Questions to Ask YourselfJen Nord has heard a hundred variations of this story. Sometimes driven to desperation, clients come to Jen asking about the legal and bookkeeping requirements associated with becoming an employer. In many cases, she’ll advise her clients to slow down and deliberate before they take the plunge.
The Physics of BusinessMismatches between the demand for your product and your operational capacity to fulfill that demand are inevitable. The question is how best to minimize the mismatches. In other words, how do we design our businesses to be scaleable?
Scalability is a characteristic of a system, model or function that describes its capability to cope and perform under an increased or expanding workload. – InvestopediaDemand for a successful product can – and very often does – grow nonlinearly. Such growth is reflected in the familiar S-shaped growth curve: In the startup phase, demand can grow painfully slowly. However, due to the accumulated effect of sustained awareness building and other marketing efforts (and a bit of luck) demand can take off. This is the “overnight success” observed by outsiders. With time, the market saturates, demand matures, and growth slows. Operational capacity tethered by physical constraints, on the other hand, tends to grow linearly: Taken together, it’s clear how these tendencies create tension: It’s expensive and risky to build operational capacity in anticipation of future demand. However, it’s also risky if you don’t. If demand takes off, you may find yourself incapable of fulfilling available orders (or killing yourself in the attempt). That results in lost sales in the short-run and might irreversibly erode your brand’s reputation. Scaleability, then, is the word we give for the magic trick of accommodating rapid bursts in demand with commensurate increases in operational capacity. How do businesses overcome the laws of physics?
Scaling Operational CapacityThere are at least three generic strategies to make your operational capacity more responsive to changes in demand:
- Rent other people’s economies of scale
- Design better systems
- Invest in productivity
Rent Other People’s ScaleAs Adam Smith anticipated more than 200 years ago, increased access to global markets encourages specialization. Not surprisingly, we’ve seen an explosion of businesses over the last couple of decades that benefit from economies of scale including:
- Web hosting (e.g. Amazon Web Services, Shopify, WP Engine, Vimeo, Blubrry, etc.)
- Software as a service (e.g. QuickBooks Online, Google Analytics, etc.)
- Logistics (e.g. FedEx, UPS, etc.)
- Fulfillment (e.g. Fulfillment by Amazon, Rakuten, Ship Station, etc.)
- Contract manufacturing and associated marketplaces (e.g. Alibaba, Etsy Manufacturing, etc.)
- Service agencies (e.g. Influx) and marketplaces (e.g. Upwork)
Design Better SystemsHenry Ford didn’t invent the automobile. However, he did create assembly line systems that allowed for the production of automobiles at an unprecedented scale. Ad hoc workflows are fine – even superior in many ways – early on. But ad hoc systems don’t accommodate growth. Redesigning workflows might not be your idea of fun. However, it’s more fun than putting in 15-hour days in perpetuity doing manual, administrative tasks. If you find yourself doing the same thing twice, you should start thinking about how to systematize the process before you have to do the same task a thousand times. Your life will be better for it. A lot better.
Invest in ProductivityWould you rather pay a worker $11 an hour or $25 per hour? It’s a trick question of course. Knowing the cost of an input, by itself, tells you little. To make an economic judgment, you need to know the associated value of the output. Productivity, to an economist, means the value of output relative to the cost of the required input. In other words, if an $11 per hour worker can generate $22 of value in an hour while a $25 an hour worker can generate $51 of value in an hour, the smart move is to hire the more expensive worker. That’s because she is the more productive of the two. Productivity is enhanced by training, effective systems, and good tools. If you have employees, what steps can you take to make them more productive? That is, under what conditions does it make sense for you to make investments in their productivity? If the alternative is the prospect of lost sales (or failed marriage), you may want to take a harder look at your options.
A (Common) Recipe for DisasterHere’s how to snatch defeat from the jaws of victory as demand for your product goes through the roof:
- Do everything in-house
- Do everything manually
- Avoid standard procedures