An updated model for accelerating frictionless growth.
Startups are about scale, but there is no playbook for scaling companies. We need a new mental model to guide the growth process between Startup and Big Company. In this post, I build on a previous idea and present a window through which a team can examine the scalability of its business model to support successive waves of rapid growth.
How do you go from $2m to $100m?
I believe this is an unsolved problem in entrepreneurship. Where is the playbook for guiding a company through that magical and challenging process of scaling a company from Startup to Big Company? Only a small group of people know how to do it, and they’re busy building away.
We have some guidance during other parts of the company life cycle. Early-stage startups know what to do: the Lean Startup movement has done an excellent job of explaining the process of build-measure-learn to test business model hypotheses until the Startup finds product/market fit. Big Companies also know what to do: there are decades of work which fill the curriculums of MBA programs and inform the executive ranks, and if you get stuck, you can call McKinsey!
But – what is a company meant to do while it’s straddling these two phases — that magical period of rapid growth between Startup and Big Company? Isn’t the unsolved question a reliable answer to: “how do we get big, fast?”
It’s crucial to resolve this issue if entrepreneurial companies are to achieve their potential. I’m increasingly focused on scalability in my work and have developed a workshop program to guide companies towards frictionless growth. (For more, see the end of this article).
Looking through a New Window
We need a new way of thinking about the challenges of rapid growth; a new perspective with which to solve growth challenges.
We know the scalability of a company’s business model is a major factor in how quickly the company can grow. However, it seems there has been no good definition of what “scalability” really means. In a previous post, I argue that the scalability of a business model is a function of the Fuels that drive it forward, and the Frictions that hold it back, and propose this definition:
Scalability = Fuel – Friction
Just like with a car, if the force from the engine is matched by its brakes, it will stay stationary. To be scalable, a business model must have more Fuel than Friction, and the companies with the greatest Fuel > Friction balance will grow the fastest and outpace their competitors.
This Fuel/Friction balance applies both to the inner workings of the company (its Execution Engine) and the way it competes and wins business in the market (its Growth Engine). The Fuel/Friction balance must be positive, both internally and externally for the company to scale. The bigger the differential between Fuel and Friction, the more scalable the business model will be.
The combination of these factors — Fuel/Friction, Internal/External — give us a window through which to examine the scalability of a business model, right to the core of its DNA.
Scalability Matrix v2.0
Over the past few months, I’ve had 50+ conversations on the topic of scaling companies. With that insight, I’ve made some enhancements to my original post on this idea, to bring it to life in a more practical way. This is the Scalability Matrix, v2.0.
Each quadrant touches on elements of a Company’s DNA (an expanded version of the Business Model Canvas). Here’s a deeper explanation of the matrix:
External Fuel includes opportunities to improve the way a company creates value and wins customers. It reflects how a company’s products/services satisfies the needs of its customers, and how it generates demand. External Fuels are any opportunities to improve: the core value proposition; the products/services being offered; definition of the target market; the company’s brand; or its marketing strategy (yes, growth hacking included). The more External Fuel built into the business model, the easier it is to win new customers.
External Friction reflects the challenges of competitive pressure. These Frictions are the battleground of competition, and represent the reasons a customer might choose a competitor instead of your company. Any problems with: the nature of the solutions the company is offering; the pricing model; how unique or well positioned the offerings are; the robustness of the company’s competitive advantage; or its messaging, would be included here. The less External Friction, the easier it is for a company to outcompete its competitors.
Internal Fuel is about leveraging resources. It represents the opportunities to achieve more with less. All opportunities to: add structure; improve culture; enhance leadership; develop employees; improve core competencies; or acquire new resources (funds, people, partnerships, etc.), are Internal Fuels. The more Internal Fuel, the more leverage a company has over the resources necessary to deliver on its promises to customers, profitably and consistently.
Internal Friction reflects operational constraints. As a company grows, its operational needs also increase. We generally call these growing pains. Internal Frictions are any operational blockages, such as: poor internal procedures; insufficient/missing infrastructure; or weak management systems. Similarly, any constraints that make it difficult to produce more product are Internal Frictions. For example, in consulting, the constraint is that experts are required to deliver a service within a given time, and in manufacturing, you can only produce so many products with one factory. The less Internal Friction, the more efficiently the company can deliver its offering.
The Process of Continuous Innovation
It’s very important to understand that the Fuel/Friction differential will change over time. This is the whole point. The Scalability Matrix is a way to approach continuous business model innovation, with a focus on speed and scalability.
Imagine this. You are sitting with your team for a monthly management meeting. For an hour, you throw up on a board all the factors that are holding the company back, and the opportunities you have to push it forward. The whole team focuses on properly understanding the root cause of the problems and opportunities they see and don’t settle for skirting across them at the surface/symptom level. The team quickly diagnoses the current balance of Fuel/Friction forces, then ranks the items by their impact and ease of execution. Priority is given to the high-impact, low-difficulty items first, and they spend the next month addressing these forces. A month later, the Fuel/Friction equation has improved and the company is set to grow faster. Repeat.
In the image below, each of the sticky notes represents an individual Fuel or Friction that is affecting the company.
This approach ties directly into the natural strategy cycle of fast-moving companies. Richard Hughes-Jones wrote an excellent post on the length of the startup strategy cycle, and argues it’s much shorter for startups than it is for Big Companies. The central question is what should the company do at each step? The unique factor for a company in growth-mode is that it is optimizing for speed.
And it must. Scaling is a race and the company that grows the fastest will win. At each of these iterative steps, the best thing a growth-company can do is look for ways to increase Fuels and remove Frictions to maximize its growth trajectory. The company will be able to make small and continuous adjustments to increase its growth rate without breaking the business in the process.
This is where the Scalability Matrix comes in. It’s a tool to support continuous business model innovation as a company goes through rapid growth.
Let me know your thoughts. Leave a comment or connect with me on Twitter.