The contractor profile in this issue of EQ got me thinking about how companies grow and achieve balance. Writer Ken Wysocky explains how excavating company James Peterson Sons Inc. of Medford, Wis., accomplished both.
Founded in the 1930s, Peterson Sons made two acquisitions in the past decade that balanced the type of work they do and expanded the geographic area in which they do it. They went from doing mostly highway transportation work in a portion of Wisconsin to a more even mix of highway transportation, general municipal and private-sector work throughout the state and in parts of two others. In short, they successfully diversified.
Three Ways to Diversify
To diversify means to add variety to your business offerings. There are three ways a company can diversify within its existing field: vertically, horizontally and geographically.
Diversifying vertically means bringing new services to existing customers. To expand a construction company vertically, a builder might get into the related businesses his customers utilize leading up to or following the actual building construction, such as land development, real estate and financing. Expanding vertically means offering more of a "one-stop-shopping" experience for buyers.
Diversifying horizontally means bringing additional services to your existing geographic market, expanding the pool of potential customers. For a builder to diversify horizontally, he might go from exclusively building single-family homes to also building duplexes, multi-family units and small commercial buildings.
Geographic diversification means serving a larger area or adding a new market for your existing services. Widening the area you already serve into the next township, county or state but still operating from one base is one way to diversify geographically. Opening a satellite office in an entirely new area is another, often more challenging, way to grow the amount of territory you cover.
Peterson Sons diversified both horizontally and geographically. As you will read in the story, they now cover a larger area of the Midwest and they have balanced the types of excavating work they do.
Diversify Wisely
It may be wise to diversify if all your eggs are in one basket and you don't completely trust the strength of the basket. If 80 percent of your income comes from one customer, it may be time to seek out additional clients. What if your best customer folds? What if they choose someone else to provide the service you are currently providing them? Would you survive?
On the other hand, if diversifying will just cause you to lose focus, it may not be worth the risk. Being really good at one thing is often better than being mediocre at 10 things.
Recently someone in the food service business told me that a new restaurant is like a baby: it requires lots of attention. The same is true with any business and if you don't have the time, talent or people to give it attention, it won't thrive. It's wise to make sure your existing business is solid before diversifying … and Peterson Sons certainly did that, solidifying for more than 60 years before buying two other companies.
Buying out an existing, established business like Peterson Sons did is the most secure way to diversify geographically if the service you are offering is already offered in an area. Otherwise you risk flooding the market. Plus, you are buying not only the company, but also the reputation the company has already built up, rather than having to start from scratch introducing the company to the market. Just make sure the reputation they have is good and that you can maintain it.
Do Your Homework
Diversification does not happen overnight. Market research is required to determine the need for the new service you are considering or the need for your existing service in a new market. It also takes time to search for just the right opportunity to buy out another company if that's the route you've decided to take.
Another diversification method you might want to explore is doing on your own what you had subcontracted in the past. This will require some number crunching on your part to determine if it's worthwhile. In addition to boosting your income, it could also eliminate scheduling problems. If you are pouring the foundation, you don't have to wait for someone else to do it before you can get your crew working.
By diversifying your investment into opportunities other than your main business, you minimize the risk if only one part of the economy experiences a downturn. However, if the entire economy is sluggish, diversification will only multiply your pain.
Do your homework before plunging into anything new, and remember: the best education on how to successfully diversify may come from reading articles in trade publications like EQ about companies like Peterson Sons that have already done it well … so read on!