Is Your Business Ready to Scale?

Operations, Information and Decisions professor Gad Allon offers a litmus test for when to consider scaling.

(Photo: Colin Lenton)

1. Instant Feedback2. What's Driving This?3. A Matter of Means4. Walking the Talk5. The Final Question6. Do the Math7. Scaling, Not Growing8. Facebook Likes Scaling9. Pre-Scale Prep
Allon often hears from Executive Education students who apply the scaling test and report back within a few days. Some companies are willing to scale fast; others prefer to grow slowly.
Discussions of whether a business is propelled to scale lead to analyses of supply-side and demand-side economies of scale. The overriding question: “Why should we do this?”
Not every business has the resources or distribution capabilities to scale. And not every product will sell the same across all zip codes.
Don’t overlook certain business owners’ unwillingness to scale. The head of a family-owned generational business, for example, might be reluctant to change.
If you scale, how do you know there will still be a product/market fit?
Scaling discussions should include a calculation of the lifetime value of a customer as that relates to sales strategy and return on investment capital.
Walmart increases revenues while maintaining its costs for supply-side economies of scale.
The social media giant’s revenues increase exponentially while its costs grow only linearly for demand-side economies of scale.
Go from discovery to validation by building a Minimum Viable Product and testing for efficiency.

In theory, most business owners want to increase revenues and at the same time see costs grow at a slower pace. As promising as that sounds, not all enterprises are good candidates for scaling, according to operations, information, and decisions professor Gad Allon. In a whiteboard lecture adapted from Scaling Ventures, his course for undergraduates, MBA students, and executives, Allon explains that when business owners consider this transformative step, they should ask a series of questions: Are we propelled to scale? Are we willing? Are we able? And are we ready? The answers could change their minds.

This honest self-assessment leads to robust conversations about why you might want to scale, whether you have the necessary resources, and whether you’re prepared for the tradeoffs it may entail. After all, scaling up often means giving something up. That could be personalized service, speed, or specialty materials—any of which may be a deal breaker. As an example, Allon discusses Allbirds, the San Francisco-based direct-to-consumer startup that designs and sells environmentally friendly footwear. Co-founders Joey Zwillinger WG10 and Tim Brown committed to using humanely harvested New Zealand wool in their famously comfortable shoes. But when they contemplated adding a new product line, they realized they would run into a supply problem: not enough wool from humanely raised sheep.

“You can go to Foxconn and say you want to double your capacity, and they’ll do it tomorrow,” says Allon. “But small growers in New Zealand can’t double so fast.” The founders wanted to maintain their company’s humane values and transparency. (“On the website, you can see where the farms are,” Allon says.) Unable to scale with the available wool and unwilling to budge on principles or quality, they brainstormed: Should they buy a farm? No, they decided; they were supply-chain experts, not farmers. Should they train farmers to become more humane? Again, not their core competency, and rolling that out was likely easier said than done. “The silent killer of scaling is complexity,” notes Allon.

Eventually, Allbirds discovered that eucalyptus-tree fiber could substitute for wool in a new line of shoes, providing the same degree of comfort without increasing cost, compromising principles, affecting quality, or disrupting the supply chain.

When businesses scale, Allon says, the biggest challenge is offering something customers want or need that is well differentiated from the competition. The next challenge is being able to deliver. “And then you can scale,” Allon says. “But first you have to have these discussions.” —Louis Greenstein

 

Published as “At the Whiteboard With Gad Allon” in the Spring/Summer 2019 issue of Wharton Magazine.

 

 

 

 

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