The Expansion Dilemma

Perhaps this issue is more relevant to those in service-based businesses, though I believe that no matter the nature of your business, this issue will resonate with you. I would be interested in hearing your feedback on this issue – as I believe that it has no right or wrong answers, merely a large set of choices.

At some point during the life of a business, the amount of work coming in the door will exceed the limits of the business. Product based businesses will see this when demand outstrips their ability to supply, service-based businesses will see this when the demands on their time exceed the number of hours available to work. In a large business, this issue may have already been solved, either by having a process for increasing the supply, or by increasing the price to reduce demand.

However, smaller businesses walk with trepidation when faced with this issue. On the one hand, their ability to increase supply is severely limited – they may not have the necessary cash flow to handle additional hires, or to front the money required to pay for additional goods. On the other hand, the inability to supply the increasing demand may hamper their ability to expand, and may result in a negative impact on their existing business.

Additionally, there is the inability to see the future, which means that the business owner trying to decide whether or not the sudden increase in demand justifies hiring another employee must guess (hopefully with some helpful data) whether the sudden demand is merely a spike in activity, or if it is sustainable. This has ramifications on what is needed to ensure that the decision is made with appropriate resources allocated to support it, should the spike in demand be followed by a dip.

To determine how to best handle the spike in demand, it is necessary to look at the goals for the business. If the aim is to grow by hiring more people, to increase the supply, then the spike in demand can be one way of moving toward that goal sooner than expected. If the aim is to reach a certain level of activity, or, in other words, to cap the supply at a certain point (for example, to work 40 hours per week), then the decision that needs to be made is only how to go about reducing the demand – should you raise your prices, or merely refuse to take on additional customers?

Others, though, are stuck between the two decisions. While they don’t mind working more than a certain number of hours, or, in other words, to work with an expanding business, they also may not be actively looking to expand. As a result, they are unprepared for the expansion, both from a fiscal point of view, and psychologically as well.

Some may choose to bridge the gap by using sub-contractors to take on the work they are unable to do. This can help defer the decision until it is clear whether or not the increase in demand is going to be enduring, but it also exposes the business owner to various risks associated with delegating work (the quality may not be up to standard, managing the contractor can be complicated). Others may raise prices moderately, in an attempt to drive up margins while they debate internally how to handle the demand.

What would you do? How have you handled sudden spikes in demand beyond your abilities to provide?