Businesses are always looking for the next new product, innovation or investment. Diversification is a path frequently considered, by applying experience and expertise in a new way. There is no doubt that diversification is the life blood of successful companies; Richard Branson and Virgin frequently apply learnings across sectors with great success.
Yet how do businesses decide in which direction to diversify? Could making sweets be a more appropriate diversification for a pharmaceutical tablets manufacture than making bottled medicine? This article will challenge the rational thinking and propose new ways of thinking about diversification.
In the food industry, too often businesses diversify based on the customer without any brand loyalty; based on competitor activity without any real expertise; by process without real capability; or by the perceived market segments without true categorisation.
Follow your competitors only if your strategy is to be part of the herd.
Many companies look to the crowd for the answers to diversification. A high percentage of fresh produce businesses have considered fruit as a logical diversification; most ambient cake manufacturers have tried fresh cream based products; and the majority of pie factories find themselves dabbling in most of the savoury pastry or hot pocket market.
Perhaps some really did think about it, but did the rest just follow?
The most appropriate diversification is not necessarily the most obvious one.
Fresh Produce is seasonal, often labour intensive; it involves the processing of raw material and then assembly into a package. That sounds just like fruit… or does it?
- Fruit may have to be sourced from the other side of the world with new suppliers. Seasons vary by fruit, not country; and containers take months to arrive. What do you do if the stock is low quality? Unlike lettuce, you cannot send it back and buy new stock within hours.
- When the stock does arrive it goes through very different intake checks, then it needs to be stored at different temperatures to other products. This often requires complicated stock systems; not to mention that FIFO may not be appropriate due to ripening processes.
- The manufacturing peaks are the same, and the factory although at capacity in the summer is at 60% all year round.
- Customers and buying teams are different, twice the audits and twice the customers.
Now you sit back and ask is fruit really the same as produce?
Each business must think differently about diversification; although the principles below should give you some food for thought.
Identify your strengths and make the right strategic decision about where to diversify.
For most manufacturing businesses what makes them money is likely to be something within the end to end process from sourcing new ingredients to selling the finished product.
If you cannot take advantage of your skillset in the new environment then it is unlikely to be the right move.
- A high volume, low cost ready meal manufacturer decides to produce a high end handmade product. Their core strengths are purchasing and automation. It may possibly work, but the new product needs high quality ingredients in low volumes – the purchasing team may struggle to deliver this without increased resources. The operations team are engineering focused – now they have a blue belt with 24 operators to manage (is the canteen big enough?).
Would soup be more aligned to this model?
It might not look like your product, it might not sell like your product but it is much closer to your product than you think.
Going back to produce for a minute…
- What are the highest cost elements in a sandwich? Protein and prepared produce.
- What type of line are they produced on? Blue belts, the same as salads.
- What is the shelf life and distribution chain the same as? Fresh Produce.
- What do I eat for lunch? Salad or a sandwich!
The difference is two new components – ‘Bread and butter to a salad business’.
Think about why you want to diversify not ‘how’ or ‘what’ to do…Counter seasonal, same supply chain, scale of purchasing, simplified raw materials, equipment utilisation, distribution gains, customer satisfaction, establish a new market.
Consider integrating up, down or across the supply chain…. If you make pies, could you diversify to fruit pies? Or stews? If you make chicken ready meals could you process chicken or make frozen meals? If you pack apples could you slice and dice them, or even make puree? Diversify in a direction where your skill sets and the financial returns make sense.
If you are going to take a leap into the unknown, you must recognise that the economic model may be different.
As you make your plan, keep in mind that you may be starting a whole new business. Richard Branson’s biggest mistake was trying to take on Coca Cola; Virgin had no advantage over Coca Cola in that sector, the rest is history.