Is diversification the key to recovery for Alberta and Saskatchewan businesses?
Posted: Tue Dec 10, 2024 8:45 am
It's been a tough year for business owners in Alberta and Saskatchewan as the economy has been hit by a double whammy: the COVID-19 pandemic and sharply lower energy prices.
Many business owners are looking to get back on the growth path. A new survey conducted by the BDC team indicates that the best way to do this is to combine investment in technology with a strategy to diversify the company’s operations through tactics such as seeking out new markets and launching new products and services.
In this blog post, I will discuss why diversified companies fared better during the crisis. In the next one, I will explain why such diversification should be done in combination with investment in digital technologies.
Diversification: a good strategy to mitigate risks
By diversifying your business, you will reduce your reliance on a single large corporate client, product line, or specific geographic markets, allowing you to generate revenue and grow. The goal is to reduce risk to your business, your customers, and your staff.
Here are some of the operational risks you can prevent through diversification.
Dependence on a single client company or city
Many businesses rely on a single customer to the point where losing that customer would have a significant impact on their entire business. Similarly, operating in a single city can expose you to significant risk in the event of a major downturn in that region. Diversifying your customer base and your geographic footprint will help your business be more resilient.
Focus on a single product or service or a single industry
You may have a large number of customers in multiple cities, but if you rely on a single product or service, you could face "obsolescence risk" - the risk that your products or services are no longer marketable due to changing tastes or technologies.
The same problem applies if you sell your products or services in a single industry. Your business’s prosperity is tied to the industry in which it operates, which puts you at risk of a sudden contraction in the industry’s activity or, worse, its long-term decline. You can reduce this risk by broadening the scope of your offering.
Holding activities in one place
Even if all of your customers aren’t in the same region, your business may be limited by a heavy reliance on a single location for offices, manufacturing, foot traffic (e.g., in the case of retail businesses), or skilled labor . If this is the case, your business may be isolated from the rest of the world, for example, in the event of a natural disaster (or simply road construction) that could limit or prevent access.
If your business sells and operates only in Canada, you face the same risk. Your fate will depend largely on the domestic economic situation, and you may face increased competition from foreign companies entering your market. Having multiple locations in Canada and abroad is a market diversification strategy that reduces these risks.
Diversified companies are more likely to experience strong growth
The survey of 500 business owners and decision makers in Alberta and Saskatchewan found that diversified businesses were twice as likely to have experienced strong revenue growth (more than 10%) in the previous year.
Overall, 16% of companies that had diversified (by expanding into new markets, launching new products and services, or expanding their customer base) experienced strong growth, despite a difficult year for the region. By comparison, only 8% of non-diversified companies experienced strong growth.
Overall, 16% of diversified companies […] experienced strong growth. […] By comparison, only 8% of non-diversified companies experienced strong growth.
Among diversified businesses, those that implemented a market expansion strategy by selling their products or services outside Canada or establishing operations in more than one Canadian city were three times more likely to have experienced strong growth than their counterparts (23% versus 8%).
We also note that a slightly larger proportion of companies that have diversified their offerings have experienced strong growth. These companies are characterized by the fact that they do not depend on a single product or service for more than a fifth of their revenues and that they serve more than one sector.
A surprising, though not statistically significant, finding is stockholder database that firms with a diverse customer base were somewhat less likely to have experienced high growth than those with a non-diverse customer base. This may be due to the unprecedented severity of the COVID-19 crisis . Since most firms experienced a negative shock, having a diverse customer base did not help mitigate the negative impact of the crisis.
Bar chart showing the percentage of companies that experienced strong revenue growth over the past 12 months
In addition to being more likely to grow revenue, diverse companies tended to be more innovative, which is key to increasing competitive advantage. The survey found that 73% of CEOs at diverse companies reported innovating in the past year, compared to 57% at non-diverse companies.
Market expansion and broadening the scope of offering remain a challenge
Although many companies in the region continue to be impacted by lower oil prices, two-thirds of respondents say they have diversified in at least two ways, with larger companies more likely to have done so. Companies tended to be well diversified in terms of their customer base, but they lagged in their market expansion efforts and broadening the scope of their offerings.
Interestingly, market expansion was the diversification strategy most closely associated with high growth, yet it was the least popular for firms in the region.
Bar chart showing the proportion of companies that implemented specific diversification tactics
By far the top reasons business owners gave for wanting to diversify were the desire to stay in business, find new ways to grow and expand their markets.
Survey results supported by previous study
The benefits of diversification suggested by the survey are supported by the findings of a study we conducted in 2015 following a collapse in oil prices. That study, based on a survey of some 1,000 Alberta businesses, found that diversification (whether by product, region or number of customers) was strongly correlated with financial success.
It also found that the most diverse companies were by far the best performers, and that even somewhat diverse companies were likely to outperform their less diverse counterparts. Even modestly diverse companies outperformed their less diverse counterparts, and the most diverse companies experienced by far the fastest growth in revenue and profits.
Continued dependence on the energy sector
The recent survey shows that many businesses in Alberta and Saskatchewan continue to rely on the oil and gas sector , with 47 per cent of respondents reporting that 20 per cent or more of their revenue comes directly or indirectly from the sector. Large businesses, defined as those with annual revenues of more than $10 million, were significantly more affected by the drop in oil prices. The survey found that 72 per cent of large businesses in Alberta and Saskatchewan were impacted by the price drop.
47% of respondents said that 20% or more of their income comes directly or indirectly from the oil and gas sector .
However, it also shows that many business owners have realised that diversification can pave the way for stronger growth. Nearly half of business owners (46%) said they intend to diversify in the next three years as the economy emerges from the current recession and growth resumes.
Of those who plan to diversify, 63% said they want to expand their customer base, while 57% said they plan to launch new products or services. Market expansion tactics are the least commonly considered by business owners in the region, which is unfortunate, since our data suggests they offer the greatest potential for growth.
Diversification intentions of Alberta and Saskatchewan SMEs over the next three years
Corporate acquisitions and the cleantech sector are promising avenues for diversification
Many business owners also said they were looking to diversify their operations by acquiring another business – a promising strategy at a time when more businesses may be up for sale, either because of financial difficulties or because their owners are retiring. The survey found that 36 per cent of respondents planned to buy another business. Business owners in mid-sized cities and those in the manufacturing sector were most likely to consider this route.
We also found that nearly 24% of companies impacted by the oil and gas sector are seriously planning to diversify into the cleantech sector , while 42% are considering doing so. The term “cleantech” refers to the provision of products and services that improve operational performance, productivity or efficiency and reduce inputs, energy consumption, waste or environmental pollution.
The pandemic and the collapse in oil prices have had serious consequences
Unsurprisingly, the survey found that many business owners in Alberta and Saskatchewan do not feel confident given the challenges of this year.
Only about a third of business owners say they are optimistic about their company’s performance over the next year. More than half (59%) said they have been negatively impacted by falling oil prices, and an even greater number (75%) have been negatively impacted by the pandemic.
Only about a third of business owners say they are optimistic about their company's performance over the next year.
For example, three-quarters of business owners said they had seen a decline in sales, and more than 40% said they had had to reduce their workforce. About a third said they were facing higher operating costs and debt.
In this time of economic turbulence and uncertainty, business owners have indicated that their biggest challenge in diversifying their businesses is finding new customers and new markets.
A stronger company in good times and bad
Ultimately, diversification, which includes entering new markets and launching new products, should be a central goal of your company's strategic plan as you work to emerge from the recession.
By ensuring a variety of revenue and profit streams for your business, you will not only enable it to grow faster when things go well, but also to be more resilient when things go wrong.
Of course, combining your diversification strategy with investing in technology can help you maximize your profits. My next blog post will explain how.
Many business owners are looking to get back on the growth path. A new survey conducted by the BDC team indicates that the best way to do this is to combine investment in technology with a strategy to diversify the company’s operations through tactics such as seeking out new markets and launching new products and services.
In this blog post, I will discuss why diversified companies fared better during the crisis. In the next one, I will explain why such diversification should be done in combination with investment in digital technologies.
Diversification: a good strategy to mitigate risks
By diversifying your business, you will reduce your reliance on a single large corporate client, product line, or specific geographic markets, allowing you to generate revenue and grow. The goal is to reduce risk to your business, your customers, and your staff.
Here are some of the operational risks you can prevent through diversification.
Dependence on a single client company or city
Many businesses rely on a single customer to the point where losing that customer would have a significant impact on their entire business. Similarly, operating in a single city can expose you to significant risk in the event of a major downturn in that region. Diversifying your customer base and your geographic footprint will help your business be more resilient.
Focus on a single product or service or a single industry
You may have a large number of customers in multiple cities, but if you rely on a single product or service, you could face "obsolescence risk" - the risk that your products or services are no longer marketable due to changing tastes or technologies.
The same problem applies if you sell your products or services in a single industry. Your business’s prosperity is tied to the industry in which it operates, which puts you at risk of a sudden contraction in the industry’s activity or, worse, its long-term decline. You can reduce this risk by broadening the scope of your offering.
Holding activities in one place
Even if all of your customers aren’t in the same region, your business may be limited by a heavy reliance on a single location for offices, manufacturing, foot traffic (e.g., in the case of retail businesses), or skilled labor . If this is the case, your business may be isolated from the rest of the world, for example, in the event of a natural disaster (or simply road construction) that could limit or prevent access.
If your business sells and operates only in Canada, you face the same risk. Your fate will depend largely on the domestic economic situation, and you may face increased competition from foreign companies entering your market. Having multiple locations in Canada and abroad is a market diversification strategy that reduces these risks.
Diversified companies are more likely to experience strong growth
The survey of 500 business owners and decision makers in Alberta and Saskatchewan found that diversified businesses were twice as likely to have experienced strong revenue growth (more than 10%) in the previous year.
Overall, 16% of companies that had diversified (by expanding into new markets, launching new products and services, or expanding their customer base) experienced strong growth, despite a difficult year for the region. By comparison, only 8% of non-diversified companies experienced strong growth.
Overall, 16% of diversified companies […] experienced strong growth. […] By comparison, only 8% of non-diversified companies experienced strong growth.
Among diversified businesses, those that implemented a market expansion strategy by selling their products or services outside Canada or establishing operations in more than one Canadian city were three times more likely to have experienced strong growth than their counterparts (23% versus 8%).
We also note that a slightly larger proportion of companies that have diversified their offerings have experienced strong growth. These companies are characterized by the fact that they do not depend on a single product or service for more than a fifth of their revenues and that they serve more than one sector.
A surprising, though not statistically significant, finding is stockholder database that firms with a diverse customer base were somewhat less likely to have experienced high growth than those with a non-diverse customer base. This may be due to the unprecedented severity of the COVID-19 crisis . Since most firms experienced a negative shock, having a diverse customer base did not help mitigate the negative impact of the crisis.
Bar chart showing the percentage of companies that experienced strong revenue growth over the past 12 months
In addition to being more likely to grow revenue, diverse companies tended to be more innovative, which is key to increasing competitive advantage. The survey found that 73% of CEOs at diverse companies reported innovating in the past year, compared to 57% at non-diverse companies.
Market expansion and broadening the scope of offering remain a challenge
Although many companies in the region continue to be impacted by lower oil prices, two-thirds of respondents say they have diversified in at least two ways, with larger companies more likely to have done so. Companies tended to be well diversified in terms of their customer base, but they lagged in their market expansion efforts and broadening the scope of their offerings.
Interestingly, market expansion was the diversification strategy most closely associated with high growth, yet it was the least popular for firms in the region.
Bar chart showing the proportion of companies that implemented specific diversification tactics
By far the top reasons business owners gave for wanting to diversify were the desire to stay in business, find new ways to grow and expand their markets.
Survey results supported by previous study
The benefits of diversification suggested by the survey are supported by the findings of a study we conducted in 2015 following a collapse in oil prices. That study, based on a survey of some 1,000 Alberta businesses, found that diversification (whether by product, region or number of customers) was strongly correlated with financial success.
It also found that the most diverse companies were by far the best performers, and that even somewhat diverse companies were likely to outperform their less diverse counterparts. Even modestly diverse companies outperformed their less diverse counterparts, and the most diverse companies experienced by far the fastest growth in revenue and profits.
Continued dependence on the energy sector
The recent survey shows that many businesses in Alberta and Saskatchewan continue to rely on the oil and gas sector , with 47 per cent of respondents reporting that 20 per cent or more of their revenue comes directly or indirectly from the sector. Large businesses, defined as those with annual revenues of more than $10 million, were significantly more affected by the drop in oil prices. The survey found that 72 per cent of large businesses in Alberta and Saskatchewan were impacted by the price drop.
47% of respondents said that 20% or more of their income comes directly or indirectly from the oil and gas sector .
However, it also shows that many business owners have realised that diversification can pave the way for stronger growth. Nearly half of business owners (46%) said they intend to diversify in the next three years as the economy emerges from the current recession and growth resumes.
Of those who plan to diversify, 63% said they want to expand their customer base, while 57% said they plan to launch new products or services. Market expansion tactics are the least commonly considered by business owners in the region, which is unfortunate, since our data suggests they offer the greatest potential for growth.
Diversification intentions of Alberta and Saskatchewan SMEs over the next three years
Corporate acquisitions and the cleantech sector are promising avenues for diversification
Many business owners also said they were looking to diversify their operations by acquiring another business – a promising strategy at a time when more businesses may be up for sale, either because of financial difficulties or because their owners are retiring. The survey found that 36 per cent of respondents planned to buy another business. Business owners in mid-sized cities and those in the manufacturing sector were most likely to consider this route.
We also found that nearly 24% of companies impacted by the oil and gas sector are seriously planning to diversify into the cleantech sector , while 42% are considering doing so. The term “cleantech” refers to the provision of products and services that improve operational performance, productivity or efficiency and reduce inputs, energy consumption, waste or environmental pollution.
The pandemic and the collapse in oil prices have had serious consequences
Unsurprisingly, the survey found that many business owners in Alberta and Saskatchewan do not feel confident given the challenges of this year.
Only about a third of business owners say they are optimistic about their company’s performance over the next year. More than half (59%) said they have been negatively impacted by falling oil prices, and an even greater number (75%) have been negatively impacted by the pandemic.
Only about a third of business owners say they are optimistic about their company's performance over the next year.
For example, three-quarters of business owners said they had seen a decline in sales, and more than 40% said they had had to reduce their workforce. About a third said they were facing higher operating costs and debt.
In this time of economic turbulence and uncertainty, business owners have indicated that their biggest challenge in diversifying their businesses is finding new customers and new markets.
A stronger company in good times and bad
Ultimately, diversification, which includes entering new markets and launching new products, should be a central goal of your company's strategic plan as you work to emerge from the recession.
By ensuring a variety of revenue and profit streams for your business, you will not only enable it to grow faster when things go well, but also to be more resilient when things go wrong.
Of course, combining your diversification strategy with investing in technology can help you maximize your profits. My next blog post will explain how.