Advice for Small Business Owners

Diversity and Focus

By Elie Kochman on November 22nd, 2010

In last week’s episode of Dragons’ Den, there were two pitches that were of particular interest, since both had the same issue, but from the exact opposite perspective. In one case, the issue was in regard to too much diversity and not enough focus, in the other, it was the lack of diversity which drove the dragons away.

The first pitch was from a pair of entrepreneurs from Vancouver, pitching their clothing line, Skyler Clothing, which they said would soon be the next Lululemon. Having worked at their business for four years, it came as a surprise that Christina Marcano and Hayley Gregg were still in debt, and perhaps because of some hard lessons learned.

During the recession, their diversification into having their own stores, rather than focus on online sales and use of various shopping channels turned the business’ finances into a nightmare. Three of the stores were eventually closed, with the fourth, their headquarters, being kept. While the products were good, and they learned much about how they could have handled the recession better, the company was under severe financial strain.

While they did not get a deal, they did get a piece of advice from Jim Treliving – close the last store and focus on getting the wholesale marketm selling to distributors, rather than trying to create their own shops, a rather expensive proposition.

In the other case, the entrepreneur had been in business for fourteen years, and had a solid product. Olivier Soap made creams and lotions that when presented by Pierre Pelletier and Clarence LeBlanc were well-received, but despite his strong business, they failed to get a deal.

The business had several stores, and was looking to move into the business model like Arbonne, in which people pay a small fee to represent the company, and then earn a commission from any sales they make. The problem was that such a strategic move required a significant amount of cash, something the business seemed to have in short supply.

While the model might work, and the products seemed to hold up under scrutiny, the dragons were still not interested. The reason, perhaps, is that the business is in a stage of transition, which makes the investment more risky than most. With a business using an established model, while there is risk that the model might not work, the business can be assessed based on past performance with that model. When, however, a business starts to tread new ground, investors may shy away for the simple reason that they have no means to assess the current owner’s ability to run such a business.

Is diversification a good thing, or a bad thing? It really depends on what stage your business is in, and what you are trying to do with your business.

When times are tough, it may be better ton focus on one or two models that are known tone profitable. While this may hinder your ability to act on new opportunities, it can also limit your exposure to risk.

Alternatively, if your business is stable and profitable, then looking to diversify, whether in the form of new products or services, or to try new marketing and distribution models, may be a wise strategic move. Finding an investor at the same time, though, may be difficult.