Why SA SMEs must diversify

The SA economy is proving resilient in the wake of the recent downgrades, the rand is slowly recovering and business seems to be weathering the storm, however, this should not stop businesses from diversifying both their business and investment portfolios.

“Adopting the ostrich mentality will not work for SMEs in a shrinking economy. The idiom “make hay whilst the sun shines” is the most relevant in this current economy. The reality is there is less money in the economy and debt is becoming more expensive to hold so most customers are decreasing their spend and credit exposure. If SMEs want to win they need to be far more diversified” says Mags Ponnan, Head of Customer Value Propositions at FNB Business.

Diversifying your business simply defined means growing a company’s service/ product offering range to providing more variation or options to the market. Through this process a company gains new customers, increasing its market base and also drives expansion success. A bigger customer base means an increased pool of business income, which in trying times is a saving grace because the business in effect has more than one stream of income.

Ponnan takes us through a few ways in which businesses can diversify:

Increase channels to reach consumer − A good approach would be to open an online store where you can sell directly to consumers. This means that you have a direct channel to the consumer that costs less and provide the business with a new set of customers who are increasingly turning towards digital platforms for ordering products and services in SA.

Increase geographical reach − The SME can look into signing deals with retailers that are available in other provinces, cities and even countries outside of where the business is geographically based. Increasing the geographical reach increases the number of customers that can be reached.

Develop new product/ service − Another effective way to diversify is to create new products, by increasing the product range, creating versions of the product that differ from an entry level version to a high end version of the product. Creating variations increases the number of customers that your product can reach because price variation means a lot additional people can afford the product.

Invest into an aligned business − One of the more aggressive ways of diversifying is a business buying into or buying out a related business either in the same market or related markets. For example a vertical integration will enable the business to control his product lifecycle where he will now be able to impact the raw materials being used or even the distribution channels used by his customers.

Save for a rainy day with Investing a portion of your profits on a monthly basis will allow you to build a nest egg that you can fall back on in the future in case of an unforeseen expenses or when you need funding for expansion of your business’ geographical footprint or for the build of a new product.

“In tough times, only those willing to go beyond the norm are bound to win, SMEs need to think about their business far more creatively, the approach should be to spread your reach and not have all your eggs in one basket” concludes Ponnan.