Are you Scaling or Just Growing?
Reading this month’s Harvard Business Review I was struck by a small piece featured in their “IdeaWatch” section on page 22 – “Efficiencies of Scale May Be a Myth” accompanied by this lovely image.
Oh to be a unicorn ....
I am assuming this resonated for me since I had only just last week been sharing with attendees of my most recent ‘Scaling Up Business Growth Workshop’ the importance of scaling, not simply growing.
For scaling the focus needs to be to increase revenue significantly, whilst keeping operating costs the same or just minimally higher. The art of scaling up successfully is putting in place a differentiating strategy, appropriate leadership, procedures, IT infrastructure, and ‘functional’ culture that can handle a much greater volume of business. Mixed with a good measure of discipline and focus.
If all you do is add resources and/or infrastructure to handle the increased demand of increasing sales at a cost which is more or less equivalent to the level of increased revenue being achieved, you are simply growing.
Why Scaling vs Growing
The danger of this is not just that you are not increasing margin, you are also increasing the demands of running the business. More people, more infrastructure just means things are getting harder and more frustrating. There is no joy or economies of things becoming easier and requiring less management hours. Leadership get dragged further down into working in the business rather than on it.
The Long-Run Average Cost Puzzle
The HBR piece referred to “The Long-Run Average Cost Puzzle” (by Aytekin Ertan, Stefan Lewellen, and Jacob K Thomas) working paper which essentially questions the commonly accepted concept of ‘economies of scale’. That essentially as a firm increases its sales the cost per unit should reduce. That the fixed costs and overheads get spread between larger units of sales.
However, instead of growth companies enjoying wonderful economies of scale, their research
found that costs and profits rose in close proportion to sales increases, without the marginal improvement the accounting theories predict.
Interestingly the research came to a similar conclusion across all industry sectors and ages of company. Researching over 150,000 organisations that ranged in maturity of just having gone public to having been Publicly listed for over 25 years. Research which led them to state
Projections that routinely anticipate declining average costs are likely optimistic. Any scale efficiencies projected, especially if they are based on short-run marginal costs, deserve careful scrutiny to confirm that they are reasonable and supported by experience.
What might this mean?
Maybe that is just one of the reasons Jim Collins author of “Good to Great – why some companies make the leap … and others don’t” suggests that it takes;
- disciplined thought and
- disciplined people, with
- disciplined action …
to move from being a ‘Good’ growing company to a ‘Great’ scaling company.
And why Verne Harnish author of “Mastering the Rockefeller Habits 2.0 Scaling Up, How a Few Companies Make It … and Why the Rest Don’t” has concluded, from his own customer base numbered in the ten’s of thousands, that his most successful scaling up companies;
- Apply “Mastering the Rockefeller Habits” content
- Continuously learn
- Utilize coach accountability
So I a question worth asking yourself …
“Are you enjoying the climb of scaling or are you simply growing?”
SO WHAT MIGHT YOU DO NOW?
SCALING UP BUSINESS GROWTH WORKSHOP - Get your New financial year off to a great start!
If you are interested in further exploring how to leverage simple, actionable, and practical tools to help you Scale Up why not come along to the Scaling Up Business Growth Workshop we are running on Thursday, 4th July, 2019.
Would highly recommend bringing along members of the Leadership Team to work together on your plan to Scale Up.
SCALING UP QUICK START GUIDE
Alternatively, if you would just like to learn a little more about Scaling Up - grab yourself a copy of the "Quick Start Guide".
Scaling Up: How a Few Companies Make it...and Why the Rest Don't
Good to Great: Why some companies make the leap ... and others don't
The Long-Run Average Cost Puzzle
Aytekin Ertan, Stefan Lewellen, and Jacob K. Thomas
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