Could diversification help you adapt to changing commercial realities?

Could diversification help you adapt to changing commercial realities?

You cannot take an effective business model off the shelf and use it as some sort of ready-made formula for success. Nor can you assume that a business model that has been effective in the past will continue to be now or in the future.

That is because a business model can only ever be effective in relation to its context.

That context comprises a web of seemingly infinite variables. However, the most relevant tend to be the state of the economy, the law and other regulatory considerations like tax, commercial competition, the cost and availability of products, materials and labour, as well as the broader trends and values that shape demand.

The better attuned a business model is to its context, the more likely it is to be profitable.

However, to state the obvious, variables vary. Change is a fact of life. Sometimes things change quickly and sometimes things change slowly. Sometimes these changes matter a lot and sometimes they matter much less.

Context, then, is more fluid than web-like. Change can be the gentle ripples of a flowing stream or thundering waves battering a cliff face.

Over the last few decades, businesses have generally enjoyed long periods where change has resembled gentle ripples, interspersed by occasional bouts of choppier waters.

The arrival of Coronavirus in the UK was more like a devastating tsunami, taking chunks out of the landscape and changing the terrain permanently in places.

Businesses that had effective business models in place found that with the beginning of the first lockdown in March 2020, they could no longer trade at all. Recent figures suggest that 71 per cent of small businesses have had to shut at some point because of Coronavirus.

This has led many to adapt to the new context in astonishingly creative and inventive ways.

Indeed, a recent survey found that 51 per cent of small businesses have changed their operations in some way in the last year, with five per cent saying they had ‘completely pivoted’ their business.

With restrictions easing, it would be easy to assume that businesses can simply revert to the models they had in place in early 2020.

That might be the case for some, but many will find that their pre-lockdown models are no longer optimally suited to the new ‘norm’.

While some changes were temporary, others look to be much more long term. It seems unlikely that there will be a mass return to spending five days a week in the office. Many consumers have increased their online shopping in a way that looks set to continue. People have got into the habit of entertaining at home.

However, there is considerable uncertainty about precisely which changes will remain with us for the long haul and which will soon dissipate.

An approach that can help businesses adapt and succeed despite this challenging blend of change and uncertainty is diversification. They can bring new products and services to existing markets, existing products and services to new markets and new products and services to new markets.

Serving multiple markets mitigates the risk, to some extent, of disruption to any one market. Similarly, offering more products and services mitigates the risk of disruption or a lack of demand affecting one product or service line. It also improves the chances of striking upon commercial success.

Of course, this comes with important caveats. Businesses do not have limitless resources, so those that are available need to be used carefully. The feasibility of offering new services or moving into new markets is also going to vary for different businesses.

Nevertheless, diversification can be a useful approach.

A good starting point is to assess the options available:

  • What markets could be accessible that you are not yet reaching?
  • Which products and services could you offer that you do not currently?
  • What would the costs be of accessing these markets or offering these products or services?
  • How much demand is there in these markets for these products and services?
  • How would this affect your ability to target your existing markets with your existing products and services?

Discovering the answers to these questions, demands careful research and detailed financial modelling of all options. It requires talking to suppliers, assessing the competition, gauging the interest of potential customers, and finding ways of overcoming any obstacles. It can also mean obtaining finance or investment to meet the costs of diversification.

Our team can help you with financial forecasting, advise you on finance options and prepare the detailed accounts investors and lenders are likely to ask for; as well as offering general business advice. We can also advise on the tax implications that can come with diversification.

Once you have started diversifying, management accounts can be particularly helpful in understanding the real-world impact over time to spot the changes you have made and offer rapid feedback on their commercial effects. Doing so can enable you to cut your losses if things are not working as expected or commit more resources if things are going well. Management accounts can allow you to experiment a little with the markets you target and the products and services you offer.

Carefully planned diversification, followed by continuous monitoring using management accounts can help ensure that your business model stays closely attuned to the wider context while being less vulnerable to change.

To find out how we can help, please contact our Accounts Specialist, Jacqueline Walmsley, on jacqueline.walmsley@benson-wood.co.uk  or at 01236 756161

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