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February 1, 2007

3 Min Read
Find your niche. Diversify. Repeat

The only way to succeed in the world today is to concentrate on your core business and be the absolute leader in that niche.

Or is it?

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Maybe you already dominate a niche and learned that operating in a niche makes you incredibly dependant on the good fortune of a limited number of customers and suppliers. Or maybe, even worse, you chose ‘the incredible shrinking niche’, forcing you to scan about for new business just when you thought you’d be hitting your stride.

Our First Look section in this issue includes a handful of stories on firms who have now opted to sell profitable business units to concentrate on what they have identified as the business unit(s) most likely to succeed in the future. There also is a story about a machine manufacturer that, having already thoroughly dominated its highly cyclical niche, realized it needed to balance its portfolio with some less-cyclical operations.

It seems not a day goes by without some executive explaining the sale of a business unit with the words, “We want to focus on our core strength.”Maybe the question of staying focused on a core, or operating a number of disparate operations, comes down to what sort of business strategy is in vogue. If enough smart executives say, “We want to focus on our core strength,”well, it’s hard not to assume that you should do the same. If, as in the 1960s and 1970s, many successful businesses chalk up outsized returns to their diversification strategy, again it’s difficult not to follow that profitable herd.

Here’s one (decidedly unscientific) current perspective. It seems that publicly traded processors and their suppliers are more often taking the ‘concentrate on our core’ route, while privately owned processors typically have a focus or specialty but strive not to put all of their eggs in one basket.

There are examples enough for both sides—core and diversify—to argue that its tactics are correct. Interesting, though, is the absolute flood of so-called smart money—private equity—that in this industry is so clearly betting on the future of those divested divisions. Financial investors certainly can afford to; leveraged buyout firms now have more money available to invest than ever before, including the Internet heyday, with the difference being that this time around the money is being spent on firms with confirmed cash flows—companies such as plastics processors.

That interest in plastics processors and their suppliers is a bet on rising demand for plastics. Innovation will carry its use further in packaging, automotive, B&C and many other markets. The world’s population is growing, with each inhabitant creating demand for more products containing plastics. Plastics demand growth is a near certainty; the rate of growth is a much tougher prediction. But private equity operates with a timeframe of years, not quarterly financial reports, enabling it to take a more patient approach.

So, focus on your core or diversify? For most plastics processors, the question of whether to dominate a niche or not is moot. Few processors have the size to do so, nor the good luck to stumble upon a profitable niche about which no one else knows. Increasingly we hear processors say the key to their success is to stay on the cutting edge in terms of employee training, automation, materials, processing technology–and cost accounting. It’s no easy trick but if you can manage all of that you’ll have a lot more fun at work, and later there will always be someone interested in your business.

Matt Defosse, Editor-in-Chief

[email protected]

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