Diversifying Your Business

March 19, 2009
It starts with defining yourself as what you do, not what you make.

Bankruptcies. Plant closings. Massive layoffs. With so many ugly headlines out there, the public must be wondering if there are any manufacturing companies that are actually succeeding in this economy.

Yes, there are! Having worked with hundreds of manufacturing businesses, I can tell you that many are not only surviving, they're thriving. The key is that while they may have started off in one industry, they've diversified over the years into new product lines and industries.

We all know that market opportunities present themselves constantly, even in tough economic times. The key is keeping your eyes open for those opportunities, however unconventional they may seem.

Grace Engineering has a long history of diversification, and success. The company was started in 1968 to manufacture products for the impact printing industry. When that industry faded away, Grace transformed itself into a precision machining, grinding and embossing supplier to the automotive and medical industries.

But they didn't stop there. In 2000, the company developed a metal injection process to make broadheads, a component of arrowheads used in archery. Later, they developed other archery products. Today, they manufacture everything used in the sport, and they just launched their own brand of "G5" archery products including a "Quest" sub-brand for the bows. Their archery products are managed through a new division, while their other product lines are managed through their core operations. Grace Engineering's revenue has continued to grow annually over the last decade, including a 15% growth last year.

Grace has been diversifying for decades, and the majority of its business is tied to industries that, while not entirely recession-proof, are at least recession-resistant. But even companies that haven't diversified before and are tied to hard-hit industries like automotive can diversify for success. Just keep in mind that within every industry, there are pockets of growth. Just look for those. Microflex, a manufacturer of flexible metal products, is a case in point.

Microflex was established in 1975 as a supplier to the petrochemical and power generation industries. The company continued to keep its eye out for other opportunities and, by the end of the 80s, it expanded into the automotive aftermarket. By 1999, it had also become a Tier One supplier to automotive OEMs and it had posted revenue growth every year since it was founded.

So, let's jump forward to today. Not only has Microflex continued to expand its automotive business, the company recently launched a new business unit focused solely on automotive. Launching a brand-new automotive operation in this market might seem ill-advised, to say the least. But Microflex leaders have found the sweet spots within this industry and diversified their customer base to take advantage of them.

Looking closely, they found that the industry's shift toward greener production and tighter emission standards created some unexpected opportunities. They realized that a lot of new things are being done to make diesel engines cleaner, and that there are even more diesels on the road today than a few years ago. Because diesels have lower horsepower than similarly sized gasoline engines, their manufacturers often add turbochargers. Microflex figured that there would be an increased need for engine, exhaust and fuel components. They began marketing their flexible decouplers, bellows and tube assemblies to engine manufacturers and, sure enough, this business has been growing for them. And the company hasn't skipped a beat on revenue growth, having posted growth every year since it was founded.

So, how does a company anticipate something as counterintuitive in today's climate as increased sales of diesel engine components? You've got to change the way you think about your business. Virchow Krause, a business development and consulting firm, works with companies to help them identify new opportunities, and this often requires a complete cultural change. Kurt Schroeder, who runs Virchow Krause's "Go To Market Solutions" division, tells his clients not to define their companies by what they make, but by what they do. Companies that aren't so married to their products are often surprised to find how naturally their core competencies fit with industries that they might never have dreamed of entering.

Recently, a hardwood floor manufacturer asked for help looking for new opportunities. When management looked at what their company actually did, they found that only about 25% of their capabilities were spent making flooring. The remaining 75% of the company's capabilities were spent handling the logistics of harvesting, preparing and transporting raw materials, particularly lumber, to market. In fact, they were pretty good at this. So, they began marketing this raw materials logistics competency to other business owners who would rather outsource that function. By focusing on their core competency, they created a whole new future for their company.

The principle of diversification is just as relevant for companies that serve the manufacturing industries. Those, like Plex Systems, that are utilizing the software as a service (SaaS) business model have been finding that the technologies and applications that are beneficial to automotive, aerospace and defense companies are just as relevant, and sought after, in the life sciences and food industries. In fact, because these medical devices, foods and beverage companies are so heavily regulated and many SaaS models can provide exceptional traceability, it's a natural evolution for them to diversify.

The thing that Grace Engineering, Microplex, and many other successful companies have in common is they don't pigeonhole themselves. Whether it's an evolution from contract manufacturer to a sporting goods OEM, or from making power generator tubing to turbocharger components, successful diversifiers know there's always another way to look at who can benefit from their competencies.

I understand how hard it is for business leaders to stop identifying themselves primarily by their product or the industries they serve. What we make and the industries we support are the foundation of our identities. But survival requires that we look at our businesses with incredibly open minds, explore diversification in all its shapes and forms, and be honest about what we can do better than anyone else.

Don't get mired in today's negative news about our economy. If we all stay focused on our strengths, together we will start creating new, more positive, headlines for tomorrow.

Mark Symonds is the CEO and President of Plex Systems Inc. Plex Systems uses the software as a service (SaaS) model to drive cost, quality and productivity improvements for manufacturers. Its Online ERP functionality enables manufacturers to manage accounting, financials, regulatory compliance, human resources and other critical priorities, based on real-time, data from their manufacturing operations. www.plex.com.

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