Scalability Is A Key Concept For Your Business

One of the most challenging elements in business model innovation is the concept of scalability.  When the team and I evaluate new business model ideas, one of the parameters on which we evaluate them is scalability.  Scalability is the term attached to how easily the business grows up as its inflow grows.

 

As a general rule, service-intensive companies are tougher to scale up.  An example of a service-intensive company may be one, for example, that is contingent on the individual talent / professional knowledge of some core team member such that replicating that position in the business model is difficult.  Specific examples include a law firm, physician’s office, or an architectural drafting company.  When the initial team member, let’s say a physician in this case, becomes busier with administrative tasks as the company grows, it is difficult to replicate that physician’s participation in providing the actual service that the company is meant to do.  So, issues with scalability arise.

 

Said differently, it is much harder to scale businesses that are services in part owing to the reason that an individual team member’s talent provides the core for the business.  Usually when we find a business model where scalability is a challenge or when we design a new business model that is a service, we focus, intentionally, on ways to make the business more scalable.  Some of these include planning for the volume of business at which we will add employees or independent contractors to be able to provide the service as the initial team member becomes progressively busier with administrative work.  It can become very difficult if we wait for a team member to be overloaded before offloading tasks from them, and so a clear discussion about how to scale up, at the onset of the business, is useful.

 

We usually say that an issue with scaling up is one of the “good problems to have” because it indicates the business is growing and the model is likely reaching a customer need / market.  So when we perceive issues with scaling we try to remind ourselves that this set of issues is better than the set of issues where no one is buying the product or service.

 

Non-service business opportunities maybe much more easily scalable.  A model that sells an online info product, for example, may be much easier to scale.  A recent online search for examples of highly scalable models revealed www.providerlifestyleexperts.com as a nice example.  Startups that focus on a website for sales are often contingent on band width, server speed and other issues such as those.  Where scalability is more dependent on technology things maybe scaled easier.  This is not to say that it is straightforward to scale business models that have inventory associated with them.

 

Business models where an object is built or an object has value added to it and is then sold can also be very challenging.  CEO’s such as Tim Cook from Apple and Jeff Bezos from Amazon are masters at logistics and this highlights the importance of those functions in a modern business model that wants to scale up.

 

When you have an idea for a new business it should be fairly clear by now that much more goes into a successful idea than having a good idea.  A good idea is key to success but there is much more around it that makes the idea move forward in a sustainable fashion.  In later posts we will discuss more on typical factors that are associated with the business success or failure.  (FYI The “we” seems to be creeping into the blog a lot.  That is because sometimes, here, I’m speaking for our team of investors and “startup mechanics”.) Interestingly there is a great deal of research, much of which is statistically rigorous, about what makes successful startups across multiple different industries.  These have always been a personal interest of mine and I look forward to sharing those with you in future blog post.

Compound Annual Growth Rate vs. Blue Ocean Strategy: Also-Ran Versus Whole New Class?

 

waterjpg

 

 

One of the typical markers taught in business school to evaluate entering a new market is the compound annual growth rate or CAGR (pronounced kay-jer). A compound annual growth rate of 15% or greater is considered a favorable market and one you may want to consider entering.  There are lots of complex formulae to calculate the CAGR however there is a relatively straightforward one in a book entitled Harvard Business School Secrets by Emily Chan.  Don’t be taken in by the table she lists at the end of the book with the CAGR trick.  Unless I have misread it, Emily, or Emily’s editor, actually rearranges the fast formula for CAGR likely on accident.

 

The quick formula for CAGR is 0.75 divided by the amount of time the market takes to double in size.

 

So, if the market takes 3 years to double in size, the CAGR would be 25% and this would be a favorable market.  This is one pole of strategic thinking which is sort of an also-ran strategy.  Meaning this focus on entering a market that is already doing well is a nice way to try to move in the same direction as everyone else and obtain a return.

 

However, there is another extreme on the spectrum of strategic ideas called Blue Ocean Strategy.  If you haven’t heard about Blue Ocean Strategy I invite you to consider reading a book also entitled Blue Ocean Strategy which has really been fascinating in my opinion. It is one of the more interesting business-related books I have seen in the last 10 years.  Blue Ocean Strategy is the name given for what was originally an Eastern idea of blue and red oceans.  Red oceans are depicted as ones in which there are multiple competitive entities that bloody the ocean with the products of their competition.  A blue ocean, by contrast, is a here-to-fore unseen market created with a game changing product, service, or business model.

 

A nice example of Blue Ocean Strategy is the counter-intuitive idea of the gaming console that makes us get up and move.  Where originally gaming consoles were thought of as static things that favored sedentary lifestyle, the Nintendo Wii and now other consoles such as Microsoft XBox with Kinect have really completely changed the market to where now a substantial degree of motion is expected in certain gaming consoles. Nintendo’s game changing move to the Wii resulted in substantial sales, first mover advantage, and an incredible blue ocean for some time until the rest of the predators were able to enter that same field.  So, Blue Ocean Strategy sort of reflects a first mover advantage until copy-cats arrive. However it is more than that as it focuses on innovation as an important deciding factor in gains.

 

Blue Ocean Strategy draws a contrast to the older business school thinking that leads us to the idea of the CAGR and the also-ran strategies. I take these as two spectrums in product development and invite you to read more about both Blue Ocean Strategy and typical tools to evaluate a market such as the compound annual growth rate.  Each has its place and utility.

MVP Does Not Just Stand For Most Valuable Player

We haven’t directly discussed this during our previous blog entries but many of the tools we have been mentioning are part of a start-up style called the Lean Startup.  Typical tools of the Lean Startup include the business model canvas and strategies to reduce initial outlay of capital in order to demonstrate that the business experiment works.  These Lean techniques are in line with similar thoughts on Lean production, Lean six sigma and Lean development.

 

Lean, however, is more than just a catchphrase.  It gives us some useful concepts.  Lean strategies focus on the 8 sources of waste in most systems.  These 8 sources of waste may be represented by the acronym DOWNTIME.  This is meant to reference downtime for machines and other capital pieces of equipment that cannot function to produce output when they are down or offline. The acronym DOWNTIME reminds us:  D=defect, O=overproduction, W=waiting (where one step waits on the next step), N=non utilized talent, T=transportation, I=inventory, M=motion (wasted movement), and E=excess processing.

 

This focus on the elimination of the 8 sources of waste, sometimes called “muda”, are classic techniques in creating a new start up.  One of the concepts unique to the implementation of lean methodology in startups is the creation of the MVP.  This doesn’t stand for the most valuable player or any of the typical ways you may have heard MVP utilized previously.

 

MVP, in this context, stands for minimum viable product. In other words, when a company that is going to sell a product or services goes live it is useful to try to strip away every single thing down to the minimum viable product that a consumer will accept and pay for at an appropriate level. This is a very tricky concept.  Often product teams are attempting to throw everything but the kitchen sink (or even including it) at the potential customer.  However the minimum viable product is a useful idea given that it often requires the least amount of time to prepare, is typically able to be held in inventory longer, requires the least intensive expenditure of capital to create, and is often the most agile in terms of flexibility for redesign etc.

 

The minimum viable product is a useful thought tool in creating a new startup that is going to sell a business or product.  You may have seen this with 3D printer manufacturers such as Makerbot.  I have one of the earliest Makerbot Replicator models and let me say this model has much more austere appearance than the eventual Makerbot Replicator 2.  For example, the earlier replicators for Makerbot had a wooden case and were very straightforward and simple in term of design and manufacture.  They often came as kits which end user were to build on their own. If you wanted an assembled Replicator it was more expensive.  Now the Replicator 2 is a product that has advanced beyond the minimum viable product stage.  It comes assembled, has a metal case, and overall looks very different than the initial replicators.  Again, I invite you to read more about it and learn about some of the interesting lean startup tools that can be utilized to create your new startup business, usually with nothing more than the funding available on one of your credit cards.

 

Our Angel investment team has found that a typical capital expenditure of between 5-10k is able to establish and fund an excellent service type business model canvas with a runway of approximately 5-6 months.  This is based on Lean startup techniques and interesting utilization of certain tools that allow a business to go live as an effective going concern with a runway of between 5-6 months.  Take a minute and read about Lean startups.  You will find it is worth your time.