The recession has had a negative impact on many types of business, but it is perhaps surprising that the specialist sectors have been among those suffering. Where niche businesses were once successful and if not always lucrative, then at least sustainable, they are now at the mercy of targeting markets that often no longer exist.

There have been warnings for some time from the Confederation of British Industry (CBI) that over-specialisation could cause small businesses to suffer in a recession. Without the ability to diversify, these SMEs would be more affected by a downturn than larger organisations, which are more likely to be spread across a number of sectors.

Even at this stage of the recession, specialist small businesses can still look at ways to diversify into new areas and markets. Those who remain successful should be looking at how quickly they would be able to adapt to a changing market if the need arose.

New offerings
A closer look at what your business offers and to whom should reveal the right path for expansion. It makes the most sense to go for products or services that can be easily launched using existing infrastructure and processes.

Larger companies diversify in different ways. For example, EasyJet launched a line of budget hotels to complement their budget airline business and Virgin added its media service to the well-established airline brand.

Smaller businesses need to look at things in a different way. It is much better to start by offering variations on your original product or complementary products. Running a hotel chain is very different to running an airline, but a large company copes simply by bringing in the right employees to do the job. Small businesses do not have the luxury of this level of budget.

One other way to diversify is to sell the products in a different way. For example, if you own a shop on the high street you could look at whether selling on the internet is a feasible option. Or if you run a café, you could consider running mobile street stalls rather than setting up a new premises.

Stephen Bentley, chief executive of Granby Marketing, faced this dilemma when he launched the company's new Granby Talk outsourced call centre service. The service was already part of the company's marketing product suite, so he simply gave the service its own identity to boost sales and awareness.

Highlighting the benefits of diversification, he added: "You've already got your accounts, human resources and other departments in place to cope with the new business. You don't need to put in all the administration like you do when you're getting a new business up and running."

Research
Thorough market research is vital to a successful business diversification strategy. It will help you to understand your new customer base, find out more about the competition and give you an idea of whether the new product or service will work.

Adrian Mole of accountancy and business adviser Mazars claims a lack of research is one of the most common reasons for the failure of a diversification strategy. "Mostly this happens at a commercial level when the entrepreneur hasn't fully understood the business that they are going into.

"The classic one is haulage. People think that because they have a fleet they can become a haulage company without realising the issues involved and that many hauliers are working on wafer thin margins."

Staff
With the launch of any new product extra resources will be needed. For small businesses in particular, staffing must be considered carefully. Do your existing employees have the time to cope with selling a new product or do you need to hire extra people? And do they have the expertise to make the new venture a success?

This is one area in which Greg Harris, development officer for Mitchell Charlesworth accountants, believes his company could have done better when they launched their small business development service.

He told Business Link: "We should have included internal training as part of the diversification process from day one. The business development service took off so quickly that we needed more trained staff to help us cope at a very early stage.

"If we'd developed the skills of existing employees sooner, we wouldn't have had to recruit from outside the company. It was more expensive in the long run."

Tax and insurance
Some final key areas that are often overlooked by diversifying businesses are tax and insurance. It is useful to inform the Inland Revenue of any changes to a business model. If diversification leads to a new business setup this may result in a change to a company's tax status.

You would also need to inform your insurance company about the new part of the business as it may affect your cover.

While expansion and diversification can be a welcome boost to a business in the tough economic climate, long-term success relies on careful planning and research.

For more information visit www.simplybusiness.co.uk [1]