Anyone who has gone rock climbing knows that scaling a wall is hard, takes a long time, and if done incorrectly can be fatal.
Same for scaling your business.
Every entrepreneur wants to scale their operations, and venture capitalists insist upon it. But “uncontrolled growth” in the medical fields is called “cancer”. Not knowing how to scale your company is uncontrolled growth and can have the same terminal results.
The inviable scaling rules
There are two primary ways to scale a business, which we will discuss in a moment. Regardless of your approach, here are some rules to which you must abide.
MISSION AND SCOPE: Make doubly sure the markets are within your scope and mission. This may require you to start by chasing smaller subsegments than trying to swallow the entire market at once.
BANK BEFORE YOU START: Make sure you have the financial resources in hand to fund the growth. This is super important because scaling costs money due to integration, human resources, unexpected cash flow disruptions, and unexpected expenses.
BE FRUGAL: Prepare to lose or have lower income during a scaling period. Scaling takes a lot more time than most CEO’s realize. Double the time you estimate during the scaling process and budget for that worse-case scenario.
When it comes to scaling, you can either be natural or unnatural, organic or inorganic.
Organic growth means to grow from your own resources, growing from within. You reinvest earnings in your teams, your technology, your ingenuity. This can be slower, but overall it avoids the risks of debt and forced fits between acquired and parent companies.
Inorganic is growing through acquisitions, which in my semiconductor industry is a common and cyclic affair. Often these acquisitions involve debt, which makes future cash flows and earnings less predictable and robust. It also comes with a wheelbarrow full of company, culture, and product integration headaches.
The best option is organic growth, because it demonstrates the strength of your core business and leadership. It is an internal and external affirmation that your company has the skill, brains and moxie needed to thrive.
Even though organic growth is preferable, sometimes it is not optimal. Competitive pressures are a key aspect to growing through acquisitions. If a hot property is available and would benefit you and your top competitor, and if you cannot internally develop competing products on a timeline that keeps you competitive, you may have to grow inorganically.
In the tech businesses, it is often a two-fer. An acquisition can instantly expands quarterly top- and bottom-line revenues. But adding a technology to your portfolio can also make you a better overall vendor. This is why companies are bought and sold in Silicon Valley more frequently than politicians.
The big warning is that if you do scale inorganicly, do not do it for primarily revenue. Associated with every acquisition are costs, incompatibilities and product line fluctuations. There are also cutbacks (many people get laid-off) and cultural differences between the companies that can actually do damage to your firm. Sometimes these can be such a problem that they erase any added revenue or earnings you anticipated.
Aligned with these harsh realities, inorganic scaling requires a hard-nosed approach to creating synergies of operations. Think of it as bolting a Chevy transmission into a Ford pick-up truck. You can make that happen, but it is going to take skill and some brute force. To get a 1+1=3 effect from an acquisition, you will need to make deep cuts and a series of tough decisions. Entire departments, divisions, and product lines will be slaughtered.
Scaling your company is not for the faint of heart. You need a strong stomach and a long-term view. Organic or inorganic, time and commitment make the difference. Nothing happens overnight and no approach is without pitfalls.
The key is to be patient, be enduring and be wise before you begin.