Diversification Strategies for Nigerian SMEs to Weather Economic Storms

Small and medium enterprises (SMEs) are the backbone of Nigeria’s economy, contributing significantly to employment and GDP. However, these businesses often face challenges during economic downturns. This article explores various diversification strategies that Nigerian SMEs can employ to navigate through turbulent economic times and emerge stronger.

Understanding the Nigerian SME Sector

Before delving into diversification strategies, it’s crucial to understand the context of SMEs in Nigeria. Small and medium enterprises in Nigeria are defined as businesses with less than 200 employees and an annual turnover of less than 500 million naira. These enterprises span various sectors, including agriculture, manufacturing, services, and technology.

Nigerian SMEs face unique challenges, including:

1. Limited access to finance
2. Infrastructure deficits
3. Regulatory burdens
4. Skills shortages
5. Market access limitations

Despite these challenges, SMEs remain vital to Nigeria’s economic growth, accounting for about 48% of national GDP and 84% of employment. Their ability to adapt and diversify is crucial for the country’s economic resilience.

The Importance of Diversification for SMEs

Diversification is a strategy that involves expanding a company’s operations into new markets, products, or services. For Nigerian SMEs, diversification can serve several purposes:

1. Risk mitigation: By not relying on a single revenue stream, SMEs can better weather economic storms.
2. Growth opportunities: Diversification opens up new markets and customer segments.
3. Increased competitiveness: A diverse portfolio can give SMEs an edge over competitors.
4. Resource optimisation: Diversification can lead to better utilisation of existing resources and capabilities.

Key Diversification Strategies for Nigerian SMEs

Let’s explore various diversification strategies that Nigerian SMEs can consider:

1. Product Diversification

Product diversification involves introducing new products or modifying existing ones to appeal to different market segments. For Nigerian SMEs, this could mean:

• Developing complementary products: For example, a bakery could expand into producing pastries and confectioneries.
• Creating premium or budget versions of existing products: This allows SMEs to target different income segments.
• Introducing seasonal or limited-edition products: This strategy can create buzz and attract new customers.

Case Study: A small-scale soap manufacturer in Lagos diversified its product line to include hand sanitisers and disinfectants during the COVID-19 pandemic, significantly boosting its revenue.

2. Market Diversification

Market diversification involves expanding into new geographic areas or customer segments. Strategies include:

• Expanding to new regions within Nigeria: SMEs can explore opportunities in different states or move from rural to urban areas (or vice versa).
• Entering international markets: With the African Continental Free Trade Area (AfCFTA) agreement, Nigerian SMEs have new opportunities to export to other African countries.
• Targeting new customer segments: For instance, a B2C business could explore B2B opportunities.

Example: A Kano-based leather goods manufacturer expanded its market from northern Nigeria to southern states and eventually started exporting to neighbouring West African countries.

3. Channel Diversification

This strategy involves using multiple distribution channels to reach customers. Options include:

• E-commerce platforms: leveraging online marketplaces like Jumia or developing a proprietary e-commerce website.
• Social media selling involves utilising platforms like Instagram and Facebook to reach customers directly.
• Partnerships with retailers or distributors: This can help SMEs reach a wider customer base without significant investment in infrastructure.

Success Story: A small fashion designer in Abuja diversified her sales channels by setting up an Instagram shop and partnering with a popular online fashion retailer, leading to a 200% increase in sales within six months.

4. Vertical Integration

Vertical integration involves expanding operations into different stages of the supply chain. This can be:

• Backward integration: taking control of the supply of raw materials.
• Forward integration: moving into the distribution or retail of products.

The benefits of vertical integration include reduced costs, improved quality control, and increased market power.

Example: A medium-sized poultry farm in Oyo State integrated backward by starting its own feed mill, reducing costs, and ensuring a steady supply of quality feed.

5. Horizontal Integration

Horizontal integration involves expanding by acquiring or merging with similar businesses. This strategy can help SMEs:

• Increase market share
• Achieve economies of scale.
• Reduce competition

While this strategy might be challenging for smaller SMEs due to financial constraints, it can be highly effective for medium-sized enterprises.

Case in Point: A medium-sized IT services company in Port Harcourt acquired two smaller competitors, significantly expanding its client base and service offerings.

6. Diversification into Related Industries

This strategy involves expanding into industries that have synergies with the SME’s current business. Benefits include:

• Leveraging existing skills and resources
• Cross-selling opportunities
• Reduced risk compared to unrelated diversification

Example: A small-scale tomato farmer in Kaduna diversified into tomato processing, producing and selling tomato paste to local retailers.

7. Digital Transformation

While not a diversification strategy in itself, digital transformation can enable and amplify other diversification efforts. This can involve:

• Adopting digital tools for operations (e.g., inventory management software, CRM systems)
• Leveraging data analytics for decision-making
• Implementing digital marketing strategies

Success Story: A traditional bookshop in Lagos implemented an online ordering system and e-book sales, significantly expanding its customer base beyond its physical location.

8. Service Diversification

For SMEs in the service sector, diversification can involve:

• Offering new services that complement existing ones
• Packaging services differently (e.g., creating service bundles)
• Introducing subscription or membership models

Example: A small accounting firm in Enugu expanded its services to include business consulting and financial planning, attracting a wider range of clients.

9. Geographical Diversification within Nigeria

Nigeria’s diverse regions offer unique opportunities for SMEs to expand:

• North: agriculture, livestock, solid minerals
• South: oil and gas, technology, manufacturing
• East: Trade, small-scale manufacturing
• West: services, technology, creative industries

By expanding into different regions, SMEs can tap into diverse economic strengths and mitigate risks associated with regional economic fluctuations.

Case Study: A Lagos-based tech startup expanded its operations to Kano, tapping into the growing demand for tech solutions in Northern Nigeria.

10. Diversification through Partnerships and Collaborations

SMEs can diversify by forming strategic partnerships or collaborations. This can involve:

• Joint ventures with complementary businesses
• Partnerships with larger corporations
• Collaborations with research institutions or universities

Benefits include shared resources, knowledge exchange, and access to new markets or technologies.

Success Story: A small-scale cassava farmer in Benue State partnered with a food processing company to produce cassava flour, significantly increasing the value of their produce.

11. Diversification into the Green Economy

With growing global emphasis on sustainability, Nigerian SMEs can explore opportunities in the green economy.

• Renewable energy solutions (e.g., solar panel installation)
• Eco-friendly products
• Waste management and recycling services

Example: A small manufacturing company in Aba diversified into producing biodegradable packaging materials, attracting environmentally conscious customers, and opening up export opportunities.

12. Leveraging the Gig Economy

SMEs can diversify their workforce and service offerings by tapping into the gig economy.

• Offering services through gig platforms
• Utilising freelancers to expand capabilities without increasing fixed costs
• Creating platforms that connect gig workers with clients

Case in Point: A small graphic design firm in Abuja expanded its services by creating a platform connecting freelance designers with clients, earning commissions on transactions.

13. Diversification through Franchising

For SMEs with a successful business model, franchising can be a way to expand and diversify revenue streams.

• Franchising their own business
• Becoming a franchisee of an established brand

Benefits include rapid expansion, brand recognition, and shared marketing efforts.

Success Story: A successful local restaurant chain in Ibadan expanded across Southwestern Nigeria through franchising, significantly increasing its revenue and brand presence.

14. Diversification into Education and Training

SMEs can leverage their expertise to diversify into education and training.

• Offering workshops and courses related to their industry
• Creating online courses or webinars
• Providing consulting services

Example: A successful fashion designer in Lagos started offering online fashion design courses, creating a new revenue stream and enhancing her brand as an industry expert.

15. Exploring Opportunities in Import Substitution

With government policies promoting local production, SMEs can diversify by producing goods that are currently imported.

• Identifying high-demand imported products
• Leveraging local resources and skills to produce these goods
• Collaborating with other local businesses in the supply chain

Case Study: A medium-sized plastics manufacturer in Onitsha diversified into producing medical supplies previously imported, benefiting from government incentives and increased local demand.

Implementing Diversification Strategies: Key Considerations

While diversification can offer significant benefits, it’s not without risks. Nigerian SMEs should consider the following when implementing diversification strategies:

1. Resource Assessment: Evaluate the financial, human, and technical resources available for diversification.
2. Market Research: Conduct thorough market research to identify viable opportunities and understand potential challenges.
3. Risk Analysis: Assess the risks associated with each diversification strategy and develop mitigation plans.
4. Competency Evaluation: Ensure the SME has or can acquire the necessary skills and knowledge for the new venture.
5. Phased Approach: Consider implementing diversification strategies in phases to manage risks and learn from early experiences.
6. Financial Planning: Develop a comprehensive financial plan, including funding sources for the diversification effort.
7. Regulatory Compliance: Ensure compliance with relevant regulations in new markets or industries.
8. Cultural Considerations: When expanding to new regions, be mindful of cultural differences that may affect business operations.
9. Technology Integration: Leverage appropriate technologies to support diversification efforts.
10. Performance Monitoring: Establish key performance indicators (KPIs) to monitor the success of diversification strategies.

Overcoming Challenges in Diversification

Nigerian SMEs may face several challenges when implementing diversification strategies:

1. Limited Capital: Access to finance remains a significant challenge for many Nigerian SMEs. Solution: Explore alternative financing options such as microfinance, cooperative societies, or government SME support programs. Consider partnerships or joint ventures to share costs.
2. Skill Gaps: Diversification may require new skills that the SME currently lacks. Solution: Invest in training and development for existing staff. Consider hiring new talent or partnering with organisations that have complementary skills.
3. Market Knowledge: Lack of familiarity with new markets or industries can pose challenges. Solution: Conduct thorough market research. Consider hiring local experts or partnering with established players in the new market.
4. Infrastructure Limitations: Poor infrastructure can hinder diversification efforts, especially in rural areas. Solution: Leverage technology to overcome infrastructure gaps where possible. Consider phased expansion, starting in areas with better infrastructure.
5. Regulatory Hurdles: Navigating regulatory requirements in new industries or regions can be complex. Solution: Seek professional advice on regulatory compliance. Engage with relevant industry associations for guidance and support.
6. Competition: Entering new markets may mean facing established competitors. Solution: Focus on differentiation and unique value propositions. Consider niche markets or underserved segments.
7. Brand Perception: Existing brand perception may not align with new offerings. Solution: Develop a clear communication strategy to explain the diversification to existing customers. Consider creating sub-brands for significantly different offerings.

Government Support for SME Diversification

The Nigerian government has implemented several initiatives to support SME growth and diversification:

1. Bank of Industry (BOI) Loans: Offers low-interest loans to SMEs for expansion and diversification.
2. Central Bank of Nigeria (CBN) Interventions: Various schemes, like the Agri-Business Small and Medium Enterprises Investment Scheme (AGSMEIS), provide funding for SMEs.
3. Nigerian Export Promotion Council (NEPC): Offers support for SMEs looking to diversify into exports.
4. Small and Medium Enterprises Development Agency of Nigeria (SMEDAN): Provides training, business development services, and market access support.
5. The National Enterprise Development Programme (NEDEP) aims to address the critical factors that have inhibited the growth of the MSME sector.

SMEs should actively explore these government initiatives to support their diversification efforts.

Case Studies: Successful Diversification by Nigerian SMEs

1. From Fashion to Face Masks: A small fashion house in Lagos quickly pivoted to producing face masks during the COVID-19 pandemic. By leveraging their existing sewing skills and equipment, they not only survived the economic downturn but expanded their business significantly.
2. Agri-Tech Innovation: A medium-sized farm in Plateau State diversified into agri-tech by developing a mobile app that connects farmers with buyers. This not only created a new revenue stream but also solved a critical market access problem for many small-scale farmers.
3. Education to EdTech: A private tutoring service in Abuja diversified into creating educational content for online platforms. This move allowed them to reach a much wider audience and create multiple revenue streams through course sales and advertising.
4. Restaurant to Meal Kits: A popular restaurant in Port Harcourt diversified by creating meal kits that customers could cook at home. This strategy helped them maintain revenue during lockdowns and attracted a new customer segment interested in convenient home cooking.
5. Printing to Digital Marketing: A small printing press in Kano diversified into digital marketing services, leveraging their design skills and client relationships. This move helped them stay relevant in an increasingly digital world and opened up new growth opportunities.

The Future of Diversification for Nigerian SMEs

As Nigeria’s economy continues to evolve, diversification will remain a crucial strategy for SMEs. Future trends that may shape diversification strategies include:

1. Increased Digital Adoption: The rapid digitalisation of the Nigerian economy will create new opportunities for SMEs to diversify into digital products and services.
2. Sustainability Focus: Growing awareness of environmental issues may drive diversification into eco-friendly products and services.
3. Regional Integration: The implementation of the AfCFTA will open up new opportunities for cross-border trade and expansion.
4. Emerging Technologies: Technologies like artificial intelligence, blockchain, and the Internet of Things may create new diversification opportunities.
5. Changing Consumer Behaviours: Post-pandemic shifts in consumer behaviour may necessitate diversification to meet new needs and preferences.

Conclusion

Diversification is a powerful strategy for Nigerian SMEs to build resilience, drive growth, and navigate economic uncertainties. By carefully considering various diversification options—from product and market diversification to digital transformation and green initiatives—SMEs can position themselves for long-term success.

However, successful diversification requires careful planning, resource allocation, and execution. SMEs must conduct thorough market research, assess their capabilities, and be prepared to adapt their strategies as needed. They should also leverage available government support and explore partnerships to enhance their diversification efforts.

As Nigeria strives to build a more robust and diversified economy, SMEs have a crucial role to play. By embracing diversification, these enterprises can not only weather economic storms but also contribute significantly to job creation, innovation, and economic growth in Nigeria.

The path to diversification may be challenging, but for Nigerian SMEs willing to innovate and adapt, it offers a route to sustainable growth and resilience in an ever-changing economic environment.