### The Importance of Diversification in Business Growth
**By Alexander Bachmann**
As an entrepreneur and investor, I often get asked why it is necessary to seek new lines of business when you already have a successful venture. It’s a valid question, but I like to use a metaphor to explain the importance of diversification. Imagine sitting in an ordinary chair with just one leg. You could do it if you were skilled at balancing, but what happens if that leg breaks? Each leg on the chair represents a business unit, and diversification allows you to maintain stability even if one or two legs break.
The reality is that businesses can fail for various reasons, some of which are unforeseeable. Diversification is a way to mitigate these risks and losses, but it must be done carefully to avoid diluting your focus. In this guide, we will explore the benefits of diversification and provide some tips for making the most out of it.
## Leverage new markets to stimulate growth
Every entrepreneur aims for growth, but it’s important to understand that vertical growth has its limits. Eventually, a business may reach a point of stagnation, face intense competition, or become a monopoly. In such cases, pursuing cross-vertical growth is essential.
Take the example of Meta, previously known as Facebook. Despite being tremendously successful, Meta realized that it couldn’t rely solely on its traditional strategies for growth. To capture a new audience and regain some lost users, Meta acquired Instagram through a horizontal growth move. This enabled them to expand into a different market and diversify their offerings.
Instead of focusing solely on vertical growth percentages, founders should explore new markets once their businesses have a well-established management team and are running smoothly. This will facilitate cross-vertical growth and generate fresh opportunities for expansion.
## Treat new lines of business like investment projects
When diversifying, it’s crucial to know when to stop pursuing a project that isn’t yielding the desired results. While allocating resources to research and development (R&D) is important, it’s equally vital to have clear parameters for evaluating the success or failure of a new idea.
Personally, I treat every new idea as an investment project. It should have testable hypotheses, dedicated investor capital, and a defined timeframe. For instance, I recently had to close a diversification project that didn’t show potential despite a year and a half of efforts. The risk had exceeded the potential return, so it was time to move on.
Determining how long to invest in a diversification project requires careful consideration. Founders should set a timeline and budget, and remain committed to them even if losses occur. It’s important to strike a balance between giving an idea enough time to succeed and cutting your losses to focus on more promising opportunities.
## Look for synergistic business opportunities
Diversification can be achieved through two approaches: synergistic and experimental. Synergistic diversification involves expanding within related verticals, while experimental diversification involves branching out into entirely new areas.
Synergistic diversification has proven to be effective for many successful companies. For example, Disney’s acquisitions of National Geographic and Marvel expanded its offerings within the entertainment industry. Google’s attempt to venture into social messaging through Google Hangouts represents an experimental approach.
For new businesses, focusing on horizontal integrations and finding niches within your current industry can be a more sustainable strategy. This allows you to leverage existing expertise and R&D investments while pursuing growth and diversification.
An excellent example of this strategy can be seen in the automobile industry. Manufacturers often start with a core set of car models and gradually expand into related markets, such as trucks or SUVs. Some even make the leap into entirely different sectors, like Honda venturing into aircraft manufacturing.
## Remember that focus trumps diversification
Entrepreneurs are often enthusiastic about exploring new ideas. However, it’s important to distinguish between intentional diversification and experimenting aimlessly. The mark of a great entrepreneur is someone who can maintain focus on their current venture without getting distracted by other projects.
While diversification is crucial, it should be pursued with purpose and clear objectives. Surrounding yourself with intelligent and competent individuals who can assess the viability of an idea is invaluable. Delegating responsibilities and decision-making when pursuing new projects enables you to stay focused on the core business while still benefiting from diversification.
## FAQs on diversification and growing a business
**1. What are 3 reasons why businesses adopt a diversification strategy?**
– Diversification enables long-term growth by tapping into new markets and customer segments.
– It helps mitigate risks by reducing dependence on a single line of business.
– Diversification enhances the overall sustainability of the business model.
**2. What is an example of a diversified business?**
Apple and Disney are prime examples of diversified businesses. Apple expanded from PCs to music to mobile devices and beyond. Disney, originally an animation studio, diversified into real estate, merchandising, and global entertainment.
**3. What makes a company diversified?**
A diversified company operates in multiple segments, often unrelated, either through acquisitions or by entering new markets. Such companies have a broader portfolio of products or services.
In conclusion, diversification is key to mitigating risks and expanding the reach of your business. By carefully leveraging new markets, treating new lines of business like investment projects, seeking synergistic opportunities, and maintaining focus, you can ensure sustainable growth and long-term success.
About the Author:
Alexander Bachmann is the founder and CEO of Mitgo, a global tech company focused on delivering innovative solutions and promoting entrepreneurship. With over 20 years of experience in the martech and fintech sectors, Alexander is an expert in smart shopping, IT-driven startup incubation, and more.
Connect with me on [LinkedIn](https://www.linkedin.com/in/alexander-bachmann-771b8967).