Eliminate Business-Killing Concentrations in 2007

by TEC Speaker Laddie Blaskowski

Have you ever noticed how many small businesses simply drop off the face of the earth? One day they’re open and successful, the next day they’re gone. Every year a silent killer takes out thousands of businesses. This silent killer is called a concentration.

I have seen more solidly operated, well managed, and financially sound businesses taken out by concentrations than by any other cause. These companies have often disappeared seemingly overnight.

A concentration is any staff member, customer, industry or vendor that is so significant to your company’s operations that, if it disappears, it could disrupt your entire business.

Revenue concentration
If your company has one or two large customers who constitute an overly high percentage of your sales, consider what would happen if they left. I once consulted to a company that generated nearly all its revenue by providing specialized products to one huge customer. The company needed to broaden its product and client base to protect itself from the existing concentration. Unfortunately, the owners were overly confident in their relationship with this customer and maintained the status quo. After a couple of years, this “golden egg” customer failed to renew its contract and went to another vendor, and my client closed its doors.

Industry concentration
In a similar scenario, a business owner told me that his company was in trouble because he had lost four large customers, totaling about 40% of his sales. He assured me that he didn’t have any concentrations. Upon closer inspection, however, it turned out that all four of those customers were in the same industry, which had recently experienced a downturn.

Knowledge or skill concentration
Another of my clients was very proud of one of his salespeople. He explained that almost 80% of sales came from this one individual. He had a salesperson concentration. If that person had been hired away by a competitor, suffered a serious illness, or been hit by the proverbial truck, my client’s business could have been sunk. When I pointed out the danger, he took immediate steps to improve the performance of the other members of his sales team.

Does Your Company Have a Concentration?

To determine whether your business has a dangerous concentration, see if any of the following statements apply to you.

1.      A high percentage of our sales come from one or two customers.

2.      We purchase all or most of a certain product from one vendor, who couldn't be replaced in a timely manner if that company were to fail.

3.      We have equipment or software that is very specific and that only one vendor can service, such as a piece of old machinery that is critical to our business.

4.      We sell most of our product or service during one season.

5.      We have an employee who knows a critical part of the business that no one else knows (e.g., how to run a machine, certain information about customers, how the accounting system works.), or who is the only person certified in an area critical to the company.

6.      We have most or all of our sales generated from one effort (e.g., trade shows, direct mail).

7.      Most or all of our sales are derived from one salesperson.

Although some concentrations are unavoidable, such as having all of your utilities under the control of your local municipality, most concentrations should be viewed as a liability and, whenever possible, the risk should be lessened.

If you have a concentration in your business, design a plan to minimize the risk, and determine what-if scenarios or contingency plans in case something goes wrong. Strive to diversify your customer base, recruit back-up vendors for essential supplies, get to know your best salesperson’s customers, and find other ways to diversify sales over the entire year.

Even if you can’t currently identify a problem, be aware that concentrations have a way of sneaking up on you. Check for concentrations in your business periodically, and take steps to ensure you're covered in case of a change.

Laddie Blaskowski is President of BusinessTruths Consulting, Inc. and co-author of the book titled The Step Dynamic: A Powerful Strategy for Successfully Growing Your Business.