The Importance of Product Line Diversification
If you’re not distinct, you’re liable to find yourself extinct.
The boiler and heat recovery business mirrors that of every other industry segment. It goes through periods of euphoric elation and troughs of despair. No business is immune from ups and downs in the economy. This serves to demonstrate the increasing need to be continually developing new products that manifest themselves into new, long-term revenue streams.
The life of the business is dependent on new products driving increased revenue. Too many companies fall into an “extend and defend” strategy as it relates to product portfolio management. This stymies any real innovation as all resources are focused on either minimal product extensions or trying to defend market share at the expense of reduced profit margins. Trying to protect core business leads to stagnant product development. This is termed “locked-in” thinking with little to no product development. The stories are endless about the pitfalls of companies focusing on the “core” as their key strategic directive.
It is reported that at least 20% of a company’s annual revenue should be derived from the sale of new products and services. In some industry circles, it’s closer to 30%-40%, where product obsolescence is a stark reality. These ratios are often a predictor of future viability, and its surprising how few companies achieve them. The key is putting concerted effort and focus into product development initiatives. It can’t be halfhearted; you have to be all in.
This requires stepping away from all the widely accepted knowns of your business and listening to the voice of the customer. Too many companies fall victim to not having their ears to the market. It becomes a “what can we make” methodology rather than understanding the true market need.
Voice of the customer
In today’s world, the voice of the customer (VOC) is critically important in our industry segment. The boiler room, as we know it, is undergoing a tremendous shake out. Boiler industry veterans are retiring in increasing numbers. Corporate and executive management are minimizing the importance of the role of boiler experts. Manufacturers are being asked to assume more of the burden of operations and maintenance. These market factors cause disruption; however, they offer significant opportunity for manufacturers aligned appropriately with the new paradigm. Out of these changes come ideas for new product and services. The market is ripe for increased diversification. The key is seizing these market opportunities with insightful customer understanding matched with smart product diversification. Customers are expressing their wants and needs, if you listen closely.
Diversification is vital to ensuring a healthy and vibrant company, especially in the swiftly changing markets we face as manufacturers today. What may have worked a year or two ago is now oftentimes rendered meaningless to customers. If you’re not distinct, you’re liable to find yourself extinct.
At Victory Energy, product development is in our DNA. Much of our product innovation comes directly out of our End Market business segment. The foundation of the group is to be in lock step with our customers as it relates to their diverse needs or what is commonly known as the “aftermarket.” We’ve rethought that paradigm with a nod toward what end users are requiring for their operations. Aftermarket is too limiting, especially in today’s new end-user market dynamics. By talking with end users every day, we’re keenly aware of “what’s next” as it relates to their boiler and heat recovery needs.
To me, diversification requires following trends and aligning product development around where the market is heading rather than where it exists today. You need to stop selling and start listening.
The majority of our new products are borne out of market need and direct customer requirements. Our GENESIS HTHW generator emanated from requests from leading higher education institutions looking for a different solution to campus-wide heating applications. This is increasing as more district energy applications take hold. In this case, the market drove our diversification. If we weren’t actively listening, we would have been late to the game. As in all new product development, the first company or brand in rules the new category. Product development needs to be quick, agile, and able to turn on a dime should the market either zig or zag.
Those operating in a mature industry need not hinder product development. Customers often express a desire to see you enter a product category to create a competitive alternative. For years, customers asked us to get into the burner business. They viewed it as a natural extension for Victory Energy. Now, three years later, we surpassed our 100th VISION burner unit sold. This required investment and patience, and those efforts are paying off in allowing the company to be far more diversified. It’s smart diversification that the market has validated and provides a new and growing revenue stream. The market asked, and we responded.
The niche strategy
The niche strategy for product diversification is often desirable. Finding and carving out a product niche is often an easier and less expensive way to gain market share. Victory Energy has found success in the vast HRSG product segment by concentrating on a small slice of the available market. Where the majority of the HRSG players were laser-focused on large projects, we found an opening in the GT-HRSG space up to 120 MW. By partnering with turbine manufacturers, we were validated as a viable alternative. We withstood the temptation to try to be all things and went all-in against this niche. This has led to multiple project engagements with major electrical and power producers.
Smart product diversification is about filling market gaps by seizing on unmet customer needs and taking advantage of competitive weaknesses. It requires having a true pulse on where markets are headed. You need people who can tell you what might be rather than what is. Too many companies suffer from locked-in thinking and seeing business as it has always been. You need to champion the visionaries in your business — those who see opportunity and can turn it into tangible product concepts. Markets are fickle. They get hot and then go cold quickly.
Your products and services must be sufficiently elastic to serve multiple audiences across several industries. Take a clear look at the percentage of your total revenue that is derived from the sale of new products. If it is less than 20%, you need to be rethinking your product development strategies and methodologies. Diversification in your product and services portfolio isn’t just nice to have, it’s mandatory. Start diversifying your business today.