There are certainly advantages to serving multiple markets, especially in a tough economy. Among A/E firms that work with private developers, for example, those that were diversified typically fared better than those firms that specialized in residential or commercial land development during the worst of the recession.
Even in a robust economy, different markets grow at different rates. Market diversification may elevate your chances of being in the right place at the right time. Many firm principals consider it a less risky strategy than focusing on a few markets. They can point to firms that suffered when their narrow market niche took a turn for the worse.
But market diversification has its own shortcomings. Many firms boast of their breadth but offer little depth in terms of client sector knowledge, specialized expertise, or marketplace reputation. Most clients value firms that understand their business—not just the services these firms provide—and are often willing to pay more for that insight. Such firms are better positioned to meet clients' higher-value strategic needs.
Diversified A/E firms often face organizational hurdles as well. It's harder to pool resources, build strategic consensus, collaborate across business units, avoid turf battles, or cross sell services when spread across multiple markets. While in theory market diversification offers greater flexibility to respond to shifting marketplace trends, I've seen this ability frequently hampered by internal competition. Concentrating management attention and resources on a promising market sector typically means diverting it from another sector or more. Many firms find this difficult to do, and their diversity can end up constraining rather than enabling their strategic dexterity.
The most successful A/E and environmental firms I've worked with have typically exhibited market focus. Among mid-sized firms, these usually have derived at least 60-70% of their revenue from 3-5 core markets. (Large firms, of course, can serve many more markets and still have substantial resources devoted to each.) These firms have often offered a broad range of services, but they were targeted to those few select markets.
By contrast, among the poorest performing firms I've worked with, they usually fit one of two profiles: (1) served multiple client sectors but lacked depth in any those sectors or (2) largely served a single client sector that had experienced decline (e.g., private land development). Interestingly, in both cases, the firms had developed little distinction in the marketplace. Whether overly broad or overly narrow in market focus, the generic firm will struggle in today's economy.
So let me offer some advice to those firm leaders who recognize the need for strengthening their firm's market focus:
Pick a few target markets to focus on strategically. Your selections may be guided by a number of criteria—current revenue, sector growth potential, firm experience, staff expertise, etc. This may or may not involve choosing to exit other sectors, but I'm not suggesting ignoring other markets on which you depend or compromising your financial performance. The intent is to give special attention to positioning your firm as a key player within your target markets (which are likely defined both by client type and geographic area).
Assemble market sector teams. You want to assemble individuals who will form your "centers of excellence" for each target market. Each team should have a committed leader to keep the effort moving forward. These teams will be responsible for driving the activities mentioned below. Give them this particular charge: Determine how to increase your firm's market share within your target markets.
Do your research. Client and market research seems to be an area of weakness in most A/E firms. I wrote on this topic in a previous post in which I cited a survey that indicated that firms that do frequent research grow at a much faster rate and are more profitable. In this case, developing your credentials within your target markets requires considerable knowledge about those markets and key clients. Adequate research is essential.
Actively participate in relevant trade associations. This involves more than attending meetings and conferences; you want to contribute to the organization's mission. Committee or task force participation is strongly advised, especially where you can help address legislative or regulatory issues of importance to that industry. This positions your firm as an advocate for clients in that industry, not just another firm seeking to do business with them.
Target marketing efforts on those core markets. I've written much in this space about content marketing, providing information and insights of value to clients rather than the usual self-promotion. Deep understanding of your clients' business enables you to better serve their needs and interests through your marketing. Don't make the mistake of focusing mostly on your firm's technical services or projects. Address those issues of greatest importance to clients. This helps establish you as a "thought leader" within your core markets.
Set up a system to share market information. You want to build organizational competency within your core markets, which means sharing the information and insights you accumulate through research and experience. Many firms default to simply posting this information on their intranet, but that's far too passive an approach to facilitate knowledge sharing. Instead you want to schedule regular meetings or conference calls for your market sector teams to share this information.
Finally, let me link this effort at market focus to avoiding what I think is a common strategic mistake, which is to seek growth primarily by expanding into new markets or geographies. Many firms I've worked with, frustrated by the stagnation or commoditization within their current markets, have been too quick, in my opinion, to look for greener grass elsewhere.
This defies the counsel of the strategy gurus I most respect—people like Michael Porter and David Maister—who say that it's best to go deep before going broad. In other words, seek to build competitive advantage where you are, with clients and markets and services that you know best, before trying to create it in places where you have little if any standing.
Start with your core markets, defining and executing strategies for growing your market share and strengthening your competitive positioning. Once you have built a competitive advantage here, then seek to export it to new (similar or related) markets or geographic areas. Moving laterally before deepening your market position often dilutes your business development efforts, spreads resources too thin, and diminishes profitability.