Are you scaling or just growing?
Reading the March edition of the Harvard Business Review I was struck by a piece featured in their "IdeaWatch" section on page 22 titled "Efficiencies of Scale May Be a Myth"
Published March 25, 2019
“Efficiencies of Scale May Be a Myth” courtesy of Harvard Business Review
Scaling versus growing
Oh, to be a unicorn ...
Reading the March edition of the Harvard Business Review I was struck by a piece featured in their “IdeaWatch” section on page 22 titled “Efficiencies of Scale May Be a Myth“, accompanied by the above lovely image.
I am assuming this resonated for me since I had only just last week been sharing with attendees of my most recent ‘Scaling Up Business Growth Workshop’ the importance of scaling, not simply growing.
For scaling the focus needs to be to increase revenue significantly, whilst keeping operating costs the same or just minimally higher. The art of scaling up successfully is putting in place a differentiating strategy, appropriate leadership, procedures, IT infrastructure, and ‘functional’ culture that can handle a much greater volume of business. Mixed with a good measure of discipline and focus.
If all you do is add resources and/or infrastructure to handle the increased demand of increasing sales at a cost which is more or less equivalent to the level of increased revenue being achieved, you are simply growing.
Why scaling versus growing?
The danger of this is not just that you are not increasing margin, you are also increasing the demands of running the business. More people, more infrastructure just means things are getting harder and more frustrating. There is no joy or economies of things becoming easier and requiring less management hours. Leadership get dragged further down into working in the business rather than on it.
The Long-Run Average Cost Puzzle
The HBR piece referred to “The Long-Run Average Cost Puzzle” (by Aytekin Ertan, Stefan Lewellen, and Jacob K Thomas) working paper which essentially questions the commonly accepted concept of ‘economies of scale’. That essentially as a firm increases its sales the cost per unit should reduce. That the fixed costs and overheads get spread between larger units of sales.
However, instead of growth companies enjoying wonderful economies of scale, their research found that “costs and profits rose in close proportion to sales increases, without the marginal improvement the accounting theories predict“.
Interestingly the research came to a similar conclusion across all industry sectors and ages of company. Researching over 150,000 organisations that ranged in maturity of just having gone public to having been Publicly listed for over 25 years. Research which led them to state that “projections that routinely anticipate declining average costs are likely optimistic. Any scale efficiencies projected, especially if they are based on short-run marginal costs, deserve careful scrutiny to confirm that they are reasonable and supported by experience“.
What might this mean?
Maybe that is just one of the reasons Jim Collins author of “Good to Great – why some companies make the leap … and others don’t” suggests that it takes:
- disciplined thought
- disciplined people
- disciplined action
Do something great
To move from being a ‘Good’ growing company to a ‘Great’ scaling company
Verne Harnish, author of “Mastering the Rockefeller Habits 2.0 Scaling Up, How a Few Companies Make It … and Why the Rest Don’t” has concluded, from his own customer base numbered in the tens of thousands, that his most successful scaling up companies:
- Applied “Mastering the Rockefeller Habits” content
- Continuously learnt
- Utilized coach accountability
Am I enjoying the climb of scaling or am I simply growing?
This is the question worth asking yourself
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