Small and mid-sized enterprises that are well diversified—in terms of products and services, geography, or number of customers—have a better chance of prospering, says an Alberta- based study by the Business Development Bank of Canada.
“Business owners who fail to diversify may be missing growth opportunities and putting their company under unnecessary risk,” says Pierre Cléroux, chief economist and vice-president of Research at BDC. “We found a relationship between financial performance and level of diversification.”
The study finds nearly seven in 10 fully diversified companies have strong revenue growth, versus fewer than two in 10 undiversified businesses. But when companies were asked why they hadn’t diversified, the most common response was they believed there was “no need.”
Risks and opportunities by sector
Manufacturing: exporting is the most critical diversification strategy for manufacturing companies. More than one in four manufacturers that export saw 20% annual profit growth or higher over the last three years, versus just 8% of those with no regular exports.
Resources: having clients in multiple cities is the best predictor of strong revenue and profit growth in the resources sector—seven in 10 resources companies with clients in more than one city had 10% or higher annual revenue growth over the past three years, versus just three in 10 companies with clients in only one city.
Construction: businesses with multiple products or services typically have stronger financial performance. Six in 10 such companies achieved 10% or higher annual revenue growth over the last three years, compared to only three in 10 companies that offer only one product or service line.
As part of its study, BDC asked business consultants or advice on how entrepreneurs can develop diversifications strategies. The experts suggested that business owners assess their companies’ strengths and weaknesses, and that they weigh the costs of diversification strategies to ensure existing operations aren’t jeopardized.
This story originally appeared on the site of our sister publication Advisor.