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BIG BUSINESS IDEAS
Stephene Chikozho
An organisation needs to develop and grow.
But moving away from existing products is risky, and developing new products to sell in new markets doubles that risk.
Expanding away from your core business has risks, and diversification has even more risks.
The four diversification strategies
Each diversification approach is differentiated by whether products or services are unchanged or new, and whether they remain in the existing market or are entering a new one.
The least risky of the four strategies is “market penetration” — maximising sales of an existing product in an existing market.
In this approach, greater sales might be achieved through competitive pricing, advertising, loyalty programmes, or by driving out competitors.
“Market development” entails selling the same product in different markets.
Additional spending may be unnecessary unless localisation is required, but the cost of setting up distribution channels in the new market poses some risk.
In this model, different geographic or demographic markets, or alternative sales channels — such as online or direct — might be tapped.
“Product development” strategy is the sale of new or significantly improved products to an existing market.
Here, the cost of product development, associated distribution, and marketing support poses a risk. Companies adopting this strategy might offer variants of the product, or develop related goods.
The final, and riskiest strategy, is that of “diversification” — moving into new product areas. This is a strategy that brings about a “new” firm in the long term, by lessening the company’s reliance on core products.
However, a company can risk a great deal, depending on the initial outlay. The company should have plenty of resources, if the strategy fails.
Navigating the African markets
In an era marked by rapid technological evolution and shifting market dynamics in Africa, many companies are tempted to step beyond their core competencies in pursuit of new opportunities.
While diversification can offer growth avenues and insulate businesses against market volatility, it also doubles the risks, demanding a careful strategy and clear-eyed assessment of potential pitfalls.
Recent trends indicate that an increasing number of African companies are exploring markets and products outside their traditional realms.
This strategic pivot, often seen as a safeguard against economic downturns in one sector, can indeed be a growth catalyst.
However, history is replete with cautionary tales of ventures that have stretched companies too thin, diluting their brand identity and over-leveraging their resources.
The risks of diversification are manifold. First, there is the financial risk involved in entering unfamiliar markets, including the potential for substantial initial losses.
Second, operational challenges can arise, such as the need for new skills, technologies, and business processes.
Third, strategic risks include the potential dilution of the company’s brand and core business focus, which can alienate existing customers.
Despite these risks, diversification remains attractive for many businesses. The key to successful diversification, according to industry experts, lies in a company’s ability to leverage its existing strengths, while cautiously approaching new ventures.
This involves thorough market research, gradual investment, and perhaps most crucially, ensuring that new business areas have synergies with the core operations.
“Companies looking to diversify must ensure they do not stray too far from their original DNA,” advises Pandora Mabai, a business strategist and president at Big Business Africa.
“They need to find a balance between innovation and the core values and competencies that made them successful in the first place.”
For businesses contemplating this strategic shift, the advice is clear: diversification should not be pursued for its own sake, but rather as a calculated move aligned with the company’s long-term vision and capabilities.
With careful planning and strategic foresight, the risks associated with moving away from the core can be mitigated, turning potential threats into new avenues for growth and stability.
As companies navigate the complexities of today’s African economies, diversification stands out as both a strategy for survival and a potential pitfall.
It is those businesses that approach diversification with a clear strategy and an understanding of their intrinsic strengths that will likely thrive, turning diversification into a rewarding venture.
*Stephene Chikozho is chief executive of Big Business Africa, a dynamic and influential network dedicated to fostering collaboration, innovation, and success for businesses in Africa. He writes in his personal capacity. He can be contacted on WhatsApp: +263772409651 or [email protected]
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