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Continued from Previous……
The subject of ‘People’ is large and can be talked about more, but we leave it here and look at the challenges faced in scaling up the product and service offering.
Most small and medium enterprises are started by people who possess the relevant skill for that product or service. It has undeniable advantages. One, the entrepreneur knows all about her/his trade and can manage better. Two, they will not be entirely dependent on hired people to run the business. Three, they will be less likely to be manipulated by staff which may have ill intentions. Four, doing things themselves saves a significant amount of money. Small businesses that are based on hired staff only, and where the entrepreneur does not understand the basics are doomed for failure. It is therefore highly recommended that small/medium entrepreneurs should go into trades for which they have enough, hands-on knowledge about. Large enterprises are a different ballgame with different rules.
Product and Service Development
In this section, we shall deal with scaling up of products and/or services.
Assortment – some enterprises like a small food joint may start with one dish. As the business grows, more products are added. Larger food joints start with an assortment offering variety of dishes. A fan manufacturer may start with one type of fan and later include other types. In some cases, the entrepreneur prefers to stick to one product for all times to come.
The first challenge in product addition is its relevance to market, not to own capability. This is a grey area where wrong decisions are made. I have seen small restaurants offering Chinese dishes in areas where they are least relevant. Our view is mostly inside-out, and we look at the world not as it is, but how it appears to us. This view is likely to lead to wrong decisions. It is recommended that addition/deletion of products must be made based on good market analysis, own capability, and financial assessment.
Services are different because they may offer the same service for long. A courier service may continue to deliver small packages and envelopes only. A laundry shall always continue doing the same service. Sometimes services can be added also. In the same case of courier service, the business may add carrying large parcels also, and/or add international shipments. For services, it is also recommended that the addition decisions must be based on market need, delivery capability and financial resources.
Diversification – is a rather misunderstood word. Many enterprises embark upon diversification without understanding the process. Diversification is when a business decides to add another line of business to the existing one. It is not adding another sales team or adding similar other products. It is not related to scale either. Opening a large restaurant after having run a small one successfully, or branching out, or adding dishes is not diversification. As mentioned earlier, it is adding another line of business which was not there before. It may be an upstream or downstream addition. For example, pharmaceutical manufacturer may establish an enterprise dealing with the supply of materials to industry, not just to themselves. This would be upstream, Or, they may choose to add distribution network for self and others, which will be downstream. There are some examples in Pharma: Hilton Pharma runs a separate indenting house by the name Progressive; Geofman has a similar arrangement running under the name Iris, and so on. Downstream business, like distribution was tried but did not do well due to perceived conflict of interest. Another examples is that a wholesaler of plastic products may decide to go into manufacturing later.
True diversification, however, happens when an independent line of business unrelated to current business is added. Gourmet Bakers did both kinds. They went into bottled water, soft drinks, wedding halls/marquees, and in home furniture. Food related ventures were successful because they relied on their rather large network of own retail outlets. Furniture did not do well.
All major textile manufacturers have gone into retail business. They have introduced ready-to-stitch/stitched/party/couture/prêt-à-porter, or even bridal dresses. It was not entirely based on their existing capability, they had to acquire new ones to be able to do it.
Diversification is a key activity for scaling up business, but it may not be mandatory. Scaling up is possible without diversification also. However, if diversification is considered, it should be done with proper working.
To be Continued……
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