Scalability and Startups

Scalability is considered to be a very important factor in any start-up company.

Investors all over the world are highly impressed by scalable business models and prefer investing in the same. However, many people in the start-up community still do not have a clear idea about what scalability is. In this article, we will have a closer look at what scalability is and how it can be built into the foundations of any business.

What is Scalability?

Scalability is referred to the ability of a business to handle growth. This means that a scalable business model allows investors to drastically increase the scale of operations within a short period of time. Under normal circumstances, growing a business can be a very difficult process.

The lack of scalability severely limits the amount of growth that a company can experience within a short period of time.

It is important to note that the profitability of the company should not be negatively impacted as a result of increasing the scale of operations. This means that the company must experience the same profitability or they must witness an increase in profitability. If growth comes at the cost of reduced margins, then the business model cannot be considered to be scalable.

Difference Between Growth and Scalability

A lot of start-up founders, as well as investors, tend to get confused between the closely related but different concepts of growth and scalability. It is important to know the difference between the two.

Both scalability and growth refer to an expansion in the level at which the business operates. Every business can experience growth. However, scalability is specific to certain types of businesses.

Scalability means that the business should be able to generate increased revenue without making a proportional investment in building the production capabilities or infrastructure. For example, a website is highly scalable since it allows the business owner to cater to a much larger number of customers than a physical store would.

Scalability is about witnessing increased productivity even when the business is going through a growth phase. Scalable business models witness a large drop in per-customer costs even as they add more and more customers to the business.

Characteristics of a Scalable Business Model

There are certain characteristics that need to be present in a business model in order to make it more scalable. These can be considered to be the drivers of scalability. Some of the important drivers have been mentioned below:

• Asset-Light: The concept of asset-light business models is also closely related to scalable business models. The basic concept is that if a company needs to invest a lot of money in plant and machinery or any other production set-up, they cannot access different markets at a very high pace.

  Hence, being asset-light prepares a company for building a scalable business model. It needs to be understood that just being asset-light does not make a business model scalable. It is a prerequisite to building a scalable model but not the only factor that needs to be taken into consideration. Companies can achieve an asset-light business model by outsourcing most of the work that requires capital investment to be made.

• Automation: The degree of automation with which a business can operate has a huge influence on the scalability of that business. If a business requires human intervention in order to run its processes, then such a business cannot be scaled up easily. Alternatively, if a large part of the business processes operates in an automated manner then the scale of operations can be increased without adding any pressure to existing resources.

  For instance, companies like Wal-Mart have an automated system to keep a check of inventory levels and place orders when the inventory goes below a certain threshold. Hence, if they add a new store, there isn’t much impact on their procurement process. However, if the same process needs to be done manually, then the company would need to hire people which would slow down the process of scaling up the business.

• Less Dependence on Skilled Labour: It is also important to note that a scalable business model should not have much reliance on skilled labor. Skilled labor can be difficult to obtain and it can be expensive.

  A start-up can be considered to be scalable if it can achieve its business objectives even with unskilled labor.

  Companies like Uber have scaled their business models while relying on a huge human workforce. However, the human workforce requires only basic skills such as driving which can be found in abundance. Hence, Uber can scale up and down at will without being heavily dependent upon the labor market.

• Replicability: Another important feature that needs to be taken into account is replicability. A business becomes scalable when it can be easily replicated in many different markets. If the product or service is highly localized then such localization acts as a barrier to scalability.

  For instance, if a company sells food products, it needs to be taken into account the tastes, cultural preferences, and religious preferences of the target market. Hence, such a business is less scalable as compared to a cab service which may be the same across most parts of the globe.

The fact of the matter is that scalability can be considered to be a defining factor for any business. It can be built into the DNA of a business if the founders pay deliberate attention to this concept at the early stages.