Trellis, who speaks and writes on the topic of construction industry diversification nationwide, advises builders to make sure their primary business is on solid ground before considering a new and potentially risky business venture. “Diversifying your investments, usually a good thing, is different from diversifying your business, which is sometimes a good thing,” he says, a truism dealers can follow, as well.
Of the three main types of diversification—vertical (new, if related, businesses, such as mortgage lending or truss manufacturing), horizontal (same business to different customers), and geographic—Trellis says the one least likely to hedge risk is vertical integration. “Vertical markets are not counter-cyclical,” he says. “It may increase your risk because all of your businesses could slow down at the same time.”
Horizontal diversification, meanwhile, may allow a builder (or dealer) to shift people and priorities when one venture or segment of the market slows down. “It’s a great strategy for smaller builders,” Trellis says.
For builders thinking of taking their homes into another geographic area, Trellis tells them to consider their product, people, and market—and make sure at least two of those are known factors. “If not, don’t do it,” he says, a lesson that dealers can take to heart, as well.
Weiss, who also is a frequent speaker and is working with NAHB to add a diversification section to the GMB curriculum, advises builders and others to “pay attention to what you have and get all you can out of it,” before diversifying. “If your business is in trouble now, diversifying into something else is even riskier.”
Cullotta, meanwhile, encourages dealers and others in the supply channel to avoid looking at the construction industry as one large opportunity—a piece of advice that also applies to builders and contractors lured by diversification. “Take a more granular look at different types of customers,” he says. “Define or redefine them and what each of them needs to succeed in terms of products and services. It’s the difference between a business plan and a one-off opportunity.”—Rich Binsacca is a contributing editor for PROSALES.
Dealing With Diversification To help your builder and contractor customers adjust to changing market conditions and business ventures—as well as your own moves to diversify—consider the following:
