GROWTH SECRETS: Engineering scalability

Many product or service businesses look great when the volumes are small, when the founders take special care over the development and delivery of the customer solution and where the customer is given additional assistance to ensure a favorable customer experience.

However, when the business grows, volume production requires a level of planning and control that is not required or needed when volumes or outputs are small. Logistics needs to be much better integrated, quality needs to be controlled through the entire value chain and the business needs to have purchasing, human resources, marketing, administrative and IT infrastructure to support the ongoing operations.

Businesses which can handle 10 or 100 transactions need to be massively redesigned when volumes reach hundreds and thousands. How will the business cope if it needs to manage multiple locations? Does the business have the right people, structure and resources to build a larger, higher volume business?

The business of today will not look like the business which has five times the number of employees and/or five times the revenue. It is almost inevitable that the firm will have to change the way it does business to manage the increased complexity of a larger business.

Entrepreneurs who have grown a business from a start-up will tell you of the transitions they had to go through as the business grew.

Almost without exception, small businesses face a crisis of management as they grow. The entrepreneur in the early days is able to drive the business through sheer energy, passion and vision. He or she knows everyone and staff are motivated because they are part of the grand adventure. As the firm adds staff, new people come into the business who were not part of the grand vision and their motivations and needs are likely to be different. They may see it more as a job than a mission.

They have different needs and thus management styles have to change. At the same time, the growth brings with it specialisation of tasks and more formal organisational structures. Reporting lines become clearer, job descriptions become the norm rather than the exception and performance targets and monitoring is introduced. Soon there is a new layer of management between the CEO and the operations. What was a project has now turned into a business.

As the business grows further, communication becomes increasingly formalised as communication lines become longer. The left hand no longer knows what the right hand is doing. Customer service quality falls as new customers don’t have the advantage of personal links with the founders. Problems escalate with the second location and daily face to face communication is not physically possible. External shareholders and/or external directors force more transparent decision-making and thus the entrepreneur can no longer make decisions on the fly. Larger numbers of staff, customers and other stakeholders now depend on the business for their livelihood. Many entrepreneurs simply are not able to make the transition or don’t want to.

Capacity within all aspects of the business will be limited by some attribute of the assets or capabilities employed. Equipment will have a limit on throughput, people are limited by the hours they can work effectively, warehouse space and plant floor space is limited by the existing structure or the land available for expansion. Ultimately the growth in the business will require every element of the business to be replaced or modified.

Growth requires that more and more people be employed to take on both specialised and general tasks. These new people need to be integrated into the business, taught the activities they need to undertake and shown how their operations link in with the rest of the business. To the extent that knowledge is undocumented and systems are ill defined, this process will inhibit the rate at which new people can be introduced and made effective.

Some firms can best grow through replication. In this situation, a business unit is duplicated and then controlled and monitored though a network of controls.

The extent to which such replication is documented, standardised and supported will greatly influence the speed at which the business can scale. Franchised operations use this as their underlying business model. They rely much less on the initiative of the individual manager, instead they prescribe how the operations will be undertaken, provide extensive documentation in systems, policies and procedures and put in place monitoring systems to enable early intervention when things go wrong.

Other growth business models use distributors. The advantage of using distributors is usually that they bring much needed talent to bear on the sales and support activities at a much faster rate than the firm can fund or support. But for a business to support distributor operations, it also needs to have considerable standardisation, set expectations clearly and deliver against its promises.

Distributors are themselves independent businesses who can decide not to put the energy and investment into the operation if they do not foresee an adequate return for their time and effort or if they feel that they won’t get the support needed to make them successful.

Reasonably high growth requires that all aspects of the firm work in harmony as the business scales. However, not all parts of the business have linear growth characteristics. Many parts of the business will have step changes in capacity and these will need to be planned ahead of time. Some changes require greater lead times than others. Thus a new factory on a green field site may require three years to plan and build but a new office might be able to be accessed and used within six months. A change in the underlying IT business transactions support system may take a year just to evaluate prior to purchase and then several years to implement.

There are important strategic insights which can be gained from undertaking a scalability exercise. It is almost certain that the business will have to change organisational structure as it grows. At the same time, it is almost certain that the IT systems which support the business will also have to change. What can be more surprising is that the firm will discover that some of their best staff are unlikely to make the transition. They may lack the skill, personality, work ethic or experience to work effectively in a more complex situation. This is very confronting for senior management but it is better to discover it early than have the disruption of having to replace loyal staff when it is really too late. With enough notice of the impending change, however, staff can undertake retraining
or change job responsibilities. In some cases, the only solution might be to transition them out of the business.

The firm can simulate activities at different levels of operation and, in doing so, the various constraints on the business will be uncovered and a plan for dealing with these can be constructed. At the same time, this exercise will uncover spare capacity which may be able to be used in the short term to solve problems, improve productivity or enhance customer operations.

Many firms put their businesses at risk by discovering constraints and bottlenecks as they expand. By planning what the business will look like in the future and working backwards to the business of today, the firm can see where the step increases are and take appropriate action to plan properly for them. At the same time, being confronted with future limitations along the path they are on might prompt management to seek new avenues for growth that they had not considered previously.

Complexity comes from dealing with more and more differing elements in the business. Thus the business which increases the number of locations will experience a step jump in complexity. The business which introduces new products into new markets will take on a host of new information which has to be dealt with. The biggest impediment to growth ultimately is the ability of management to cope. Thus linear expansion of the business, that is, ‘more of the same’, is going to be much easier to cope with than expansion into new products and new markets.

When considering expansion, many entrepreneurs leap after new opportunities without considering the impact on their own time or the capacity of their firm to absorb new activities. Perhaps this is why high growth firms put so much effort into selling more of the same products to existing customers or in finding additional products which they can sell to existing markets. Rather than grow by increasing the number of markets they chase after, they concentrate first on the markets where they already have an advantage and where their existing systems are established to support them. Thus geographical expansion of existing products into the same markets would seem to have less complexity than to expand locally into new markets.

While diversity has the advantage of spreading the risks and increasing expansion opportunities, it comes with a complexity cost. To the extent the firm has a centralised management culture, this will place a severe limitation on the ability of the firm to aggressively expand.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.