Pick the Next Business Segment in which Your Shop Will Succeed

Originally titled 'Pick Your Business'

In machining, market segmentation is an important strategy for success. An executive of a major contract manufacturer offers advice.

What is the obstacle to a machine shop expanding its business? Ironically, the answer is often accepting new business.

Dave Rugaber has seen this. The executive VP with Oberg Industries, a Pennsylvania-based contract manufacturer with over 700 employees, says his company used to be opportunistic about taking whatever business came. The frequent result was high startup costs cutting into returns.

In pursuit of better financial performance, the company’s leaders decided to begin deliberately targeting specific market segments. Doing so meant ignoring opportunities in other areas. This change was at odds with the company culture at the time, but today Oberg enjoys expanded sales through the business it has won in the segments it chose: orthopedic instruments and commercial aircraft components.

Mr. Rugaber believes there is a lesson here that applies even to smaller shops. That is, pick your battles. Or more accurately, pick your business.

“Choose the next niche in which you will have a competitive advantage,” he says. “Focus on a portion of your customer base, so you can tailor new offerings and new capabilities in that direction.” Electing to become very good for one or two market segments is more powerful than remaining simply OK for all of them.

What are market segments? There are different ways to define them, he says. The end-use sector (aerospace, medical) is one way. Other segments include geographic regions, processes (grinding, Swiss-type turning) and quantity needs (prototype vs. production, high mix vs. high volume). For some shops, one specific customer company can be a targeted segment all by itself.

What, then, makes a segment a good choice to become the focus of your shop? Mr. Rugaber offers three considerations. Look to evaluate:

  1. the stability of that segment,
  2. the potential to provide the growth and profits you aim to realize, and
  3. the likelihood that your shop will be able to not only develop a competitive advantage in that area, but also keep that edge by continuing to advance.

This will take time, he says. The commitment of company leadership to market segmentation is crucial. So is the enthusiasm of a core group of employees who initially will be the ones to pursue this chosen niche. Indeed, this group will need to be protected, because their efforts will not show returns early on. The pursuit of a new segment will need to function and be treated like an entrepreneurial startup for a while before that segment can become a mature and thriving market.

But this payoff is worth the price. Rather than struggling for business within many segments, he says, “it is so much easier to sell within a couple of markets as a recognized leader.”

Machining is a terrific field, he notes. The advantage of machining work is that expertise in this area can potentially serve many different market needs. But this is also its disadvantage. Oberg’s successes began to multiply once this company recognized that too much opportunity was actually a problem it had to confront.