activities and provide a tax haven to many businesses. The management should also perform research to find out the future of such a sector. If there is no growth of a said product or service in the future, then the business should refrain from entering into that sector.

4.The Assets in hand

Some of the products or services require assets which are similar to the ones which are already present with us. In such a case, the company should go ahead with the diversification of the business as this will save a lot of cost of the company, which can be utilized in a better way. If the same machinery or resource can be re-purposed, then the business can generate additional cash flows without making any additional investment.

These are some factors which the management should keep in mind before thinking of diversifying the business.

The Necessity of Diversification in the present Environment

We can see that businesses all around the world have been hugely affected by the spread of the virus. Having more than one core competency will allow a business to fall back on a different product in case the demand for one of the product goes down. If a circumstance in which the pandemic-like conditions reappear, it will be best if a business has diversified its business activities.

If you want assistance in deciding whether your business should diversify or not, then you can take the help of JAXA Chartered Accountants. The experts at JAXA will help you to understand the best possible solution for your business and will make sure that the business reaches its maximum potential. JAXA also provides various other services that will help a company perform at an optimum level and increase its profitability. To know more about JAXA Chartered Accountants, Contact Us. We will be delighted to answer your every query.