Diversification vs. Specialization — Which is right for you?

by Rich Bradley on March 14, 2010

On this week’s radio show, we touched on the subject of diversification vs. specialization. While we weren’t to come to a conclusion favoring one or the other, we were at least able to reach a consensus that it really depends on a number of factors, and that each business has to decide which is right for itself.

In our discussion, we brought up some recent examples of how large companies are diversifying their product offerings so they can capture a larger market share. Among the examples we discussed were fast-food places expanding their menus to add chicken, salads, boutique drinks and healthy food; car manufacturers offering vehicles ranging from subcompacts to coupes, to sedans, minivans and SUVs; and big-box retailers offering dozens of television styles, audio equipment, CDs, DVDs, and home-theater systems and installations.

All of these are prime examples of diversification — trying to offer “something for everyone.” This is also commonly referred to as “one-stop shopping”. The theory is to make it easy for a consumer to get whatever they want under one roof. For the retailer, it’s also a chance to get a consumer to spend more.

But is this good? The answer is a definite “maybe.” And most of that depends on the consumer. For example, a truly discerning coffee drinking might shy away from McDonald’s new coffee drinks since — in their opinion — they’re not made well or they use lesser ingredients or whatever. A true audiophile might not go to a big-box store to buy equipment or accessories since the salesman may not know enough about the product to offer an informed opinion.

This leads us to specialization. Starbucks is a classic example of a specialized retailer. And there are maybe hundreds of stores that specialize in audio equipment for the discerning listener.

But how does this work for the smaller business? Obviously, specialization can work, with some caution. For instance, a business can’t be so specialized that they have too small a customer base. The example we cited was a lawn care service. They may want to only work with residential accounts. They may be under-capitalized to buy the necessary equipment to go after larger commercial accounts. So what can they do? They can offer other services that are familiar to the residential homeowner — edging, leaf removal, mulching, hardscaping and seeding, to name a few. While some of these may require some equipment purchases, they’re probably much less than a commercial-grade mower, and the trailer to haul it, and the extra personnel to man the equipment.

Likewise, an entrepreneur who wants to start a commercial lawn-care service doesn’t want to be bothered with knocking on doors and trying to make a customer one  homeowner at a time. His equipment is probably ill-suited to cut residential lawns.

Another example is in the field of medicine. A general practitioner may see dozens of patients a day, while a specialize will probably see a lot less. Yet they make make the same amount of money at the end of the day. Why? Because the family doctor will most likely refer the more difficult challenges to a specialist. It’s not to say he can’t treat the patient, but his business is built on treating “more common” ailments.

Again, going back to the small business, if you choose to service a niche, it’s can’t be too narrow. You can be in the oil-change business (which is already specialized), but it would probably be akin to business suicide to decide that you only will change the oil of red Chevrolets.

The best bet is to try to service two or three niches, provided they are related services. For instance, a Realtor might specialize in short sales. And he might target his marketing efforts to a certain geographic area. One benefit to this is that he would be seen as an expert in that area. However, our Realtor friend probably still accept any referral for a sale in that area. Again, he has a niche, but leaves the door open for other sale opportunities.

Diversification vs. Specialization? Yes, you can have both.

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    [...] media project Measured Impact, and a teaser about next week’s radio show. Check out the Rich’s Blog Post for more great points on diversification vs. specialization from last week’s [...]

  • Lovelovelyming

    yeah!!!thank you for your point!

  • Lovelovelyming

    yeah!!!thank you for your point!

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