Putting All Small Business Eggs in One Basket Is Bad for Business
Here are four reasons why concentration can be bad for business.
A narrow business focus – one location – one client – one market – one product line –should be a part of a larger, long term broad based business strategy. Putting all your “eggs in one basket” is a good philosophy for a start- up company but concentration should only be a short- term goal. Risks are greater when the business is highly concentrated; i.e. – a locale, with a limited customer base and a small product line. If there is a natural disaster and the company is located within the disaster zone, the outcome may be fatal for the business. Sensible long term financial goals should reduce risk as you the company reaches out to a larger customer base.
The recent natural disasters in Texas, Florida, Puerto Rico and the Virgin Islands serve as examples of how concentration can negatively impact a small business that has a narrow focus. Even without a natural disaster, concentration has more risk than diversification.
Concentration as defined by Wikipedia (in non-chemistry terms) is “the ability to give exclusive attention to a single objective or activity.”
Concentration is vital when a student is studying for an exam or a performer is memorizing a musical score. However, concentration as applied to a small business enterprise can be a danger.
Here are four reasons why concentration can be bad for business:
- One Location:
An unexpected extended street closure by a municipality can prevent ready access for a customer base. The business still must pay rent and cover payroll. (A smart business owner tries to address this possibility in his lease negotiations.) A sudden natural disaster can destroy a local market. Many small businesses in the path of Irma have had setbacks. Some of these businesses will have difficulty recovering. And, the owners who plan to reopen ASAP should anticipate an increase in the cost of insurance when a property has suffered storm damage.
It may be wise for these businesses to consider business interruption insurance and property damage insurance which also includes inventory.
- A Narrow Market:
If a major retailer such as a supermarket or a national company that brings traffic to the local area goes out of business, small retailers may lose their customer base. We all read about many major retailers closing locations and some major companies are being restructured following a bankruptcy. A small retailer near a big box that closes its doors must reconsider its marketing plan.
- One Product or One Project Line:
- If the line is popular others will try to undercut your pricing.
- If the line does not create enough buzz, the company will have to have an ongoing marketing budget and perhaps pay sales commissions.
- Items that have limited shelf life that are confronted with the perils of a disaster such as Irma, will undoubtedly result in a loss of revenue. Many products cannot survive the lack of air conditioning or an increase in humidity. No available product = no sales.
- If faced with a natural disaster a business that has a seasonal market can lose a year of sales if they miss the strong season. i.e. winter clothing in the northeast or flower sales in February (Valentine’s Day) or June weddings. Or heaven forbid, the Christmas season.
There are other emergency situations that unfortunately from time to time should be address by small business owners.
Clients or competitors may write negative blogs; your product line may lose its fashion appeal; heavy local traffic may impede growth of your local market, delays in shipping may slow down deliveries and thus slow down revenue. In every situation, additional dollars and creative marketing concepts are required to get back on track.
- One Customer:
A one customer business can be impacted by a change of management or a change of management policy. Products can be cut from their budget. Not nice, but it has happened. The customer could be a Federal Government Agency that is impacted by a budget cut and that policy change could put you out of business. it is not unusual that a retailer tries to go around a distributor and buy directly from a factory, thereby cutting his costs and improving his profit margins. If a business is narrow in scope – one customer, one market, one product, or one location, long term survival is questionable, until the business gets big enough to control a market.And, trying to get financing for a company that has a narrow base of customers or a narrow product line is very difficult. The best way to finance this type of company is to finance a contract which can be expensive, or if the company has long tern history a bank may provide working capital.
Of course, you need both good personal credit and a strong balance sheet to obtain these funds from a bank. There are lending programs that are currently being offered to small business that need assistance to get back on track. Beware of the short term offers that appear attractive but can turn into long term debt.
Recovery always takes longer than planned and if the company needs additional working capital, the disaster financing may interfere with its ability to access the needed capital for expansion.
Related articles:
Planning Is Core to Small Business Success
Customer Service Still Matters
