It’s easy to leave diversification out of your long-term business plan. You grow comfortable with an intimate client base — a few, solid customers who consistently turn to you for products and services. You are satisfied with your dependable revenue and steady profit margins. Like sinking into a cushy recliner, you see little reason to budge … and you nod off for a while.
Business owners tend to let down their guards when they settle into a relaxed relationship with clients. Why risk the stress and potential overhead investment of acquiring new ones, or launching new products?
But reaching into new product sectors and fresh markets is especially important in today’s economic climate, where consolidations whittle away the client pool. We can learn a lesson from the Delphis, Ford Motor Cos. and Daimler Chryslers of the world.
“If you’re a supplier, clearly you’ve got to be cognizant of concentrations you have with any one customer,” says Craig Johnson, president and CEO of Franklin Bank in Southfield, Mich. “Given what is going on in the automotive industry today, that really underscores the need for business owners to look outside the region and find out how they can diversify their base, both product-wise and geographically.”
Smart Business spoke with Johnson about how business diversity can keep your business running smoothly.
What do you mean by diversity?
Don’t put all of your eggs in one basket. Try to have multiple customers that aren’t all in one type of business. For example, you would struggle if all of your business were tied up with Delphi. You want to make sure you have other customers, as well.
You can even diversify within a company. One of our clients does business with five different divisions of a single company, and brings some measure of diversity to their operation so they are not solely reliant on one line of business from one entity. If a single entity was your only customer and it was in trouble, you would sink along with it.
What are some ways to diversify a business?
Consider markets you don’t currently serve. For example, if you only supply to automotive manufacturers now, check into aircraft or diversify into parts for appliances, recreational vehicles or any number of products. Spread out your business so if one industry has problems, while it may hurt you, it won’t take you down.
Diversification is something every business should be thinking about all the time. With what has happened in the auto industry — with Delphi’s bankruptcy and other well-documented financial difficulties that automotive companies are experiencing — all businesses can learn a lesson. You really have to make an effort to find other sources of revenue, and in (the Detroit) area we are particularly dependent on (the automotive) sector. Even if you don’t work directly with automotive companies, their struggles set off a domino effect.
Also at risk are restaurant owners across from plants that could potentially shut down. The housing industry, which has been really strong for the past five years, is slowing down. And if you look at the big builders in our area, they are diversifying geographically and building all over the U.S.
What are some effective ways to start diversifying?
Get involved in organizations where you network with business owners in different industries. This gives you an opportunity to meet someone that could use your products or services.
Also, you can’t get complacent — and it’s no different for us in the financial business. If all we do is a certain type of lending, and then that segment has difficulties, we are just as much at risk by not diversifying our service base.
Business owners and managers should constantly be on the lookout for business opportunities through networking with trade organizations and a variety of different sources.
How do you think the automotive industry’s economic stress will play out in the local business climate?
In the long-term, we have a knack for being survivors in the automotive industry. This region has been working hard to build partnerships to bring new technology into the market. Business is cyclical, by nature.
But in the short-term, I think it will be painful. That is why businesses must do as much as they can now to diversify and protect themselves so they can weather these tough times.
Craig Johnson is president and CEO of Franklin Bank in Southfield, Mich. Reach him at (248) 386-9860.
