A smart business owner should regularly think about new business opportunities. While business growth is rarely possible without encountering some risk areas, diversifying into an unrelated business can pose some additional potential disadvantages that should be considered in advance. This growth strategy can also offer some benefits that often make it a viable approach.
Reducing Cyclical and Seasonal Variations
Some manufacturing and service sectors are especially sensitive to either seasonal or cyclical factors. For example, the automotive industry is typically more impacted by a recession than military suppliers. A college bookstore is likely to be impacted by seasonal student activities that will result in periods of high sales activity followed by reduced cash flow. By expanding into an unrelated business area, a company can offset these variations and stabilize cash flow.
A Lack of Synergy
If you and your company are viewed as experts in one primary business area, it will be difficult to acquire a similar positive reputation in a new and unrelated business. When a leading technology company acquires another technology business, there are likely to be synergies in such areas as purchasing and human resources because of similarities in how the companies operate. On the other hand, if a prominent law firm wants to buy a technology company, a significant lack of synergy should be anticipated.
New Employee Opportunities
If your company has become totally focused in one product or service area, some employees might question their promotion opportunities due to limited growth. Even if your business is highly profitable, this does not always translate to employee satisfaction. By entering an unrelated business, you can add an element of excitement that can inspire both employees and your entire management team due to new challenges.
Increased Management Responsibilities
It is always difficult for any business executive to admit to a possible lack of adequate time or skills to facilitate a successful business acquisition. When the proposed corporate addition involves a brand new business area, the added management responsibilities can prove to be daunting to even the most experienced business manager. Even when key managers deny the existence of a problem, this potential disadvantage is regularly present in circumstances involving unrelated business acquisitions. How you handle it is up to you, but a candid assessment of this delicate area is strongly recommended.
Other Issues to Consider
Some business diversification issues will unavoidably depend on the situation at hand and are unlikely to fall into a consistent category as an advantage or disadvantage. Competition in a new and unrelated business area can represent an imposing challenge, but the potential of entering a business market with much less competition than what your present company faces can make it an acceptable trade-off. The possibility of losing your current corporate identity is a potential disadvantage to consider when considering unrelated business opportunities.
However, this perspective also works the other way if your company has a stodgy image that you would like to invigorate with a new business strategy – this is often how corporate “makeovers” get their start.
Stephen Bush is based in Ohio and has been a business finance consultant and writer for more than 30 years. Bush obtained a Master of Business Administration in management and finance at the University of California, Los Angeles.