Diversifying into new areas requires business nous and good resources, writes John Downes

When you think of Nokia, forestry is probably not the first thing that comes to mind.

Yet back in 1865, Nokia started out as a forest industry enterprise, before gradually moving into other business areas such as rubber and cable. This diversification led, eventually, to its current position as one of the best-known manufacturers of mobile phones in the world.

The Nokia story outlined above is a good example of how a company can seek to enter new markets to expand its business and increase sales.

For Nokia, this led to a significant divergence from its original area of business.

For others, however, diversifying offers the opportunity to increase turnover, while at the same time maintaining their core business.

But what are the challenges facing an established company which is looking to diversify? And what benefits can it bring?

According to Mr Gearóid Mooney of Enterprise Ireland, there can be a number of reasons why an existing company might seek to diversify its business.

Sometimes, it might be struggling to maintain its market share with regard to its existing business.

This is especially true where there are already a number of strong competitors in that market. As a result, it may seek to develop new products or specialisations to counter any fall-off in sales.

At other times, the changing nature of the market might dictate the need for a company to diversify, he explains.

"When a company is doing well, its ambition is usually to increase sales," he says. "The answer generally comes from spotting an existing opportunity within the client base that they have or spotting a general change or trend in the industry they are already in.

"Competitor intelligence is very important," he adds. "You need to look at what is happening going forward. For example, most big companies would have specific departments trying to spot trends. You need to keep a weather eye on all this, so you know what's happening with your competition in the market."

When considering diversifying into new areas, it is essential for any business to have a very clear idea of what fits with the company's ambitions, Mr Mooney says.

"If you are diversifying, you are either going to move your product, your customer base, or both," he explains. "You have to look at the resources you have to do this, and how it fits with your existing facilities. If you don't do this, sometimes the changeover can choke you... you have to start from somewhere with a fairly clear focus. Unless you know your target, you are not going to hit it."

Once a company has decided what fits with its ambitions, then usually it has to find the necessary resources to implement its plans.

Sometimes, companies will do their own research and development to achieve this; at other times, they may decide to go into partnership with other companies.

Microsoft's decision to enter the games console market with the launch of Xbox in early 2002, however, primarily came from a desire to get more involved in the home entertainment field, according to Ms Orla Donovan of Microsoft Ireland.

As the world's largest software company, its strength in research and development (R&D) meant it did not have to go down the partnership route, at least in developing its new console.

"We had some really core strengths, and we were not in every market we could have been in," she explains. "We have a very strong R&D base, and we would also have the financial strength to break into the market.

"So it was a logical next step for Microsoft, it represented a good entry strategy into a more defined home strategy... the Xbox is all about focusing more on a particular target market."

The move into an already mature market, however, was not without its challenges, even for a company as large as Microsoft. Established players, such as Sony and Nintendo, had already sold millions of consoles worldwide.

Given this, Ms Donovan says Microsoft employed two important strategies.

First, it targeted what it calls "core gamers" - people who play game consoles on a regular basis - in order to persuade them that its product, although new, was able to compete with the existing consoles.

It also successfully focused on certain key retailers here, such as Smyths toy stores and Xtra-vision, a strategy which was helped by Microsoft's already strong brand recognition - albeit in a different market.

As we have seen, then, diversification is not without its challenges, requiring a large amount of advance planning, and significant financial outlay.

However, Mr Mooney is under few illusions as to the benefits it can bring. "If diversification is done well, it can significantly add to a company," he says.

Sentiments with which both Nokia and Microsoft would doubtless only too readily agree.