Scalability

The ability to overcome and cope with business challenges efficiently while increasing profits as the company steps on the growth path

Author: Osman Ahmed
Osman Ahmed
Osman Ahmed
Investment Banking | Private Equity

Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He's currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.

Osman holds a Bachelor of Science in Computer Science from the University of Southern California and a Master of Business Administration with concentrations in Finance, Entrepreneurship, and Economics from the University of Chicago Booth School of Business.

Reviewed By: Christopher Haynes
Christopher Haynes
Christopher Haynes
Asset Management | Investment Banking

Chris currently works as an investment associate with Ascension Ventures, a strategic healthcare venture fund that invests on behalf of thirteen of the nation's leading health systems with $88 billion in combined operating revenue. Previously, Chris served as an investment analyst with New Holland Capital, a hedge fund-of-funds asset management firm with $20 billion under management, and as an investment banking analyst in SunTrust Robinson Humphrey's Financial Sponsor Group.

Chris graduated Magna Cum Laude from the University of Florida with a Bachelor of Arts in Economics and earned a Master of Finance (MSF) from the Olin School of Business at Washington University in St. Louis.

Last Updated:November 30, 2023

What Is Scalability?

Every venture starts from an idea, which is transformed into a business addressing a unique gap in the market. Scalability is a term often heard in the context of business strategies. It is also used in financial markets.

In layman’s terms, it refers to the ability of a business to grow without being hampered by resources or structural constraints. The potential to scale a business directly impacts the profits and efficiency levels when faced with an increased workload.

While in the growth stage of the business lifecycle, will the profits increase, decrease, or stay the same? How efficient will the processes continue to be? The scalability of the business model concerned discovers the answers to all these questions.  

This concept draws its roots from the famous theory of “economies of scale,” wherein a company can cut down on its production costs, increasing its profitability with every additional unit being produced.

Blending it into operating models and business strategies have become more important now than ever, owing to the technology boom. Acquiring new customers, expanding market reach, and competition have all become easier with innovative technologies coming every day.

The investor landscapes have evolved in the past five years, and scalable businesses are what they look for amidst several other evaluation criteria. An organization’s long-term growth is directly affected by its ability to adapt, scale and implement.

Scalability Importance

This ensures that a business can maintain the growth levels achieved. When expanding, greater resources surrounding business activities are needed, absence of the corresponding ability to scale will imprint the business as an inefficient one. 

These efforts impact not only the profitability but also the reputation and overall success of the business. In addition, active scaling enables quicker adaptability to change the market and consumer needs.

The importance of business scalability can also be observed in any business’s economies of scale. Display of ease in expanding business reaps direct benefits from bulk purchases, greater risk appetite, and enhanced operational efficiency.  

What is a scalable business?

Navigated by the business model, operational structure flow, and business strategy, a business becomes scalable when it improves its profitability and efficiency unaffected by the corresponding increase in demand and workload.

Although small at the start, scalable businesses grow rapidly over a brief period, unlike small business, which tends to stagnate over time. 

McKinsey published in one of its reports that most companies focus on launching a new business, but the real value for companies comes from their ability to scale them up. 

The same report states that based on an analysis of U.S. venture capital (VC) data, two-thirds of value is created when a company scales up to penetrate a significant portion of the target market.

Ability to scale starts with the people leading the company. The founding team needs to have the deep technical know-how, strategic knowledge, and an understanding of the market dynamics. In addition, every stakeholder needs to be involved in developing business trajectories.

Another phase of scaling a business is embedded in the effectiveness of communications, internal or external. For example, brand messaging is an essential tool enabling market penetration for the company. Any inconsistent messaging efforts may easily affect the market share it holds.

Scaling evaluation is a key step in forming a scalable business. Sustainability interacts closely with this. Growth without a sustainable business model cripples the business, destroying it slowly.

The Three-Step Approach

A sustainable and scalable business model can be created by following a three-step approach.

1. Reflect 

Understanding why we are scaling and the motive behind it. Deciding whether the scaling efforts are for building market awareness, penetrating deeper into the market, growing the profits, or shooting up brand awareness.

This step sets the foundation for the sustainability of the planned scaling efforts.

2. Plan 

Understand, frame, and review a plan to scale, often known as a scalability map. Allocate timelines against the goals stated, similar to a normal business plan

This should serve as an outline providing sustainable solutions guiding the actions to scale the business based on the company’s strengths and skills. In addition, solutions need to be such that they offer more scope for future scalability, even after the 3 or 5-year plan ends.

3. Act 

Once the plan is in place, the implementation phase arrives. First, one must act on the devised strategies and solutions by leveraging core strengths, resources, and team capabilities.  

Next comes measuring the ability to scale based on planned goals, reflecting on the efforts, and planning again to address any evident gaps. This is how the cycle continues.

How to build a scalable business?

Every company and every business is different, each having a uniquely curated approach to growth. However, certain do’s and don’ts of scaling stay similar irrespective of the industry or the business size. 

1. Choose a direction

Rapid growth does not always mean good growth. In the initial stages, it is of utmost importance for the business to decide on its theory of business. Where do the founders see the company shortly forming the base of all their plans?

At this stage, strategies need to be selected wisely, the right team needs to be formed, and processes need to be drafted, which result in steady growth, opening up opportunities to scale efficiently.

2. Set SMART goals

Scalability comes from growth; with no growth, no company can scale. Therefore, specific and realistic goals must be set for each department and individual.

These goals must enable the company to grow, meet increasing demands and work towards its vision.  

3. Implement strategies and tools

Without a dynamic strategic plan, it is impossible to achieve sound growth. In addition, the business strategies must be adaptable to industry trends and the business size. 

Technology and tools selected for operational workflows need to optimize processes. Therefore, the potential benefit must always be higher than the expenses and set-up costs for the chosen tools.

4. Track growth and be ready

Data is the powerhouse of any business right now. Monitoring data, evaluating the same, and taking meaningful decisions based on the interpretation are essential steps in achieving a scalable business level.

Under uncertainty, deciding on future steps is often a gamble. Being ready for the future is the key. The entire set of business efforts may be unsuccessful if the business is not prepared when the time to grow arrives. 

5. Divide and conquer

Defining work for every organization’s members makes growing easier. However, undefined, ambiguous job titles and definitions create chaos in the organization.

A company needs to hire specialized talent for specific tasks to scale efficiently.

6. Digitize workflows

Technology lies at the core of scalability. Thus it is of utmost importance to integrate technology in various operational facets to attain optimal results.

Going digital is not only limited to integrating business tools but also relates to adopting digital frameworks and approaches.

7. Capitalize on strengths

Focusing on the organization’s core strengths is a driving force in utilizing resources optimally and achieving goals swiftly. Leadership must concentrate on managing the business and not be a jack of all cards. 

Outsourcing is a core consideration of any business’s strategic direction in the modern environment. Therefore, every business needs to identify what it can outsource. 

However, while leveraging strengths, a business cannot afford to turn a blind spot on its weaknesses.

What Distinguishes a Scalable Company

Having understood various considerations of building a scalable business, identifying a scalable business model should no longer be difficult. But, a scalable business model looks different for some.

When evaluating an investment proposal, a scalable business model is often one of the primary criteria. The core components of a scalable business model can be understood as follows:

1. Standardization

All businesses aim for agility and the ability to go to the market swiftly. Therefore, creating and implementing standard operating procedures is the main task to successfully achieving any go-to-market strategy.

Apart from the benefits achieved from entering the market as planned, standardization also aids the management of partnerships and associations with various stakeholders across areas.

2. Strong Management

Human resources are said to be the biggest asset of any business. People and Leadership set the tone for any organization’s overall operations.

Effective management makes it easier to run your company by handling various teams aligned with the business goals. 

3. Capitalize on existing assets

Developing and working on a business model which optimally uses the existing business assets to expand and enter into new markets, products, and customer segments makes for a business that can scale easily.

Rather than building everything anew, focusing on and using current business assets is a more profitable way to grow. 

Unlike growing, wherein investments in resources are proportional to the increase in revenue, scalability means increasing revenues without any substantial incremental investments in these efforts.

It is important to note that scaling fast and blind without considering the other coexisting factors impacts the quality of product and service offerings, affecting the brand value in the long term.

Thus, scaling should result from growth; scaling efforts cannot drive growth.

examples of a scalable business

The scope for scaling exists in all businesses; there is easier scope for scaling in certain domains fueled by the market. These are purely based on the tailwinds currently and might change based on the specifics of the business model.

Three popular models here are - 

1. Software and technology

All know that technology is profitable and has witnessed many successful ventures. Saas-based business models, software, and newer technologies such as deep tech, machine learning, and artificial intelligence scale quickly and cleanly.

Heavy investments are required during the initial stages of development. However, the expenses can be tuned down to grow once in the swing.

2. Knowledge-based products

Knowledge-based products and services, such as online tutoring, require serious efforts to build the knowledge base. However, once ready, the milking phase becomes relatively simpler. 

Scaling here becomes more accessible as the set-up costs are not that high.

3. Premium and Freemium models

Subscription models are eminent across all sectors, whether music, food, movies, or medicines. Moreover, as millennials take on the world, the demand for these memberships that make life easier is rising.

These businesses are usually built on a digital base, shaping a leaner path to scale for those organizations. 

Some companies and brands around us that have demonstrated scalability are Zoom, DoorDash, Airbnb, and Amazon.  

Conclusion

Scalability is the ability to overcome and cope with business challenges efficiently while increasing profits as the company steps on the growth path. Meaningful growth is what depicts scalability efforts to the best.

With the continuous developments in technology and industries globally, it is no longer a choice but a necessity in any business model aiming at sustainable growth. Technology makes efficient scalability possible. 

A five-step approach to scaling a business is

  1. Work towards constructing a solid foundation in the early stages.
  2. Divert your focus on scalable business solutions to market problems.
  3. Resort to holistic strategic planning and implementation.
  4. Embrace your strengths and weaknesses.
  5. Be persistent and patient.

The growth path is not as black and white as it seems. Increasing business size, addressable market size, entering new segments, and any other strategic step toward growth have their sets of obstacles. 

The valuation of the business is driven by its growth potential and corresponding scalability. Hence, all the steps taken need to be assessed carefully, as the goal is not to make the business big but to make the business successful. 

A scalable business model operates on the right mix of sales techniques, management strategies, and optimal technologies in a market that supports growth.

Researched and authored by Krupa Jatania | LinkedIn

Reviewed and edited by Parul GuptaLinkedIn

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