Diversification in the Liquid Waste Management Industry

Business Diversification Defined
Business diversification, reports the U.S. Government’s Small Business Administration on its website, is one of several growth strategies. By offering multiple services, businesses can fill seasonal voids, increase sales and raise profits, acquire a new business, create an alliance with a complimentary company, license or purchase new technologies, distribute or import a products line manufactured by another firm, venture into a new market segment, or sell new products or services, among other diversification strategies. Many companies successful at diversifying may become involved in a combination of these options. Such combinations are determined by available opportunities and consistency with the objectives and the resources of the company. In general, diversification involves investing in opportunities that leverage your knowledge and expertise.
The four main models of business growth strategies are: market penetration, market development, product development and diversification. The first three strategies are usually pursued with the same technical, financial, and merchandising resources, whereas diversification usually requires a company to acquire new skills, new techniques, new facilities, etc.

Diversification is a Risk Reduction Strategy
Many small companies are one-trick ponies, betting their entire future revenue making on a single product, a single service, a single location or even a single customer. There is nothing wrong with that in the beginning: A narrow focus lets startup companies concentrate their energies on doing one thing extremely well.
However, putting all eggs in one basket can make your company extremely vulnerable to failure if one or more of the few major clients you have leaves. You don’t want that to happen to your small business. The answer is diversification, but it’s an answer that is much more easily offered than implemented. You need to strap the thinking cap on tightly for this one, and tap the most creative minds in your small business.
Even if diversification does not increase your profits exponentially, it can provide you with enough of a cushion to withstand losing a key customer while you seek a replacement. In addition to using diversification as a growth strategy, businesses often diversify to manage risk by minimizing potential harm to the business during economic downturns. The basic idea is to expand into a business activity that doesn’t negatively react to the same economic downturns as your current business activity. If one of your business enterprises is taking a hit in the market, one of your other business enterprises will help offset the losses and keep the company viable. For example, a portable toilet business expanding to septic tank pumping and servicing to off-set the reduced amount of portable toilet business during the winter months.
And, as you grow larger, you’ll find opportunities to add products, services, locations, customers and markets. Diversifying in this way can help your business weather tough times by providing alternate sources of revenue in the event that your original market dries up, stops growing or is hit by new competition. Most companies that survive for long periods of time find that they have to develop new sources of revenue as tastes change and opportunities evolve. Growth through diversification can help your company have options in place when they are needed.

Vertical and Horizontal Diversification
There are different diversification strategies a company may employ. We’ll take a look two of the primary strategies, called “vertical” and “horizontal” diversification.
Think of vertical diversification acting along the “same” line of diversifying your business, like a vertical line moves straight up and down. Think of horizontal diversification acting along “different” lines that intersect a horizontal line that stretches across different segments of businesses and products.
A company may decide to diversify vertically its business opportunities by expanding into markets or products that are related to its current business. Diversifying vertically helps you improve your brand image among specific groups related to your core services or products, which might allow you to increase your prices or sell more items in a smaller marketplace. Once your brand is established, you might diversify your service or product line even more. For example, a liquid waste management company that starts out singly focusing on septic tank servicing may diversify by adding septic tank inspection, tank installation, power jetting, or camera inspection, etc. to its portfolio of offerings. Or, once profits and cash flow are substantial the company may purchase a number of portable toilet units for rental purposes, servicing them according to liquid waste management principles.
One major advantage to vertical diversification is the synergy that can be created due to the complementary products and markets. Additionally, expansion can be relatively easy because the skills and knowledge to run the new business are similar to those the company already possesses. This means that there is a technological similarity between the industries, which means that the firm is able to leverage its technical know-how to gain some advantage. The above example of diversifying your septic tank services is a good example. You are already an expert in certain aspects of septic tank business. Expanding that vertical line of business offerings means you become an expert in other aspects of the same core service; i.e., septic tank operations of all kinds.
One thing to keep in mind when diversifying is that it often requires the purchase of new equipment so there must be steady and successful revenue streams in place to fund the purchasing of sometimes very expensive equipment. For example, a liquid waste management company might expand its service offerings by getting into high water pressure cleaning of roads, and other paved surfaces, perhaps airports, or taking on a contract for an entire municipality. The tanker truck and necessary additional equipment can be in the 100,000s of dollars.
Horizontal integration, on the other hand, involves getting involved in acquiring businesses that are different than your main core business, although they can be related. That is, horizontal versification focuses expanding into services and/or products that spread across different and varied businesses or industries, and which are sold to a broad range of different customers. Horizontal diversification means selling a product or different products to a wide spectrum of consumers. For example, a successful liquid waste management company who owns and services a large number of portable toilets units and has relied on various or a chosen vendor or supplier of holding tank odor and biomaterial enzyme digestion products, decides to buy the company that manufactures and sells the holding tank product. Then, in a process of horizontal diversification, starts manufacturing a line of soap products in addition to the odor-enzyme product and sells those soaps in different industries and different kinds of customers like commercial outlet stores or supermarkets, for example.
With horizontal diversification the focus is on attracting new customers in different markets, unlike like vertical diversification, which involves offering a broader range of goods and services to an already established loyal customer base. A horizontal market, by comparison, is able to sell its goods and services in more than one industry, and is therefore focused on a wider range of business opportunities and practices. The company adds new products or services that are often technologically or commercially unrelated to current products but that may appeal to current customers.
Horizontal diversification is desirable if the present customers are loyal to the current products and if the new products have a good quality and are well promoted and priced. Moreover, the new products are marketed to the same economic environment as the existing products, which may lead to rigidity or instability. The company could seek new products that have technological or marketing synergies with existing product lines appealing to a new group of customers. This also helps the company to tap that part of the market which remains untapped, and which presents an opportunity to earn profit.

Some of the Risks of Diversification Itself
Diversification has the highest level of risk and requires the most careful investigation, research and planning. Going into an unknown market with an unfamiliar product offering means typically a lack of experience in the new skills and techniques required. Therefore, the company puts itself in a potentially substantial state of uncertainty. Moreover, diversification might necessitate significant expanding of human and financial resources, which may detract focus, commitment, and sustained investments in your core industries. For these and other reasons, many companies that have tried to diversify with insufficient planning, can end up in dire circumstances or even business failure and bankruptcy court.
Therefore, a firm should choose diversification only when the current product or current market orientation does not offer further opportunities for growth.
If customers want your new product or service, the requirements to fulfill those sales might strain your ability to operate, making the diversification unwise. You might reduce productivity among employees who must now multitask. Short-term capital needs and debt expense to fund the diversification might be too high. If you produce, store and ship products, your supply chain might not be able to handle the burden. When you consider a diversification opportunity, analyze the affects it will have on your human resources, information technology, production, finances and marketing In order to measure the chances of success. Different tests can be done:
• The attractiveness test: the industry that has been chosen has to be either attractive or capable of being made attractive.
• The cost-of-entry test: the cost of entry must not capitalize all future profits.
• The better-off test: the new unit must either gain competitive advantage from its link with the corporation or vice versa. (www.businessdictionary.com)
Timing is critical when it comes to diversifying offerings. Small businesses need to take into consideration the status of the economy, both national and local, and the market for which their current and potential new service or product would be marketed and sold. These kinds of business decisions could become very stressful but can ultimately prove to be fruitful for your liquid waste business. With that said, it’s essential for small business owners to have an understanding of what customers find attractive along with an awareness and vision for what your company can additionally offer. With emerging technology and evolving consumer trends, there are definitely signs you can pick up from your customers that help make the decision to diversify easier. In sum, understand your customers, the economy and stay ahead and be aware of emerging trends and new waste water, etc. technologies being developed.

Success Stories of the Different Forms of Diversification In the Liquid Waste Management Industry
Russell Reid Responsible Waste Management. One of the most aggressive versions of vertical diversification is to buy a company, or multiple companies, that provides services or makes products related to yours. If you can swing it, this can be a very smart move. You diversify your lineup and remove a potential competitor or multiple competitors from the playing field. As explained above, a vertical market is tightly focused on meeting the needs of one specific industry. Vertical markets are focused on a single niche, so purchasing and owning a group of companies that serve each other’s specialized needs and that do not serve a broader market is the very definition of a vertical diversification strategy. This type of vertical diversification has been super successful for Russell Reid. Their story is about how the original owner, the present owner’s father started with a few self-built portable toilet for rent and with the help of his sons, built Russell Reid’s sister company Mr. Toilet, into a huge company that now has a few hundred portable toilet units. This allows them to rent to huge events where they might need dozens or more portable units. With the company’s success they bought a local Liquid Waste Management company called Russell Reid and built it by continuing to buying out most of the competition stretching their operations from one state to eventually servicing a four-state radius. On any given day, you can see close to 250 Russell Reid Pumper and other Liquid Waste trucks on the roads of those four states on any given day. (You can read more about Russell Reid Responsible Waste Management in the June issue of American Liquid Waste Magazine under the Spotlight section.)
Russ’s Septic Service. This company became involved in an interesting form of diversification. One of the owners began an active social media campaign, developing a company Facebook page, Twitter account, and Google+ account, with the possible development of a company blog and company YouTube channel, as well as other social media outlets on the way. They use all of their social media outlets as part of their marketing and advertising strategies. In fact, their foray into social media marketing and advertising has been so successful that it allowed them to cut back on the traditional forms of print advertising. “Our social media marketing has so far been fantastic” says Kristeen Neher, partner with her husband Russ Neher. “It’s just more targeted than sending out flyers in the hopes that someone might see them.” “If you set up your social media with a good plan, it actually attracts business to your website, Twitter, Facebook, and Google+ platforms,” Kristeen lets us know, continuing “social media marketing has cut our advertising budget to the point where we can take all the money we save using inexpensive social media advertising and put it to other good uses in other needed aspects of our core services.”
Using social media is a kind of hybrid form of business diversification. It meets the criteria for vertical diversification in that the company has expanded vertically, staying with their usual customer base. But, it does not fit other vertical strategies like offering a new service. So, in a way, the fact that Russ’s Septic Service turned to social media advertising and marketing, they effectively were able forgo spending money on an advertising company or consultant. This is not exactly buying a new unrelated business like horizontal business diversification, but it does all but do away with one relying on an unrelated business like an advertising firm, which is almost like buying out an unrelated business in the sense that you can stop employing that advertising company that is unrelated, but nevertheless important to your core businesses such as septic tank servicing, inspecting, jetting, camera inspection and portable toilet rentals. (You can find out more about Social Media and Marketing in the Business section of this issue of American Liquid Waste Magazine. (You can read more about Russ’s Septic Service in this issue’s Spotlight section.)

Story by Mark Joseph Manion


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