1. To Scale or To Grow – it’s not just a matter of language.
The U.K.’s national broadcaster, the BBC, recently ran a radio series called “Magic Consultants”, which examined the growth, influence and mystique of the management consultancy industry. The first
episode explored the mystery of the management consulting terms that have found their way into everyday language. These include expressions like – in the ballpark; low hanging fruit; deliverable; deep dive; and acronyms like KPI, RACI, DACI and RATSI.
One of the latest business terms that has been popularised is “scaling” or “scaling up”. But do we really understand what it means and how it differs from what we have been doing in running our businesses all along, growing them?
Here, I will explore the challenges with the term and its definition and describe the six strategies that will enable you to scale your business.
All too often we assume that because a term is used by our peers in business, we understand what it means. This may be fine in scientific or technical circles, or indeed between members of the legal, accounting and medical professions, for instance. But can we make the same assumptions in business where, let’s face it, most managers have their own bubble of expertise, but
otherwise we are all generalists.
So, let’s try to define what we mean by scaling or scale up.
Our business is infested with idiots who try to impress us by using pretentious jargon.
Cambridge Dictionaries defines scale up as “to increase the size, amount, or importance of something, usually an organization or process”; whilst Dictionary.com defines scale up as “an increase in size, quantity, or activity according to a fixed scale or proportion: a scale up of an engineering design; a scale up program of energy conservation.”
Now, whilst these definitions are useful, they are not specific enough to be applied to business in general. This especially applies to the Dictionary.com definition which refers to “a fixed scale or
proportion” which introduces the assumption that scaling the parts of a business should always be in proportion as it develops. Even we, as human beings, find that our bodies develop disproportionately as we age.
Scaling is multidimensional. Different methods address different things.
So, for example, the only parts of the body that dont scale as we age our eyes, which always looks enormous in infants, which is part of what makes them so appealing,
because the eyes are proportionately large as part of their faces.
So back to business…. If we associate the words scaling or scale up, with the process of enhancing the capacity of your business to generate revenue and profit, we are defining a specific set of activities which create enhanced leverage for the business in its every day revenue generating activities.
Having recognised the nature of the distinction between scale up activities and non-leveraged business activities, then it is useful to come up with a word or shorthand to define the process of making use of the enhanced capacity that scaling creates. For these we use the term “growth” which is about increasing revenue and profit with the scaled-up resources that scaling activities deliver.
What are the factors that specifically drive the creation of scalability in a business? They are probably not what you think.
Listing in order of escalating impact the first three scaling strategies are:
- market segmentation – the process of analysis and stratification of your client base to determine, using the Pareto principle (80/20 rule) to determine which are your most profitable clients and which are the least Typically, businesses spend 80% of their time
servicing the least profitable clients on their roster who represent only 20% of their revenue and profits, rather than focusing on the most profitable.
- physically increasing the scale of the business by acquiring more plant, staff and/or services to increase the physical capacity of the business to trade to generate more revenue and
- the ability to understand the pricing and packaging choices of your competition and
applying the counter-intuitive strategy to either bundle or unbundle your products, to make price comparisons harder and enhance the scope to increase your margin and profit.
Typically, businesses are most effective when their leaders are clear about the distinctions between scaling and growing activities and manage these as distinct phases in the management of the company’s progress towards the achievement of its vision.
2. “Management speak” and how to ensure that you eat your own lunch.
Henry Reed’s 1942 war poem “Today we have naming of parts” introduces a precise and neutral
language to distinguish the various parts of a bolt action rifle and what they do. I believe we owe it to ourselves in business leadership and management be equally precise in our communication about how we distinguish growing business from scaling it.
It is my view that when it comes to our products or services and technical terms connected with them or their production or delivery, we, as leaders and managers we are fluent, precise and
definitive in our choices of words, but we tend to be much less so when addressing management, design and delivery of our businesses.
Once again, listing in order of escalating impact the other three of the six scaling strategies are:
- innovation and new product/service design – the process of continuously creating a pipeline of product and service improvements, as well as new products, to enable your business with existing customers in addition to finding or producing new products and new markets.
- developing third-party advocates as channels to market provide a continuous flow of new business opportunities instead of chasing sales, and to improve sales conversion from 10:1 down to 3:1.
- focus and leverage your brand position as a distinctive representation of your business to attract your best customers and others who choose to engage with you, because you have focused on precisely who you want to attract with your clear and compelling messaging.
The power of these scaling strategies lies in the way that each amplifies your opportunity to make more money from your business by acting as a catalyst to create systemic improvements in client profitability and business ROI.
For instance, by employing a combination of market segmentation, product innovation with pricing and packaging, a business owner can redefine the relationships with clients whilst simultaneously strengthening them and making increased profits to boot. Add a well-crafted and focused brand to add clarity and cut-through to reach new clients and the effect becomes exponential.
So far, I’ve reflected on six key business strategies which create the effect of adding scale to your business, thereby enhancing revenue and profit. Of the six, only one involves a significant capital outlay in physically increasing the size of premises, plant and/or or headcount. Each of the others
employs management abilities which amplify the effect of your existing business by in the words of an old BT advertisement, “working smarter not harder”. They also tend to provide a less linear return on investment and one that can continue to add value long into the future of the business.
In particular, the three strategies listed above, can also have a dramatic effect in improving the multiple of profit that a business owner can achieve on exit. This is because as each becomes an embedded competence and demonstrable ability within the infrastructure of a business, so they provide more confidence or an acquirer that their investment in your business will create a sustainable return on their cash.
Too often I have seen business owners sell out for what they perceived as the best deal they can make, only to find that the acquirer employs these highly leveraged techniques to add the value that was missing in the previous incarnation of the business and then flip their acquisition to another buyer. These are of course some of the techniques used by venture capital and private equity
businesses to redevelop their assets like real-estate to make enhanced profits on sale.
An ex-client once contacted me out of the blue four years after our last contact to tell me how he and his business partner had curtailed our assignment supporting their business to make a sale to a hungry acquirer. Not only did he tell me that he and his colleague finally received about 10% of the value they thought they would gain from the sale, but that he deeply regretted not having continued our work together, because he now recognised how it would have consolidated the value in their business whilst they still owned it. He also asked me to refer to him anyone who was thinking of
doing something similar, so he could dissuade them.
The value of acquiring this know-how to scale their business for a business owner is enormous, both in terms of cash and peace of mind from having the confidence to employ a proven mix of
techniques to scale a business and build its value. They also serve to ensure that the people who buy your business don’t “eat your lunch”.
In the final article in this series, I will explore how business cycles have a crucial effect in making the best choices about which scaleup strategies to employ and when, as well as why learning how to scale up your business can be as effective in winding down or scaling it back if circumstances make it necessary.
3. The riddle – how to scale and when to scale and why?
According to one of the legends about Oedipus, King of Thebes, when he returned to his homeland, he was confronted by a Sphinx which ruled in terror over the city. The Sphinx put a riddle to all passers-by and destroyed those who could not answer correctly. Oedipus solved the riddle of the Sphinx, which then killed itself, enabling him to take the throne. The riddle was this: “What goes on four legs in the morning, two legs at midday, and three legs in the evening?”
What, you might ask, has the Sphinx’s riddle what to do with scaling your business? Nothing and everything.
Whether you recognise it or not, we live amid a series of currents which flow around us and through us every moment of every day. Some of these currents, once they have been studied follow a discernible pattern and trend, whilst for others, though we experience them, these patterns elude us.
In my world, I refer to these currents, as “Cycles”. We are familiar with the cycles of the years, as they pass and the seasons; economic and market cycles; equity and bond market cycles – bulls and bears; we are also familiar with the accounting and regulatory reporting cycles with which our businesses are tasked as part of the overhead of doing business.
Yet, there is another cycle which governs how our sentiments change that is seldom observed, which has a crucial effect in how each of us makes personal and business choices over time, and governs the development of all business enterprises, small and large, and affects the feelings of those leading them as well as all those who work in them.
Cast your mind back to the day you started your business – if you were the founder, and if not, the day you joined your last employer. Can you recall the feelings that were flowing through your body and the prevailing sentiments that affected your perceptions at that time? How excited were you? How long did those feelings last? When and why did they change to something else, and can you recall the next prevailing sentiment that replaced it?
For all sentient beings, our perceptions are coloured by our feelings. You’ve heard the expression “wearing rose tinted spectacles” – this is what it denotes. Some of these shifts in sentiment influence our behaviours and choices in a positive way, as when someone lands their first big sale in six figures or their six-figure promotion; others take us down, as when we have celebrated our new riches too well and suddenly realise that we’ve spent too much. We then crash out of our elation to feel frustrated with ourselves and everyone else.
For example, I recall working with a PR firm which had a lion for its logo. The MD commissioned an expensive steel lion sculpture for the company’s roof garden as a demonstration of its achievements. Soon afterwards, his mood and the mood of the whole firm changed to one of cost cutting and frustration, and he sold the company soon after as a distress sale to a large advertising agency.
Learning to read the cycles of sentiments provides an invaluable management tool for leaders to read the mood contours of the road ahead of them much like a GPS. Also, as a GPS, it can guide business leaders in what to do, when and when not to act as well as how to manage critical decisions on the business journey. Once you can recognise where you are its easier to plan for the road ahead.
To close the loop then, I contend that learning to read the sentiment cycles alongside macro and microeconomic cycles, etc, will often indicate when is best to scale your business and when not. Combine this knowledge with the critical techniques I have described previously to scale up or indeed, to scale back your business and they can serve to optimize your strategic planning and provide the confidence that you are doing the right things at the right time when you scale up.