The New Magic Word in Industry

DIVERSIFICATION

GROW or Die" is the chief axiom of U.S. businessmen. Never have more businesses grown faster--and fewer died--than in the years since war's end. But size alone is not the remarkable thing about this business growth.

The most significant point is how U.S.

corporations have been finding new products and new markets, branching out into new fields. Diversification has become so popular that it is almost a fetish.

Most industrialists diversify to 1) hedge against recession, 2) even out seasonal ups and downs, 3) give a company room to grow, 4) make up for the cyclical swings of a market. For example, to offset the big fluctuations in basic steel production (now down 30% when all industry is down only 10%), Republic Steel diversified into such things as steel kitchen cabinets and chain.

The primary object of diversification by the Rockwell Manufacturing Co., which makes everything from saws to parking meters, is to provide, "as nearly as possible, 'security of profits,' and thus security of jobs and dividends." Says President Willard Rockwell: "A company tied to one industry, or operating in one plant, is too vulnerable. One soft market, one bad fire, one strike, and profits are suspended, people are laid off, dividends stop. At the worst the company is out of business." Diversification also got a boost from the war-baby industries; they were forced by the loss of defense orders to find new products, or go broke. In general diversification is along two broad lines. A company may start making new products closely related to the old (e.g., Kelvinator added washing machines to its appliance line), or it may step boldly into some completely new field (e.g., Stanley Warner Corp. took over International Latex, thus moving from theaters into girdles, baby pants and foam pillows).

Since diversification requires capital and involves considerable risk, big business is in a better position to try it than a small company. When a big corporation makes a mistake on a new product, it can afford to drop it quickly and write off the investment. A small business, facing a loss it can ill afford, cannot. One of the costliest mistakes of diversification, says Thompson Products President John David Wright, is for a manufacturer to "stick with his product long after it should be dropped, to prove he was right." Another great problem is to find the new executives needed to make and sell a new product. Many a company falls into the trap of spreading its talent too thin.

In a new field production is easier than sales. But making a product to sell at the right price can often be a tough problem. Warner & Swasey bought a textile machine from its Swiss owners, then spent five years and $3,000,000 to redesign the machine so that it could be sold for $7,000, which the mills could afford, rather than the $18,000 that the Swiss machine would have cost. Even at the low price, says Warner & Swasey Vice President Walter Bailey, "finding distributors, creating a market, convincing the customer that your product is better than what an established competitor is selling is a stupendous task." Some companies even specialize in diversification. A classic example is California's Food Machinery &Chemical Corp., which started with the merger of a pump manufacturer and a maker of canning machinery. Moving into farm machinery, auto equipment, fire-fighting equipment, insecticides and industrial phosphates, Food Machinery now has 13,500 employees, operations in 20 states and an annual gross of $239 million. Says President Paul Davies: "The manufacturer of a very durable mousetrap would readily see the advantage of owning a stabilizing cheese business." Not all companies have been so successful. Both General Mills and Bendix have tried appliances, but ran into so many sales and distribution problems that they got out. The urge to diversify leads many an industry to buy another company just because it is on the market. But as most experts in the field know, the bargain counter is risky; an estimated 50% to 60% of all companies up for sale are in trouble.

The swift progress of diversification by big companies has caused some economists to fear that the big, well-heeled companies may squeeze out smaller competitors in the fields they invade. Actually, there has been little evidence of that. The facts seem to be that diversification increases competition simply because there are more companies in many fields. For the economy as a whole, diversification should prove a strong bulwark against a deep recession. Hundreds of corporations once rose or fell with the sales of one product--and helped pull other companies down with theYn. Now these companies have gone a long way to balance the drop in one product with a rise in another.

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