As a small business owner looking to grow the business, a diversification acquisition strategy can be very attractive. But you need to understand the differences between related diversification and unrelated diversification before investing. Diversifying your business, your markets or your products can be expensive; therefore, invest in efficient diversification.

Typically, companies diversify through acquisition. Why diversify? The reasons should focus on rapid growth and/or less expensive growth. However, do some strategic analysis to investigate whether or not the growth decision will generate a high enough return on investment to cover the risks associated with acquisitions.

What are the most efficient diversification strategies for your business? Diversifying efficiently through acquisition means ensuring that you have built, or will build, strategies to increase your competitive advantage, improve economies of scale, and improve your cost structure, to meet customer needs quickly, or to achieve your goal. business plan.

Business owners must weigh the advantages and disadvantages of related or unrelated diversification.

Advantages and disadvantages of related diversification:

A related strategy is when you add or expand existing products, services or markets. For example, a car dealership that buys a detailing business (cleans, washes, and polishes cars, both inside and out) has engaged in related diversification.

The advantage of this type of related strategy is that it provides easier expansion: You already know the industry in which you operate, and you can take advantage of that knowledge.

The downside to this strategy is that if there is a seasonal or cyclical downturn in the industry, you will feel the downturn in both the dealership and the detailing business. The impact could be severe. There may also be problems with integrating two businesses and overestimating financial returns. Would it have been more cost effective to just outsource the details in the example above?

Advantages and Disadvantages of Unrelated Diversification:

An unrelated strategy is when you add new or unrelated, products, services or markets. For example, the same car dealer may decide to buy the restaurant next door. There is no direct connection between the two businesses (although employees and customers may eat at the restaurant next door). The reason for buying the business is that the dealership owner wanted to get into a business that was different, had different seasonality, good potential for high returns (although the restaurant business has some high risk/high stats). failure).

The advantage of buying an unrelated company is that it reduces the risk of putting “all your eggs in one basket”; If the economy, competition, or other success factors hit the business or industry hard, owning an unrelated business can help offset the downturn. In this example, you can also control part of the restaurant’s customer base (eg, give a restaurant coupon to your car customers waiting for service).

Why invest in unrelated diversification? Because you may be able to invest in a new product or a new market that has “peaks” when your business has “valleys.” Many businesses have seasonal ups and downs; If you can acquire a business that is up when your business is down, you can make up for the down periods. Or, the unrelated diversification investment may bring cost efficiencies (such as subletting part of your office or plant space to the new business; or sharing/consolidating some of the administrative costs of running a business: human resources, accounts payable and collect, shipping and storage, sales and more). The higher profit potential drives an investment in unrelated acquisitions.