When we are talking to a business owner, investor, or board of directors about scaling up their business, we will often ask them what their trigger was to decide that they wish to scale up their business at this particular point.
Sometimes they will reply that it just feels like the right time because of their revenue success; sometimes the trigger may be because of the arrival of a new director or investor who brings new energy; sometimes it will simply be that they now have access to new capital to invest in their business which makes scaling possible.
In a very few cases they tell me that this was part of the original plan and vision for the business and that they have now hit the particular trigger points to scale up; often these businesses will have been started with a view to a particular exit point.
The businesses in the last category generally have a series of interlocking plans in place which represent the KPIs not only for financial performance, but for the consistent management and measurement of a series of other factors, including an understanding of the arts of building equity value whilst growing revenue and profit.
Yet, for most owner-managed businesses, this means that CEOs tend to focus on the short-term building blocks of revenues and sales growth without sufficient planning for the medium or long term. Paying attention to day-to-day sales, cash-flow and profitability is important but does little to fulfil the objective of scaling a business. Scalability and scaling up for a business require the application of a complementary set of abilities to the everyday ones and a different perspective or focus on an expanded range of key success factors, which I list below.
Timing – Cycles
When scaling a business, it is important that the leaders understand their own business cycle and how the prevailing sentiment in their business can be managed to synchronise with their scale up strategy rather than working against it.
It is also essential that the business understands and monitors how its success in scaling can be affected by market, financial and economic trends, and shifts. Engaging with the cycles at the right point can accelerate the process, whilst the wrong point may slow or stall the process.
Scaling Productivity and Infrastructure
Typically, the growth of the business does not follow a neat curve as business model charts would have us believe. The graphs flatten out what are a series of steps through which a business progresses as it grows it revenue and then scales its resources to achieve the next level of revenue growth.
The key elements here are an understanding of the capacity of the business to generate revenue factored against its current productivity in generating revenue. This ratio, combined with an understanding of cycles, described above provides the best indicator of when a business should scale up and when scale up may place too great a strain upon its infrastructure, its people, and its financial resources.
Does the business truly understand the business model it operates and to do so does it draw on elements 1 and 2 above in designing its scale up strategy? If one is to look at a business like a machine or a building, then the business leaders must think like engineers or architects to understand the essence of what they have built and are building.
Without these insights many of the choices made by business leaders may be unreliable or based on inference rather than real insight about what they are building and scaling.
Management of a business scale up will generally require some form of investment from within the company’s own resources, from shareholders, other investors, or loans. It is a general habit of business owner managers to run a dividend remuneration model in preference to rolling up and accruing profits so the business can reinvest.
Whilst the attraction of earning a substantial annual income is obvious, accruing capital to reinvest is often the simplest way of financing a scale up and the most effective if it adds to the underlying financial equity valuation of the business entity.
Building scalable infrastructure
Linked to elements 1, 2 and 3 above, is a question about whether the business has a strategy, structure, or model for how it grows its people infrastructure as it develops. In the early stages, most businesses operate an organic principle, adding resources on a basis of a relatively random and unplanned basis which follows a “just-in-time” recruitment or more realistically a “needed them yesterday” approach. Frequently this approach is perpetuated beyond the time when it serves the long-term interests of the business. It also tends to lock in behaviours for business leaders which mean their focus is constrained by the roles they have always performed.
By contrast, when the business applies a strategically driven functional model based on a clear allocation of responsibilities which fits roles to a transparently consistent structure, this creates a flexible framework that supports scalability to almost any level of business growth. It also means that the business has a complete understanding of all the areas of responsibility that need to be covered for the effective management of an enterprise, instead of finding itself limited by what appear to be the areas of priority at any point in time. This aspect of building a scalable business also entails the creation of clear process, policy, and procedure mapping for every aspect of the business, to create a blueprint for its operation.
Building scalable operational model as described above, can effectively address the questions “who, what and when” and to some extent it can create the answers to “how”.
Yet above all of these sets the question “why” which sets the frame for the purpose and vision, but also create the context for culture and behaviours in a business. It has been demonstrated that companies that invest in creating and maintaining a viable culture which supports the business vision, significantly outperform their competitors. But for so many businesses, culture ends up becoming an extension of the personal value system of the founder or the leaders rather than a set of principles that have life and energy of her own.
Culture becomes the glue that drives the shared values and personal alignment between those working in a business at all levels and encourages productivity. It also sits behind the system of mutual trust which sits like a film of lubrication that coats the surfaces between all the moving parts in the organisation. Research has also demonstrated that perceptions of shared values and trust are, for most people in businesses, more highly prized than status or salary. As such, the management culture becomes a key measure to support scaling a business in the way it promotes cohesion and continuity in the workplace.
If culture describes the nature of the trust and shared values in a business, so Brand is the extrovert expression of the nature and characteristics which the business has chosen to build with its customers and other external stakeholders. Fully implemented, Brand defines the customer market focus, style, or manner of service, as well as clarifying what specific benefits a customer gains and the price/value proposition. It is also a key and powerful driver to build scaling a business, if used effectively.
Of course, choices about Brand create a powerful platform upon which strategic and tactical marketing of products and services depend. Too often, however, Brand is used as window dressing, rather than as a key equity value driver for a business as an off-balance-sheet asset, the roots of which are most effectively driven deeply into the infrastructure and psyche of the organisation.
Marketing and Channels
The role of marketing has changed considerably in the era of e-business because of the way it creates a rich seam of customer data to support marketing and sales decisions. In some ways it has brought a closer integration between sales and marketing because of the disintermediation it has brought about.
It is important to understand that whilst marketing and sales are key drivers of revenue growth, they are distinct from the scaling effect of brand development.
Channels describes the process and management abilities to develop multiple, complementary channels to market, that leverage the focus created through the application of a well-defined market position and brand. Investing in the creation of effective and secure distribution and channels to market, is another key driver for building scaling a business. But in SMEs looking to scale, creating channels is too often seen as an extension of sales activity, which it is not. The skills of channel development and sales development are distinct and require a quite different approach from one another, especially since an effective channels strategy is another key driver for scaling and building asset value.
Market and Product Innovation
In a world of fast change where there is little time to adapt to the changing status quo, many SME businesses fail to seize the opportunity to innovate on a continuous basis. In the past, where barriers to entry in most markets were significantly higher, the scope for challenger products and brands entering an established market were limited. Now that technology and the Internet have enabled ever broader market access in national and international markets, no business can rest securely on its laurels.
The businesses that scale effectively, are those which are implementing defined strategy to build new markets for their existing products and are investing in product innovation to open opportunities in existing and new markets as well. This activity reduces risk by creating a broader revenue base and enables the business to develop plans to run ahead of the game in their markets rather than playing a reactive role.
A business which actively manages the development in the abilities of its leadership and management team of the business is investing in a primary building block in consolidating the foundations for sustainable future growth, scale, and value. This area of management provides a basis upon which to benchmark management ability, develop management skills and support succession.
All too often, a business which wants to scale is limited by the experience, range, and depth of the management abilities of its leaders and managers, who tend to seek solutions everywhere, rather than looking in the mirror to understand where responsibility for those limitations lie. Also, it is tough to fully comprehend what the mirror shows one if one does not have a clear concept of what the reflection should be showing.
Whilst many businesses are managed using the “spinning plate principle,” where the focus of attention as always on the plate that is about to fall, their ability to properly scale the business is limited by the amount of concerted attention that can be applied to the interaction of the key scale drivers, described above.
The essential question for business leaders who aim to scale up their business is whether they are managing their business in some or all of these areas, and if not all, what they can do to develop or acquire the abilities to manage the missing areas effectively.
To conclude, too many leaders attempt to scale their business by doing what they have always done, without examining what may be their blind spots and the limitations that they impose themselves on the scaling of their business.