Going after more challenging goals to improve the growth potential in your SME is the best way to avoid its stagnation and disappearance from the market. Diversification is key to achieving this. However, knowing how and when to do it require strategies. RACO Investment founder Randall Castillo Ortega explains how the strategy works and when you should implement it.
To maintain the competitiveness of your business, it is necessary that you find the best time to look towards new horizons and implement a plan that allows you to generate more and better results. It has to be one that bets on new products and customers.
When companies want to transform and expand to better take advantage of their business opportunities, the need to diversify arises. Explains Castillo, “Business diversification is based on the application of growth strategies with the aim of expanding the field of activity in which a business operates.”
In other words, it consists of offering new products or services in the market to serve another segment, or where appropriate, the same but from other angles and value offers.
There are plenty of benefits to diversification. It allows you to take advantage of market conditions and changes in the economy to maximize the performance of portfolios. It protects the patrimony against the lows of the economy and the industry. It generates liquidity to avoid a potential loss due to the advance or forced sale of instruments. Lastly, it covers different degrees of liquidity to achieve goals.
To carry out a diversification strategy, it is first necessary to analyze the business to know its current and potential situation. Taking this into account, you can only plan. In this process, putting together a business model focused on diversification is crucial.
It is advisable to wait on diversification until your business is stable and profitable. Otherwise, you would be negatively compromising your finances and time. Likewise, it is vital that you investigate in advance the new markets to which you want to venture, so that you foresee the reaction of customers and markets to new products or services.
Once you spot diversification opportunities within your company, now the next step is to determine what strategies to develop to achieve this. This is accomplished through a few primary types of diversification, depending on the commercial activity.
Related diversification combines two or more activities that have some kind of relationship at a technological, commercial or productive level. For example, a mobile phone manufacturer expanding into the tablet market.
In unrelated diversification, the activities are completely new to the company and have no relation to the products or services you offer so far. As an example, a construction company that ventures into the manufacture of fabrics.
With horizontal diversification, the company offers new products for sale in markets that are related to the commercial spectrum in which it operates. The format is different, but the goal is the same. A burger restaurant that adds toys to its food packages is a good example.
Another is vertical diversification. Here, the company enters fully into the development of products that it previously accessed through third parties; in a certain way, you become your own customer or supplier.
Concentric diversification consists of the production of new products, almost always within the same line as those that already exist. For example, a mint soft drink brand that expands its production range by launching the same drink with lemon and orange flavors.
Conglomerate diversification involves the development of new products, although with the difference that these are not related to the traditional ones. It is typical of large companies.
These are some of the strategies par excellence to boost expansion plans, since it allows to take advantage of its potential to meet other types of demands and address new consumers. Your job as an entrepreneur is to decide how to do it based on your philosophy and opportunities.
Concludes Castillo, “Your business must be able, in addition to generating revenue, to remain solvent. Getting stuck is never an option.”
About RACO Investment
RACO Investment is a financial investment firm serving small- and medium-sized companies in Panama and Costa Rica. It was founded by Randall Castillo Ortega, an expert financial adviser who has his roots in the import and export industry in Latin America. The firm has helped numerous startups find the financial support they needed to get off the ground. It has also contributed bridge loans to assist those looking to restructure or improve their operations.
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