lecture 11: scaling

why scaling isnt for everyone

- reliance on personal, services, or niche markets that dont easily expand
- may not align w founders objectives (lifestyle business vs high-growth startup)
- time & resources spent on scaling can be used for other strategic priorities

scaling a business

added revenue faster than it is adding costs
(sales growth, no. of employees, market share, capital raised)

costs & risks of scaling

1) CAC: achieving low CAC is imp, scaling too fast w/o efficient CAC = burn capital quickly
2) operational complexity: more customers = more logistical & organisational challenges
3) team & culture management: hiring/managing people across diff locations = communication & cultural issues
4) financial risks: additional inv & overhead (equip, offices, marketign) increase financial exposure if growth isnt realised
5) quality control: compromise prod/service quality, may damage rep

when not to scale

lifestyle, limited market (specialisation in local market), risk aversion, cultural reasons
choice to not scale is more common than pursuing growth

when to scale

- validated product/market fit
- standardised processes & systems
- can handle increased volume w/o compromising quality/efficiency
- sufficient funding/path for capital
- understand new markets
- data to support ability to compete successfully
- mapped out potential risks

why do you have to choose to scale

scaling is a strategic decision, not natural outcome
req significant resource investments
forces them to move from exp → structure and execution
risk vs reward - increases both

penrose effect

there are limits on growth rate of any firm at any point in time (firms are limited in the available resources & managerial capabilities needed for growth)

law of almost proportional growth

firms growth potential at a moment depends atleast in part on the size & the age

potential / benefits of scaling

1) replication: firms can create more of the same resources/capabilities that enabled initial success to grow
2) economies of scale: prod increases = avg cost per unit decreases
3) network effects: more users = prod more valuable

growth rates

young firms often find it easier to grow (%) compared to larger, more established firms.
- smaller initial size = smaller challenge of achieving growth

gibrats legacy

if young firm survives & scales, it can achieve a much higher % growth compared to older firm.
but prof of failure is also much higher for young firm than older

choosing to scale: +ve and -ve

trade-offs
new resources & capabilties that help create & deliver value, but uses current resources & capabilities intensively which can exert pressure & destroy firm in the process