This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
As has been remarked, the managers of a corporation that has proved successful are seldom willing to stop. They wish to go ahead and enlarge their profits. This statement applies notably to the business men of the United States. In England and other countries business customs favor building up a sound business and maintaining it rather than restlessly pushing into other fields. No doubt the American practice makes for pro-gressiveness, yet it also involves a constantly recurring danger of disaster.
The number of companies which have taken on "side line" enterprises to their sorrow is far beyond what would usually be supposed. A conspicuous example is the American Locomotive Company which some years ago decided to engage in* the business of manufacturing automobiles. The plant was poorly located and it is to be presumed that the officers had neither the time nor the special training which would have enabled them to handle this business with success. In 1913 internal dissension in the company brought to light the fact that over $2,300,000 had been lost during that year in the automobile enterprise. Subsequently the directors decided to accept their loss, dispose of the plant and other assets, and close all their activities in this field.
In 1914 the American Water Works Guarantee Company became financially embarrassed. This company had been a highly successful promoter of public utility corporations and of holding companies operating in the public utility field. After having succeeded in this line, it attempted to carry out certain irrigation projects and invested in these projects more than $10,000,000. In addition it eventually became necessary for the company to indorse more than $23,000,000 of the obligations of its irrigation subsidiaries. The result was that this "side line" became the most important activity of the company and was the direct cause of its embarrassment.
On the other hand, it is sometimes true that a "side line" may prove to be the only really profitable feature of a business. For example, the London Underground Electric Railways Company shows investments of a nominal value of £17,000,-000, of which £15,500,000 is in the various underground railway companies, and £1,500,000 is in the London General Omnibus Company. The profits from the underground railways were a trifle over 1%, or about £160,800; the profits from the omnibus service were nearly 23%, or approximately £377,000.
Some of the great meat-packing concerns such as Armour, Swift, and Morris, started a great many years ago to operate refrigerator cars primarily for transporting their own products. As a "side line" they began to run these cars for the benefit of producers of fruit and vegetables, with the result, as is well known, that operating car lines became, in time, one of the most profitable features of their business.
In the same way the United Fruit Company was originally designed merely to market tropical fruits, especially bananas. In the course of time, however, the company has taken over one "side line" after another until at present it conducts banana plantations, sugar plantations, railroads, tramways, steamships, and refrigerator car lines. It is understood that each of these developments has proved a profit-maker and that the company's revenue from its transportation interests is almost as great as from its original field of operation.
The United Cigar Stores Company is said to have developed successful "side lines," but has followed the policy of selling these lines after they were developed to separately organized and managed corporations. The profit-sharing coupons of the company have, for example, been taken over by the United Profit Sharing Corporation and the sale of chewing gum has been taken over by the Sterling Gum Company.
Perhaps the most definite conclusion that can be reached here is that the creation of "side lines" is a dangerous business policy. It involves a diversion of capital, of thought, and of creative energy that would otherwise go into building up the company's own business. This is especially the case when a "side line" is taken on that has no vital or necessary connection with the original and proper business of the company. In that case, it calls for an especially heavy drain on the talent and resources of the company. The "side line" that develops naturally and almost unavoidably is of a different type. It may be considered as rather in the nature of an extension than a "side line".
Even when a "side line" is successful, the question still remains whether the application of an equal amount of capital and of managerial ability to the company's own product would not have brought still greater success. Certain it is that those companies which have achieved the greatest records of growth are those which, like the Ford Motor Company, the National Cash Register Company, the Curtis Publishing Company, and thousands of others, have devoted themselves exclusively to turning out one or two cognate products and have never allowed money or energy to be diverted from this main purpose.