“We feel like we’re maxed out with our current product line and current market segments,” started Erica. “Some on our team have suggested we consider diversification, something none of us know a lot about. What do we need to think about / consider? Any of you have any experience with heading in a new or different direction?”

“I’ve been involved in some of that,” responded Bill. “We were looking at perhaps going into a new geographical market. As you know, we have grown our business primarily in a 50-mile radius. Given our sales and installation teams, there’s a limit to how far away it makes sense to try to go for new business. Besides, since we focus on industrial businesses, they tend to be located in business parks, or at least there’s a lot more to target in a business park. So, we started looking at other larger areas where industrial companies were located.”

“Erica, how do you define your current product line and market segments?” asked Cindy. “We have a line of miniature industrial valves that we sell into manufacturing environments. We sell all over the U.S.,” Erica replied. Cindy continued, “OK. There are a lot of ways to diversify. We usually start with two questions:

Is there something else we can sell to our current customers?
Can we sell what we currently manufacture to a new group of customers?

It’s a lot easier if you can leverage something you’re already doing in a new direction.”

Jack jumped in, “We started down the path of considering an acquisition, so we brought in a consultant to help us narrow down our options.” He started us by analyzing our current markets and products. There was not a lot we could do with our current technology and product line, but like you, we only sold in the U.S. He started asking us about the international market, and whether we could sell our existing products outside the U.S. We looked at the competition both in Europe and Asia, and found a company in Italy that was very similar to us that dominated the European market, while there were several companies in Japan that dominated Asia. He showed us that it would probably be easier to penetrate Europe with our existing products before looking at an acquisition. We actually considered acquiring that competitor in Italy, but decided we could compete head-to-head with them with our existing products and probably win. We manufacture in Mexico, so our cost structure is less than theirs in Italy. So we hired a European sales manager and headed down that path.”

“Cindy, your two questions were the exact questions we asked ourselves,” noted Sarah. “We concluded that there was nowhere else we could sell our current products; we had already gone international. We did go down the acquisition path, and actually completed two acquisitions … both were additional products we thought we could sell to our current customers.”

“So, how did it work out?” asked Erica.

“Well, one was a bust,” responded Sarah. “Like Jack, we have a factory in Mexico. We found a company for sale that also manufactured in Mexico; they really struggled with a lack of process controls and a high scrap rate. We figured we could move them into our factory, fix their process problems and grow the business. But the problems were a lot tougher to solve than we expected; we never did turn a profit. But the other one was a success. They had a quality product line, but were underfunded; too small a division in a large corporation. The main change we made was to teach them our new product planning process – how to create a product roadmap. It was a lot tougher than we thought; they were not a very disciplined organization, not used to creating and following plans; it was quite an effort to turn their culture around. It was a lot easier to integrate their sales team into ours; we taught our product line to their salespeople and their product line to our salespeople, and off we went. Definitely worked out!”

Bill jumped back in: “We initially expanded into a new geographical area with a large business park; started from scratch: new salespeople, new installers, new support people. It just took too long. I think we forgot how long it took us to get established here and figured it would be a lot quicker now that we know so much! It was too much like starting over. When we went to our next territory, we decided to buy a competitor already established, rather than start from scratch. We got to the target revenue a lot faster that way. That’s our strategy going forward … just buy our way in.”

“We diversified,” commented Tom. “but we did not do an acquisition. We looked at our water filtration systems, which we sold only into very large public aquariums, like the Birch Aquarium and the Monterey Bay Aquarium. While our filters were very large and very effective, we figured we could miniaturize them with our technology and sell them into the much larger home aquarium market.”

“Interesting,” Erica responded. “I like the two questions; and I like the process you all went through. Tom, you went into a new market with a new product, but used your own technology … so no acquisition. The rest of you ended up using an acquisition to achieve your goal.”

“Each path has its own challenges, and its own advantages” concluded Don. “Somehow, I think we’ll be talking about this for a few months to come, as you move forward with your answers to those two questions.”

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