Mix It Up

Thinking about diversifying your business? Here are some things to consider before adding to your company's offerings.
Magazine Contributor
5 min read

This story appears in the October 2006 issue of Entrepreneur. Subscribe »

Patrick Crowe isn't your typical entrepreneur. He avoids business lunches and after-work business mixers. He usually leaves the office by 6 p.m., and he doesn't work on weekends.

When it comes to his 4-year-old company, Crowe isn't doing things the usual way, either. Over the past few years, Crowe's Minneapolis-based branding and marketing company, Kamper Brands, has launched software, real estate and mortgage divisions. The company now has 27 employees: The real estate, branding and software divisions employ 13, 10 and four people, respectively. Overall company sales surpassed $2 million last year.

Outsiders might not see obvious synergies, but Crowe, 28, sees diversification as the best approach to innovation and sustainability. He admires conglomerates like 3M and W.L. Gore, which he describes as progressive and dynamic. Besides, he'd get bored designing brochures all day long. "The way my brain works, that's not enough. I need more than that," he says. "Diversification is what I do."

This thinking flies in the face of modern business theory, which tells entrepreneurs to stick hard and fast to a core competency. Forty years ago, however, the conglomerate was king as large companies used leveraged buyouts to amass a variety of disparate businesses under one roof. By the early 1970s, the stock market cast a wary eye on conglomerates, a view that continues to this day. "Conglomerates are not well-received," says Peter Coffey, a Milwaukee mergers and acquisitions attorney and chairman of the Association for Corporate Growth. Stock analysts, lenders and equity firms "are looking for a pure play, something they can understand."

Diversification can improve a small company's chances of success over the long run, but it should be pursued with extreme caution in the short term. "Adding a new competency is always a risk you should consider very carefully," says Chris Trimble, co-author of Ten Rules for Strategic Innovators: From Idea to Execution and a professor at Dartmouth's Tuck School of Business in Hanover, New Hampshire. He suggests entrepreneurs wait until the business matures and look for other ways to grow instead, such as updating product lines or expanding geographically. "As long as your business is growing quickly, it may be too early to be so aggressive about diversification," Trimble says. "It's easier to expand your product line without changing your business model."

You might have to think about diversification, however, if your product line can't grow much more. Extreme diversification can also work for young companies with good cash flow that are in cyclical, low-growth and low-margin industries. Coffey sees companies investing in areas close to their existing channels. "You can innovate in your core area," he says. "The hurdle rate, if you're going to deviate from where you've been successful, [will likely] be very high."

Crowe sees Kamper's entry into the real estate market as a natural extension because the company was already doing branding projects for real estate companies. Kamper Realty sells hip, downtown, multifamily townhomes in the Minneapolis area and generated $1.2 million in sales last year. But when it comes to diversifying further, Crowe has his limits; he's turned down more than one opportunity to develop real estate. "We've shied away from that," he says. "If you're going to diversify, be smart about how you diversify. Do your due diligence."

There are added complexities to running a diversified company. Kamper has six checking accounts, two trust accounts and a parent company so resources and costs can be shared. The company has started color-coding its invoices. Kamper also maintains a website for each division.

There have been a few shake-ups, too. Crowe instituted layoffs last year to get the real estate company off the ground, and he has invested heavily in its growth. Now his hiring and investment focus is back on the branding side. Crowe says extreme diversification has helped him become a better leader. "All of a sudden, I got stretched in a bunch of different directions I wasn't used to being stretched in," he says. "It really tests your ability to run a company."

With so much diversity under one roof, Trimble advises that you create interaction only where it's necessary to avoid culture clashes. It could take longer to understand new markets and generate customers, too. "That doesn't mean don't do it," Coffey says. "But make sure you've maximized the low-hanging fruit where you are before you go after the next big thing."

Crowe wonders what the next generation of corporations will look like and how diversified they'll be. In the meantime, he sees variety as the spice of life. "If we just say, 'Do what you do, and do it really well,' I don't think that sets up a good enough foundation to build a strong culture or a strong economy," he says. "I have this company that can create anything, and that's the most beautiful thing about it."

Chris Penttilais a freelance journalist in the Chapel Hill, North Carolina, area.


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