At some point during the life of every company, an opportunity will arise to expand into an additional line of business. Sometimes the startup phase of a company can be more freewheeling, with organizational structures being built out, processes being experimented with and any and all opportunities being pursued. However, at some point, the successful company will have established its niche in the market, developed its internal culture and processes and will have the talent in place to adequately execute what it does. Its annual sales will often be acceptable to the ownership and it will have an adequate bottom line.
At some point, company management will look at a competitor and see that it appears to be very profitable with a product that seems very similar to the company’s own. In the case of a company in the pump industry, the other product is typically another line of pumps, valves, gaskets, etc. The company decides it should be in this line of business as well to grab a share of these profits. And so, it attempts to enter this side market, convinced that its personnel and internal systems are similar enough to be able to compete. However, what often happens is that company management fails to fully appreciate the complexity and specific factors necessary to operate in the new market—factors that are not apparent at first glance.
In some cases, management fails to understand the nuances of marketing into what can sometimes essentially be a new industry. A company that is successful clearly understands how to market its existing line of products. But sometimes, its marketing skills can fail on a new product. One spectacular example would be the launch of a yogurt line with the fashion magazine Cosmopolitan. In 1999, the magazine decided it would be a prudent investment to expand and create their own line of yogurt in partnership with MD Foods. While a fashion magazine would be assumed to have great marketing skills, this attempt did not pan out. One of the major factors that caused this launch to fail was the lack of connection of yogurt to the Cosmopolitan brand, which one can classify as not understanding the marketing nuances necessary to sell the new product.
In the case of the pump industry, often what is really being sold is not specifically the pump itself but rather the customer support the company is able to provide along with what it sells. It can take a long time to develop a high level of customer support capability for a specific product line. A product such as an industrial pump, for example, may be used under varying conditions and applications. The key for an end user may not be the actual pump itself but rather the ability of the manufacturer to back up its product with engineering support, quick replacement of defective or worn-out components or even modification.
One example of a company that offers great after-sale product support would be Apple. Users of Apple products know they will enjoy easy returns, technical assistance and proactive customer engagement. Apple also has retail stores where a user can go for help if they would like, rather than calling a number and being put on hold for a long time. While one could imagine a company being able to produce a product similar to an iPhone, being able to produce the backup support would be very expensive, yet very necessary, to be able to compete. A company that tried to launch a similar product, even one that was technologically superior, would likely fail.
Another option companies sometimes use is to purchase a company that has already proven itself capable of operating in the market the purchasing company would like to target. This can be an expensive way of entering the market, but it is one with considerably less risk, as the target company clearly knows how to operate. The challenges with such a purchase can be down to synergies. While reducing combined operating costs through the elimination of some of the administration staff—for example, the combined company only needs one HR department instead of two, one marketing department instead of two, etc.—there are other factors to consider. For example, the 1998 merger between Daimler-Benz and Chrysler is considered to have failed due to cultural differences in the management style of the two companies. Another example is the Hewlett-Packard acquisition of Compaq in 2002 to compete with Dell in the PC market. This is viewed by some as having distracted HP from competing with IBM in other areas.
As a commercial banker for 20 years, one of the authors of this article (Chris Angle) has seen many occasions where a small- to mid-sized company decides to enter a similar product line only to fail. Often, it is a lack of specific skills or understanding (such as a contractor bidding on a much larger job than what they normally do) that leads to problems.
For companies that are successfully able to move into a side market, they are often able to leverage their existing infrastructure and brand name to move into new markets. In other words, the new product actually is similar enough that the company’s existing infrastructure really can compete in it. An example of a successful company is again Apple, which was able to expand out of computers and into smartphones and smartwatches. The company had an established brand as well as the engineering and customer support assets to be able to be successful.
For a pump company looking to expand into a side product/industry, it is critical to take a long look at the company’s true capabilities as well as what is needed to be successful in the new market. Being able to accurately assess these factors will be the difference between success and failure.
If there is any doubt about whether a company possesses what it needs to be successful in a new market, it can often be better to simply stick with what it knows.
