Should You Scale or Should You Grow?
Originally Posted: February 2, 2018
For decades, the conventional wisdom in many sectors was that bigger was better. The larger you got, the argument went, the more likely you were to achieve market dominance, supply chain efficiencies and coherencies that you could then carry from developed markets into developing markets. That should lead to happy investors.
Except that, as PwC’s Strategy & discovered, in key sectors like consumer packaged goods there is no direct correlation that can be drawn between being big and achieving higher shareholder returns. That’s a startling conclusion. There may be a number of reasons for that: Media fragmentation has made it harder and harder to get “big” messages out to a mass audience in the ways that companies could when channels were far more limited; the competitive advantage gap between large companies and smaller participants has closed because small companies have learned how to perform well; and, ironically, innovation has in many ways defeated the need for scale because global networks have changed how big individual companies need to be in order to achieve the presence that they would once have had to grow themselves.
So, how should companies decide whether they need to get bigger? Should they even bother? For many, the decision to remain artisan or to work within defined boundaries is an absolutely valid strategy; it enables them to define what matters to them, and to work within those parameters. But, for those companies that do decide to increase their presence, here are some key factors to consider.
Define your goal, and make decisions from there.
The decision as to whether to grow or scale comes down to the definition of success that you have set for yourselves in your strategy. As Jeremy Melis, UPS’s marketing director for small businesses, told The Balance, “The goal isn’t necessarily the speed of domestic or international growth. The goal is to best position your business to achieve what you’ve defined as success. That could be revenue growth, geographic expansion, a community of loyal customers or a better quality of life for yourself and your employees.”
As in all aspects of strategy, the key concern is why, not what or how. Growth or scaling should be the means, not the end. Your goal should be deciding what you are committed to achieving.
Growth and scaling are different things.
A key issue is that growth and expansion are too easily confused. Business coach Mihir Thaker makes the excellent point in an article on the site Business Business Business that, “Growth is all about adding percentages here and there around the business …. Growth is normally a factor of turnover …. Scaling is different. It’s a process driven approach to growth. No longer is the business concerned with growth for growth’s sake, but only with growth which can be managed.”
So, in seeking to scale a business for example, you are looking to change not just the pace and scope of growth but also the manner in which that acceleration takes place. Growth and scale demand different management styles and therefore different types of leadership, while the pace at which expansion takes place also requires careful judgment. Expand too fast, and the business risks becoming over-extended; expand too slow and the company risks stalling as others react and/or the business cannot keep pace with demand. And because scale demands a different set of actions than growth, it follows that it springs from a different mindset. One of the key questions that is asked too seldom is: “Does our company have that mindset?” If not, it may be better, and more profitable, to focus on growth.
To scale the business, first scale the culture.
Companies that are serious about scaling their presence must understand that their ability to do so hinges on their ability to shift and coordinate new thinking internally at the same time as they look for opportunities and new customer relationships externally. The temptation is to focus only on the latter — to see a shift in scale as achieving a greater footprint through growth, acquisition and/or diversification.
In point of fact, in order to deliver on that, the business itself must change mindset. As McKinsey has noted, in order to achieve a change of scale at requisite speed, particularly in a digital setting, an organization today needs to start by realigning its technology infrastructure to handle the new levels of customer interactions that will come. It will also need to invite new people into the business to make the new scaled process work better, develop new ways to ship faster and more diversely and reset its success metrics so that it can accurately gauge performance against its highest strategic goal and act/react accordingly.
Should you scale?
What questions should you ask yourself to determine if you should scale or grow? We have developed a model that helps companies figure out what they should do in order to meet their objectives. This model, called The LASSO Model, addresses a brand’s optimal expandability. Nearly all the businesses we spoke to in the course of developing our model commented that the decision to pursue scale was about much more than aspiration. It was a conscious decision to achieve critical weight in the markets that they were focused on because otherwise they risked being unable to achieve their goals.
That’s particularly true in sectors like consumer packaged goods, media and entertainment, where the pursuit of scale can become an end in itself.
Companies that are fueling their growth through venture capital, for example, will sometimes set their sights on being a particular size at which they are deemed to have succeeded in their quest to expand. In media, the goal for many is to make it to the $100-plus million revenue mark because that is deemed to be a benchmark for a scaled media presence. If that’s the metric that is expected of you, then that will be the key measure you focus on. Many will get stuck at around $50 million or lower, unable to grow a unique audience, achieve consistent engagement, differentiate themselves against others and over multiple platforms, and improve their margins.
Size alone is probably not enough.
That leads to the final factor. Strong businesses depend on more than one thing to protect themselves against competitors. We liken this to a Rubik’s Cube. What makes the Cube hard to solve is that the puzzle does not exist in one dimension, but rather in three. Equally, businesses that have ambitious expansion plans need to look for ways to build in other aspects of competitiveness beyond just size itself. Indeed, wherever possible, they need to use scale to reinforce and strengthen those other elements that make up their value proposition, so that the bigger they become, the more competitive they are. Many of the companies we spoke to in the course of our research found this the most difficult part of their expansion planning — thinking of scale as a competitive factor that wouldn’t just strengthen their market presence but also raise the barriers to entry for copycats and enable them to profitably leverage and capitalize on what really drew customers to them.
Growth and scaling are different approaches and neither one is “better” than the other. Each has its strengths and weaknesses. Each works better in some sectors than others. Each has its own dynamics and makes its own demands. What’s important for entrepreneurs with ambitious agendas is that they understand why they have chosen one approach over the other, how they have organized their infrastructure and culture to make it happen, and where they will integrate growth or scale with other competitive factors to make it harder for others to emulate their success.