This is our last article in the common threads series. Over the past four months we have looked at four of the common problems that we have found in businesses that have become insolvent. This month we look at businesses that over or under specialize – whether in their product or service offering or in the customers they serve.
Over specialization may be a potential problem. But trying to be all things to all people can be a disastrous business model too. Many of what we think of as the big general businesses are generally just retail stores that sell a wide range of products. Places like Wal-Mart and other ‘big box’ businesses are attempting this ‘all things to all people’ approach, a one stop shop for your life, with limited success (on all appearances, Wal Mart is doing it well). The large retail parts of the business may thrive, but many times they are just supporting the loss-making ancillary businesses.
This also happens on a much smaller scale, when otherwise profitable businesses expand into new areas believing that they can transfer their expertise into a new business model.
On the other hand, any business which over specializes – whether it relies on one or a few related products, or one customer or small group of customers and limited products – may be strategically unbalanced. This is a sweeping statement but the important word is ‘over’ specialize. A certain amount of, giving rise to a perceived and probably a real expertise, is generally expected in most businesses – and in fact necessary in a lot of industries. This comes from an accountant who has done nothing else but insolvency in their 20 year accounting career.
What is over specialisation in any particular business? This is one of those questions that has no correct answer, and any good answer is a moving target. By way of example: someone with a broken leg needs a doctor and will generally seek someone good – a specialist. Cars break down, houses need maintenance, tax need to be done, defences need to be filed, building plans need to be drafted etc. In each of these situations, customers will seek someone that ‘specialises’ in that area.
These are examples of industries where a certain amount of specialization (and hence the perception of expertise) is expected, but the range of customers is not that limited. Anyone can break their leg so the business model of fixing broken legs appears to be sound. Over specialization would occur if the doctor only fixed broken left knee caps of 20 year old males who suffered the injury whilst playing full-back in rugby. Regardless of how good you are at your trade, this business model relies on a very over-specialised customer base. Over specialization may mean that businesses miss a lot of customer’s spending potential, or a lot of customers.
One very obvious example of both over specialization in customer base was the Korean karaoke business detailed in our Four Lessons series (see our July 2009 newsletter). This business provided a karaoke experience, only in Korean, in premises that sold neither food nor alcohol. I explained in that article that they had over specialized their customer base to dieting, sober, Korean karaoke singers. That business failed because it was over specialised.
Another example was the sawmill business described in Part Three of this series. They failed to innovate the way they produced their product which meant that they (maybe unwillingly) over specialized in their product offering. They certainly also over specialized in their customer base – having only one. They too failed.
Sometimes it is difficult to determine the best level of specialization (note I did not say ‘correct level’). A wider range of offerings should mean a wider range of customers. But it may also mean a lesser degree of perceived expertise. It may also mean divergence into businesses that do not make money and survive off the profits earned by the original part of the business. A very successful house builder is Bundaberg failed leaving many debts when they expanded into building commercial premises in Rockhampton. In theory building is building and they were builders. In reality the under-specialisation brought about the company’s demise because they did not have the expertise on hand to manage the expanded business.
In many of the business insolvencies we deal with – and with the greatest of hindsight – we see that some business owners want their business model to be everything to everyone, and some want it to be one thing to a few people. Within this range there will be a business model that works. It’s the ‘over’ and ‘under’ part in the title, taking that model too far, that is the common thread.
I hope that this short series has given some light to the common issues that we find in insolvent businesses.