How Many Baskets for How Many Eggs?

"An emotion-free analysis of each segment of the business is a good place to start."

One of the most difficult and important decisions any business operator has to make is whether to specialize or to generalize. Should you try to be all things to all customers or seek out and serve only a specific market niche? It may seem so, but it's not an easy choice to make.

In some ways, the route to specialization is easier to follow and the reasons to take it are more compelling. You may have particular skills and experience that lend themselves to one type of service work, or a real eye for style and fashion that makes you a genius when it comes to buying merchandise, as well as a reputation in that market that will help you bring in the business. You and your crew may have superb expertise in fine cabinetry, for example, and the tools and inventory to compete with the best in turning dowdy kitchens into visual masterpieces, but lack the practiced touch of a master glazer (not to mention the shop space and equipment) necessary to create custom ceramic tile. If that's the case, it only makes sense to play to your strengths and concentrate on the cabinet business.

The payoff of specialization can be large because, if you work at it, you can grow to dominate your niche by trading on your reputation for outstanding workmanship. As your dominance grows, you'll probably be able to charge slightly higher prices and amortize your fixed costs over a larger revenue stream, two factors that will substantially increase your profitability. In an ideal world, your small competitors won't be able to economically compete, and you'll have all the business you can handle.

Specialized dangers

Few of us operate in an ideal world, however, and there are downside risks in becoming too specialized. Consider the cabinet maker again. That is, after all, a type of fashion business with all the marketing uncertainties that word implies. What are you going to do with all those hand-forged hinges and handles if the rough-hewn rustic look goes out of style next year? Or what will happen to your Italian marble counter top monopoly if most of the home owners in your market decide they prefer faux granite?

Like more and more businesses these days, yours is also probably driven by technology, which changes relentlessly. The business owner or manager who doesn't keep up with the latest technological advances is going to find him or herself with empty aisles and a storeroom full of unsold inventory. The problem, of course, is that technology mutates exponentially, making it harder and harder to keep up with what's coming down the pike and making forecasting errors more and more expensive to correct. If you think it can't happen, ask yourself whatever happened to all those CB radios, eight-track players, and avocado-colored appliances.

So, to return to our cabinet shop example, should you strive to be a full-service home remodeler? Sure! All you need to do is find a 5,000-sq.-ft. building and fill it with tools and equipment, hire plumbers, painters, carpenters, upholsterers, electricians, designers, glass cutters, a few general gofers, and some really wild creative types of unknown expertise, finance a 10,000-sq.-ft. warehouse full of specialized inventory, hang out a shingle, and you're in business! While you're at it, why not throw in a retail showroom and a few good salespeople? Simple, huh?

General confusion

Generalization has its drawbacks, too, obviously, including high set-up costs that can be difficult to amortize. An auto body paint booth that is used once a week costs the same as one that is used once a day, which makes the profit on that once-a-week job pretty slim. And let's not even talk about the salary of the guy who wields the spray gun. How does he contribute to the bottom line when he's standing around waiting for the next job to pull in?

It's also tough to be really good at a lot of different things, which makes it harder to totally satisfy every customer. That, in turn, can lead to a reputation for less-than-stellar service and the resultant lukewarm word-of-mouth that goes along with it. The daily management headaches multiply with generalization, too, along with the wider variety of employee skill sets required, not to mention the greater number of project problems that can arise. The solution for most business owners lies somewhere in between.

The middle path

The smart operators don't put all of their eggs in one basket, as tempting as that may be, nor do they spread themselves too thin. A business that focuses on one type of work or stocks particular, related lines of merchandise probably has the best chance to combine the advantages and minimize the drawbacks of both approaches. You can diversify your business enough to cope with the vagaries of technology and style while specializing enough in one area to have a good run at dominating the market for it.

An auto shop that concentrates on interiors, for example, can combine several disciplines that have inter-related skills, tools, and equipment. Upholsterers can generally handle carpeting while audio installers may also be able to put in instrumentation and gauges. Such an operation can also be very successful at selling add-ons because the customer is pre-disposed to upgrading that area of their vehicle already. Plus, of course, the shop owner can probably show the customer some price advantages of doing multiple jobs simultaneously. Selling a set of dash and door inserts to the customer who's come in for new seat covers should be an automatic.



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