How diverse do businesses need to be to survive the 21st century?

Battle lines between two distinct styles of conducting business are being drawn. The buzzword for businesses to survive in a tough economic climate is 'diversification'. This comes down to their core product offering, how they offer the product or service, what methods they use to communicate and market the product, and even within their leadership teams. Yet some argue that specialization in a niche is a better alternative, focusing on a specific clientele. Which is likely to be more fruitful in the long run?

Specialization
Specialization in business refers to focusing on one key area, one star product, or a specific customer profile rather than appealing to everyone. The benefits of specialization come from establishing stronger relationships with customers. Customers also perceive companies that specialize as being better at that one thing compared to competitors who have a wider range of products.

Companies that specialize include 2016-launched online platform Hayu which focuses on reality TV, retailer Forbidden Planet who targets a specific pop culture-loving customer, and Yankee Candle who specify in their name what their key product range is. Specialization doesn't just have to be based on the product offering, however. Discount shop B&M, which joined the FTSE 100 index in September 2020, has raised its profit forecasts after customers have continued to spend healthily. Their specialization focuses on price – keeping it cheap. In the six months to September, revenue was up 25.3 per cent overall and up 19.1 per cent in the UK as we entered the third quarter of 2020. The profits for the half-year are predicted to be around £285 million, up from the £250 – £270 million previously forecasted.

B&M raises profit forecast following first-half sales surge https://t.co/SIQMCN5zv7

— Retail Week (@RetailWeek) September 29, 2020

Specialization can backfire, however. Oatly faced some criticism in September 2020 when it sold a stake for $200 million to Blackstone, a company accused of participating in activities that could lead to further destruction of the rain-forest. The brand focuses on their alternative to the dairy industry through their oat-based products. Had they had a wider remit, the $2 billion company would likely have faced less flak for allowing a company to use them to 'greenwash' their other business activities.

Diversification
Diversification, conversely, focuses on throwing many products at many kinds of people. These multiple income streams mean that all the business's eggs aren't in one basket. Investment groups diversify their portfolios by investing in businesses that span a variety of industries, so if one faces an external issue, they won't see their entire portfolio collapse.

One of the best examples of diversification within a business is Amazon. Unilever, P&G, John Lewis & Partners, and Tesco – which offers online and offline shopping, banking, mobile services, and high-end electricals – are also key examples of diversification. The 1892 merger that led to General Electric began a history of diversification that showed how it could be done successfully. Virgin, however, was also a heavily diversified business that proves a cautionary tale in over extension. From airlines and trains to cola, banking to home media, Virgin dabbled in a variety of businesses. However, while they have some claim to their success in telecommunications, most of the other arms of their business were choked by competitors or mismanagement. Elsewhere, businesses like Thomas Cook paled in comparison to their diversified rivals.

Ever had a Virgin Cola or worn a Virgin bridal gown? How @richardbranson learned from his failures & kept going: https://t.co/77PZIDbPdZ pic.twitter.com/lkfbEEPEeo

— How I Built This (@HowIBuiltThis) January 31, 2017

Even smaller businesses have found ways to diversify themselves through their business operations. Restaurants offering takeaway services and retailers upgrading their online offering are the main ways we've seen business diversification in the past few years. Even service-led businesses, such as personal training ones, have seen an increase in appealing to online clientele through videos and check-in plans, as opposed to the standard method of booking in sessions. The customer has greater choice and the trainer can expand their audience.

Is There a Middle Ground?
Could there instead be a middle ground that takes the best aspect of specialization and diversification to offer a new way of doing business for retailers and online platforms? By taking the close relationships built up with a more specific audience that specialization allows and combining it with the security and scope that diversification offers, businesses can benefit from both camps. Many are already doing so.

One way of doing this is by becoming specialists in a field while still offering a diverse array of products. For example, Betway have focused on the online casino industry as a specialism, yet offer a wide range of titles and variants on each game (such as live versions of poker and blackjack). Through the addition of games from Microgaming and NetEnt, Betway have the diversity of products, yet have focused on specializing in one area – capitalizing on the middle ground. Similarly, musicals streaming platform BroadwayHD focuses on offering high-quality musicals as a specialism, with their actual content being very diverse in this field. Etsy provides a good way for specialist sellers to benefit from the diversification of the site. Sellers may have one small range of products but can use the heavily diversified shopping platform to appeal to a wide variety of customers. eBay has always benefited from this kind of diverse specialization. Sellers can benefit from niche products, like wet suits, and the diverse audience that eBay's platform allows, allowing them to amplify their reach for their specialization.

There are benefits to both diversification and specialization. While many would prefer the security that comes with diversification, there are already plenty of successful businesses who specialise. Crocs, for example, specializes in one type of shoe, yet achieved revenue of $344 million in 2020's Q3 (up from 2019's Q3 takings of £312.8 million).

The best strategy for businesses could be a combination of both diversification and specialization – focusing on one product or key customer while offering a wider service. Much like people are being urged to become T-shaped people in business, businesses should do the same.