When evaluating your company’s overall risk of sustainability, examining your company’s product lines or services you offer may help determine ways to minimize risk. Single product companies face several challenges not faced by companies offering two or more product lines or services.
Here are two real world examples of single product companies I have worked with over my finance career. These examples may give you an example of having a diverse product and service mix may help you survive circumstances beyond your control.
Over a year prior to the Enron collapse I worked with a company that provided custom software programming for the oil and gas industry. They were the world’s leading experts at writing software to keep track of pipeline capacity and handling the financial settlement of gas purchase transactions between companies involved in buying and selling natural gas. Since the company was located in Houston (where Enron was based) it was natural for Enron to be its largest customer. At the time I began working with this client, Enron represented 90% of the company’s business. My lender was considering a loan that would help this business dramatically grow in size. At the time, Enron looked like a platinum customer. No one on the loan committee evaluating this company’s loan thought that Enron really represented much of a risk, but just because there was such a large concentration of credit, the lender told my client they would make the loan when the business had less than 20% concentration from Enron.
My client worked hard to diversity their customer base and during the next year reduced its reliance on Enron to only 10% of annual sales were being generated from business with Enron. By that time, my client had generated substantial additional profits and didn’t need the loan. It wasn’t long after that Enron filed for bankruptcy. My client was an unsecured creditor providing custom software development. The good news was their company survived, despite a loss of nearly all the profits they generated that year. The lesson was valuable to my client. After seeing Enron collapse they started a new software product line that had nothing to do with natural gas or petroleum.
The second example of a single product company I have worked with during the last five years was a manufacture based not too far from Austin. They employed 50+ people in their manufacturing operation and was the largest employer in the county. They manufactured a simple but necessary device and had been in business many years. Their product was a tire repair plug. It was made of woven polyester strings with a sticky tar-like compound bonded to it.
Many years ago, people that had flat tires had two choices to repair them. They could take the tire off the wheel and put a vulcanized patch on the inside of the tire to “block the hole” or they could “drill a hole from the outside, insert a special plug from the outside then seal it with a chemical that caused the plug to bond to the tire. Over the years patching a flat tire from the inside became the repair method of choice. Tire plug manufacturers began going out of business until there was only one left in the U.S. You guessed it; that was my client.
My client just couldn’t see the end of the tire plug business coming. It was still a viable way to patch tires in other countries so my client simply started selling its product line of tire plugs overseas. Then manufacturing operations begin popping up in those foreign countries and they could produce a similar product to my client’s cheaper. My client held on tightly to their business but the market slipped away from them. The company ran through all their safety cash, found themselves on COD with their vendors, and had trouble meeting delivery demands. One day the company management just shut the doors and closed the business.
By the time the tire plug manufacturer recognized they needed additional products to manufacture it was too late. They simply didn’t see the end coming.
There are many companies and industries that are here today and will be gone in 5-10 years but those that are constantly reinventing themselves are going to have greater long-term success than those that remain as single product or service companies.