Managing the Transition from Maturity to Decline: Diamond Power Corporation
This case study, prepared by Richard C. Scameborn, follows the Diamond Power Specialty Company from its humble beginnings in 1903 to its decline in 1991.
The birth of Diamond came with the invention of the hand cranked soot blower. As the years and technology progressed, so did the Diamond soot blower. Along with this main product, Diamond also added several other products to its line, but none had the profitability of the soot blower. Diamond had the market to itself for a number of years, but eventually two competitors sprang up to challenge Diamond: Copes-Vulcan and Bayer Company. Competition did not become fierce until World War II, when the soot blower became a major commodity used by the U.S. Navy to clean boilers on board its ships. At this point, the soot blower industry became a seller's market and the need for strategy (both corporate and business) became a necessity for growth and survival.
Diamond Power's main mission at its beginning, to produce soot blowers that would efficiently clean the inside of boiler as it continued working, basically stayed the same up until the addition of competition into the market. At this point, Diamond had to revise its mission to include technological advances to stay ahead of it main competitor, Copes-Vulcan. With the passage of time, production efficiency and technology were not enough. Diamond eventually had to add foreign sales, customer service, and replacement part production to its original plan to keep ahead of the game. By the 1970's, the mission to supply replacement parts and service became one of Diamond's top priorities as it opened parts and service plants in New Jersey, Georgia, Ohio, Texan, Colorado, North Dakota, California, and Washington.
Diamond Power's goals over the years seem to stay pretty congruent with its mission up until the early 1980's. Basically, Diamond's goals included staying on the
moderate levels of technology, building a foreign market by exporting machines and parts and establishing joint-venture manufacturing companies overseas, establishing an extensive and profitable domestic aftermarket support system that included minifactories that supplied both parts and service, and to keep the upper hand on the soot blower market share.
Diamond Power's parent corporation, McDermott, Inc, utilized several different corporate strategies to try to achieve Diamond's goal of a profitable and extensive aftermarket support system. However, some of the decisions made by McDermott, Inc in regards to its replacement part division caused more harm than good. For example, when a small operator began to copy and sell Diamond replacement parts at a lower cost than Diamond with great success, McDermott overrode Diamond executives' wish to acquire the operation. This decision had far-reaching repercussions as will be discussed in later paragraphs.
McDermott also had to take action where Diamond was concerned when it began experienced severe financial difficulties in the late 1980's and early 1990's. McDermott had to implement a major costcutting effort and restructuring plan to keep from going bankrupt. This plan included putting pressure on Diamond to increase profits. Diamond had to take implement several business strategies in order to appease its parent corporation.
Decisions made on the corporate level had a direct affect on the business strategies implemented by Diamond Power. The development of the aftermarket support system was a plan with several long term benefits. The plan, developed by the marketing vice president at the time, involved a nationwide network of minifactories that offered service and replacement parts that could be delivered in a matter of hours to industries in need. Diamond's high market share on soot blowers allowed the company to lower its new equipment prices and recoup any losses through its
replacement part division. This resulted in increased sales in both new equipment and parts. Diamond's competition, Cope-Vulcan, did not have any service centers and only limited replacement part manufacturing, and therefore did not reap profits as high as Diamond Power's. However, not all of Diamond's business strategies worked as well as the replacement part and service system.
Under the pressure of McDermott, Inc, Diamond felt it had to make several rash decisions in order to increase profitability. First, Diamond did not purchase Bill Blalock's low production company that made Cope and Diamond parts. This allowed a foreign company to buy it out and break into Diamond's dominant part industry. It also allowed Cope-Vulcan to increase its part production market by forcing it to implement an aggressive management team and add new products to its line. Diamond responded to this by deciding to reverse-engineer nonpatented Cope parts in Korea and sell them for a lower price than Cope sold them itself. Diamond also made the decision to close a very productive plant in Canada and lose a very influential employee in the process. Both of these decisions eventually caused severe problems for the company and helped to lead to its decline.
Ethically, Diamond commits only two mistakes in judgment that should have been avoided. Diamond's decision to start making Cope parts was not illegal, but was underhanded since the two companies seemed to have an understanding that they would not make eachother's parts. Diamond also made and ethical mistake by closing the plant in Canada and basically turning its back on a loyal Diamond employee. Both of these breaches of ethics ends up causing Diamond a lot of trouble as time goes on.
There are three major problems that come up in the Diamond Power case. The most obvious problem the company encounters involves the handling of its lucrative parts industry. For a number of years, the parts division was able to carry the company through times of low new equipment sales. But, for as important as the parts business
was for Diamond, it did not take adequate measures to protect it. For example, Diamond never bothered to patent its parts in the U.S. or in Korea, and this left the door open for other companies to reverse-engineer Diamond parts and sell them for their own profits. Also, Diamond did not take the opportunity to buy out the profitable Blalock low production company, a company making Diamond parts that were not patented. Patenting would have saved Diamond from the invasion of a low producer invasion and from aggressive retaliation by Cope later on for making and selling nonpatented Cope parts. It seems that a division as valuable as the service and replacement division would have been protected more heavily.
The second major problem Diamond had was in shutting down its Canadian factory. This caused trouble for Diamond in two ways: it gave other companies the opportunity to cash in on a profitable Canadian market, now left wide open by the removal of Diamond, and it caused a very influential and valuable employee to leave and eventually join forces with Cope-Vulcan. The consequences of closing the Canadian plant and failing to protect its replacement part business eventually come back to haunt Diamond as Cope is able to break into Diamond's replacement part market share and lower it from 60% to 56% in less than one year.
The third major problem Diamond creates for itself is its shut down of 6 of its 8 service divisions in the face of profit pressure and cost-cutting. This was probably the worst place to cut back, since the former expansiveness of its service business is what made Diamond such a nationwide force. Industries that once turned to Diamond for service and subsequently Diamond part had no choice put to go to Diamond's competitors for service and parts. By this foolhardy decision, Diamond's president not only lost profits for Diamond, but also lost his job.
The weakness most in need of fixing is found within the administration. The leaders of Diamond Power seemed to become increasingly weaker and/or more
foolish as time went on. Examples of incompetence and lack of vision by the business leaders of Diamond include failure to patent and protect the replacement parts division, failure to acquire small businesses that posed a threat to the replacement market share, reverse-engineering of a competitor's parts without protecting the company from retaliation, closing and losing a very vital and important foreign plant and employee, and shutting down the nationwide influence of Diamond by closing service centers in major cities. Diamond's strengths lay in it replacement parts and service departments. Both of these industries proved profitable for many years and often carried the company in hard times. This strength was not protected, but could have still been improved.
Revival of the replacement parts and service division of the company is essential for the survival of the company. Major improvements of old parts should be made and quickly patented in order to win back clients and protect future profits and market shares. Price reductions might need to be implemented in order to resuscitate sales quickly. Also Diamond may want to boost the technology level in its machinery and parts to prove that to customers that Diamond makes high quality products. Some expenses would have to be increased initially, but these would soon pay for themselves by increasing sales and reputation.
Long-term changes should include reopening service centers and possibly trying to break into the Canadian and foreign markets. Also, the production of new products or services could be a long-term goal to reach for. New, more aggressive management should also be a long-term project. The initial mission was a good one and should be kept. The strategies should include lowering new equipment costs to spark increase in customer service and parts needs (like was done in the past). Also, Diamond should try to raise the market shares of other divisions, such as foreign sales to back up its aftermarket support system so the company is not reliant on just one of
its divisions. However, fixing the weaknesses and improving the strengths would probably be the most productive course of action for the Diamond Power Specialty Company.