Major challenges and issues of scaling up, based on experiential data and not hearsay!

1. Scaling up operations
Hyderabad, 24 July 2009
‘Scaling up of New Enterprise’

2. Contents
I. Executive Summary
II. Why scale up?
III. Scale up options
IV. Scale up environment
V. Scale up process
VI. Scale up nuances
VII. Conclusion
‘Scaling up of New Enterprise’
2

3. I. Executive Summary
1. Scaling up operations should be pursed based on a sound logic and rationale, ‘scaling
up for the sake of scaling up’ is no reason.
2. Given the timing, one can scale up operations at inception or in the maturity phase of
the product; in a planned or unplanned manner, all such options have their pros and
cons. Its called triumph if succeeds and disaster if it fails.
3. The scaling up process requires certain elements and environmental factors to
support this endeavour.
4. The scaling up process as such is simple and straightforward, however its important to
keep your nerves and be sensitive to certain nuances when pursuing this objective.
5. Finally to drive such growth one requires specific kind of talent, very rare but very
effective. Justifiably this breed of people enjoy nothing else but scaling up
operations.
‘Scaling up of New Enterprise’ 3

4. II. Why scale up?
1. Scaling up of business should not happen for the sake of scaling up but based on
sound logic and reason for expansion.
2. Many enterprises want to grow and expand since that is a fashionable thing to do in
the business world. There couldn’t be a more illogical reason for doing it.
3. Having said that, the intent to grow is well entrenched among successful
entrepreneurs but the growth should be undertaken for the right reasons.
4. While there are many drivers for growth or scaling up, the most commonsensical or
the obvious reason is the presence of significant market demand.
‘Scaling up of New Enterprise’ 4

5. III. Scale up options
Scaling up is generally carried out at the second stage in the life cycle of a product or a
business. However one should only venture to scale up after establishing proof of concept.
Correlation with demand curve,
Scaling up vs. product life cycle
Proof of Incremental Scaling
Ideation Launch
Concept Growth up
‘Scaling up of New Enterprise’ 5

6. III. Scale up options
Scaling up of business can happen by design or by default, both processes have their set
of advantages and pitfalls.
S. No. Area Planned scaleup Unplanned scaleup
• A planned scaleup process runs • This is a demand driven growth
the risk of limited of demand therefore the likelihood of low
and sales growth. demand is less.
1 Demand
• The sales or demand generation • The growth however is sporadic
is based on sound assumptions and intermittent based on
and robust systems. ability to serve
• Relatively less as most elements • High, given that most decisions
2 Cost of scaling up are evaluated and determined are adhoc and based on the
to a fair degree of detail. need of the hour.
• Controlled, it is based on the
Speed to Market • Quick response time, almost
3 commitment and the laid out
instantaneous.
plans.
• Strong and robust, most • Weak, only focus on delivering
4 Quality of Service/Product elements are well planned and product/service to meet
executed. demand
6

7. IV. Scale up environment
Scaling up requires adherence to certain ground rules listed below.
1. The team or person heading this initiative should be competent and have the intent
and skill to exponentially grow the business.
2. Principle of scale up requires the enterprise to pursue one thing and ‘do it well’;
“beware of the growth that comes from doing more things, rather than doing the same
thing more times”.
3. The initial demand and the need for product and/or service should be well
established.
4. The resources both financial and non financial should be tied up before the embarking
upon this journey.
5. The scale up team should have the resilience to accept failures and rise over those
impediments even though eventually such gambles are either blessed or cursed by lady
luck.
7

8. IV. Scale up environment
The scaling up process is predicated upon four key areas that determine its success or
failure supported by strong systems with talent being the overarching requirement.
Sales Supply Chain
Systems
Support Resources
Growing exponentially requires systems that govern each of the areas.
8

9. IV. Scale up environment
Sales or demand is by far most critical area of scaling up, regardless of the commitments
made by the sales team, scaling up should have a robust process for generating and
serving demand.
1. Market Estimates and demand needs to be ratified by reliable sources rather than ‘gut
feel’ of the sales team.
2. The ‘devil lies in detail’ the entire sales process should be broken down into smaller
pieces and each outcome should be predictable and/or controllable (as far as
possible).
3. Sustained growth is incredibly difficult. Not only does one have to pluck the ‘low
hanging fruit’ but one must then work deeper and deeper into the marginal sales
where each successful deal takes considerable effort.
4. The sales throughput has to be dimensioned based on the distribution or sales channel
which is not only adequate but competent to deliver the required sales numbers.
‘Scaling up of New Enterprise’ 9

10. IV. Scale up environment
Resources comprise of both financial as well as non financial resources to make the scale-
up project successful.
1. The financial needs for growth should be determined based on the project needs with
a certain amount buffer for contingency. However if don’t have money, don’t do it!
2. The key requirement in an expansion plan is to manage cash flows and funds, the
enterprise should not be overleveraged and in case of paucity of funds, the plans
should be curtailed accordingly.
3. Generally the financial resources are committed based on certain deliverables and
outcomes i.e. project financing, it is therefore necessary to keep those metrics under
close scrutiny.
4. It is prudent to use very frugal means during the scaling up process, ‘penny saved is
penny earned’. However this does not mean that one should compromise the quality
of the scaling up process.
‘Scaling up of New Enterprise’ 10

11. IV. Scale up environment
Supply Chain relatively less glamorous and neglected area of business but important key
to scale up business.
1. The enterprise needs to identify suitable sources, suppliers, vendors for the product
or service who are reliable with requisite scale of operations. Number of suppliers for
each product of service should be more than one.
2. In certain cases alternative sources or channels are required where the traditional
suppliers are inadequate to support the expansion.
3. The plan/estimate of demand should communicated with the provision to increase
that by over 50%, for contingency.
4. Suppliers and partners are confidants and well wishers, use them are sounding boards
and treat them as part of the team.
11

12. IV. Scale up environment
Support activities from a criticality standpoint are lowest in the pecking order, however
this causes maximum amount of heartburn during the growth process.
1. Human Resources: Needs to help in identification of talent and manpower that is
required to scale up, this is an important need both from a quality as well as
quantity standpoint.
2. Production Capacity: Regardless of whether the enterprise is in manufacturing or
service industry, the production capacity needs to be increased to use the Supply
Chain input and convert that to meet the market demand.
3. Administrative Support: The administrative support deals with facilities required by
the company to expansion i.e. office space, telecommunications, travel, logistics and
other amenities generally provided by the Administrative staff.
4. Information Technology: Given that most of systems run on IT platform, this support
helps in improving efficiency, control and monitoring of the proposed expansion.
‘Scaling up of New Enterprise’ 12

13. V. Scale up process
1. Planning: Determining the task at hand at a macro level as well as the unit
economics such that the business is salable. The planning process is complete when
the entire process from demand generation to delivery is simulated on the drawing
board with quantities.
2. Resourcing: This refers to both resourcing of manpower as well as funds,
infrastructure etc. Certain resourcing requires long lead time i.e. plant requisition,
material requisition, all of that needs to be factored into the final timeline for
launch.
3. Execution: Based on the approved plan, the entire line is executed from
procurement, manufacturing/production, shipping/dispatch to distribution/sales.
4. Line Balancing: Review the progress compared to plan, ensure that output is based
on the weakest link in the chain. Streamline the capacity by following the pareto
principle i.e. 80-20 rule, all of the monitoring of the growth should be driven through
the IT tools.
5. Improvise: Regardless of the quality or the comprehensiveness of the initial plan, all
scaling up plans undergo improvisation, the enterprise/team has to learn to do that
and ensure that desired goals are achieved.
‘Scaling up of New Enterprise’ 13

14. Case Study: Subhiksha Retail
Case Study: Subhiksha Retail
Background
This case study will highlight the Subhiksha Retail’s anatomy of bust.
Organization Goal
To establish Subhiksha as Walmart of India and become the largest retailer in the country.
Brief Story (Saga of up and down)
• R Subramaniam, IIT Chennai and IIM A alumnus started a chain of discount stores
“Subhiksha” in 1997 in Chennai”
• The USP of these stores were the discount pricing (a take on Wal Mart, USA)
• By June’2000 company expanded and established 50 stores in Chennai
• By Feb’2007 company had 500 stores across the country
• End of 2007,company established more than 1000 stores across India
• April’2008 made foray in to eastern India
• In Sep’2008 Subhiksha defaulted on vendor payments, Employee salaries and Wipro
takes 10% stake in Subhiksha.
• R. Subramaniam admits Subhiksha needs Rs.300 crores to keep afloat and once the
largest Indian retailer got doomed.
‘Scaling up of New Enterprise’

15. Case Study: Subhiksha Retail
Case Study: Subhiksha Retail
Reasons for Downfall
1. Unmindful Expansion across states from south to west and north and east leading to
huge investments / cash outflow.
2. Growth without Consolidation in 2004 marked a departure in Subhiksha philosophy from
Consolidation & Growth to uncontrolled growth leading to very few stores making profits.
3. Whither Retail management focus was towards multiplying turnovers and not the
bottom-line
4. Customer service was weak and stores lacked a healthy appeal to consumers often giving
the store a look of Government uniform Pricing Store
5. Downstream supply chain was not integrated. Subhiksha Supply chain strategy of bulk
buying was a disaster as in effect, Subhiksha was acting as a reseller buying products from
vendors and selling them at zero margins
6. Weak Inventory management and credit defaults caused supply breakages and resulted
in either huge store Inventories or the stores simply did not have stocks
7. Diffused focus as Subhiksha sold fresh vegetables, medicines, groceries, mobile phones,
‘Scaling up of New Enterprise’
accessories and more so there was no focus.

16. Case Study: Infosys
Case Study: Infosys
Background
The case describes the set up and successful scaling up of India's leading software
company – Infosys
Organization Goal
To become the biggest IT company in India and the best managed Information technology
company worldwide
Growth Story
• Infosys was set up in 1981 by Narayanmurthy and his 6 colleagues.
• In 1987, Infosys entered into a joint venture with Kurt Salmon Associates (KSA), a
leading global management consultancy firm. KSA-Infosys was the first Indo-
American
joint venture in the US
• Infosys grew rapidly throughout the 1990s the employees were given stock-option
and the company followed best corporate governance practices.
• In 1999, Infosys became the first Indian firm to be listed on the Nasdaq
• By 2000, Infosys' market capitalization reached Rs.11 billion
• In 2001 Infosys became the biggest exporters of software from India ) and was voted
as the Best Managed Company in Asia in the Information Technology sector
‘Scaling up of New Enterprise’

17. Case Study: Infosys
Case Study: Infosys
Key Success Factors
1. Robust Leadership team, building a strong balanced team was one of the trickier aspects
of creating a successful start-up and that’s what Infosys did.
2. Well-conceived Business Planning and Execution: Business plan of Infosys was
well conceived and seamlessly executed
3. A Strong Product: The product needs to have a ready market meaning that there is a
market for it and that either there is no real competition or that the product allows the
company to differentiate itself from the competition and Infosys had it all.
4. Well thought Expansion: From the beginning company focused on market demand and
since there was no market for software in India at the time Infosys started expanding
through exporting products to US in which they had a competitive advantage.
5. People Management: Infosys followed very good HR policies to retain there employees.
The turnover rate at Infosys was around 11% as opposed to industry average for software
companies' of over 25% during the 1990s
6. Corporate Governance: Infosys followed best corporate governance policies. Infosys
adopted the stringent US Generally Accepted Accounting Practices (GAAP) many years
before other companies in India did.
7. Adequate capital : The senior leadership team of Infosys ensured that the company is
always equipped with adequate capital to meet its growth plan and was able to manage
consistent cash flows. ‘Scaling up of New Enterprise’

18. VI. Scale up nuances
Listed below are the common myths and the reality pertaining to the scaling up process.
Myths Reality
• Most scale up plans are comprehensive • Scale up plans are detailed but it’s
with every aspect clearly laid out in the theoretical, many aspects have to be
overall plan. improvised based on ground realities.
• Scaling up is possible in only certain kind • Incorrect, every company can scale up
of industries regardless of the industry it belongs to.
• Contrary to this view, systems help in
• Systems and processes slow down the
faster scale up given the better decision
scaling up initiative.
making
• Nothing can go wrong in a well defined • Even the best laid out plan will report
growth plan. wastage and bad decisions.
‘Scaling up of New Enterprise’
18

19. VI. Scale up nuances
Generally following mistakes are made by fledgling enterprises while scaling up their
operations. Despite this being common knowledge, its uncanny how companies do it so
religiously.
1. Limited or unsuitable talent with experience to scale up.
2. Spreading the enterprise too thin i.e. pursuing too many things simultaneously.
3. Intuitive market or demand estimates, not backed by sound logic or a plan.
4. Incorrect estimation of the resources required, while certain variations are
acceptable in this area, major deficiencies in estimating and provisioning resources
can be disastrous.
5. Weak Supply Chain or lacking flexibility to change with the environment.
6. Lack of a contingency plan in case of surprises
‘Scaling up of New Enterprise’ 19

20. VII. Conclusion
1. Scale up if you have to, however it is not easy, if it was then a number of companies
would have scaled up by now.
2. A significant amount of time is required to develop a ‘blue print’, there is no short
cut to being blessed with a perfect plan instantaneously.
3. Line up all the resources and support that one needs to scale up, no miracle will
happen during the scale up process. You either have resources or you don’t; there is
no shame in walking away from such a plan if you can’t muster adequate resources.
4. Things can and will go wrong, Murphy’s law is most applicable while scaling up.
However the key is how you surmount those impediments rather how those bog you
down.
5. If despite all these discouraging inputs you still want to scale up, then you deserve all
the salutations for taking up the challenge, since it requires nerves of steel and a
place in the history for all such heroes of the business world.
‘Scaling up of New Enterprise’ 20