Diversifying for Success

We’ve all been told not to put all our eggs in one basket. If you do, you run the risk of breaking them all. By putting them in different baskets, you reduce that risk.
   That’s the philosophy behind business diversification. If you base your success on one business—especially a cyclical business such as scrap recycling—you face greater risks than if you’re diversified in other businesses.
   Simply defined, diversification is engaging in varied operations, tapping into interests outside your core business. The rationale is that each business can help support the others. Diversification can also be a growth strategy for your business or a way to achieve greater synergy, as in creating new markets and providing more services to customers.
   In general, there are three ways to diversify: Expand within your current niche, go into a related business, or venture into an unrelated business.
   Diversifying successfully, of course, is no easy feat. Success depends, in part, on entering other ventures at the right time, understanding the new business you’re entering, picking good partners and managers, and more.

Profiles in Diversification 
Many scrap companies have used diversification to great effect. Here are mini-profiles of just six scrap firms that have made diversification work for them, followed by advice on how to succeed and what pitfalls to avoid.
   City Carton Co. Inc. John Ockenfels, president and CEO of City Carton Co. Inc. (Iowa City, Iowa), is first and foremost a paper recycler. His family’s first venture, however, was a trucking business, Ockenfels Transfer, which hauled loads of old corrugated containers to a recycling operation, later buying its own baler and facility to process the cartons itself. Today, City Carton has seven paper processing plants in Iowa, making it the largest private paper recycler in the state, says Ockenfels.
   The Ockenfels family learned early the potential risks of relying too heavily on one business. In 1975, City Carton’s major mill customer announced that, because of difficult market conditions, it could no longer buy the firm’s scrap paper. Though City Carton had Ockenfels Transfer to mitigate this major blow, the company learned a valuable lesson: Don’t wrap it all up in one market, Ockenfels says.
   Since then, City Carton has diversified into three related businesses—Document Destruction & Recycling Services, which ensures the secure destruction and recycling or disposal of a variety of products; Greenfield Energy, which converts nonrepulpable paper and other hard-to-recycle materials into fiber fuel pellets; and EWI Equipment, which sells, installs, and services new, used, and rebuilt equipment for companies in the recycling and waste industries.
   Though one corporate pyramid embraces all these companies, they’re independently operated. “All of our plant managers are responsible for their own operations,” Ockenfels notes. “They compete against each other. But it’s a healthy, friendly competition. They also work closely with each other for the benefit of the company as a whole.”
   The Snyder Group. Jim Snyder, president of the Snyder Group (Brownsville, Pa.), is one recycler who has ventured into businesses both related and unrelated to scrap recycling.
   In addition to once owning a waste hauling company and a foundry, Snyder has delved into the fast food and restaurant businesses, home development, tank rebuilding for the government, and the manufacturing of coal-mining equipment. He also likes to buy and lease industrial property.
   Part of Snyder’s philosophy is to avoid taking on what doesn’t fit his system. “You must have the ability to track everything you’re doing,” he says. “ We’ve got everything set up on the same computer system. I can look at everything I own almost on one screen.”
   Colonial Metals Co. “Yes, diversity is a big advantage because scrap is cyclical but also because when you’re not fighting the same battle every day, you’re able to see the forest for the trees,” says David Serls, chairman of Colonial Metals Co. (Columbia, Pa.) and vice chairman of Consolidated Scrap Resources Inc. (Harrisburg, Pa.).
   While metals are his core business, Serls—a past president of ISRI—owns or is a partner in a host of other ventures, from a mini-storage facility to a marina to three dental offices. “I don’t know a cusp from an eyetooth,” he says half-seriously, “but I sit on the board and make policy decisions.” His strangest venture? “It’s my son’s cookie business—Uncle Nookie’s Cookies.”
   What’s more, the time Serls spent lobbying on environmental issues while ReMA president led him to found an environmental consulting company named Alliance, based in Harrisburg, Pa.
   M. Lipsitz & Co. Inc. For Tom Salome, co-owner of M. Lipsitz & Co. Inc. (Waco, Texas), scrap recycling was his first business and remains his largest. Among his other ventures, he operates an industrial waste hauling company, which isn’t as risky as recycling scrap, he says. “It doesn’t have the ups and downs scrap has. With trash hauling, the only thing you really have to worry about is new competitors.”
   Salome and a partner have also been heavily involved in buying and developing land. “We only buy in Waco because we know the market here,” he says. Real estate is “one of the best places you can invest” and is “less risky than the stock market,” he adds.
   Gordon Industries Inc. The Gordon family in Statesville, N.C., owns two rather different businesses: L. Gordon Iron & Metal Co., a metal scrap processor, and Gordon’s Furniture, which sells retail furniture.
   Harry Gordon, a New York City scrap peddler, moved to High Point, N.C., in 1900 to set up shop in an area noted for its furniture industry. Gordon knew little about furniture, but he sold rags to furniture manufacturers, who used them in the wood-finishing process. His son, Louis, grew up learning both industries. At age 17, Louis ventured some 60 miles west to Statesville to start his own scrap firm in the shadow of a foundry. The furniture business followed naturally because he was renting property that had a storefront.
   Today, the Gordon scrap business has 75 employees while the furniture enterprise has 14. Seven Gordons are currently in the recycling division, one Gordon brother runs the furniture division, and the family has—when all four generations are counted—more than 400 years of experience in the scrap and furniture businesses.
   Alter Trading Corp. Do you know which scrap company opened the first legalized riverboat casino in modern U.S. history?
   That would be Alter Trading Corp. (St. Louis), run by the Goldstein family, which has always seen diversification as a means of growth. Aside from its scrap and gaming enterprises, Alter’s affiliates and related parties own and operate hotels, barge terminals, a barge line, and a grain company. In addition to grain, Alter Barge Line Inc. ships coal, fertilizer, steel, and scrap throughout the entire Inland Waterway System, particularly the Mississippi, Illinois, Ohio, and Missouri rivers.
   As typically happens with diversification, one business led to others. Rob Goldstein, president of the scrap operation, notes that his father, Bernard, got the company into the barge business. “We found that by operating our own barges, we could access the Pittsburgh market and bring coal back to the Midwest. It wasn’t long before we figured out that there was more corn in Iowa than there was scrap. We wanted to transport many things, and then the shipping operation took on a life of its own.”
   Alter’s affiliated gaming company opened the country’s first legalized gaming boat in April 1991 on the Iowa side of the Mississippi River. “We began working toward this in 1988,” Goldstein recalls, “when it looked as though Iowa might pass legislation legalizing gaming.”
   Alter bought property in Iowa, opened the riverboat casino, then took its gaming company public. The firm, known as Isle of Capri Casinos Inc., is now the country’s seventh largest publicly traded gaming company. It has 11 gaming operations, is constructing two others, and is purchasing two more.
   Alter’s barge line is also growing—“We just purchased a new tow boat and 60 new barges,” notes Goldstein—and the scrap business now encompasses 15 facilities.
   “Scrap is probably tougher” than any of Alter’s other businesses, says Goldstein. “If you can effectively learn to manage a business as cyclical as scrap, those lessons are applicable to many other businesses.”
   Louis Cohen & Son Inc. Charlie Medico, president of Louis Cohen & Son Inc. (Wilkes-Barre, Pa.), comes from a family that emigrated to the United States early in the 20th century. The Medico men worked 18-hour days at one business and then another—trucking, electric motors, refrigerators, mining—until the 1950s and 1960s when things began to fall into place. The family business began winning competitive bids to rebuild tank turrets and rocket warhead parts for the Department of Defense. The family’s business interests subsequently branched off in many directions, including a horse-racing track, a tractor business, a forklift business, realty companies, and scrap.
   Though “a lot of those early companies have moved on” out of his family’s hands, Medico says, he continues to look for new prospects.

Making It Work
Diversifying can be a gamble, one that can bring great rewards but also considerable headaches. How can you improve your chances for success? These words of advice can help:
   Timing Is Critical. “You have to get in at the right time of a business cycle,” says Medico. “I don’t want to be the last horse in. Get in as soon as you can, just like buying a stock at the bottom of the barrel.”
   Jim Snyder tries to “get in when things are at their worst.” That way, “things are more reasonably priced, you start to learn what everything’s about, and then when things start to swing the other way you can take full advantage.”
   Follow Your Heart—and Your Expertise. When considering a new venture, Medico advises, “it has to be something you really want to do, and your heart has to be in it.”
   Snyder has found success by venturing into businesses to which he can apply his experiences of running a scrap recycling company. “I’m not looking for an Internet company to fix and grow,” he says. “I know what works in the metals business, and I like the challenge of applying that knowledge to a failed company.”
   For its part, the Ockenfels family tends to invest in the familiar. “We don’t get into something we have no knowledge of,” says John Ockenfels.
   Understand the New Business. If you do decide to enter a niche that’s tangential or completely different from your core business, you “need to have some understanding of what that business really is,” Medico says. “When you go into a business, you have to make sure there’s a need for that business. Ask yourself: Is there a need for this service in the area? You need to know how strong, how efficient, the service presently is.”
   Buying or starting a new business always means having to learn new things: new business practices, new regulations, new people. Warns Medico: “You learn through experience how different some of these industries are that at first seem closely related.”
   Pick Your Partners Carefully. Choosing partners may be the most difficult—and important—decision you make when diversifying. “When you pick a partner, it’s like picking a spouse,” Medico says. “You have to evaluate all the pluses and minuses and make sure the pluses outweigh the minuses.” In particular, you need to be sure that the partners share your goals so you can move the business in the same direction.
   Snyder disdains having partners in his metal-related core business, choosing instead to work only with his two brothers. As he explains, “We’re a family business. We move differently than somebody else would. We know where our dollars are coming from. I don’t necessarily know where another partner’s dollars are going to come from.”
   In the case of City Carton, the business partners are the five Ockenfels brothers. When picking partners, John Ockenfels preaches caution—and something akin to a prenuptial agreement: “It’s very easy to get into business together. It’s very difficult to get out. So you need to discuss up front how to dissolve the operation.”
   Hire the Best. The managers you choose to run your new business can make or break it. “Pick key people,” Snyder suggests. “By that I mean someone who ran your new acquisition before you got in or somebody who was working for you all along and understands the way you do things.”
   As David Serls adds, “You can’t do it on your own. Hire experienced people, pay them well, and give them a chance.”

Avoiding the Pitfalls
Much can go wrong when you branch out into other businesses, but there are ways you can minimize the risks:
   Weigh the Potential Losses. “When looking at any new expansion,” Goldstein suggests, “you have to figure out how bad it can possibly be and decide whether you can afford to lose that much. If you can’t, don’t go into it.”
   Don’t Get Overextended. Sometimes going into another business takes you away from your core business—it exhausts time, concentration, energy, and money. 
   One danger, Snyder offers, is spending too much on the new venture to the point of weakening your core business. Another danger is leveraging yourself to the point where you can take only limited steps forward, he says.
   It doesn’t have to be that way. Goldstein says that diversification allows Alter’s companies to offer more services to its suppliers and consumers. The only conflict in operating an array of businesses, he claims, “is when you’re trying to allocate your capital dollars between competing projects—but that’s not a bad thing.”
   Hold on Loosely. According to Ockenfels, the worst thing that can happen is losing control of the business, which can occur if you lose control of the information flow. Paradoxically, one way to have more control is by delegating, he says.
   “We learned a long time ago that you can’t go out and make the day-to-day decisions for people,” Ockenfels explains. “You don’t step in unless it’s a serious event. You need to step back but pay attention, and that’s hard to do.”
   Reward Yourself Last. To make a diversification venture work, you shouldn’t pull money from it too fast. “After the business is running, working, paying all of its bills and obligations, and you’ve done modernization, and it’s a stand-alone company making money—then you can take money out,” Snyder advises.
   Of course, not everyone is so disciplined. That’s the key reason why Snyder doesn’t want partners: “Because they need dollars and cents. Everybody does. But they might be buying so they can take money out right away. That’s not our philosophy, and we don’t want partners who need to do that.”
   Know When to Get Out. While some diversifications are intended to be long-term ventures, others may be short-term investments. In those cases, you have to know when it’s time to sell. Ockenfels says the time to do it is when you and your partners decide the business is no longer viable, you don’t like getting up and going to work in the morning, or “somebody decides it’s worth a lot more to them than it is to you.”
   Picking up on the last point, Snyder advises: “Get out whenever you have the ability to make a profit. And that doesn’t happen every day. The first offer is usually your best.”
   Adding to this advice, Medico comments, “When you get one business that’s in a downer for a long time, that’s when it’s time to sit down and do a business analysis of what’s likely to happen in the future.”
   And the analysis doesn’t always come up negative. “We retained our defense business even in the slowest times,” he notes, “because we had confidence that it would come back up again.” •