Investors, capitalists, entrepreneurs and every stakeholder to an enterprise wants a fast business scale-up. This blog tell you about 7 indicators of ‘why and when?’ you should not scale-up and what to do about it.
Why are Companies restless to Scale-up Business ?
Pressure from shareholders. People want to get a good return for their monies and rapidly.
Get encouraged with current success and ‘Mini-surges’ in business. A growth of (say) 30-40% in a year (again an industry average of 15%), and you want to take it to 100% year on year.
Want to maximize the ‘First-mover’ advantage- You have a great product and business model, and you want to leverage your differentiators before competition catches-up
Primary ‘Testosterone’ Effect: the moment we enjoy first success, we think we cannot go wrong, and we put all our chips on scale-up.
Missed Business Opportunities- When a company turns away customers and when supply is lesser than demand
A company tries to capitalize on a ready opportunity. Scale-up swiftly, build valuation (or at least perception of it), and sell off the stake. We call this ‘flipping’ in investors lingo.
It is not a simple question. More companies cannot achieve their potential (or even go out of business) when they try to scale-up too early or too late. In this article, I will talk about ‘What and how’ to avoid the risks of scaling up too early. Here are 7 Signs, which should tell you that your business is not ready to scale-up, AND what should you do to address those gaps.
Sign #1: No medium or long-term differentiator/USP
You may have a strong USP, but hold-back if any of the following situations exist-
Competition can catch up within less than one year.
You haven’t got an excellent Entry Barrier to the competition- they can enter your turf by throwing skills and monies.
You do not have substantial enough exit barriers for your customers to switch over.
Scale-up is all about looking into the future and do scenario building and ask yourself tough questions. For example- you have come-up with a line of foldable furniture with ultra-light material, which helps the young-unmarried population to set up their homes with elegant, low budget furniture. However, how much time will it take for a significant player like Ikea to make knock-offs and perhaps upgrade the technology?
How to cover the gap?-
At any point in time, have 5 Differentiators for short-term (1 year), 3 for medium-term (1-2 years), and 2 for long-term (2-3 years). Or at least you should have clear and visible progress on achieving these differentiators.
Developing Differentiators (through fast innovation) should be an ongoing pipeline, whereas soon as competition catches up on one of your USPs, you have one waiting on the side to plug it in.
A company that wants to scale-up should commit a minimum set of resources on innovation and USP creation.
Sign #2: Stagnating Industry
Let’s say that you have created a great niche to tell a retail chain for mothers for pregnancy and post-birth care. You have hit the jackpot, and you are adding one store every six months. Market feedback is good, and investors are lining up. However, would you take a hard look at the overall retailing industry, where online stores are taking away business from brick & mortar stores by the day? What happens if tomorrow there are ten online portals addressing the same niche, supported by excellent customer support, online counseling, a physician on call, super-discounts, and a wide range of products?
So you may have done fantastic, but if your overall industry is becoming shallow, you cannot launch a big ship in it.
How to cover the gap?-
If you have a great product, surely look at the possibility of expanding in the online world.
If you have a great product- create a business model that adopts a multi-channel approach. A multi-channel approach is not an easy model with all inherent conflicts on pricing and turfs, but there is no option but to crack this equation.
Sign #3: Uncertainty and Risks of Disruption
Till a few years back, we thought disruption could happen mainly in the tech industry, given the speed of ‘local to global’ and ‘concept to deployment,’ because of its mostly non-physical nature. However, not almost every industry is facing the risk of disruption. For a company to scale-up, disruption is undoubtedly as much of an opportunity as it is the risk. As you get ready to scale-up, you need to have the right balance of speed of scale-up vs. the risk of disruption. Ask yourself two questions:
What could be the Top -3 disruptions?
Will you be able to scale-up in time to gain the economies of scale and muscle to hold back against the disruption?
With the advantage of size and access to funds, will you be able to add more differentiators quickly or respond to those disruptions?
If you can find definite answers, you can get onto that path. If not, you should hold-back.
How to cover the gap?-
When you get onto scale-up, pace yourself based on the competition and risk. Your scale-up plans could be (say) 3X scale-up in one year or five years, based on external threats and opportunities. The bottom line is that you need to be two steps ahead of the risks (or at least have an ability to reduce them)
Have a complete road-map of scale-up, with monthly milestones
Ensure that you have a risk-mitigation and event-response sheet
Build Flexibility and Agility in your capabilities to improvise as you go along.
Sign #4: Lack of Sustainable and Predictable Growth
In War, before a general launched a major battle, he ensures that his current territories are secure and he can fall-back to a strong defensive line, in case he has to retreat. The same is with scale-up. You need to achieve a certain level of predictability and sustainability in your current business operations. This includes-
A captive and loyal customer segment keep on giving you business.
A Regular income model (subscription fee, renewal, maintenance agreements), through long-term contracts.
A well-functioning business, which will give you 15-20% (or industry average) growth in profitability, even if you do not scale-up
In short- if you cannot hold your territory and supply lines, no point in launching a new offensive. You may have a great product and have tasted quick successes, but till you do not stabilize your foundation, do not take a leap.
How to cover the gap?-
Stay focused- Phase out your goals in three steps:
Making the current business scalable and sustainable.
Making current business highly efficient and tightly run ship. Scaling-up inefficiencies are a great mistake.
Scale-up
These goals may not be precisely sequential but should be mostly sequential.
Sign #5: Lack of market-size to support business scale-up
When you say scale-up, we assume 5X to 10X Scale-up (irrespective of time and years it takes). For a scale-up, not only a company has to grow, but its sector/customer segment also has to be large enough to support the scale-up. No point in launching a large ship in shallow waters. Industry size needs to meet the following criteria:
Large enough to support your scale-up
Large enough to support multiple scale-ups. So even with disruptions and competitive forces, there is enough space for various players.
If your sector does not meet this criterion- Hold-back or temper your scale-up ambitions to more realistic levels.
How to cover the gap?-
If your target market is limited, you could consider the following strategies:
Devise new products and variants to serve more niches. For example, using the same facility of assembling full-size bicycles, can you also start creating bikes for adolescents?
Launch multiple brands targeting different segments. For example, can you manufacture high-end televisions and medium-end televisions for different income segments with different branding and maybe even channels?
Get into associated segments- Can you get into a new segment using the strength of your operations and brand. For example, you are making industrial lubricants, and you add the consumer auto-lubricants market.
Sign #6: Lack of powerful Leadership
Ask any investor, and he will put the quality of the management team and leadership as among the top 3 criteria. Scale-up (like anything else) is all about people. Here are some leadership qualities needed for high-growth.
Growth Mindset
Process Orientation
Being Agile and Responsive
Digitization and Tech-Savy
Entrepreneurial mindset with a complete sense of ownership
Capability-Building
The challenge with any small- or mid-sized enterprise is to get the right resources to help them scale-up their business. If you feel that, you do not have the minimum critical mass of people to take you through this journey, hold-back.
How to cover the gap?-
Let us say that you have 15 people in level 1 and level 2 of management. Identify the best 5, and shape the organization around them, giving the best of the responsibility. So essential to put your most reliable horses in the center.
Replace the bottom 25% of leaders who will not meet the cut and do not have it in them to develop. There is no science to it, but if a leader is operating below the minimum thresh-hold.
For the leaders at the cusp (not operating to the mark, but have potential- typically largest population), invest your time and effort in coaching them. Give them assignments, have focused feedback sessions, assign a buddy (a senior and a better leader) to them, and so on.
One more option could be to bring in an external heavyweight that you cannot hire and cannot afford the full time. He/she can help fill up leadership gaps.
Sign #7: Running out of Monies to scale-up business
This surely is among the top 3 reasons companies fail in scale-up (and sometimes close their business)- They run out of money. Here are the reasons:
Under-Sizing Scale-up: You plan cash to keep in mind a certain level of scale-up which is lower than the right level, where the real benefits come-in
Investor loses confidence or capacity to invest mid-way, leading to delays or reduction in monies coming in.
Mid-course corrections- you need extra monies to respond to an unexpected situation (competition or disruption)
How to cover the gap?-
Make a conservative plan on the benefits of scale-up and always keep a 20-25% buffer in investment demand.
Avoid getting into too tight a performance-based release of a different tranche of funds. So if you are expecting to achieve (say) USD 20 Million Sales at the third milestone, you should not commit over 15. Things can go wrong, and more often than not, they do.
Always have the funding for next 6-12 months burn (depending on scale-up life cycle)
Agree with investors for an ‘Emergency Fund’ to take care of unexpected scenarios.
Some people may think this approach could offend investors/shareholders. The fact is that it is the opposite. Investors appreciate the realism and maturity. They dislike promoters who are over-shooting or are over-optimistic.
