Irrigation: Strategic Diversification – Horizontal vs Vertical

The last few months have impacted all of us and our businesses in many different ways. As business owners, you’ve learned how to navigate a challenging set of circumstances including: government regulation, social distancing standards, communicating with customers and employees during a crisis, and you’ve learned the moves you need to make to keep your business healthy during the pandemic—both physically and financially.

Many industries such as tourism and hospitality have been hit hard by the pandemic. Many business owners in these harder hit industries have shown real ingenuity and innovation during this time and have figured out ways to stay afloat during a crisis by turning to diversification. While other industries such as manufacturing have stepped up to help with national shortages and have diversified their production. We’ve seen diversification take many forms during the pandemic, from restaurants selling groceries and other house hold essentials like toilet paper and cleaning supplies to spirit makers switching over to make hand sanitizer, Ford and other car manufacturers making ventilators, and clothing manufacturers making masks.

These few examples of diversification showcase reaction to a crisis but diversification does not need to be reactive. It is a very common proactive tool to that keeps businesses healthy long term. You’ll see diversification in the some of the largest companies in the world like Disney, Berkshire Hathaway, and Johnson & Johnson. These are some of the most diversified companies in the world, and they lead with the mindset of, “don’t put all your eggs in one basket.”

So, is diversification right for your business?

You’ll need to evaluate what works best for your business but realized diversification does not automatically mean you need to add a new category like lighting or lawn maintenance to your irrigation business. Below we’ll explain what you need to know about diversification along with two different types that can allow you to be proactive and strategic with the health and growth of your business.

What do you need to know about diversification?

Diversification is often viewed as a safety net against downturns in a single industry or a way to grow your business. Diversification can be seen as a way to build stability. The thought process is if you concentrate too heavily on a single area or product, you risk volatility in revenue and resources as demand rises and falls. With diversification, your business can stretch across many areas or categories, and in the long term you may have more predictability in revenue and demand.

The most conservative reason to diversify is to avoid major repercussions when an industry or sector suffers a downturn. Some single-business or single-product organizations couldn’t survive a lengthy decline in their industry.

Another reason to diversify is that you want to stay competitive against your local competitors. If a specific city or region is under-served in a certain category like landscape lighting or mosquito/tick control, it may make sense for your company to expand into those areas to stay competitive against a competitor. Or on the other side, perhaps adding a service instead of a new product category can be beneficial.  You may want to add or just focus promoting a system maintenance program or even consider adding an option for financing new system installs. These little things can help you stay competitive. The idea is if your company doesn’t diversity and expand to fill the additional demand of products or services, competitors may be likely to do so.

There are two common types of diversification, vertical and horizontal. We’ll discuss what each one means and how they may benefit your business.

Vertical Diversification

As important and valuable as diversification is, it does have some drawbacks and risks. When you expand, you potentially lose focus on what your best products or offerings are. That’s where vertical diversification can come into play.

Vertical diversification is the development of a depth of service offerings around your core competency and positioning. As an irrigation specialist, this can include things like adding an upgrade option for WiFi controllers, offering a Central Control service, or focusing on the promotion of existing maintenance programs (spring turn on/winterization). For these programs, consider creating a regular schedule and communicate that schedule with your customers. This will help increase loyalty and may be a service that your competitors do not offer.

It can also include additional business support services that that helps position you as a leader within your core competency areas. Think of things like adding a financing option for new installs or bigger projects, offer educational classes on water conservation, host how-to’s for using WiFi controllers, share recommendations for proper maintenance of existing irrigation systems, or offer end-of-year reporting on how much water a customer used/saved.

Even adding something as simple as a “Welcome Walkthrough” where someone on your team takes the time to walk the property with the owner the day of install, thoroughly explaining the process one last time, setting expectations and answering any final questions. This maybe something you already do, and if it is, just promoting it may be something to consider. This can be considered diversification of a service and something that sets you apart from your competition.

Horizontal Diversification

With horizontal diversification, think of it as offering services or products across multiple categories. This type of diversification allows you to offer a breadth of services so you can be “everything to everybody.” Or at the very least, horizontal diversification allows you to expand into serving a new (and similar) customer base in your existing market, or a new market similar to your existing one.

Horizontal diversification is often used to promote growth in an existing business. When you add a service like design build, outdoor lighting, landscape maintenance, or even mosquito/tick control this opens up a new base of customers that you can reach. It also allows you to retarget your existing customers with the new services. With horizontal, it’s important not to diversify too much too fast, this can carry risk. Remember, you want to make sure your core competency does not suffer when you expand into a new service offering. You also need to take the time to develop, promote, and grow that additional service so that over time it becomes a core competency for your business.

As you can see, diversification can be done in a few different ways. You can deepen your core competencies and add complementary services to amplify what you already do well or you can expand into a variety of new categories/services in order to target new customers or new markets. It’s most important that you examine your current business and determine what diversification strategy can be most effective, profitable, and sustainable for your business.

Finally, rely on Central to help, whether it’s questions about business and marketing strategies, strategic purchasing, or business planning during COVID-19. Central is the right partner for your business. We stay at the leading edge of the industry and we’re ready to help you grow!