The Source - Is It Better to Specialize or Diversify?

Is it better to concentrate on one product or service and do it extremely well or to broaden your business offerings and protect yourself from swings in the market?

Both specialization and diversification offer rewards as a strategic business position, and both carry risks. Businesses that specialize frequently consider broadening their reach to get through a period of soft demand. And companies with a broad line may think about trimming their list to cut costs. From either perspective, you need to examine market demand, potential synergy, and technological requirements.

Market
A company specializing in one area generally finds it easier to achieve and maintain market dominance. Narrowed focus reduces the stress on organizational energy and talent, produces efficiencies that come with expertise, and builds reputation.

Diversified offerings, on the other hand, offer the comfort of a backup market position during business downturns or seasonal dips. The frequent combination of coal and ice delivery operations early in the last century offers an example of how diversified offerings can keep a seasonal business going. A more modern illustration is the combination of landscaping and snow removal services.

Synergy
Linking products or services can produce synergy — a combination in which the whole is equal to more than the sum of its parts. Synergies can arise from compatible distribution channels — like those used to deliver coal and ice — or from offering a set of closely related products or services to an identifiable customer niche. The niche might be defined by age and life experiences — perhaps new grandparents, first-year college students, or first-time homeowners.

Such groups may have common needs and desires across a mix of products and services that might seem unrelated at first. A business diversifying around the beginning college student market, for example, might offer dorm room furnishings, electronic and musical equipment, and trendy personal accessories.

But diversification by niche can have a downside, too. Softening in the targeted market niche can sweep across all sales categories, no matter how diverse the products are. For example, a real estate slump could slow action on all products and services pitched to homebuyers.

Technology
If you’re thinking about expanding your line of services, consider what technological expertise is required to operate in the new field, and if you’re thinking about dropping a current offering, look at potential tech savings. Acquiring sufficient expertise to stay abreast of technological innovations across a number of areas of operation can become a significant cost to businesses seeking to enter new operational areas.

Usually, the diversification/specialization decision is not an either/or proposition, but a question of finding the right strategic mix of the two approaches. Frequently, circumstances require a dynamic blend, sensitive to changes in the business cycle and market conditions.

Customer Service
In tweaking strategic policy, keep customer interests uppermost. Even if you achieve great economies by diversifying, you need to be wary of giving customers the impression that you’re a jack-of-all-trades and master of none.

In particular, be careful that customer service meets or exceeds the market standard. If a loss of service sends your customers to the competition, it won’t matter how much synergy you achieve.