What’s your minimum scale?

What’s your minimum scale of operation? Disruption means businesses often have to survive declines in revenue as they change business model. Are you able to adapt to the future disruptions or will your business model be a barrier to change? Remember that the capabilities of your people will be a key element of any transformation.

Focusing on Minimum Scale of Operations

Clay Shirky wrote a telling account of the challenges facing printed media in the NY Times The insight is that inherent in any business model is a minimum scale of operations.  We are used to thinking of overhead.  However, Shirky points out that falling volumes can turn the infrastructure of operations into overhead. At a given scale, there’s no point continuing. The need to operate above that scale becomes a barrier to responsiveness and even survival in times of disruptive change.

We don’t pay much attention to the minimum scale when we are growing. We look for investments to make to grow the business. Our myopia only becomes an issue when we need to make changes to our business models.

Turning Growth Investments into Overheads

Often the investments in growth we make on the way up are the overheads we struggle with as we change the business model to respond to disruption:

  • Need national sales offices or store network to grow? It will be overhead as you shrink. Ask any bank about the challenges of keeping branches economic as transactions, sales and advice move elsewhere. 
  • Need a custom built IT system? It will be overhead when competitors adopt agile solutions in the cloud. 
  • Need a warehousing, distribution or manufacturing operation to cater to growth? It will determine the minimum number of units your need to sell. 
  • Need a fancy office for your growing workforce? At least you can probably sublet this overhead as your workforce shrinks or works from home.

The business cases for each of these investments would be based on steady business volumes and predictable growth. These assumption mean that the business has ruled out the ability to handle exponential growth or any significant decline in activity. Few investment plans consider the need for agility or the impact of the investment on future changes in business model. Requiring greater consideration of optionality in an organisations approach to growth would change the business model to a more responsive one at the outset.

Investing in the Agility of People 

Many organisations respond to their failure to create a responsive business model by aggressively cutting their personnel costs. Undoubtedly, disruptive change will mean a loss of jobs as business models change. In this process organisations need to take care that they don’t lose the human capital critical to the potential to respond to change.

People can be cut far more quickly than writing off one of the growth investments above. Announcing a personnel cut, often has a far more acceptable hit to the profit and loss statement for the share market. Cutting personnel can become a substitute for a strategy to respond to change in the market.

To avoid this outcome organisations need to consider on the way up that talented people can be redeployed more easily than an investment in infrastructure. Instead of investing to deskill people with infrastructure that become overhead in times of disruption, we can invest in agility and the capability of our people. Organisations also need to chose their activities to maximise the value that their people create. People can learn, adapt and create new ways to work and create value for customers. A responsive business will have at its heart a team of people working both in the business and on the business model, constantly learning new ways to be more effective, to respond to customers and to grow.

Struggling to maintain their growth, businesses facing disruption can face surprising new challenges in their scale of operations. Organisations need to plan for optionality as they develop a more responsive business model. They also need to consider the role of our employees as the engine of responsiveness. 

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