Diversifying your Markets: Staying Ahead of Changing Business Cycles
Monday, December 2, 2019
Posted by: Emily Steinmetz
Diversifying your markets: staying ahead of changing business cycles
Being prepared for a potential recession is more pertinent now than ever. To help ensure stability during different economic cycles, contractors must focus on strategy, organizational structure and financial stability. By looking at new markets and diversifying your portfolio, construction companies can better prepare themselves for an economic downturn.
Economic indicators and construction outlook
There are many different economic indicators that economists monitor when preparing outlooks (i.e., consumer price index, interest rates, unemployment, etc.). All market segments experience a continuous cycle of expansion and retractions – the depth and length of which signal a recession. We recommend that contractors watch changing trends in the markets in which they work and strategically diversify into expanding markets in order to ‘ride the tides’ of growing markets.
Strategic diversification happens when you redirect your sales and marketing efforts to align with growing markets and move away from those in a decline. For example, ITR Trend Report for November 2019 indicates that both education and hospital spending will experience accelerating growth in 2020 while the office and warehouse construction spending is forecasted to have significant slowing1. Your company can take this data and strategically diversify towards education and hospital markets that are forecasted to grow and away from those on a decline. Diversifying your markets can help stabilize your company so when one market turns, you have others to rely on.
However, before committing resources to diversification, we highly recommend that you read the article on profit potential[AG1] , published in the October 2018 issue of Chicagoland AGC newsletter. Experience with projects of similar size (+/- 10 percent) and similar types of buildings (clinic remodel, etc.) have the highest potential for profitability.
Improving profitability starts with a clear picture of what you want your company to be and answers these key questions:
· Which markets?
· Which customers?
· What competitive differentiators?
· Is growth top line or bottom line?
Answering those questions can give you a better of idea of what kind of growth you want to see in the future and where you want your company to be before an economic downturn hits. When you think about your company’s growth plan, making a strategy framework can be a helpful way to keep your vision, mission and values at the forefront of your mind while including all the different components that go into your plan.
The first step of a diversification decision is looking at the markets that have an accelerated growth on the horizon and deciding which could be a potential for your company to enter. This process evaluates current competitors and purchasers in order to decide if it is the right fit for your company.
Before you can enter into a new market, it is critical to assess both your internal strengths/weaknesses and external opportunities/threats. This process can give you a better understanding of how your company can complete in the market so you can be more prepared to make decisions about your future growth strategy.
Organizational structure that supports strategy
Strategy before structure; it is critical to have your strategy mapped out before you determine the best structure for your company. A strategy is successful when supported internally by standardized process and procedures. Management and employees both need to be on board for the new strategy and understand how the company is going to get there. Components of that organization’s structure to review for alignment with future growth include:
· Value-added business systems and process
· Predictable project outcomes through standardized execution
· Measurable outcomes
· Incenting long-term behavior
Business processes can either help or hinder an organization’s ability to achieve their goals. By assessing current practices, identifying problem areas, redefining the process, defining new measures and finally, training your employees, you are supporting strategy with predictable and scalable practices. Defining measurable outcomes is a critical component of change. Measurements could be a number of new prospects contacted, annual revenue, or profit margin. It is hard to know if you have achieved your goal if you cannot measure and you cannot improve what you do not measure.
Diversifying your construction company’s portfolio can help you stay ahead of the game when an inevitable economic downturn occurs. Remember to align your company’s vision, mission and values with the strategy and allow the strategic plan to be adaptable. Review the plan on a regular basis to ensure it remains pertinent to your changing business and adapt accordingly – in good times and bad.
1 ITR Economics, https://www.itreconomics.com/
About the author:
Laura Cataldo is a senior manager with Baker Tilly, specializing in work with construction companies. She has experience in evaluating business practices and assisting with management challenges in construction-related firms of all sizes. Laura can be reached at email@example.com.