During scaling, founders/CEOs often face trade-offs as they balance becoming more efficient with the increasing pressures of a larger organisation and rapid customer growth. So how can founders and leaders reduce the downside of this tension during scaling?
Based on our recently published research: From digitalized start-up to scale-up: Opening the black box of scaling in digitalized firms towards a scaling process framework,
The road between start-up and scaled was once measured in decades, yet innovation in digital technologies have significantly accelerated this to months and years.
Digital start-ups tend to grow at high rates in more compressed time. However, rapid growth can be both a blessing and a curse. The pressure of scaling leads to new tensions for digital founders and management they must learn to balance from start of scaling and during subsequent scaling stages.
I feel the need. The need for speed...
Digital technologies are central to scaling. They enable cost-advantages and scale economies of growth without significant increase in operational costs.
They also enable innovation and new business models associated with rapid replication, early internationalization, and infinite scalability.
Rapid product iteration in short-product development cycles helps to find product-market fit quickly and continue to innovate to improve value to customers.
Just think about any shopping experience you may have had before retail moved online. You will have a perfect example of how search and discovery, range, transparency, informed decision making, ordering, paying and convenience has improved over the past 20 years. For shoppers they now have the luxury of browsing, shopping, renting, ordering, paying, receiving, and returning products they love from anywhere in the world and at greater speed (sometimes reduce cost) of a visit to the local mall or high street.
Scaling Digitalized Start-ups
Rapid growth can be both a blessing and a curse for digitalized start-ups.
During scaling, many founders and leaders face immense pressure and often personal stress of transforming their businesses from lean, product-focussed, founder-led start-ups to larger, more structured sales-led organizations, where there are many more decisions to be made.
Our recently published research explains how digitalised start-ups transform to scale-up, While the process of how digitalized start-ups transform during scaling appears relatively straight-forward to explain and outlined in our framework, its complexity revolves around not what but how. Where to focus and how to make the change necessary to transform from start-up to scale-up, while minimizing the potential trade-offs associated with transformative change.
4 Trade-offs and how to balance them
We uncovered four trade-offs or tensions which present significant challenges to founders as they transition between start-up and scale-up.
Trade-off 1: Structure vs. Culture
The scaling process in digitalized firms commences in many cases with hiring or building more organizational capacity to drive and manage growth.
At the start of scaling, digitalized firms shift from lean teams, working at maximum capacity, to investing in new people (leaders) and capabilities (specialists), creating some "slack" in the organization to seize growth opportunities.
With new leaders and people comes increasing structure which inevitably puts pressure on culture, particularly on it’s entrepreneurial culture such as being agile, proactive, flexible.
“You know, the cultural alignment, the cadence of how fast you work, the work ethic. All of those were major issues and was the biggest challenge, right? But actually, I would say the cultural and mindset issues were even larger than the technical infrastructure issues.” [Interview 9]
Examples of how to manage the tension:
A strategy-culture"reset" at the start of scaling. Including making explicit the company's inherent culture and core values to off-set any potential negative trade-offs of cultural "dilution" from increasing structure.
Get explicit about culture and values, communicating repeatedly, weaving them into the fabric of the new organization. (e.g. recruitment and performance processes, town hall and other meeting cadences and communication materials)
Critique the recruitment processes and your hiring results in the previous new hires. Add steps to attract people fit to stage and culture, as well as experience and competences.
Bring strategy, culture and core values alive through leadership behaviours and finding new innovative ways to repeat, repeat, repeat....
Trade-off 2: Short-term wins vs. long-term outcomes
How resources are allocated between short-term wins vs. long-term growth outcome forces trade-offs.
For example, decisions in which technical effort is prioritised between product innovation (which tends to result in more long-term growth outcomes) and process innovation (more short-term outcomes).
Long-term capability building includes hiring more specialist or functional management, investing in new technology such as customer relationship management software, AI-automation and data analytics, all take effort and cash.
Whereas allocating time, cost, effort on activities that help you to achieve your goals within the current year (short-term wins) might include an increase or decrease in marketing spend, a focus on sales excellence and key account customer expansion or securing new suppliers or distribution partnerships.
Often times, founders are faced with the decisions of what to "sacrifice" as they are still operating relatively lean. For example, when referring to the decision to invest in new platform capabilities -
“I would have sacrificed growth in the business for a year completely … in order to get it done in a year and get it fully done.” [Interview 5]
How to balance and manage the tension:
Be intentional about balancing short-term and long-term initiative. Investing in long-term capabilities and growth-driving projects >1 year while at the same time, not sacrificing short-term wins every month or quarter.
Align both during Strategic Planning sessions. Being clear about what must be true about the business over the long-term to achieve your strategy.
Invest progressively in building the long-term capabilities by making iterative investments in projects and hiring decisions pegged to long-terms capability building goals.
Take steps each quarter towards longer-term capabilities and goals with small, often cross functional teams or "squads" to separate it from the distractions of the short-term core business.
Trade-off 3: Balancing Moving Fast vs. Performance
During scaling, the pressure to make fast decisions which directly or indirectly affect growth may be perceived to be riskier than at start-up stage.
Decisions concerning, for example, price, customer demand, unit costs, operations have larger impact on sales, customer satisfaction, margin, cashflow, and returns to capital, in the larger firm.
“how to balance between structure and repeatability versus moving fast and being entrepreneurial and doing things in a quick and dirty way.” [Interview 9]
How to balance and manage this tension:
Through sufficient data, where the business has a complete view of the influence of decisions on firm performance, founders and leaders are more confident to manage the trade-off between fast decision-making and potentially negative impacts on firm performance.
Focus on both leading and lagging indicators. Becoming more data-driven in tracking and measuring firm performance includes measuring both the outcomes and the inputs most affecting outcomes (referred to as leading and lagging indicators).
“And then it was easy for us to adjust it on a monthly basis. This was probably one big advantage for us for a long time, and it’s still a big advantage, a data-driven-go-to-market-approach.” [Interview 11]
Trade-off 4: Delegation vs. Staying Connected
Perhaps the trade-off that was most challenging for founders to manage at the start of scaling is the tension within the founders themselves.
The tension between delegating of more decision-making to specialist leadership they have hired, and a founders' need to stay connected to the operations and decisions (i.e., having appropriate level of oversight and control when and where needed).
To help with founders' letting go, start-ups should prioritise process innovation like technologies, systems, data sufficiency, and organisational routines.
“Being able to train the more junior guys, to escalate things at the right time and make sure the leadership was aware of those things before things went south and make sure there was a certain level of quality.”
How to balance and manage this tension:
Implement new organizational processes and routines at the start of scaling are important to founders letting go and achieving a more autonomy.
Having sufficient data and hiring the right people, help founders balance trade-offs between delegation yet staying connected to the operations of the business, without needing to be accountable for 100% of the decisions.
Turn outward investing in founder leadership capabilities for scaling stages, learning from coaches, mentors and experienced founders/operators who can offer advise relevant to stage.
Key Points
Successful digitalised scale-ups strike a balance between remaining entrepreneurial and improving cost advantages and efficiencies that delivers higher and higher levels of growth over-time.
Minimising the pressures and trade-offs on the journey requires balancing tensions associated scaling.
The tensions will evolve and change from early to later stages of scaling. Some scale-ups continue to scale both efficiently and entrepreneurially (i.e., innovative, agile, flexible, competitive etc.) for long periods, even decades, after becoming large, scaled firms with high market valuations (think today's Apple or Amazon).
Mastering how to manage trade-offs and balance the tensions, is likely to not only improve start-up to scale-up transition liklihood, but also help relieve some of the pressures and stress on founders and leaders during scaling.
For more information on the research or strategies on managing Scaling, please reach out to claire@madeforscale.net
Excerpts from:
Claire Mula, Nora Zybura, Thomas Hipp,
From digitalized start-up to scale-up: Opening the black box of scaling in digitalized firms towards a scaling process framework,
Technological Forecasting and Social Change, Volume 202, 2024, 123275, ISSN 0040-1625,
The authors would like to acknowledge and profoundly thank all those founders and experts who supported the research. Please click here for full acknowledgements.
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