Diversification in business refers to entering new markets. Entering the emerging voice/data/video (VDV) market for an electrical contracting firm that has concentrated solely on traditional power distribution is certainly diversification. Successfully entering the VDV market demands a diversification strategy that is tailored to the electrical contractor's goals, organization, market, and resources. The company's diversification strategy provides a framework for entering the VDV market and should be the central element in its business plan. This article will provide strategies for successfully market entry.
VDV's relationship to your existing business
The first step in developing a diversification strategy is to determine how related the VDV market is to your traditional power distribution business. Determining the relationship between these two markets for your company is very important because this perceived relationship should be a major factor in developing your diversification strategy. If you consider the VDV market to be an extension of your traditional power distribution business, you may elect to integrate it directly into your existing business. On the other hand, if you consider the VDV market to be much different from your traditional business or totally unrelated, you may choose a different strategy and separate it completely from your existing business.
How related is the VDV market to your current enterprise?
Determining how related the VDV market is to your power distribution business is much more complicated than just considering the overlap in your power distribution and potential VDV customer bases. The relationship between the two businesses is multidimensional and can be very different even for similar firms operating in the same market. Market relatedness deals with a variety of factors, including things as qualitative as the electrical contracting firm's culture and its organizational attitude toward the VDV market.
Ask yourself some basic questions to determine how related the VDV and power distribution markets are for your company. Answering the following five questions should provide an idea of the relationship between the two markets and how you should structure your market entry:
- Is there a common customer base?
- Are sales and marketing efforts related?
- Are image and goodwill transferable?
- Are business processes common?
- Are installation processes common?
Is there a common customer base?
Determining whether or not there is a common customer base between your power distribution market and planned VDV market niche is the first step. Commonly, electrical contracting businesses enter the VDV market through their existing customer bases, but it is not necessarily the rule. Perhaps the existing customer base is not in the market for VDV services or is locked into other preferred suppliers. In either case, you may decide that the VDV market is completely unrelated to its power distribution business and select a market entry strategy that reflects this.
Are sales and marketing efforts related?
Sales and marketing efforts between the two markets are often related. In fact, many discover a tremendous opportunity to cross-sell power distribution and VDV project capabilities to customers who seek a single source for power, communication, and control system installation, integration, maintenance, and upgrade. However, there are also those who have found their customers skeptical about their ability to successfully handle both power distribution and VDV work. As a result, these companies have developed diversification strategies that separate the two services in the customer's eyes.
Are image and goodwill transferable?
This is an important question for electrical contractors to consider. Many have been working for the same customers for many years. These customers are comfortable and familiar with the expertise and integrity behind each project. If image and goodwill, established through hard work in the power distribution market, is transferable to the VDV market, then this is a strong selling point for your business. Your dedication to quality and customer satisfaction in the power distribution market can be a real marketing advantage and a good reason to fashion a diversification strategy that treats the two markets as related.
Are business processes common?
Business processes are all of those "behind-the-scenes" processes that support the installation work at the customer's site. For the electrical contractor, these processes include marketing, estimating and bidding, material procurement, material warehousing and delivery, tool and equipment management, payroll, billing, and information services, to name just a few. In general, business processes are the same for both power distribution and VDV work. Treating the two markets as related allows home office staff and facilities to be common and reduces overhead and duplication of services.
Are installation processes common?
Installation processes are those processes that actually take place at the customer's site and result in work in place. Whether or not installation processes are common between power distribution and VDV work depends on the electrical contracting firm's VDV market niche. If the electrical contracting firm is specializing in VDV cabling and equipment installation, then VDV installation processes are similar to power distribution work and, depending on the extent of cross training and other factors, the workforce could also be somewhat interchangeable. On the other hand, if the electrical contracting firm specializes in systems integration and programming, then the installation processes are not so common.
Are there other considerations?
The five questions are just a starting point; they will usually lead to a number of other more detailed questions about the VDV market and how your firm should approach its chosen niche. The question of market relatedness needs to be thoroughly explored and understood from your firm's perspective before attempting to select a structure for your market entry.
Structuring your market entry
There is no one right or wrong way to structure your firm's VDV market entry. Different electrical contracting firms structure themselves differently based on various factors including market relatedness. Commonly used strategies include internal department or division, separate company, acquisition, and joint venture or alliance.
Internal department or division
Probably the most common strategy to enter the VDV market is to establish an internal department or division. The advantage of an internal market or division is low startup costs, shared facilities and services that reduce overhead, common sales and marketing, and being an integral part of the company.
Internal departments are sometimes started and run by existing personnel who have acquired technical expertise in VDV systems and also understand the electrical contracting firm's goals, operations, and culture. However, more often than not, the electrical contracting firm will need to bring in outside personnel with the necessary VDV technical and market expertise help it successfully enter the VDV market. Starting an internal department or division has the advantage of quickly acclimating new VDV personnel to the electrical contracting firm's culture and procedures.
The disadvantage of entering the VDV market through the development of an internal department or division is speed to market. Building a viable internal VDV department or division takes time and effort. Those charged with developing the VDV department or division are often saddled with procedures and decision-making processes that evolved over time for the power distribution market and are not well suited to the fast-paced VDV market. In addition, there may be organizational opposition to entering the VDV market, and rifts can develop because of resources being shifted into the new endeavor.
Forming a separate company
A separate company could be formed to serve the VDV market. It could be an independent business in name only and share the same facilities, as if it were a department or division. Some electrical contractors have adopted this strategy because of customer perceptions about their capabilities in the VDV market. By forming a separate company with a different name, you help form perceptions in the minds of your customers. They perceive that you are serious about the VDV market and that you have the expertise to do VDV work.
Another approach is to either establish an independent sister company or a subsidiary of a holding company. The holding company could own not only the VDV firm, but also the inside electrical contracting firm, along with any other subsidiaries such as an outside electrical contracting company. A totally independent VDV firm has the advantage of being structured for the VDV market, and is therefore not encumbered by the traditional power distribution company's procedures and decision-making processes. This is not a novel approach; many electrical contractors with both inside and outside operations have made them separate companies because they are in very different markets.
One disadvantage of a separate VDV company is that it could evolve as a truly separate company with its own strategy, culture, values, and procedures. This can be avoided if upper management is aware of this possibility and makes integration of the separate companies or subsidiaries a priority. Integrating the separate companies or subsidiaries is important if the electrical contracting firm is to reap the benefits of cross-selling services and take advantage of customers' desire to deal with one entity for all of their power, communications, and control needs.
Establishing and growing a department, division, or company takes time. Time is money in the growing VDV market. Customers have VDV needs that must be met either by the electrical contractor or some other firm. Acquiring an existing VDV specialty company instantly provides your business with the VDV expertise needed to meet your customer's needs. In addition, the acquired VDV firm will come with an established customer base that may be different from your own. This existing VDV customer base will not only provide your firm with a base income stream to build from but will also provide an opportunity to cross sell your power distribution expertise.
There are also many disadvantages to acquiring an existing VDV firm that need to be considered thoroughly. First, the culture clash between a VDV specialty company and a traditional electrical contracting firm can lead to organizational rifts. Secondly, the cost of acquiring a successful and growing VDV specialty company is high and may require that you take on debt or equity partners that can cause problems. Finally, you are purchasing knowledge and expertise when you acquire a VDV specialty firm, and there is no guarantee that the acquired firm's employees will stay with you after the acquisition-even if you have employment contracts and noncompete agreements in place.
Forming a joint venture or alliance
You can form a joint venture or alliance with a VDV specialty firm, manufacturer, supplier, or combinations of these entities. Joint ventures and alliances are a good way of meeting a customer's need on a particular project but rarely work as a long-term strategy. Forming a joint venture or alliance with a VDV specialty firm introduces that firm to your customer and positions it as the customer's supplier of VDV services in the future essentially cutting your firm out of the market. Joint venturing or allying with a particular VDV manufacturer or supplier also has its risks because, depending on the nature of your agreement, your firm may be limited to that manufacturer's or supplier's systems and equipment. This could limit your flexibility to supply and install either specified equipment or the best system to meet a customer's needs.
Joint ventures and alliances do have short-term advantages. If you are planning to acquire a VDV specialty firm, a joint venture or alliance on a particular project might be a way to try out the arrangement and see how the two firms work together. Similarly, joint venturing or allying with a manufacturer or supplier on a particular project may result in training for your installation personnel, experience with the systems or equipment, and improved credit or financing terms.
Selecting a strategy
There is no right or wrong strategy. If you compare the different strategies, you will see there is a tradeoff between risk and speed to market. The strategies that offer the greatest speed to market result in both greater financial and organizational risk for the electrical contracting firm. Similarly, the most conservative VDV market entry strategies reduce the risks faced by the electrical contracting firm but result in slower market entry that may result in permanently lost market share. Like every business decision, diversification requires the electrical contracting firm to weigh risk against return on investment to select the best strategy for market entry.
Once you have selected a strategy for entering the VDV market, the next step is to determine how to implement it. Staffing and financing the electrical contracting firm's market entry will be addressed in the next article in this series.
This article is the result of ongoing research into the impact of information technology on the electrical contracting industry that is sponsored by the Electrical Contracting Foundation, Inc. The author would like to thank the Foundation for its continuing support.
Dr. GLAVINICH is chair and associate professor of architectural engineering at the University of Kansas. He can be reached at (785) 864-3435 or firstname.lastname@example.org.