Diversification—a strategic solution in time of crisis?

12 Nov 2020
Estimated reading time : 3 minutes
Diversification—a strategic solution in time of crisis?
12 Nov 2020
Estimated reading time : 3 minutes

The COVID-19 crisis has hit businesses hard, forcing decision-makers to do what it takes to ensure the long-term future of their business.

One option is reshoring—or simply bringing operations closer to home. Another is diversification. By spreading risk more effectively, this can help put your business on a sounder footing, and may even secure the future of sites that might otherwise be shut down.

 

WHEN CRISIS STRIKES, DIVERSIFY

Economic fallout from the pandemic poses serious new threats for businesses.

On the one hand, breakdowns—or simple slowdowns—in shipments of raw materials and components are putting supply-chain logistics to the test. They threaten both production and packaging lines.

Read our article When distance is dangerous: 3 pitfalls of offshoring.

Meanwhile, reduced spending by consumers facing an uncertain economy translates directly into lower sales.

Sites that produce or distribute a single product line are even more vulnerable. Risk builds, and if operations slip into the red, parent companies may decide to shut them down.autom

Enter diversification, viewed by some as an effective way to avoid closure. Put simply, companies that diversify their activities also dilute risk: if business conditions destabilize one product, they can launch another.

Moving up the supply chain, diversification can free your company from overreliance on a single supplier or region. For example, you may opt to stop importing a semi-finished component and produce it on site.

Lastly, diversifying can boost sales if you’re able to harness existing essential infrastructure and expertise to ramp up production of new items.

Diversification is viewed as defensive when your main activity is threatened and you want to limit risk, but it can also be an offensive move—for example, when you identifies trouble ahead and adapt to take future changes in stride.

 

TWO APPROACHES: Horizontal VS vertical

When an existing site faces closure, adding new activities can help you keep it running. Broadening your business portfolio helps you:

  • Spread risk more effectively, especial in time of crisis
  • Diversify your client base and generate new growth opportunities
  • Acquire new market share and improve your competitive position

 

The choice of horizontal or vertical diversification will depend on your market, your environment and your short- and medium-term goals.

 

HORIZONTAL DIVERSIFICATION

In some cases, it makes sense to expand horizontally, moving into new products that build on technologies you’ve already mastered and production lines already in place. For example, if you make protective gloves, you might add a line of protective footwear.

There are clear benefits: you’ll be selling to the same customer base and you have the resources and expertise you need on hand. New investment will be limited, making horizontal diversification a fairly safe proposition, and an excellent way to explore new sources of growth.

VERTICAL DIVERSIFICATION

The challenge is different when you invest in activities you’ve outsourced in the past–or even start distributing your own products. The aim is to be more independent and reduce reliance on other players in tumultuous times.

Amid the Covid-19 pandemic, vertical diversification has been a natural move for companies facing disruptions in their supply chains. When Biosynex, a company specializing in Rapid Diagnostic Tests for Covid-19, was unable to secure certain components from China, it began producing these at its French sites. On the other side of the supply chain, you might consider distributing your products directly—online, for example—as traditional retailers suspend their operations.

Auto equipment manufacturer WTX has successfully diversified twice—first within its original sector, and then in construction. Learn more.

 

IMPACT ON EXISTING SITES

If you want to reposition your business and strengthen it against the risks of an uncertain world, diversification and reshoring can go hand in hand.

Together, they offer an effective response to the difficulties created by offshoring.

If you diversify vertically, you can repatriate outsourced work performed in distant lands or at other sites operated by the same group, effectively eliminating supply chains disruptions from the pandemic–or any other crisis.

Diversification can also be a way to bring you product lines closer to the consumers that buy them.

When you diversify horizontally, you can leverage on-site expertise that has already proven its worth—and been recognized by your board—to win new markets. This also allows you to tap into a tried and true local ecosystem that you know will be a reliable partner for your new activities.