About 17 years ago, officials at Lerdahl Business Interiors Inc. in Middleton decided their company was a lot like a one-legged stool: much more susceptible to failure.

Uncomfortable with the precarious perch, brothers Greg and Jeff Lerdahl and first cousin Tim Lerdahl began to aggressively expand their product offerings. In doing so, they eventually transformed the company from a small niche firm, known for installing movable-wall products for offices, into a full-service, office-furniture supplier.

The game-changer came in 1997, when Lerdahl became a dealer for Kimball Office, says Jeff, now the president and co-owner of the company, along with his cousin, Tim. Within a few years, the company’s sales mix flip-flopped from 80 percent movable walls and 20 percent office furniture to 80 percent office furniture and 20 percent movable walls.

“In our business, it’s difficult to be a viable supplier without a partnership with a major furniture manufacturer,” says Jeff. “Being a Kimball dealer expanded our product offerings exponentially…we probably had five times more office products to offer at a lot of different price points.”

Unlike its pre-Kimball days, Lerdahl suddenly could source an entire office project from one supplier with nationwide name recognition, instead of piecing it together from open lines of products.

“Customers prefer to purchase all their products from the same manufacturer,” Jeff notes. “That’s how the professionals do it.

“It had a major impact on our business,” he continues. “All of a sudden, after 13 years in business, we were being considered for jobs we otherwise wouldn’t have been asked to bid on. Before becoming a Kimball dealer, we were a good minor league baseball team. After that, we were in the big leagues — with a chance to get into the World Series. You can’t get to the World Series if you’re a minor league team.”

Classic strategy
Lerdahl’s transition reflects a classic diversification strategy: Expanding a customer base by bringing new products to an existing market. Two other time-tested strategies involve taking existing products/services into new markets, or bringing a completely new product/service to a totally new market, says Dan Olszewski, the director of the Weinert Center for Entrepreneurship at the University of Wisconsin-Madison School of Business.

No matter how it’s done, diversification is critical, says Bud Gayhart, the director of the Center for Innovation & Business Development (CIBD) at the University of Wisconsin-Whitewater, which oversees the Wisconsin Innovation Service Center (WISC), a group that helps companies assess market-expansion opportunities.

“When companies find themselves too leveraged in an industry, or with too few customers, that should be a wake-up call to grow their business in other areas,” he says. “We always counsel people about the dangers of being more leveraged with just one customer, because that one customer can go out of business or change suppliers.”

As an example, Gayhart cites a major Milwaukee manufacturer that audited its vendors, then dropped a supplier because the audit revealed it was 90-percent dependent on the manufacturer.

The accelerating rate of change in industries and in the overall economy also should motivate companies to assess their customer base, Olszewski says.

“Who would’ve thought 20 years ago that General Motors would go bankrupt?” he asks. “You just can’t afford to have all your eggs in one basket, tied to one customer or one industry. And with technology changing so rapidly, the things your customers look for can also change quickly. So you need a broad offering of products to handle that.”

Stick with what 
you know
Research shows that of the three strategies, the one used by Lerdahl works best. Olszewski says companies that offer new products/services to an existing market enjoy a 40-percent success rate, most likely because they already know their customers well.

“A good example is Apple,” he points out. “Years ago, Apple was a computer company. Now they’ve diversified into iPods, iPhones and iPads. They’re no longer just a computer company, but a consumer-electronics company.”

On a smaller scale, Lerdahl gained a diversification foothold in 1987 by agreeing to sell a cubicle workstation product made by one of its wall-manufacturing partners. That led the company to hire an office designer so it could serve more than one aspect of office-space division, Jeff notes.

In 1994, it took an even larger step by representing a company that makes stackable-panel products for office cubicles, which provided access to an even wider swath of the office-outfitting market. “Before, we didn’t have a product that would invite us to the table,” says Jeff. “You have to give customers a reason to consider you.”
   
For companies that follow a different path — bringing existing products/services to totally new markets — the success rate drops to 25 percent. And those that go to new markets with new products succeed only 5 or 10 percent of the time, Olszewski notes.

“It’s tough to be successful if you stray too far from what you do,” he says. “Don’t diversify just for the sake of diversifying. Do it because you can create another successful business. It’s the best of both worlds if you can get farther away from your core business, but stay related.”

Making the switch
So how can companies begin to diversify? They can start by using resources like WISC Small Business Development Centers. (See Diversification Resources at right.)

“We look at various sectors and emerging trends — new areas that companies never considered before,” says Gayhart of WISC’s services.

Libraries also offer a wealth of information, including immense databases like NEXUS and LEXUS. These resources provide clues about new markets that companies could exploit.

Gayhart says many companies aren’t aware that scientists and engineers at universities have developed and 
patented — but never commercialized — intellectual property. Organizations like the non-profit Center for Advanced Technology and Innovation of Racine County Inc. specialize in pairing 
businesses with new technology that’s languishing on the vine.

Olszewski says that one key to successful diversification is early-stage conversations with customers, both new and old, as the case may be.

“The key thing is talking through the details of what you’re going to provide to your future customers,” he says. “It’s not a sales pitch at this point, it’s information gathering…doing market research with customers you think might be a good fit. You need to hone your message, meet with customers and attend trade shows before you figure out if there’s an opportunity.

“You also need to know what you’re competing with and be sure that you’re cost-effective, too,” he adds. “It’s not productive if a company solves a problem more elegantly than a current solution, but it costs 10 times more.”

Gayhart recommends a three-pronged attack. First, companies should go after emerging sectors within various industries. For example, maybe there’s a certain kind of medical equipment that would be a good target for a plastics-molding manufacturer.

“It’s relatively easy for a plastics company to establish a clean-room environment at its facility and start serving the medical equipment or device industries,” he says.

Next, companies should examine what Gayhart calls “hibernating” markets that aren’t declining, but may be dormant or stagnant. Last but not least, search for declining markets that competitors may have left due to declining sales — and where your company can enter the vacuum and offer a more attractive solution.

“Customers are like fish in a lake,” he notes. “They may not always be biting, but they’re always in the lake … and if you stop fishing, you’re not going to catch anything. And sometimes the bait you’ve been using is no longer attractive to the fish, so you have to change it. Too often, companies get stuck in a we’ve-always-done-things-this-way mentality.”

The Challenge of Change
Diversification brings its own set of challenges and expenses. For Lerdahl, it meant everything from hiring and training more employees and buying more service vehicles to purchasing interior-design software and moving to a larger facility in Middleton, then later doubling the size of that facility.

“Our whole business model changed, so we had to remake our company and become more astute business people,” Jeff explains. “We went from 12 employees to 18 pretty fast, so we also needed more management … we had to develop things like written policies, formal job descriptions and performance reviews.

“But without diversifying, I don’t think we’d be here at all,” he asserts. “Doing just movable walls wasn’t sustainable in the long term … it wasn’t a business model that would allow us to grow. But it was a viable platform for us to become an office-furniture dealership because we weren’t starting from scratch. Instead, we diversified our existing business.”

And along the way, replaced that precarious one-legged stool with a more comfortable and stable seat.



Diversification resources
Center for Advanced Technology and Innovation of Racine County Inc.
www.racinecountyedc.org/CATI/index.htm

Small Business Development Centers
www.sba.gov

WISC
wisc.uww.edu

By Ken Wysocky

Ken Wysocky, owner of Write Words Communications, is a freelance writer based in Whitefish Bay.