When you start a business, one of the things you will have to come to terms with is the fact that you can't be everything to everybody. This will be tougher than it sounds, especially early on: Customers will likely approach you asking you to do something outside of the scope of your business, and it will be tempting to try to fulfill their needs to acquire sales and customers. It isn't always a bad thing to pursue some of this business, as it may help identify an underserved market, but the long-term success of your business will be based on the returns it generates and not the sales. Therefore, you need to be able to distinguish between new business that will add to returns and that which will not.

A simple way to help make this distinction is through what an advisor of mine at the University of Wisconsin termed "efficiency-seeking" and "flexibility-seeking" long-term survival strategies. From this perspective, there are essentially two ways a firm can generate a return on sales: It can generate a high volume of sales with a small margin on each sale, or it can generate a smaller sales volume with a higher margin on each sale (unless your firm holds an absolute market advantage and is able to generate high sales volumes with high margins, in which case you likely aren't looking for advice from columns like these). High-volume/low-margin firms generally have a standard product or service and compete on operational efficiency. Low-volume/high-margin firms generally have something unique or custom-designed for which customers are willing to pay a higher price, and they compete on their flexibility in meeting end-customer needs.

One decision you will need to make early on is which of these strategies your business will follow, as they require different types of organizations to be effective. For instance, consider fast-food chains (efficiency-seeking) and fine restaurants (flexibility-seeking). The fast-food chain generates returns by efficiently producing and delivering standard food items: It sets up systems so that all of its food is prepared at a central location and sent to each restaurant frozen, with systems in place at the restaurant for order handling and food preparation (throw the fries in grease and set the timer). These systems greatly reduce the marginal cost per unit sold, and customers are happy because burgers are inexpensive and taste the same no matter who makes it and whether it's at a restaurant in Fargo or Fresno. The fine restaurant, on the other hand, generates returns by providing each customer with a unique dining experience: all of the food is prepared on site by skilled chefs, either shortly before or after the customer orders. Marginal costs per unit are higher, but customers are willing to pay more for high-quality food and service as well as the ability to order food according to their individual taste.

A common trap that many new and growing small firms run into is attempting to take on business from both sides of the aisle. For example, a manufacturer of standard-sized pallets in the Midwest began getting requests from customers for unique pallet sizes. Seeing an opportunity for growth through higher-margin sales, the manufacturer jumped on this opportunity. The problem was that the firm was not set up for custom offerings: It had a generally unskilled labor force trained to operate standard machinery, and these workers could not effectively produce custom pallets. It also had to interrupt its normal production processes to produce custom pallets, which reduced efficiency. The company did hire some skilled labor, but found that at different times they would either have skilled labor working on unskilled projects or unskilled labor working on skilled projects. The basic result was that the company was not able to effectively maintain a low-cost position or effectively meet end-customer needs, and returns suffered.

With your business, decide early on what your long-term survival strategy will be and stick to business that fits with that strategy. If your business follows an efficiency-seeking strategy and customers are repeatedly requesting customized versions of your product or service, consider setting up a separate division focused on custom business. This will allow you to implement separate systems that are consistent with efficiency and flexibility goals and to hire the right workforce for each division with the right incentives to achieve those goals. Again, remember that ultimately the success of your business depends on returns, and setting up a consistent organization and selecting business that fits with that organization should help to strengthen those returns.

Got a comment on this topic? Post your thoughts in the Inc. Forums.

Published on: Aug 1, 2004