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The traps companies fall into when scaling up

business intelligence entrepreneurial task

The traps companies fall into when scaling up

ENTREPRENEURSHIP CHALLENGE

Kaplan Jaroslav
Kaplan Research Company
Founder of the Business IQ project
Oftentimes, growth-oriented executives do not realize problems at the market and customer interaction level until they turn into full-scale crises. As a result, about 90% of startups don't make it to the scaling stage. Why does it happen?

Jaroslav Kaplan, an entrepreneur, expert in the field of business efficiency improvement, developer of contextual market research methodology, author of scientific works, author of the book "Business INCOGNITA: How to Expand the Boundaries of Entrepreneurial Thinking", founder of the Business IQ project and president of Kaplan Research Company, explains many of the difficulties that arise during scaling. What do entrepreneurs stumble upon and how can they cope with difficulties?
They don't see the difference between growth and development
Unfortunately, very often we confuse two concepts that are close in terms of meaning but completely different in significance: growth, which is measured in terms of increased sales, production, customer service calls, etc., and development - improving the quality of business and the value of products and services offered to consumers. The latter is related to the meaning of the company's activity and increasing the value of its products and services for consumers.

As an example, let's focus on photographers. A few years ago, each photo printed from film had a high production cost, and the productivity of a photo studio could be assessed by their quantity. Today, however, almost anyone can make, view and store an unlimited number of professional-grade photos in their cell phone for free. Therefore, the productivity of a studio can no longer be evaluated based on the volume of printed images. And in the context of the entire photography industry, discussions about productivity include the new opportunities that are emerging, for example, in medicine, through the use of artificial Intellect and the ability to take a huge number of images, particularly for early cancer diagnosis. In fact, in today's world, labor productivity is no longer a quantity, but a transition of the old into a completely new, previously non-existent quality.

And in practice, business growth is far from always accompanied by development. For example, improvement of financial indicators in the conditions of inflation will say nothing about whether the business system is actually developing or degrading. When scaling up, processes such as logistics or customer communications that worked well in one context may no longer be effective in others. If they are not adapted to the new context, problems will arise later. Therefore, indicators need to be evaluated in a comprehensive manner.


They do not take into account changes in the external environment
General Electric CEO Jack Welch used to say, "If change on the outside is faster than change on the inside, the end is near." In today's reality, this statement is more relevant than ever. Sanctions, external and internal economic changes directly affect the work of companies, and it is no longer possible to turn a blind eye to them. Managers have to be as flexible as possible so that the business can continue to develop.

For example, before the events of 2022, most of the assortment of the Rive Gauche retail chain, which includes 250 stores, consisted of international luxury brands. When they left Russia in order not to leave store shelves empty, the company refocused on domestic mass-market brands, the development of its own brands (STM) and exclusive niche cosmetics. This entailed radical changes in the entire business logic, but allowed it to cope with the crisis in the current situation.

Ignoring customer values
Most small companies are created spontaneously, without clear strategies, and when they think about growth, the objects of their scaling are:

  • Product or service— Expanding a product or range of services to capture a larger audience.
  • Market — Entering new markets, regions, or countries to attract more customers.
  • Processes — Optimizing business processes and making the company more efficient.
  • Infrastructure — Scaling up physical or digital infrastructure to support business growth.
  • Human Resources — Expanding the team or improving staff skills to accommodate increased workload.

But this is not enough to operate in a highly competitive market. To scale successfully, you need to identify the meaning and value of your product or services to the consumer and take a systematic approach to building your sales proposition and product line. For example, a beauty salon has a "standard" list of services such as haircuts, manicures and pedicures, makeup, waxing, etc. However, if we ask clients why they value it and what they see as the point of visiting it, we will hear about appearance, relaxation, recovery, professional advice on the choice of cosmetics, the availability of services that are not available for independent performance at home, leisure, socialization, etc.

And each new insight into what customers value in your business can be the starting point for creating new business models or improving existing ones. In the concept of serial entrepreneurship, each new "point of meaning" has the potential to start a new line of business.


Focusing only on direct competitors and failing to see indirect competitors
A successful company does not exist in a vacuum. It operates in a context of interaction that consumers have found important and meaningful. However, as often as it scales, it faces competition in an area where it was not initially obvious.

Let us consider as an example the chain of Starbucks coffee shops that left the Russian market. The company is present on the coffee market because it is its main product. Here it competes in different categories: with other grocery stores, supermarkets, fast food restaurants and other cafes. Because the coffee market is highly competitive, profit margins are quite small in many of these categories. If the company were to stay in this competitive environment, its chances of scaling effectively would be low, as it has no advantage over other companies in price, convenience, or even, contrary to what the company's marketers claim, taste. What then is the secret to its success?

According to the company's CEO Howard Schultz, Starbucks is fighting for "your third place." The place where a person wants to spend time, in addition to his own home and work. In this frame of reference, the company has an entirely different set of competitors, one in which coffee shops have only a segment. Here it competes with bookstores, parks, theaters, libraries - with all potential places where you want to spend time away from home and work. And that strategy has led the chain to success.

A key problem in scaling is that companies think they "just" sell their products or services to customers, and going into growth, nothing needs to change. But in a highly competitive market, customers are not buying products and services - they are buying meaning. This is the most promising area for increasing the chances of success in scaling businesses - working with the meanings that arise as a result of interaction between companies and brands and consumers.


6 facts on business scaling
  1. About 90% of startups don't make it to the scaling stage or fail at this stage of development.
  2. Scaling too early or too late can lead to excessive costs or missed opportunities.
  3. Not everyone needs to scale. Some businesses do better in a very niche or localized way, and trying to do so can result in a loss of focus or resources.
  4. Scaling often presents challenges with recruiting and retaining staff, creating company culture and managing teams.
  5. The infrastructure that worked at the start-up may not be suitable for a scaled business. This can lead to performance, security or management issues.
  6. Scaling requires significant investment, and mismanagement of finances can lead to bankruptcy.
Jaroslav Kaplan
Author of the book "Business Incognita. How to push the boundaries of entrepreneurial thinking". Expert in the field of sustainable development of organizations and discovering new sources of growth. Developer of the methodology of contextual market research. Member of the International Association of Strategic and Competitive Intellect Professionals SCIP (USA).

Blog: https://www.kaplanresearch.pro/eng

In this light (yet profound) business fable a very magical and sincerely nice goldfish, Goshio, navigates her aquarium and the seas of the Paraquarian world beyond. The heroine's journey is an allegory of the entrepreneurial world (and of life) – based on the author's own research journey to circumnavigate the fascinating World of Entrepreneurship. www.goshio.com

Contact:
E-mail: work@kaplan4research.com
Linkedin: www.linkedin.com/in/jaroslavs-kaplans-11255b