Marc Emmer is president of Optimize Inc. and an author, speaker and consultant specializing in strategy and strategic planning.
We tend to use the word “scalability” freely, as though it applies equally to all businesses. Yet, as companies move through the growth cycle, their approach to scalability changes. Startups are principally focused on getting their product to market. Product ideation and iteration are all-consuming. A small team of generalists wears many hats and doesn’t have time to develop corporate functions like accounting, operations, sales and finance. Everything is raw.
Once the product is built, the team shifts attention to distribution. In this stage, sales and marketing become all-encompassing.
It’s later in their evolution that companies truly begin to “scale” by creating infrastructure that includes people, processes and technology. Once a private company reaches a substantial size (say $50 million in revenue), it requires more structure:
1. Automation And Technology
While many have felt the need to automate, rapid deployment of automation has proven difficult over the past two years. Yet, the promise of AI and machine learning has operators excited about the prospects of both manufacturing and office automation. Microsoft recently introduced Copilot, a generative AI tool. There is a clear shift within mid-market IT teams toward building applications that enrich the client experience.
2. Business Model Innovation
The new era of AI will enable a revolution in application development. Apps will be faster to market and much more configurable. Many of these innovations will just aggregate existing technologies into a new offer, an activity referred to as “recombining.” When scaling, recombining can be a method by which companies separate from the pack by providing a novel solution. Airbnb combined home ownership with a matchmaking app to spark an entirely new industry. Expect waves of recombining and new business blends, such as TV plus streaming, etc.
3. Integrated Systems
Perhaps the most painful chasm for mature private companies to cross when scaling is moving from cobbled-together systems to integrated systems, such as those in enterprise resource planning (ERP) software. Given the high cost and pain of integration, management teams often freeze when making these decisions. Today, there are many cloud systems that talk to each other, but companies that fail to make this leap as they scale could be stuck in a state of perpetual manual process, where they can’t access the information they need at the push of a button.
4. Workforce Management And Planning
Most every private company plans labor for the current quarter or year. This has only been exacerbated by the talent war, which leaves many human resources departments scrambling. Mastering recruiting (and perhaps retention, for that matter) requires succession planning and a more long-term view of how many people need to be hired and when. This informs on role descriptions and career progression opportunities for existing high-potential employees. Managing labor today requires thoughtfulness and preparation.
5. Standardization And Mass Customization
Smaller companies often customize, as it is a differentiator. However, I’ve found that customization is not scalable, and the most scalable technology companies offer “mass customization,” which gives the illusion of choice. For example, you can buy an iPhone 15 in five colors, but there are two models. On Amazon, you can buy an endless number of products, and you can choose from multiple delivery options.
People confuse the word “disruption” with doing something new. But when Clayton Christensen coined the phrase, he was talking about developing products that are accessible to the masses. While generative AI is not a new idea, ChatGPT was easily accessible to the public in a form people could understand. To scale quickly requires standardization of some type.
6. Accounting Controls
Mid-market companies must put in place significant accounting controls. I once had a client with a dirty CFO who stole more than $500,000, which is proof that in accounting, you can’t let the fox into the henhouse. For example, larger private companies will have redundancy for treasury by requiring two signoffs to add a new vendor or transfer cash. Companies can also build more rigorous budgets based on true sales forecasts and departmental projections. Such organizations will have better clarity on costs because they employ cost accountants who have access to reliable information.
7. Cash Operating Cycle
In the startup phase, founders are consumed by managing runway until they need a new round of funding.
One thing that can be counterintuitive to many businesspeople is that the more you grow, the more working capital is required. Bigger businesses need access to more cash. So, at some point, management needs to be more intentional about compressing the cash operating cycle. This is a primary motivator for so many companies switching to subscription models. Companies at scale are “bankable” and have access to debt instead of needing to give up equity.
Within one of our manufacturing clients, segmenting high-velocity production items into A, B and C dramatically improved its cash operating cycle.
If you are a growing company looking to scale, ensure your management team is investing in strategic planning in a way that is building the people, processes and technology required to grow.
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