Diversification - The Big Growth Driver for Manufacturers

Diversification - The Big Growth Driver for Manufacturers

Mark Coronna, Area Managing Partner & CMO, Chief OutsidersMark Coronna, Area Managing Partner & CMO, Chief Outsiders
Introduction

I don’t agree with people who express “grow or die” statements. But there are numerous reasons to have a clear view of the growth roadmap for your manufacturing business. Here are a few reasons you need a growth roadmap—and hopefully, a diversified growth roadmap.

• Over time, every business’ core products and markets will start to become less relevant and atrophy as they are replaced with innovative new products.

• It’s hard to come up with any reasons why a business would not be interested in incremental, profitable revenue streams.

• It’s also hard to come up with reasons why increasing the value of your business would not be of interest to the owners, shareholders, board, and management team.

Diversification is the BIG Growth Driver Today

There are many ways to grow, including growing your existing or core business. But what if 85% of your business is with one customer? What if 85% of your business is in one market? We recognize these as business risks—maybe even enterprise risks. The experiences of businesses during the past couple of recessions should make diversification a high priority.

Here is one example. The solar market often behaves as a “pendulum market” which is either healthy and growing when it has government subsidies and consumer credits or is lethargic when those investment incentives are missing.If you chased manufacturing opportunities in that market exclusively over the past ten years, you might have seen record years, but just as quickly, you might have ridden the revenue roller coaster back down when government investment and incentives disappeared with different federal policies. It’s great to grow—as long as that growth is sustainable. Manufacturers with too much concentration on the energy market missed an opportunity to develop a more diversified, and sustainable, OEM base. They might even have put their enterprises at risk.

The pandemic has demonstrated these dynamics in a familiar way. If you only manufacture restaurant equipment, you probably had a poor year in 2020 as restaurants were shuttered and many went out of business--and you could be looking at several additional slow years. Your target market is not healthy, and growth will not return soon. If you had one or two other markets besides restaurants you provided equipment to, you were likely to shift your focus to those which might either have seen growth or at least are recovering more quickly.

Customer and Market Concentration Can Lull You

One of the challenges with high customer or market concentration is lethargy.
You can be celebrating your market leadership in one market right up to the day when the market dynamics turn unfavorable. You can celebrate a major customer renewal right up until the day they get sold and a new decision-maker comes on the scene. There’s any number of bad things that can happen, many of which a prepared mitigation strategy would alert you to. A change in interest rates, a pandemic, and act of God, a terrorist event, a change in the decision-maker in your long-term customer—these are only a few examples of events which can negatively impact your business in the short- and long-term.

There’s a concept in business development which says: “The time to change is when you can, not when you need to.” This concept has a wonderful name: bifurcation. Here’s a working definition: Bifurcation Definition (investopedia.com). The moral of this guidance is that the best time to diversify your growth is when you have the capital to invest, the time to try options out, and the risks are low. No one wants to come up with a plan for an extra $1MM (or $10M, or $100MM) in revenue when the clock is ticking and you don’t have the lead times to properly vet, prioritize, test, and manage opportunities for diversification.

How Many Markets Do You Need to Thrive?

The answer is not zero, nor is it 80! When you use structured growth planning such as Horizon Growth, one realizes that “zero” means no one has thought about the future of the business, or if they have, they really don’t have a clue how they are going to grow. You might find this Horizon Growth background useful: Horizon Growth Primer.

The opposite scenario is a business with too many growth ideas. Let’s call that a target-rich environment. It doesn’t matter if you are an SMB or a large manufacturer, no organization can effectively manage 80 opportunities concurrently.

I was once given the task of filling a $200MM revenue growth gap which we identified as three years out. I had the responsibility not only to figure out what the working list of opportunities might look like but also to develop the screening process and to recommend the best fit priorities to management for investment. We brainstormed 80 ideas, winnowed them down to 12, scored the 12, and selected 2 for investment. We also made a small acquisition to help fill the gap. Three years later, when we needed the revenue, the new revenue streams were in place. We didn’t wait until we were facing the gap to act.

Takeaway Best Practices

• Adopt a mentality that future growth needs consistent attention.

• Adopt a structured growth process and proactively use it to select opportunities which will help diversify your business.

• Look for opportunities which leverage your assets, capabilities and expertise, and which fit your value proposition and risk tolerance.

• Proactively develop a mix of opportunities with short-term value (1-2 years), mid-term value (2-3 years), and longer-term value (3-5 years). That’s the key to successful horizon growth planning.

• Look for markets where you can find more of the kinds of customers who represent your best customers today.

Get started now. Prepare for the day when your only market or your big customer hits a wall which might put your business at high risk.

A good growth strategy makes for a successful, healthy, high value business.
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