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Scale (or Scale-Up) and Growth are two terms commonly heard these days when talking about just about any kind of business. More and more these terms seem to be used interchangeably, but they are in fact two very different things.
Scale To “scale” fundamentally means to increase your firm’s overall revenue without adding significant increase in fixed and/or variable cost spending. Essentially this is the challenge every start-up will face, however Small and Medium Enterprises (SMEs) and even large multinational companies also have this challenge when attempting to respond to a changing environment. For a start-up, resources are constrained, however the business must find a way to advance especially if it has not reached break-even. For an SME or a very large corporation, the market may dictate the selling price for their product - therefore the only way to beat the competition is to find a way to provide more value than others at the same price. The only way to do that is to scale - to offer greater value without taking on greater cost to do so. Growth Growth is the opposite strategy to scale. Growth is the commitment of resources and money in order to make more money. We see this scenario all the time: a company has a great idea and receives an investment, which is intended to give them the tools they need to get to the next level. If it were this simple, why do so many companies continue to struggle and at a far greater cost post-investment? Creating Effectiveness Our experience has illustrated to us that many companies that believe they have a growth challenge actually have a scale challenge. You may be aware of Dr. Peter Drucker’s seminal research over 60 years ago that resulted in the popular expression: “before you can be efficient, first you have to be effective”. In a manufacturing business, this relates to the idea that there’s a hierarchy in the development of any product or service - where no product or service can be optimized until it is first capable of producing the requirements dictated by the business. If the product is poorly engineered and can’t be supported by supply chain or operations, no amount of optimization will improve it. We have seen countless efforts to optimize or continuously improve business processes that aren’t effective, and the result is wasted effort, cost, time (time being the most expensive, non-renewable resource), and often a lot of fire-fighting and churn in an attempt to delay the inevitable failure of that product. The only way to know if something is effective is to measure it against the business case, the primary objectives of the company. If the process or product isn’t delivering what is required by the business, the solution is often to take a scaling approach versus a growth perspective. Once you’ve managed to scale, strategic investment in resources and technology can expand the firm’s scaled operations and leverage the knowledge developed through the preceding scale process. That knowledge is a firm’s competitive advantage, particularly if it enhances the value that customers experience with that firm’s products and services. Competitive Advantage When a firm has been able to scale, they have developed the internal knowledge of their product and operations without adding significant capital expense or investment. Their cost to produce and deliver has remained more or less the same, but they are realizing greater value for each sold unit. Often however, scaling leads to lower costs with higher value, so the firm enhances its performance at both ends of the profit equation: price and cost. Beyond this however, this newly developed product and operational knowledge is difficult for an outside competitor to replicate. A firm that has scaled successfully has changed the behaviour of its employees and supply chain. This usually results in even further improvements in both effectiveness for customers and efficiency of production. At this point, carefully targeted growth strategies can leverage a firm’s effectiveness - while the unscaled firm lacks the internal knowledge and capabilities required to effectively utilize investment. Scaling is possible here, in Ontario The number of times we have heard people say that manufacturing companies can’t scale here in Ontario (or Canada) is staggering - yet it’s simply not true. Here in Waterloo Region, we are the 4th largest manufacturing sector in Canada, virtually any type of high-performance service you can imagine is within a 250km radius. Scaling efforts need to be guided by hands-on experience, for which there is no substitute or magic technological bullet. Scaling effectively means taking a whole-business (or “systems”) approach versus a “silo” approach (focusing only on individual business functions or symptoms as disconnected challenges) to unlock value. The silo approach is the most obstructive barrier to achieving successful scaling. However, once a firm has developed its own “system” knowledge around scale, the sky is the limit for what the firm, its employees and supply chain partners can achieve. |
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