Divide and Conquer Strategy

It may be time to split your business into two. Or three.  Over the past year I have watched several of my clients spin off portions of their business as separate divisions—and I’ve been amazed at the positive results.   Each of these companies followed a similar progression—which got me thinking about the nature of start-ups and the lost art of spin-offs.

Most startups begin by taking business that nobody else wants.  Growth companies lack the capital to make big investments, the clout to garner attention, and the buying power to compete on price.  So they get by on the scraps left behind by larger firms—tiny unexploited niches, customers with non-standard needs, and other odd-ball opportunities.  Startups that make it through this stage (and only a fraction do) survive largely on their relentlessness and flexibility—if a deal can be done, they’ll find a way to do it.

Often their opportunism will lead them to a niche with some real growth potential.  So they’ll make some investments to exploit that opportunity and will see that segment of the business really take off. They usually continue to sell whoever and wherever they can—but slowly this new more targeted business represents more and more of their total sales.  And that’s when the trouble starts.

Often the new business brings with it a completely new set of dynamics.  It may have a different cost structure, require a different kind of sales strategy, different distribution system, or it may require a different approach to servicing.  Usually companies simply “bolt on” additional capabilities and don’t pay attention to subtle changes in their business as the new business gradually overtakes the old in terms of focus, prestige and investment dollars.  

Then the company may find itself happy with the progress of the new business, but facing a stagnation or decline of their original business.  They may also find it difficult to price either the new business or the old business because they lack a simple way of appropriately allocating cost between the two businesses.

One of my clients recently opened a new plant 120 miles from headquarters in hopes of creating a more competitive cost basis for a commodity-like line of gaskets, filters, and seals his company has manufactured for 75 years. He decided to reorganize at the same time and split off the old line of business with its own management team.  In recent years, sales in this traditional line of products had stalled as the company built an expertise and market share in a new set of technically sophisticated products that now make up more than 50% of sales.

On my last visit, I knew something was different the minute I walked in the room to meet with the management team.  The people responsible for the old line of products seemed more focused and assertive—and confident in their abilities to kick-start a business that appeared to be dying on the vine.  As I listened to them talk, I realized what had happened.  Over the past several years, most of the attention in the firm had been focused on the Company’s “sexy” new products which were technical and which customers were buying in major long-term contracts totaling millions of dollars.  Over time, the more technical products began to be seen as the important ones—the ones that held the company’s future.  Why beat your brains out in a distribution system to stock $50,000 worth of filters when you can get a single order from an OEM for as much as $2 million?—or so the logic went. People in charge of that business got all of the R & D resources, sales support, and management attention—and people responsible for the older line of business got in line behind them.  

Now with the old business split off and put in the hands of an experienced management team—these folks were ready to grow again.  Within an hour of beginning the discussion the group outlined the concept for a new filter technology that had been developed for a customer and if perfected, could greatly increase the company’s market share with new profitable business.

Another client makes heavy-duty power cables, and since splitting its business into two divisions (Marine and Mining and Industrial) has grown revenues 60% and doubled EBITDA during the past three years.

Startups win because they are focused.  But as they grow and expand incrementally, often they lose some of the focus that made them great.  It’s a good idea every year or so to look at your business with an eye toward spinning something out into a separate group or division—to make sure all lines of your business get the attention they deserve.