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Focus and Diversification

post # 492 — January 21, 2008 — a Strategy post

Here’s a question from Mike Spack in St. Louis Park, Minnesota:

“I was talking to a colleague about his employer’s strategic plan. They are a 120-person science/engineering consulting firm located only in Minnesota. They are 100% employee owned. Their plan says that no more than 10% of the firm’s receipts should come from any single sector. This strategy blossomed from a time 10 years ago when the firm only worked in three sectors and almost went under when one of the sectors dried up.

“They now work in about 25 different sectors, many of which don’t even have potential for cross-selling. The interesting thing is they are attracting talented people in a broad range of specialties to work for them. Many of whom have come from firms that have a small niche. The idea of having a broad client base appeals to many engineering / science types, who are not naturally risk takers.

“This seems to strongly go against your beliefs on developing a consulting firm. You seem to advocate having a deep, but narrow focus which requires strategically choosing who you will consult for. Am I missing something? Is this a viable business strategy for them since they are 100% ESOP and they are “all in it together?” Can they make this work or are they doomed?”

****

Mike, I don’t have an absolute distaste for diversification, but I *do* believe in “depth, then breadth.”

If you’re going to have a portfolio of client sectors that you compete in, you still have to make sure that you are a credible “specialist” in each. It’s not enough to say “we can do that, too.” If you’re going to attract clients, you usually have to convince them that you REALLY know the special circumstances of their sector, and are not just one more generalist.

So, this raises the question of how many sector specialties you can have and still be seen as an informed expert in that sector. I don’t know the details of the engineering / science business (since it’s not one of MY specialties, ha-ha), but the numbers you give do make it seem like your friends’ firm has swung from one extreme to another. You say they have 120 people, competing in 25 sectors. That seems like “a thin layer across a lot of things” to me. I’d guess that, in many of those sectors, there are more focused competitors who might persuasively convince clients that they have a special interest in their sector and a special capability to serve them.

I don’t disagree that many professionals like to work across client sectors (it’s fun as well as risk-diversifying), but you have to balance what the provider would like to do with what the clients will pay for.

Does anyone else out there have a perspective on this?

10 Comments

Jim Donovan said:

By operating in so many sectors, they are unlikely to be anything other than a generic group of clever bodies – selling inputs rather than outcomes, and competing on price with employees and contractors Its also harder and more costly in time and effort to sell in a diversified customer base. Unless they have a clear advantage in some hard-to-gain expertise, I suspect they’ll be earning lower rates than genuine specialists. It’s a common failing to think that spreading sectors is better value for the owners It’s not – you’ve just swapped cyclical risk for lower everyday earnings.

posted on January 21, 2008

Ed Kless said:

Sounds like in this case the pendulum has swung too far in the direction of diversification, but I have seen where too much specialization has caused problems as well.

I think the answer is a target for percentage of revenue from either industries or customers that the firm did not have in some defined time period.

I believe this encourages innovation. For example, the oft cited 3M measure of 25% of revenue needing to come from a segment they did not have three years ago. It is my understanding the even 3M had fallen into the trap of creative defining just what exactly counts as a different segment.

Overall, I think a percentage of revenue from new customers is a healthy way to go because it will naturally lead to some specialization.

posted on January 21, 2008

Mike Wallace said:

If the firm is big enough surely they could specialise in lots of different sectors. With 120 employees they could operate as small niche focused groups within the total firm. My experience is that specialisation is much about peoples perceptions than reality.

posted on January 21, 2008

360 Survey said:

I agree too. You definitely need to demonstrate deep skills in each area of practice otherwise you won’t develop consistent sales in area.

Wth so few people working in each area you may have prospects but your teams are working elsewhere!

posted on January 21, 2008

Ken Hedberg said:

I’d ask the question a different way: What draws the staff together, and attracts new staff?

If the answer really is nothing but the firm name and a flexible openness to a wide variety of expertise, then I think they’ve swung too far to the opposite pole from their previous too concentrated position.

On the other hand, they may quickly conclude that a particular set of engineering capabilities run through most of their sector specialities. (E.g., we operate in many different sectors, but almost all rely on the core capability of nanotechnology, or materials science, or custom chemical engineering, etc.)

If they indeed have a strong, consistent set of core capabilities running through most or all of their sector specialties, then I’d conclude they have the foundation of a great professional services firm, sustainable and extensible. But, they clearly aldo have an internal communication and external marketing problem in emphasizing the common core.

posted on January 21, 2008

Nick McCormick said:

What do the employee owners really want from the business? I think that’s a critical piece of information that has a large bearing on which direction they should go. If they are a risk averse group, that is content with moderate growth, the strategy of cherry picking like-minded prime talent in a variety of disciplines might be just fine.

posted on January 22, 2008

Pawel Brodzinski said:

I agree with David: “depth, then breadth.” There’s one aspect here which wasn’t covered. We look how hard it is to have a team which is skilled enough to bring expertise on all markets they work on. OK. But the one thing is to have the team now (which I believe they have) and quite different is to maintain the team over time.

I’ve been a number of times in situation when some talents went away and it was practically impossible to simply replace them with recruiting just another person on that position. It usually happen when you work with people who are skilled in many different areas.

Although it hasn’t been said here I gyess that can be the case of the firm – they have those cross-disciplnary people and they strongly rely on them. They switched from being strongly dependant on one thing to another one.

My approach tends to have deep expertise in your niche and to look carefully all the time if the niche is going to live for another years. If you have any dobts that’s a time to switch. And, after all, when you work for big companies they just don’t disappear in a month.

posted on January 22, 2008

Coert Visser said:

I think it could work. I am still attracted to the framework described in the book ‘the discipline of market leaders’ by Wiersema and Treacy. They explain there are different ways of becoming succesful. The three ways they describe are: product leadershup, operational excellence and customer intimacy. According to the authors, these types can be found in any industry. A customer intimacy leader will have to have deep industry knowledge and be very close to his sector and clients, whereas a product leader can easily work across sectors as long as it has deep knowledge about the product or service it delivers.

hope this is useful,

Coert Visser

posted on January 22, 2008

Wally Bock said:

From a marketing standpoint, you can do a number of things, but you’re only going to be known for one, so pick something you’re good at, love to do and can make money from.

posted on January 22, 2008

Jim Bullock said:

You are talking about diversity in segments served, but what if there is some other similarity to what they offer? Same kind of applied skills, approach, or so on. For example, there’s a subset of management and OD consulting folks who offer similar things to all their clients, across industry segments.

Here’s another example – Corning, Inc. They make glass, right? Actually they make, or made at one time as my info is a bit dated, dinner ware, TV tubes, catalytic converter cores, fiber-optic cable and medical diagnostic equipment. They had previously exited the light bulb, insulation and cookware businesses after good runs in each. Common among all the businesses – non-ferrous engineered materials, and the manufacturing engineering to make them. The business model & life-cycle across segments was similar. Get in by creating a market through product or manufacturing innovation. Own the market while they can. As it becomes a commodity market, move to the next thing. So, a rolling sequence of seemingly disjoint “services” yet also based on the same strengths and similar ways of doing business.

posted on January 25, 2008