The ability to expand a business when everyone is tightening their budgets is a sign of true leadership.
There are advantages to diversification beyond simply expanding ones product line. For example, a diversified business is potentially better insulated against a loss of income in one business category.
The solution is not diversification for diversifications sake. A great example of controlled, well-managed diversification is McDonald’s. The company is in a perpetual state of diversification – McCafe, McSalad, McNuggets and so on, but it doesn’t diversify out of its sphere into retail or consumer electronics.
The lesson? Even during tough times – stick with what you know.
Accountants will tell you that some 90% of newly diversified businesses fail within the first two years of trading. Often, not only does the diversification fail, but the core business comes under pressure because it may have ignored the following:
- Leave sufficient capital for re-investment
- Management has “moved on” to the diversified business because it is new, exciting and more appealing
- Technically, not keeping up with developments
Diversification in a dairy business can be positive, by spreading risk, but it can also be a negative – an excuse for not making a success of dairying.
Sometimes the middle point of diversification can be for a genuine set of circumstances such as a need to grow the business, but the core enterprise of milk production is already optimised due to farmsize/location/commercial quotas.
If an existing dairy business is optimised then diversification may be sensible, but excellent, realistic planning is essential – the following points should be considered and understood:
- Don’t underestimate the implications a diversification will have on your time, your core business, and staffing. There may be potential challenges such as new skills and resources may be required. More importantly underestimate the level of capital that will be required to establish the new business. How will you finance this?
- How profitable it will be and how will you market and sell your products?
- What are the legal requirements and fiscal business structure?
If you reach a positive conclusion with the answers to the above questions, you will be in a position to diversify.
Alternatively, answers to the above questions may mean it is apparent that diversification is not for you and you will be in a better position to think realistically about the choices you need to make in your existing business.
There are many different types of diversification options for a dairy business and which one you choose will depend on your situation.
- Passive Diversification such as renewable energy such as wind turbines or solar panels – this will need capital and initial management input, but one established it may require little on-going input.
- Core business diversification, for example converting milk produced on the holding into other manufactured products such as retailed liquid milk, cheese, ice cream or yoghurt. Often, the relatively easy part is to produce the product, but key challenge is the route to market. Outsourcing the manufacture of the product to a non-competing business can allow all resources to be focused on marketing and sales.
- New business diversification like a farmshop is probably the most dangerous of all. This involves a completely new product in a completely unknown market and often demands significant capital and personal input. Realistically, the sector is the most likely to fail unless great market research is completed along with a very knowledgeable business driver and champion. Many dairy farm businesses that are delivering excellent results in their core businesses could be wise to expand or relocate in order for this success to continue. Perhaps one of the most significant factors that can influence success in a new business is not to refer to it as a diversification, but to treat it solely as a new business that needs the same level of drive, energy and determination as the core business on the dairy farm.
Tony Evans is head of business consultancy at The Andersons Centre