Independents Days!

Omaha, Ne. – Omaha Local Independent Business Alliance’s second annual Independents Days is reaching out to consumers to show their pride for local business during the two weeks of festivities.

The campaign got underway June 28 when OLIBA’s website: www.shoplocalomaha.com was officially re-launched. Included on the website is an opportunity for consumers to vote for their favorite independently-owned business in the Omaha area. By voting, site visitors also register for a chance to win a bundle of gift certificates from OLIBA members.

The website will also house discounts, applicable to many of the member businesses. Independents Days discounts include offers at Rockbrook Women’s Gym and The Bookworm, among others.

According to “Local Works,” a 2008 survey, $68 of every $100 spent at a local business stays local, while only $43 of $100 spent at a national chain remains local.

Millard Lumber is proud to be part of this year’s Independents Days!  Once again go to: www.shoplocalomaha.com for an exclusive discount from Millard Lumber!

Your Homebuilders’ Success Report for June 2010

Edited by Ted Garrison and Ron Black

Should You Venture into New Niches to Survive the Recession?

The worst construction industry recession that anyone in the trade has experienced is causing many companies to seek new types of work. But is that the right decision for your company? There is no definitive answer to that question because every situation is different. For example, if 30 years ago you were building nuclear power plants, you would have had to change niches no matter what. But for most contractors, it’s not that simple.

Doug Woods, president and cofounder of DPR Construction, said in an interview, “I think it’s important to stick with what you are good at. I think oftentimes as contractors we all have big egos, and we think we can go do something different that you haven’t done before. We may take chances during economic crisis or downturns, and that path has gotten a lot of us in trouble. Stick to what you are good at!”

In How the Mighty Fall, Jim Collins wrote the mentality that “we’re so great, we can do anything!” leads to disaster. While he was referring to how companies fall even during good times, this type of attitude is even worse during a recession because there is virtually no margin for error.

Obviously if the niche your company operates in totally dries up in your region of operation and it’s not feasible to expand to other regions or the other regions are no better off, then drastic action will be required. This situation offers three basic options. The first is to shut down before losing a bunch of money. Several companies did this in the late 1980s in New Orleans. The second option is to shrink to a size that will allow your company to survive the economic crisis. The first two choices are painful and not the solution most companies are seeking. The third choice is to shift into a new niche, which is what this report is about.

A common mistake in this situation is to chase what appears to be the industry’s most attractive opportunity. The problem is that in a severe recession, there probably aren’t any truly great opportunities, and those that appear attractive get lots of attention and experience hypercompetition. For example, this past year has seen an excessive number of bidders with some bids going for below cost. That doesn’t sound like a great opportunity to me.

The recession notwithstanding, any time a contractor is considering entering a new niche, it needs to consider the facts. The rules of economics will apply whether in a recession or during a boom, except during a recession the competition will almost always be greater.

Therefore, the decision to enter a new niche must be based on sound economic reasons, not desperation. The contractor must find a niche not only where the economic conditions don’t work against it, but also where the contractor offers something that the other competitors don’t. If the contractor can’t differentiate itself, it will be forced to compete solely on price, and in a recession that is a formula for financial disaster.

Entering a new niche will often create additional costs, including the following:

• Additional marketing expense to establish business in the new niche
• Additional investment in technology
• Lower margins than originally anticipated because its entry in the market increased competition and lowered prices
• Subcontractors and vendors might give you the lowest prices
• Unanticipated problems can occur
• The recession might suppress the volume of work in the niche

Michael Porter in his classic book Competitive Strategy identified five competitive forces: entry cost, bargaining power of suppliers, bargaining power of buyers, substitution and rivalry. Historically the entry costs into the construction industry have been fairly low, which has contributed to a significant increase in the number of contractors and the corresponding decline of profit margins in all segments of the industry. However, moving to a new niche may still incur additional costs than found in your original niche. The bargaining power of the various subcontractors and vendors might be less than normal since they are under pressure too, but if you are the new kid on the block, you might not have as much clout as other competitors. In a recession, owners certainly have tremendous power, and many are bashful about squeezing contractors.

Depending on what kind of work you perform, substitution may or may not be a major factor. If you’re a general contractor, obviously it doesn’t matter what the building is made of, but the owner does have the option of buying an existing building instead of constructing one. Subcontractors often face substitution issues. For example, a concrete subcontractor must not only compete against all the other concrete contractors, but he must deal with structural steel contractors. Finally the rivalry is the host of other contractors, so the idea is to select a niche where the competition is at least reasonable.

If you are considering entering a new niche, especially during a recession, you must look for a niche where you can minimize the above forces. A few suggestions include the following:

• Bring something special to the niche. This could be a special skill you developed in your prior niche that can now be applied to the new one. This is probably the most important point because no matter what niche you are in, if you don’t have something that gives you a competitive advantage, you will be forced to compete almost solely on price. You must be able to ask the question, “What makes us different than our competitors?” If you can’t answer that question and back it up, you will be forced to compete on price.
• The level of the competition should be less skilled than you, so you can bring superior management skill to bear. However, be careful; some projects might run very well with limited management and, therefore, not allow your more sophisticated management approach to pay dividends.
• Your experience and reputation should be an asset and minimize your effort in establishing yourself in the new niche.
• Look for a niche that might help other aspects of your business. For example, if you are a mechanical/plumbing contractor, you might enter the service niche on the types of projects that you build.

In the end the decision about whether you should move into a new niche, whether in a recession or not, depends on the sound economic principles. If you attempt to move into a niche that doesn’t fit your company’s strengths, then it will probably result in an economic disaster, whether it’s during a recession or not. In fact, it might be worse in a recession because the margin of error is less. Do your homework before jumping because the grass may not be greener in that other niche.