On many occasions, I am asked this question by owners of micro, small and medium enterprises (MSMEs): “Is it advisable for MSME businesses to diversify?” To me, this is an area of ambiguity, as it depends on the business, its founder, and its performance. 

For MSMEs operating with limited resources, diversification can strain finances, human capital, and infrastructure. The need to invest in a new category or venture can stretch thin the already constrained resources, potentially harming the core business operations.

MSMEs often thrive by specializing in niche markets or specific product categories. Diversification may dilute the focus on the original market segment, and diverting mental bandwidth and resources away from the core business may decrease efficiency and effectiveness.

However, we also need to remember that in diversification, a seasonal downturn in one market may be offset by steady sales in another. Diversification enhances the resilience of MSMEs by making them less vulnerable to economic downturns or industry-specific crises. A diversified portfolio can help cushion the impact of adverse events, ensuring the continuity of business operations even during challenging times. We saw this during the pandemic, especially the intermittent lockdowns.

From the brand perspective, introducing unrelated products or services under the same brand umbrella can dilute its identity and confuse customers. MSMEs may undermine the reputation they've built in their core market by associating with unrelated or inferior offerings. However, if planned well, introducing new products or expanding into new markets can reinforce the MSME brand presence and enhance its visibility. A diversified portfolio demonstrates innovation, adaptability, and a commitment to meeting diverse customer needs, thereby enhancing brand reputation and customer loyalty, which should positively affect revenue through cross-selling and upselling.

Markets are dynamic, with consumer preferences, technology, and regulatory landscapes constantly evolving. Diversification equips MSMEs with the agility to adapt to these changes effectively. It allows them to pivot their strategies, explore new business models, and capitalize on emerging opportunities, ensuring long-term sustainability and relevance in the market. However, we should also appreciate that managing diverse business interests adds complexity to operations. MSMEs may find it challenging to maintain standards, streamline processes, and ensure consistent customer satisfaction across multiple ventures. This complexity can hinder agility and responsiveness to market dynamics.

MSMEs can spread their risk across multiple sectors or customer segments by diversifying their business categories or entering new markets. This may reduce the dependency on a single source of revenue and provide a buffer against market disruptions. One may argue that venturing into new markets or product categories exposes MSMEs to additional market risks. These risks include demand fluctuations, regulatory changes, and competitive pressures. Unlike larger corporations with greater financial buffers, MSMEs may struggle to weather adverse market conditions in multiple sectors simultaneously.

As I said earlier, there is no fixed rule.