But how do you know if your business has its eggs in the appropriate number of baskets? And what areas should you evaluate?
Customers
If you lost your biggest customer, what would happen to your business? For some businesses, they would completely shut down. Others would find themselves crippled and struggling to pay their bills. Still others might just shrug it off as business lost and continue running along with their other customers.
Which one looks more like your business? If you are too reliant on one or two customers, you certainly have a risky situation to deal with. Not only does your business hang on every dollar you bring in from those customers, but you also lose bargaining power when negotiating future business with them.
As entrepreneurs, you welcome every customer. But if you find yourself reliant on one or two to keep eating, you may want to put a heavy bit of investment in customer acquisition efforts. Get your marketing machine in gear and work to become reliant on hundreds of customers instead of just a couple.
Vendors
I once ran a business that acted as a retail front for bands that wanted to sell their merchandise online, but didn't want to set up an entire storefront. Sales had massive peaks and valleys, though, and usually corresponded to new releases from just a couple of the artists. The survival of the business was wholly dependent on the product release schedule from just a couple of vendors.
Once again, this situation puts you in a weaker negotiating position with your vendors. But worse, being reliant on a single vendor really makes your business just a de facto employee of that vendor. Whatever service you provide, if your business totally rotates around the activities of one vendor, you become totally at their mercy. Your cease to control your business's direction and success.
The solution: take back your control where you can. Look to diversify suppliers, particularly if they offer commodity type products. If not, look at why certain vendors are succeeding and try to leverage that information to acquire new vendors with similar characteristics. Figure out if there are services you could offer that would reduce your reliance on particular vendors and increase your customer stickiness. Become more valuable to the vendor than they are to you.
Employees
You enter dangerous territory when you find yourself single-threaded on employees. Even the best and most loyal employees can often find themselves in personal situations that necessitate a job change. When that time comes, you may find yourself with a gaping hole in your organization where critical knowledge or certain tasks leave with the employee.
Sure, cross-training can help, but as an entrepreneur, you need to recognize these situations and take other steps to prevent it. For small businesses, often the boss knows how to perform everyone's job and can fill in in a pinch, but that role should quickly evolve into trainer as someone else comes up to speed in the area. Sometimes, niche knowledge falls through the cracks, though, and does not ever get effectively communicated to others in the organization.
Employee retention certainly plays a part here as well. Get to know your employees and coworkers well. Try to understand their motivations and make the workplace somewhere they want to be. Compensate people fairly. And while doing everything you can for the people of your business, make sure that you have ample backups and coverage for all critical items.
Products
How much do you rely on a single product or service to generate your revenue? What would happen if another business came in and blew that product away? Could you adapt in time to keep your business afloat?
This one seems obvious, but you would be amazed how many small businesses run out there on a single platform of a single product or service. Even at scale. Think of taxi companies. They provide a singular service - transportation. Introduce Uber to the market, and while taxis still exist, they certainly take a hit because of the additional technology and connectivity that Uber brings to the market.
So here, you can minimize risk by adding products and services, but you can also future-proof your business by making yourself willing to adapt and stay ahead of technology and the industry. Your product portfolio needs an assessment and strategy and risk has to be part of that.
Conclusion
You can absorb risk much better the more diversified your business operates. Beyond even these categories, you should evaluate investments, real estate, technologies, industry and business model, and other areas of your business to identify where you are single-threaded or reliant on a very small number of alternatives. Once you know where your risks lie, work to eliminate them.
Do you have any other good stories about diversifying to reduce risk? Please post a comment or email me to let me know. I'd love to hear them.
