To Boldly Grow...Carefully, That Is

One fast-growing firm's foolproof diversification strategy

Written by Andy Holloway

Technology has a nasty habit of relegating once-proud companies to the sidelines as new and better products emerge. Survival can require carefully choosing a new — and preferably related — business to enter.

Andrew Richardson, president and CEO of Targray Technology International Inc., knows a lot about that. In 2005, his Kirkland, Que.-based firm diversified into a sector — supplying materials to solar-panel makers — that, despite initial appearances, is closely related to its original business of supplying materials to makers of CDs and DVDs. The expansion was such a success that, just three years later, Targray’s sales to the solar industry were generating more than half of its US$225 million in revenue. That was the key to achieving five-year growth of 1,155% and ranking No. 73 on the 2009 PROFIT 100.

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Now, Targray is about to diversify a second time. Although its optical-media line is still doing well, the sector is slowly winding down as the world goes ever more digital. And solar-panel sales are oscillating with swings in oil prices. It’s time to expand into a steadily growing sector.

“We have the choice down to two industries, and will select one by the end of this year,” says Richardson. “But I can’t reveal what they are yet.”

The new sector will again be one in which Targray can apply its existing expertise. While the two industries it now supplies might sound light-years apart, they’re actually quite similar, says Richardson. Both use robotic manufacturing and employ “sputtering targets” that deposit a layer of metal far thinner than a human hair onto optical media or silicon wafers. And the solar-panel sector is starting to use inline-manufacturing processes, which are already common in the optical-media industry.

Targray entered the solar-panel sector after evaluating and rejecting several other options. It then spent a year in planning before putting a toe in the water.

The company is using the same process this time out. “We set up several hurdles to determine a new industry fit for Targray, and an industry has to pass all of them to qualify,” says Richardson. These include that it must be an “adjacent” manufacturing sector, meaning it employs at least some technology or materials similar to ones Targray already uses; that it must have been growing by at least 10% per year; that Targray has solid prospects for US$100 million in annual sales after five years, assuming a reasonable market share of 5% to 10%; and that there are at least 100 potential clients, not just six or eight.

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In 2001, Richardson set a big, hairy, audacious goal (BHAG) to grow revenue tenfold in 10 years, to US$100 million. This goal seemed like anything but a slam dunk when Targray entered the solar-panel industry four years later. The challenge: getting panel makers used to dealing with companies that are strictly manufacturers to buy from a firm that uses whichever supply-chain model it deems appropriate to a specific case — whether making a product itself, designing it but outsourcing the manufacturing or distrubuting products made by others.

“I remember a very senior executive at one of the solar industry’s largest suppliers saying to us: €˜You have an interesting business model, but this industry likes to buy direct. I don’t think your model will work in the solar industry,'” recalls Richardson. “This helped galvanize our efforts to prove him wrong. And we did.”

Doing so required patiently educating prospects to realize that it’s not always cheaper to buy direct. That proved crucial to achieving Targray’s BHAG in six rather than 10 years. In 2007, Richardson reset the target to US$1 billion by 2017, another tenfold increase over a decade. The outcome of Targray’s foray into a third sector will determine whether the firm again meets — or beats — this goal.

Richardson offers two words of advice to other entrepreneurs thinking about diversification: “Start now.”

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He warns against the temptation of sticking to your core business too long because you still see opportunities in it: “If you wait until your current industry is in decline, you won’t be able to make the investments you need — in cash, in developing people and in time — to succeed in the new industry.” So, Richardson urges, don’t wait for tomorrow to get the ball rolling.

Success strategy

Offer unmatched product breadth: Richardson isn’t fazed by competition from behemoths such as General Electric. After all, his firm boasts a far wider product line in the niches it serves than its giant rivals do. That gives Targray a reason to visit each of its clients up to 10 times a year — and get to know them better — instead of the once or twice it would if it sold just a single product. “In terms of anticipating customers’ needs and staying ahead of the competition,” says Richardson, “we can do that better because we have more information.”

Originally appeared on PROFITguide.com