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Specialize or Diversify?

In these troublesome times, much is written about business survival, and much of this is cast as the question: To prosper—or even to survive—should you specialize or diversify?
The answer, both in our own and in related industries, comes up as a resounding “Yes.”

“Yes, what?” you may wonder. Yes, the pundits inform you, you should specialize and diversify.

Though on the surface this might appear a contradiction in terms, it is not necessarily so.

But first let’s take a look the general pros and cons involved—pros and cons that were compiled from a variety of online sources with a healthy helping of common sense.

Pros to Specializing

1. Focusing on only one area means that your initial learning curve will be far less steep than trying to get up to speed on, and master, many different disciplines.

2. Jobs will all be of a similar nature, and you will find it easier to apply—and develop—your skill set, applying what you learn on one job and taking it to the next one.

3. As you develop expertise, you will also develop a reputation, making it easier to land new jobs.

4. Also, as your reputation grows, you will be able to charge more, i.e., see a better margin on your jobs.

5. If you advertise, you will see lower advertising and promotional costs since you will be focusing on a single segment of the market.

6. Specializing also entails lower startup costs, since you will need fewer types of tools and equipment and their cost will be spread over many similar projects.

A key point in specializing, however, is this: Make very sure that there is an adequate demand for your specialty in your area. Insisting on only bidding and working with beige soundproof ceilings, for example, will soon see you out of business.

Cons to Specializing

1. The biggest con to specializing is that you will operate in a narrow market where, while there are fewer competitors around, there are also fewer bid opportunities.

2. If your specialty is seasonal—say plastering, and you work in the northern part of the country, meaning bitter winters—you may find your market shutting down altogether during the off season.

3. There is little margin for error. One botched project may undermine your reputation to a degree that you’ll have trouble securing more work. A diversified bag of tricks is not so vulnerable to that one messy or unfortunate project.

4. The entry of a single competitor may crowd the field and make it hard to secure sufficient business.

5. If your specialty is considered a luxury—say, elaborate plasterwork or drywall art—as money for projects tightens, your area of expertise may be the first to be crossed off the bid requirements.

Pros to Diversifying

In a troubled economy, diversifying may be the key to staying afloat.

1. You will not depend on a single market segment (which, should it struggle, you’ll struggle right along with it).

2. By diversifying, you will—to the extent of your diversification—broaden your market, which means increased bid and project opportunities.

3. As you develop a larger base, you may also be able to sell any existing specialty to new clients.

4. You will have a greater chance of keeping busy with a variety of projects, meaning less downtime and possibly avoiding layoffs.

5. One silver lining to diversification is that you will see many different types of jobs and projects, which tend to keep boredom at bay.
A crucial point in diversifying: Even if you have to spread yourself thinner, quality must not suffer—in other words, do not over-diversify.

Cons to Diversifying

1. A jack of many trades while master at none may never produce a quality of work high enough to compete in any market.

2. Working many types of projects means keeping a high inventory of different types of tools and equipment.

3. In order to work many different types of projects, you will need a diversified (as in large) crew, which may seriously affect your bottom line.

From the Trenches

How do these principles play out in the field? How are AWCI members approaching these issues? A brief survey reveals the following:

Adding Specialties. “While many of our customers come to us because of our existing expertise, we have expanded into other areas that also call for our current skill set,” says Robert Aird, president of Robert A. Aird, Inc. in Maryland. “Also, we have targeted some special products and systems that require factory training and certification, and we now have employees who are certified in these products. Ensuring certification—and, of course expertise—gives us a leg up on the competition, and this has worked well for us.”

As for both diversifying and specializing, Aird adds, “In a sense, we are diversifying into niche areas with less competition, which in turn has improved our margins.”

Niche Clients. Greg Vangellow, president of R.W. Dake & Co., Inc. in New York, also specializes, but more on client segment than on a particular discipline.

“We specialize in the financial services sector,” he says. “But that actually tends to generalize us. As a rule, a bank that needs construction work, whether that’s branch renovations or additions, would like to involve as few contractors as possible—less to keep track of that way. So, as we’re on their approved vendors list, and they’re comfortable with us, they tend to throw everything our way, including a recent request to pave the parking lots for 20 different branches.
“Of course, we sub some of that out,” he adds.

Then he stresses, “This boils down to relationships. We have become a full service solution for the local banking industry, and they know to come to us for quality work. We have built a comfort level with them. It is a consultative, design-build sort of relationship.”

Does working for a niche market segment improve margins?

“It not so much improves them as secures them” Vangellow says. “True, we could take advantage of the situation and boost our margins, but that would not be ethical. In fact, we have done jobs where—because we saved some money during the project—we’ve billed them less than what we quoted in the bid. They called us and asked if we made a mistake. This builds relationships. And it all comes down to that. Good times or bad.”

The Go-To Guy. When it comes to plaster, Stephen Angell, president of Cape Cod Plastering, Inc. in Massachusetts, is the go-to guy in his area.

“When you’ve specialized in a particular discipline, like plaster, for as long as we have, you become an expert and build a reputation for doing it right, and well, the first time. The pro, of course, with a specialty, is that there are fewer people who do it, which means less competition. The con is that it’s a smaller market, with fewer potential customers. In fact, we are looking at adding cement and metal siding to our offerings. These are small markets, too, but they will allow us to bid more jobs.”

Does having a specialty bring better margins?

“Yes,” he says, “specializing will give you better margins. You get fewer jobs, but they pay better.”

Exterior Specialist. Stephen Donnelly, president of Stephen P. Donnelly Company, Inc. in Minnesota, only works the exterior.
“We don’t do any drywall at this point,” he says, “just the exterior walls. Our specialty is stucco, that’s what we’re known for. We’ve done that for over 30 years now and people know to come to us when they need something fixed, or for remodels. Also, I find that expert service commands better margins.”

As for client relationships, Donnelly could not stress this enough. “At least 60 percent of our work is repeat customers. We stay in good communication with all of them, and we do what we do as perfectly as we can. That’s what keeps our GCs coming back to us.”
Sticking to Basics. Steve Birkeland, owner of Artcraft Wall & Ceiling Contractors in Minnesota, has looked at adding offerings but decided to stick with basics.

“We’ve promoted special custom plaster finishes, such as Venetian finishes, which we are capable of doing,” Birkeland says. “In this market, however, there is no real call for that. It is more expensive, and people are still watching their budgets, so we’re sticking with our basic product line—interior drywall.”

Full Service Company. Brady Company in Los Angeles does not specialize in any one particular area. It’s chief estimator, Dave DeHorn, reports that “we work closely with our general contractors and follow them around. If they bid a hospital, then we’ll do that.

“We’re a fairly large company, and to specialize would limit what we can offer. Our success is based on relationships.”

Diversifying. Dennis McDonnell, vice president of T.J. McCartney, Inc. in New Hampshire, is expanding his service offering.

“Over the last few years we’ve begun to do some door installation and some wood framing, although that is limited in the commercial market,” McDonnell says. “We’ve also added cement board panels and composite material panels to our bag of tricks since we have guys on our crew who do that well. But I should stress that we don’t go after things that we don’t know well; we steer clear of that.”

The Trickier the Better. Brian Mead, president of Commercial Builders, Inc. in Florida, knows exterior framing very well. “In good times, that’s what we focus on,” he says, “and the heavier the gauge, the better. We can deal with it. And we work EIFS equally well.
“Today, though, in Southern Florida, there are not many EIFS projects going, so we cannot afford to be too choosy.

“We do, however, only bid negotiated work, where the general is looking for two or three subs, at the most. The open market is still way too cut-throat. Any given job will have at least 20 subs bidding, and some of them will bid at cost, or below.

“But negotiated work is competitive as well. Even the big guys I should be able to beat any day of the week are becoming ultra-competitive and bidding at cost just to keep their employees on.”

Mead also stresses that you cannot diversify to the point of stretching yourself too thin: “We have seen contractors bidding—and winning—EIFS jobs when they’ve never done one, and are not even certified by the EIFS manufacturer. That spells disaster.”

Restoring Classics. While Easley & Rivers, Inc. in Pennsylvania is a full-service contractor, they have earned a reputation for expert restoration of decorative plaster.

Glenn Sieber, their company’s chief estimator and a co-owner, says, “We have the tradesmen and the know-how to do decorative plaster, big Carnegie Hall–type jobs, so we still do a fair amount of restoration work in that area. Many contractors don’t even know how to price that, much less how to do it. Our clients know that we have the expertise, and they come to us.

“Of course, we’re a full-service company, and we cover the full commercial market from healthcare, to retail and schools. We cover all interiors and exteriors, metal studs, ceilings, drywall, EIFS, spray fireproofing, access flooring and folding partitions. From the moment they get the steel up, we’re in the building pretty much until it’s done.

But Easley & Rivers has diversified as well.

“We have diversified into access flooring, both in computer centers and commercial office buildings, where the access flooring allows a greener approach to heating and air, for example,” Sieber adds.
The consensus among the AWCI members interviewed for this article seems to be that whether you choose to specialize, diversity or do both, you must deliver quality—every time, and build relationships.

Light at the End of the Tunnel

There is another consensus in the trenches, and that is that the light up ahead is not an onrushing train.

Vangellow reports that “the last two years have been the most challenging for us, but we’ve really turned the corner now. We recently landed two of our biggest jobs ever and now have the largest backlog we’ve ever had. Of course, we still have the situation with accounts payable. The earliest payments these days are no sooner than 45 days.”
Angell says, “Right now, there is plenty of bidding for the next year. Of course, it’s speculative at this point, nothing we can put on the books as true potential jobs, but there is more activity that’s for sure.”

Donnelly also sees a light at the end of the tunnel. He says, “We’re very busy right now with remodeling, both residential and commercial. No complaints.”

Birkeland’s company is looking at “a pretty nicely sized government project. It seems like there are more things to bid today than there have been over the last two years, so I’m pretty optimistic.”
Then he adds, “It will take some time for prices to return to where they were, but it looks like the jobs are coming.”

McDonnell notes that “there is a lot more bidding going on these days.
It has picked up in the last two or three months. The margins are still too low, though.”

Mead is another who sees the light at the end of the tunnel: “We’re bidding several projects right now, and we’ve already signed a few for next year. It’ll be a while, though, before we’re back to 2006–2007.”
Finally, Sieber says he also is noticing an uptick in business: “We’re starting to see some nice potential right now, with lots of bidding—although not many jobs awarded just yet.”

Specialize and Diversify

Specializing allows you to build expertise and a great reputation, while diversifying (especially within existing skill sets—and never spreading yourself too thin) allows you to keep busy even during rough times. The answer to the title question does indeed seem to be a resounding, “Yes.”

Coeur d’Alene, ID-based Ulf Wolf writes for the construction industry as Words & Images.

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