scaling an emerging growth company | Strategies to improve business profitability | advice for company growth
Getting to scale is the most important challenge that emerging growth companies face on their path to realizing their potential and generating real wealth for their investors and at least some of their executives and employees.
Scaling an Emerging Growth Company: How Technology Can Help
Technology is a main way that companies create the economies of scale that allow them to spread fixed costs over an expanding base of output—decreasing the cost of producing the next marginal unit of goods or services. For growing companies, achieving scale is often a necessity. As No Man’s Land, the acclaimed book by Newport’s Chairman Doug Tatum, explains, growing companies predictably come into competition with companies bigger than they are. To keep pace, they have no choice but to deliver a higher volume of goods and services at relatively lower per-unit cost. Technology is an essential aspect of a company’s business model: how it creates and delivers value to its customers, capturing a portion of the value as profit for itself.
For emerging companies, what Newport’s Four Ms framework calls the “Model” basically means how the company makes money. It is our observation that an entrepreneur’s original grasp of their business model is typically intuitive. For the company to grow out of No Man’s Land (where it is too big to be small but too small to be considered big), he or she must now formalize and share the model with the entire company.
The Challenge of Getting Out of No Man's Land
An essential challenge is to determine how the value delivery system can be as profitable at larger scale as it was when the company was smaller. The costs that a firm accrues as it expands do not correspond to revenue flow. Instead, they occur in a “step-fixed” transition, ahead of revenue. A firm must invest capital in infrastructure to deliver higher volume before it can generate cash from increased sales. If a business that was profitable when it was smaller is not viable at greater scale it risks growing itself out of business. To get out of No Man’s Land, a company needs a new model that will support both a growth trajectory and targeted profit margins.
Scaling a business is very different from replicating it. Replication basically involves creating new iterations of a well-defined business model. Scaling on the other hand does not mean “more of the same.” It requires building both physical/information processes and mechanisms to ensure employees stay connected to the mission of the company. All physical and information processes follow U-shape cost curves. Up to a certain point cost related to a specific process tends to decrease per unit of volume, as the company ascends the learning curve and understands how to do business more efficiently. But at some point its model starts to produce diminishing returns. It must find a new model to generate scale.
An example of the challenges of creating scale is a small restaurant run by a proprietor with a small kitchen. If the restaurant is successful and wants to expand, it can create replicas of itself in new locations, which will likely be geographically dispersed. But the owner can’t be at all these restaurants to oversee operations. Scaling in this case requires a complete new set of skills: choosing new sites, hiring talent, providing supervision and centralizing purchasing to get lower costs and ensuring quality. In a case like this it is critical to redesign the physical and information processes and make the necessary investments to achieve scale.
Management as an Important Aspect of Scaling an Emerging Growth Company
An equally important aspect of scaling, also part of the Four Ms framework, is Management. This is about how a company continues to promulgate its mission and values as it grows. How will hundreds or thousands of employees remain motivated and inclined to comply with policies and processes without the founder being personally present? Writing and distributing mission and value statements won’t suffice. The leaders of the company need to demonstrate these values in action across all its operations and locations. This requires putting the right “boots on the ground,” a very challenging and time-consuming task.
In my career as a CEO running technology companies, I have seen many examples of companies using technology in diverse ways--to create scale that helped them beat the competition. I will describe several examples of this in the next article in this series.
Looking for some additional insight for your emerging growth company on how to break through No Man's Land? Download our complimentary ebook: The 5 Steps to Survive No Man's Land or Watch Newport's on-demand webinar on How to Break Through No Man's Land here.
About the Author
Farhat is a hands-on technology company leader with a successful track record running and turning around hardware, software, services and support operations.
As CEO/COO of several Fujitsu America subsidiaries, he managed profitable operations for 40 consecutive quarters. He turned around PC and Server units by revamping the full range of operations, including sales, services, IT and supply chain. In those roles, he was instrumental in launching a number of new businesses in the data center outsourcing, storage and software sectors. Learn more about Farhat or contact him here.
Connect with Farhat on LinkedinPhoto credit: Flickr , Scott Mcleod
