by Merlin Hernandez

I think one of the things we have always to be mindful of in running our own business is to resist the temptation to shift too far away from our core business or core competencies. In the euphoria of finding a new opportunity to increase revenues, it is common for small businesses to confuse the incorporation of a complementary product for compatible usage which would fall under product enhancement, and diversification which will take the business into new activities. Finding ways to expand the basic product platform by enhancing the product mix through low cost improvements for competitive advantage would pose less risk than moving too early to diversify.

Product enhancement maintains the product and target market but seeks to add value in order to increase customer satisfaction. Costs should be minimal and the move is intended to improve sales. Enhancement aligns with core competencies and resources as they exist i.e. it utilizes current resources to create a more inimitable product offering in order to sharpen the competitive position and increase margins. For example a wine bar can start a wine club which will increase the customer base for wine sales. Serving cheeses, fruit or nut complements to the wines can also effectively enhance the product depth but maintain its consistency for greater value delivery and client satisfaction. It is basically selling the same product through new strategies and channels which would require minimum capital outlay rather than incorporating the cost of marketing a new product. This type of resource-based growth is more concerned with margin growth and the accumulation of assets/surplus revenues.

Diversification has to do with broadening the product platform outside of the core business with products which might appeal to the current customer base. To extend the wine bar example, the inclusion of a complementary product line, in this case perhaps crystal stemware, would be a related product but will target a new market e.g. the gift trade. This would alter the business model as well as place different demands on the business in terms of cost and other resource capabilities. Diversification should only emanate from excess capacity that would support the introduction of greater product variety. Critical to diversification is that assets have been accumulated to the point where the excess is being underused and can possibly support multiple usage. There should also be definitive evidence of a demand opportunity in the new product being offered since introductory/competitive strategies like advertising can erode margins gained through diversifying. Small businesses are therefore better poised for incremental product enhancements or gradual expansion of their market reach to increase profitability to the point where a diversification strategy might be indicated by the availability of surplus assets.