The Value of Being Diversified

One of the breakthroughs in Scaling Up your business is finding your ‘great customer’ – big orders, easy to work with, repeat.  Then all of sudden you realize they are 50% of your business, and a new problem arises – if you lose them, it will have a major impact on the business.  The relationship also begins to change, as the customer begins to have more power to press their agenda. In the meantime, you are trying to grow and they are a key reason why you are seeing success, making it tough to say no.
 
The same scenario can be said for a key employee or key vendor, where losing them would make a big impact on the business.  And just like the key customer, you might start making business decisions based on saving the relationship vs what is good for the business.
 
Any one of these three scenarios present significant risk to the business.  They comprise what we call the ‘Switzerland Structure’.
 
The name comes from the country Switzerland. If you know anything about Switzerland, they are fiercely independent as a people:
- They didn't participate in either one of the World Wars
- They didn't send troops to Afghanistan or Iraq
- They even balked at being a member of the United Nations. Ultimately they did join the UN in 1945, but you can see that their independence is very important to them.
 
The concept of the Switzerland Structure is there are three constituencies that, as a business, we need to examine our dependency on them. Those constituencies are customer, employee and supplier. Concentration in any area is a real risk for the business because it impacts business value.
 
Buyers are sophisticated. They will figure out where concentrations exist and use it to discount your business. These concentrations affect your business beyond the selling process, such as bank relationships and their willingness to lend.  Building a strong bench among your employees and vendors is how to protect yourself and the business from risk in those areas. And of course, customer diversification is the key to breaking up customer concentration.
 
The purpose of this Value Builder series is to help owners understand what really drives wealth creation. And the answer is simple - business value.
 
Do you have a concentration issue? Take a closer look at those 3 constituents. Remember, what you do today will either increase – or decrease – business value. Those actions will not only impact today’s income, but also determine what options are ON – and OFF – the table for transitioning the business on your terms tomorrow.  
 
Check out my video here on the Switzerland Structure.