26-06-2026


Pitfalls of diversification

Diversification into aerospace

The business was producing mechanical transmissions for the defence industry. At that time, spend on defence was in decline so the management team decided to look at diversifying into growing markets. 

They picked the aerospace market as it appeared to be a good match for their precision manufacturing capabilities, and they anticipated that it would generate good margins.

A sales campaign was launched and soon contracts were won with prestigious aerospace OEMs to manufacture high precision components and transmissions on a “make-to-print” basis. 

The influx of new aerospace contracts increased the manufacturing workload significantly.

The production control system of the business struggled to cope with the increased volume and variety of parts to be manufactured. 

This led to missed delivery dates and increased manufacturing costs.

The whole management team focussed almost exclusively on improving control of production, but the business kept missing deadlines and manufacturing costs kept increasing.

Analysis of the problem

Analysis by an independent third-party consultancy reached the following conclusions.

Most aerospace contracts were loss-making. 

Although the business had been very successful in winning aerospace contracts over a short period of time, this had been achieved by under-cutting prices in a fiercely competitive market.

Most machines in the large manufacturing facility were under-utilised and could not produce parts cost effectively due to their limited capabilities and lack of automation.

The company relied on a multitude of small local sub-contractors, who struggled to meet the demanding and ever-changing schedules, and delivered sub-standard parts as a result.

Decisions made

Termination of the unprofitable “make-to-print” aerospace manufacturing contracts in a controlled manner with customers as the business could not compete on price on products for which they did not own the design.

Drastic simplification of in-house manufacturing to focus exclusively on the essential and complex parts that the business was able to produce effectively.

Outsourcing of parts that could be made more cost effectively by specialist sub-contractors to a few carefully selected suppliers. 

Neglected core business

In the meantime, the core defence business had been neglected. 

A serious technical issue arose with parts procured from an external supplier.  This had a disastrous impact on the military transmissions produced, rendering them unable to meet the specification. 

Too busy dealing with trying to control the production of aerospace products, the management team had left people at the working level to deal with the sub-contractor issue. 

The magnitude of the problem and its impact on customers quickly overwhelmed the people trying to deal with it. 

The management team had taken too long to recognise the seriousness of the situation and had failed to take timely actions. 

Outcome

As a result of exiting unprofitable aerospace contracts and implementing a drastic make-buy exercise the business returned to profitability and re-focussed on its core military transmissions. 

Seeing that the business had failed to diversify into the aerospace market, the mother company decided to sell the business. 

This resulted in almost all employees losing their jobs in the process.

So what went wrong?

Inadequate market research

The decision to diversify into the aerospace market was based on a few conversations, anecdotal feedback and personal intuition. 

The costs of meeting aerospace standards and fulfilling product traceability and customer approval requirements had not been researched and taken into account. 

The business entered a market where incumbents were much stronger than anticipated and dictated pricing.

Trying to compete with them resulted in loss-making contracts.

The core defence business was not strong enough before diversification began

Diversification was used as a remedy for the inefficient core manufacturing business and added strain rather than solving the underlying issue.

The amount of management attention required by the diversification was under-estimated. 

As a result, the core business suffered, the new aerospace initiative was under-managed and both underperformed. 

I can help

I work with leaders of engineering SMEs to help them prepare their business so they can achieve profitable growth.

To discuss how I can help you with your specific challenges, please use the link below to arrange a free 30-minute conversation.

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