Differences Between Single Business & Business Diversification Strategies
In a single-business approach, you rely on one product or product line, business format or customer base to generate all revenue. In a diversification strategy, you use a mix of product lines, business formats or customer markets. Both strategies may work for your small business, depending on your goals, strengths and weaknesses, and resources.
Specialization and expertise are central advantages of a single-business strategy. Small businesses often develop from a single entrepreneurial idea or the core abilities of company founders. In a single-business strategy, you can concentrate all planning, budgeting, investments, operations and activities around developing an elite product or serving a specific customer market. This single-minded focus allows you to align company departments and employees around focused goals and gives you a better chance to brand your business based on its expertise in a particular arena.
A drawback of a single-business setup is that you may miss opportunities to expand your company into naturally correlated industries or marketplaces. Additionally, a single-business strategy is sometimes riskier in the long run. If your industry becomes obsolete or struggles through economic conditions, you may be wiped out. Risking everything on one endeavor leaves you nothing to fall back on.
Diversification is commonly associated with risk minimization, whether in investing or business operation. If you operate in multiple product categories or business types, you are more likely to survive failure of one format or industry. By diversifying, you can expand your supplier base, business partners and associates. This enables you to draw in other experts and talents. A diversification strategy also gives you greater revenue potential if your company effectively serves the needs of customers in each business format.
The extreme of diversification is spreading yourself too thin. If you try to do more than your resources, strengths and market potential can afford, you may end up not succeeding at anything. You also put more pressure on company leaders to stay on top of goals, strategies, partnerships and market factors in a diversification strategy. Diversification requires more investment in product development and marketing, which makes it difficult to distribute extra cash through dividend payments to owners.