Specialize? Or diversify?

Some builders believe the key to success is concentrating on their core business. Others suggest that diversification allows them to smooth out the peaks and valleys of the economic cycle; when one aspect of their business is down, another is bound to be doing well.

Should you stick to what you do best or avoid putting your eggs in one basket? President Leo Souder of MPB Builders in Ripon, Wis., says flexibility is the reason his company has thrived for more than 45 years. Founded to serve the post-frame agricultural construction market, MPB now generates 40 percent of its revenue from commercial projects. “Our construction focus has had to change with the times and with what’s happening in the market,” he explains.

In addition to taking on commercial construction, MPB has expanded its services by offering stud-frame buildings and by supplying materials to other contractors. The company also rents equipment and performs custom digging and drilling.
Another 25 percent of MPB revenues are generated by selling building packages to farmers and non-competing builders. “You’ve got to develop the opportunities that are happening around you,” Souder advises, “because if you’re just in a couple of areas and then one drops down, you’ll get hurt more.”

For example, construction activity in the Wisconsin agricultural market often rises and falls on the price of dairy products, grains, potatoes, and other staples. “There are a number of vegetables grown here and the industry tends to fluctuate a lot,” Souder observes. Thus MPB’s commercial jobs help the company sustain a more stable bottom line.

“We also fabricate our own I-beams and headers, have our own trim facility, and can build small trusses and stud walls,” Souder continues. “That gives us a lot of flexibility, and allows us to keep our materials in a controlled environment until they’re needed on the jobsite. And when the price of lumber is low, we can buy surplus material and store it in the almost two acres we have under roof.”

Yet providing multiple services has its challenges. “Being diverse is definitely more complicated and it can be frustrating for employees to have to learn new techniques,” Souder points out. “We’ll find a foreman or an employee to teach the skill — or even find another builder who has experience in a skill we need. That might mean sending one of our crews to work with one of theirs for a day. Developing a network of builders who are willing to share ideas and best practices can help you save money and operate better.”

When MPB has added new services, the company has been compelled to make capital investments before any revenues started flowing in. Yet Souder encourages forward thinking both in his business and his clientele. “I ask customers to look ahead 10 years. Will their structure be big enough to accommodate future machinery they might need? What are their expansion options? What about resale value?”

By offering a diverse range of services, Souder believes, MPB is better positioned to capture repeat business. “If past customers need something different than what we provided before, we can still service them,” he states. “Because we’ve already established a level of trust, we have an edge over competitors. Customers will consider doing business with us even if they have a cheaper estimate from someone else.”

With an economic downturn now in the offing, MPB is preparing to diversify once again. “We’re gearing ourselves up to do more repair work for buildings damaged by fire or wind, as well as to do residential re-roofing,” Souder says. “Maintenance is an important service when people aren’t as interested in new buildings.”

Rural builders who stick with a limited menu of services, observes Souder, can end up making a common mistake. “When times get tough and you’re short of work,” he explains, “you can’t place all your bets on getting those big jobs. Having smaller jobs you can handle is better than getting all your work from just a few customers.” But the key to getting a steady stream of smaller jobs, he suggests, is offering a variety of services that customer wants.

Deciding to Diversify

Another diversified builder is Fingerlakes Construction of Clyde, N.Y., which has survived numerous economic downturns since its founding in 1969. “We were primarily in the agricultural market in the beginning, but we’re now full-service. We serve the entire state and build anything from medical centers and schools to garages and warehouses,” relates owner Bob Brisky, who took over the family business in 1982.

Because Fingerlakes opted to serve a diverse array of construction needs, the company manufactures its own roof trusses, steel panels and columns. “We do buildings with large roof spans that must withstand heavy snow loads. So we took on manufacturing in order to control the designs of our buildings,” says Brisky. “In addition, we don’t have to wait on a third party for pricing, which gives us even more control.”

That kind of control has helped Fingerlakes Construction survive and thrive, even when the market seems out of control. According to Brisky, “Diversifying in bad economies is vital. Right now, commercial business isn’t that hot, but agricultural is keeping us alive. Any type of market that we serve could be up — or down — in certain years. So flexibility is a key.”

Nevertheless, Brisky cautions that offering a diverse portfolio of products requires “a trained and experienced sales force, people who can design and estimate a variety of buildings, and dependable crews.” Cultivating that expertise does not happen in a day. Rather than jump into a new market all at once, he suggests a gradual approach: “If you build residential garages and want to get your feet wet in commercial or agricultural construction, start with jobs you can reasonably handle. Then as you gain experience, you’ll be able to switch your operations between the different markets as the economy dictates.”

While economic necessity is most often cited as the reason for diversifying, Brisky advises rural builders to be ready to diversify for other reasons. “You have to give customers what they want, which can mean adapting to new products that come into the market. For instance, if people start asking about cement board siding then your employees must be trained and ready.”

Even if tough times can limit the amount of capital a rural builder can invest in new equipment or warehouse space, Brisky believes that “investing in your brand and investing in your employees’ skills is vital, no matter what the economy. If you’re not growing in this business, you’re going backwards. You have to be ever-changing to meet customers’ needs. After all, the customer pays our salaries.”

Specialized Success

Though diversification is the path to profits for many builders, examples also abound of success through specialization. One such story is told by Glass Construction of Gray, Tenn., founded as a spec home builder more than 35 years ago. Then as the years went by, reports president Tony Glass, “We moved on to a combination of spec and contract homes and eventually added commercial and renovation projects.”

By the late 1980s, Glass was overseeing large commercial projects and a payroll of 70 employees. “Working six or seven days a week, at all hours of the day and night, became a rat race that just wasn’t worth it,” he recalls. “You start to realize the money doesn’t justify the time you’ve spent.”

That realization led Glass in a new direction. Rather than spend time on projects he did not enjoy, he discovered an unfilled niche in his East Tennessee marketplace. “In my case, I gradually turned to specializing in log home construction,” he relates. “Not only could I make a living, but I found that’s what I liked doing.”

Part of that enjoyment is working with skilled people who share Glass’s appreciation for quality. “Before, I’d be building a 162-unit apartment complex,” he recounts, “and I’d keep losing workers because, after the first week, it’s all repetition and they would get tired of it. Or if I was doing a remodeling project, the more talented carpenters would sometimes get frustrated because everything was out of square.”

By contrast, as Glass began to specialize in new log homes, he attracted a core group of skilled carpenters. No longer was he competing with other builders for the same pool of often-unreliable workers. “When you specialize in custom projects, employees enjoy the work because it’s fresh and new to them,” he points out. “Anyone worth his salt likes a challenge that makes him work and think.”

Scaling down the business and transitioning into a specialized niche took time. Though Glass immediately stopped pursuing large commercial projects, “I continued to build standard homes as well as log homes until 12 years ago, when I was able to do strictly log construction. It takes a special talent because nothing we do comes in a kit. We order logs from a mill and cut everything on site to fit. Working with logs means using totally different materials and equipment than we used before, which can take years to learn.”

Glass’s gradual approach can be contrasted with several log construction companies that have come and gone in his local market. “They thought they were going to make big bucks, but didn’t really know what they were getting into,” he reports. “In my case, during the early years as I was starting out, I was willing to redo my work — sometimes more than once — to make sure the project was right.”

Rural builders who decide to specialize should start with a careful self-evaluation. “The decision to specialize depends on the size of your company and the abilities of your personnel,” Glass counsels. “Construction workers are so varied. Some are most adept at roofing or framing, while others might be talented remodelers. Stick with what you can do well with the employees you have.”

Because Glass’s crew is mainly comprised of craftsmen, he started outsourcing less-skilled jobs previously done by employees on the payroll. “Why use a $25-an-hour skilled carpenter to pull wire, when you can get the same job done by an electrician for $10?” he asserts. “Not only is it cheaper, but since that’s what electricians do every day, the job gets done faster and it frees up my skilled crews to do what they do best.”

Becoming a log construction specialist with a reputation for excellence has generated a steady stream of business. As the only log home builder in its area, Glass Construction operates solely on referrals — even though its specialty, log homes, accounts for only five percent of the nation’s residential construction market.

Just as Glass enjoys working with the skilled craftsmen who are attracted to log construction, he gets satisfaction from dealing with the kind of customers who are drawn to log homes. “The homeowners generally have a good idea of what they want. They’ve done research and are prepared for what to expect. They know wood expands and contracts, so they’re not expecting a perfect item.”

Then too, adds Glass, his company benefits because most log home customers are financially well qualified.
“The business has been economy-proof because I’m dealing with people who are ready to build the log home they always wanted, regardless of the economy,” Glass explains. “They can afford it or they wouldn’t call me to start with. When I was doing standard homes in the past, however, I found that conventional home buyers were often just looking for the cheapest builder.”

To rural builders who are thinking of economy-proofing their businesses through diversification, Glass offers a word of caution: “If you can’t do well whatever you do already, what makes you think you’ll do better at other things?” Instead, he counsels contractors to “diversify by hiring the right people — when you have to have the money to do it. You can’t always expect that you can just suddenly go to the market where the money is. Too many have tried and too many have failed, often because they sacrificed quality. Diversifying into new construction markets is a process, not a quick fix.”

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