Scalability

April 25, 2017

 

Q. I read your book, Let Go to Grow. I’d like to grow my company into what you call a fully developed midsize business —one where the business effectively runs itself on a day-to-day basis so that I can focus on more strategic issues. Unfortunately, I’m having a hard time. Are there some businesses that just can’t get to this point? 

 

A. First, thank you very much for reading our book. We hope you found it to be helpful.

 

The short answer to your question is, yes, there are some situations where it is very difficult or even impossible to grow a company into a fully evolved midsize structure. Such companies are not easily scalable. Those businesses tend to have one or more of three characteristics.

 

1. The owner has a unique skill set – If the owner’s skill set is so unique that it would be difficult to hire another person to do the primary work of the business, the enterprise is not scalable. For example, it would have been essentially impossible for Rembrandt to have scaled his business. No one else had his skills. As a painter, Rembrandt was stuck in what we call a micro business structure—one where the owner does the primary work of the enterprise. The same could be said of great composers like Beethoven, Brahms, or Bach. Having phenomenal skills in a particular area like these masters is an amazing gift, but it will make your enterprise almost impossible to scale.


Being a public speaker or a celebrity of any kind might well fall into the same category. This doesn’t mean that such people can’t hire people to help them. They certainly can and many do, but when the owner has a unique skill set he/she will nearly always have to do the primary work of the business and therefore the size of the enterprise will be limited.
 

2. Limited margin – A midsize business structure is one in which the business owner is managing managers. In these cases, the owner and the managers are not doing the primary work of the business. They are overhead. Some businesses simply do not have enough margin to support this overhead.

 

Consider consulting to small businesses. Large corporations can pay millions of dollars for a few months of consulting work because they face problems and/or opportunities where the difference between success and failure may be measured in the hundreds of millions of dollars. Therefore, it makes sense to pay a lot of money to improve the odds of success. Small businesses don’t face issues where the swings are this large. Therefore, they neither can nor should pay these large fees for consulting services. This means that the fees small business consultants can charge are capped.

 

Employees who would be capable of doing top notch consulting work for small businesses are expensive. There is just not very much margin between what a small business can afford to pay and what you would have to pay a competent employee to do the consulting work. It is very difficult to scale such a business.

 

3. No benefit to size – There are some businesses where being a part of a larger company may not offer the person doing the primary work of the business enough benefit to cause him/her to remain an employee. He/she would simply start his/her own business and capture all of the revenue themselves rather than sharing it with an employer. It is difficult to scale such businesses because the people doing the primary work of the business inevitably leave to start a competitive enterprise.

 

Growing your business to a fully evolved midsize structure is a worthy goal, but before spending years trying to make this happen, be sure that your industry doesn’t have characteristics that will prevent you from succeeding.

 

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