scaling strategies!
what's the essence of scaling, in business? Let me tell you all about it!
I know I'm obsessed with scaling, but if you're in business, that's the primary domain you'll deal with daily and at a long-term strategic level.
Indeed, when it comes to scaling, it'll be critical to understand its nuances, as the landscape changes everything (from product development to marketing and sales processes).
But what about scaling that makes it so critical for business?
Business scaling is the transformation process of a business as broader and wider market segments validate the product.
Business scaling is about creating traction for a product that fits a small market segment.
As the product is validated, building a viable business model becomes critical.
As the product is offered to broader and broader market segments, it's important to align the product, business model, and organizational design to enable a wider and wider scale.
It all starts with a great product. Yes, but for whom?
“Great companies are built on great products.” ― Elon Musk
If you ask any entrepreneur who has survived long enough in the marketplace, they might all answer the same thing. While they will first focus on survival, they will also balance that with building a great product.
There isn’t a better market entry strategy than having an incredible product. Yet, an incredible product for whom?
As we’ve seen so far, it all starts by identifying what’s the segment of the market that we want to tackle first to prove the viability of our product. And scale from there. For instance, when Tesla had to develop its first electric car prototype.
Rather than starting by wanting to produce the cheapest electric car for everyone. It did the opposite. It started with a premium sports car, what would be called the Roadster, which targeted sports cars’ aficionados who looked forward to something unique.
From there, Tesla built to develop cheaper models for larger market segments. In this specific case, it wasn’t easy at all to execute this plan. Yet it eventually worked out (after many near-death experiences) as Tesla slowly validated the market.
If Tesla had gone all-in with the grandiose plan of developing an electric car for everyone (which is instead a plan that became feasible only by 2020), this would have led to sure failure, with billions of dollars burned on the way.
Once the product has been validated, it might happen that the company still hasn’t balanced the various pieces of the puzzle to create a sustainable business model.
The more innovative (meaning you’re operating in a new, developing market) your company is, the more time it might take before your business model becomes viable.
In fact, as Steve Blank highlighted in his Customer Development Manifesto, “Startups don’t fail because they lack a product; they fail because they lack customers and a profitable business model.”
Therefore, the first steps are really toward scaling up the business by tweaking the business model as the product reaches its initial target market.
Once the business model and product are aligned (this isn’t a linear process, and it might require years of trial and error), then the organizational design (or, more precisely, how you decide to structure your company to keep scaling) becomes extremely important.
As Colin Bryar highlighted in his book, ‘Working Backwards: Insights, Stories, and Secrets from Inside Amazon’, “as Amazon grew, we realized that despite our best efforts, we were spending too much time coordinating and not enough time building. That’s because, while the growth in employees was linear, the number of their possible lines of communication grew exponentially.”
Therefore, the long-term process looks something like this:
This means that for various stages of growth of the organization, you will need to focus on more and more aspects.
The product will always be at the center. Yet, one thing is to have a product that works for a small segment of the market. Another is to have it work for larger and larger segments.
That won’t only change the product itself as it scales, but it will also need a rebalance of how business models and organizations are structured. For instance, going back to the Tesla case, as a customer, it might sound trivial that the company would finally offer a cheaper version of the electric car.
Yet, this is a revolution that requires the company to reinvent everything from product development, design, manufacturing, supply chain, distribution, cost and profit centers, and therefore, organizational structure!
Recap: In This Issue!
Starting with a Great Product: Successful companies are built on great products. However, it's essential to identify the specific market segment that the product is intended for. Targeting a specific segment first helps validate the viability of the product.
Segmented Approach to Scaling: Companies often begin by focusing on a niche or specific market segment to validate their product's potential. Tesla's approach of starting with a premium sports car (the Roadster) targeted at enthusiasts validated the electric car concept before expanding to larger market segments.
Balancing Product and Business Model: Validating the product is the first step, but a sustainable business model is equally crucial. Startups can fail not because of the product, but due to a lack of customers and a profitable business model. Scaling involves fine-tuning the business model as the product gains traction.
Organizational Design for Scaling: As a company grows, coordinating becomes more complex. The number of possible lines of communication grows exponentially with the increase in employees. Organizational design becomes vital to ensure effective scaling without excessive coordination overhead.
Phases of Growth and Focus: The long-term growth process involves shifting focus across various aspects. While the product remains central, different stages of growth require attention to business model refinement and organizational design. Scaling involves a continuous cycle of rebalancing these elements.
Evolution of the Product: As the product scales to serve larger segments, it may undergo changes to cater to the needs and preferences of diverse customers. This evolution impacts various aspects, including design, manufacturing, supply chain, distribution, cost structure, and profit centers.
Restructuring for Innovation: Scaling often requires significant organizational restructuring to accommodate new strategies and business models. For instance, offering a cheaper version of a product, like Tesla did, necessitates a comprehensive reinvention of multiple aspects of the organization.
Free Additional Resources:
Real World Case Studies
Tesla's Segmented Scaling Approach
Tesla started its journey by targeting a niche market segment of sports car enthusiasts with its Roadster model, validating the electric car concept among enthusiasts who valued performance and innovation.
After proving the viability of its product in a smaller market segment, Tesla gradually expanded its offerings to cater to larger market segments with more affordable models like the Model S, Model 3, and Model Y.
This segmented approach allowed Tesla to validate its technology, build brand credibility, and gradually scale its operations to meet the demands of mass-market consumers.
Amazon's Organizational Design for Scaling
Amazon's exponential growth posed challenges in organizational coordination, as highlighted by Colin Bryar in "Working Backwards."
To overcome these challenges, Amazon focused on decentralized decision-making, emphasizing autonomy within teams while maintaining a strong customer-centric culture.
Through its innovative organizational design, Amazon streamlined operations, facilitated faster decision-making, and sustained its growth trajectory across diverse business verticals.
Startup Failure due to Lack of Business Model
Consider a hypothetical tech startup that developed a cutting-edge product but failed to establish a sustainable business model.
Despite initial excitement and positive feedback from early adopters, the company struggled to acquire paying customers at scale and generate sufficient revenue to cover operational costs.
Without a viable business model, the startup faced financial constraints, failed to attract investors, and eventually had to shut down operations despite having a promising product.
Restructuring for Innovation
IBM's transformation from a hardware-focused company to a leader in cloud computing illustrates the importance of organizational restructuring for innovation and scaling.
Recognizing the declining demand for hardware products, IBM strategically shifted its focus towards high-growth areas like cloud computing, data analytics, and artificial intelligence.
This restructuring involved divesting non-core businesses, acquiring innovative startups, and realigning internal resources to capitalize on emerging market trends, enabling IBM to maintain its competitive edge in the rapidly evolving tech landscape.
Product Evolution and Market Expansion
Netflix's evolution from a DVD rental service to a global streaming platform exemplifies how scaling involves adapting the product to serve diverse market segments.
Initially targeting movie enthusiasts with its DVD-by-mail service, Netflix later transitioned to online streaming, offering a vast library of movies and original content to cater to a broader audience.
This evolution required significant investments in content acquisition, technology infrastructure, and international expansion, transforming Netflix into a dominant player in the entertainment industry.
Ciao!
With ♥️ Gennaro, FourWeekMBA
