Peer-to-Peer: "I disagree with my partner's diversification plan"

Written by PROFIT-Xtra


Last issue the president of a Mississauga, Ont.-based manufacturer wrote to ask PROFIT-Xtra readers:

“I’m at loggerheads with the co-founder of my company. We currently manufacture a single flagship product we launched four years ago. So far it has sold well, and since we keep signing new clients, I’m reasonably confident sales will continue to grow. But he’s paranoid that we’re exposing ourselves to risk by making just one product, and he wants to diversify our product range. I think this is a terrible idea, since our narrow focus has got us where we are today. This is the first major disagreement we’ve had; we’re on the same page about almost everything else, and I don’t want our business relationship to end. What can we do to get beyond this impasse?”

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Best reader responses

Brock L. Wadey, FarLook Inc.:

Many companies periodically face tough business decisions such as these. Based on our experience with clients and the limited information this manufacturer has provided, the following approach should help:

  • The single flagship product that you launched four years ago: You need a sound strategy to assess and substantiate your belief that sales of this product will continue to grow. You can do so by using market intelligence, such as by evaluating customer accounts, doing an assessment of the competitive situation and scoping new business opportunities. And you should couple this with an analysis of key business metrics, such as trends in sales and gross margins on your current accounts, as well as how much each account contributes to overall net profitability.
  • Diversifying your product range: It would be prudent to do market research and write a business plan or proposal for your potential diversification, so you can determine the extent to which you’re exposing yourself to business risk by making only one product. In this assessment, you should also look at the implications of manufacturing new products. These may include the target markets, expected sales and margins, additional investments required, possibly the need for different employee skills, changes needed in management or business processes (or both), and other business risks.

The results from the above two sets of analysis will provide both founders with a more solid foundation on which to base their discussions and to reach a sound agreement on a plan of action.

Kelly J. Ramsay:

Congratulations on your four years of growth. Many companies, unfortunately, don’t make it that far.

That being said, I am, however, afraid that I have to agree with your partner, at least that you need to explore more fully the possibility of expanding your product offering. This is based on my presumption that whatever it is you make, there are, or could be, other competing products in the market. Quite often, starting off with a single item gets you in the game, but what keeps you there is surrounding this item with other value-added products and/or services. By the same token, you need to remain focused. Therefore, any products or services you add should be in the same category, which will help build your firm’s expertise and make you a more valuable supplier.

How far you can or should go in adding other products depends on the space you’re in. For example, if you make the pin that holds the landing gear on a particular model of jet plane, you could start making pins for other planes and perhaps even landing gear assemblies or other fasteners for aircraft. But getting into seats for aircraft wouldn’t necessarily make sense.

In deciding whether to diversify your product range, you need to consider what you currently make, what you can make with your current infrastructure and equipment, who you currently sell to and whether you can sell additional products to these customers. Being a single-product manufacturer is very risky. Even if you’re the only maker of your product, other, perhaps larger players that already do business with your customers could themselves diversify by launching a rival product that quickly erodes your customer base. And new technologies and products are always entering the market, so, if the winds change and a competing entry gains traction, you may also find yourself in a difficult situation.

You need to sit down with your partner and talk this through. If his idea is to extend your product offering with complementary items that can be sold into your existing channel, then you might want to listen, because this could improve both your revenue and gross margins. You can always test the waters by asking your existing customers if they’d be interested in buying other products from you. This would limit the risk while allowing you to further explore your options for growth.

For his answer, Kelly J. Ramsay will receive a copy of Personality Poker: The Playing Card Tool For Driving High-Performance Teamwork and Innovation by Stephen Shapiro.

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Originally appeared on PROFITguide.com