Don Sull on Prepping for Scaling UpDon Sull a professor of management practice at London Business School, has been researching the ins and outs of operating in undertain markets for many years. This past June he published an article in the Wall Street Journal that looks specifically at the key questions an organization needs to consider in reaching a decision on whether to proceed with scaling up to take advantage of a promising initiative.
The five questions Sull identifies and discusses are:
1. What are you betting on?
Sull argues, "When entrepreneurs cannot provide a clear or compelling answer to this question, it typically signals that they haven't yet articulated a clear customer need or settled on a business plan that makes financial sense and provides an advantage over competitors." Sull's recommendation is to defer committing substantial resources to the initiative until a robust business model has emerged from smaller-scale experimentation.
2. Have you standardized what matters?
In Sull's view, the areas in which the organization needs to institute appropriate standardization are:
- Processes e.g., for manufacturing, decision-making, and setting compensation.
- Frames "mental models that focus employees' attention" on common goals. As examples, Sull offers "identification of the company's focal competitor, choice of target customers, criteria for selecting retail sites or key performance indicators."
- Resources both tangible and intangible. Standardization here promotes efficiency. Sull cites the example of Ryanair, which limits the types of plane it operates.
- Relationships with external parties e.g., customers, regulators, suppliers, and distributors. (I would have liked to learn more about Sull's thinking concerning standardizing relationships with customers, since often treating customers differently generates a good return.)
- Culture "shared norms that unite and inspire employees and shape what actions they take." Sull notes that a healthy culture "can ... induce employees to do the right thing without elaborate control systems." He points out that some companies go so far as to hire based on the compability of a person's values with the company's values, and then use training to get employees up-to-speed on the job skills they need.
Sull urges looking actively for where binding constraints may lie. Having identified a constraint, the organization needs to be ready to adopt an effective way of loosening it. For example, if internal resources are a bottleneck, a company can outsource some production. If some managers are ill-suited to a scaled-up operation, they can be replaced with managers who have the necessary skills for leading the transition.
4. How will you handle unanticipated difficulties?
Sull calls for hedging via such measures as starting out with a strong balance sheet (substantial cash and marketable securities), maintaining tight control over fixed costs, diversifying without detracting unduly from focus (e.g., the Brazilian jet plane producer Embraer "diversifies its market risk by producing both military and commercial aircraft that share certain design features and production processes"), and hooking up with strong, reliable partners.
5. Do you have the stomach for it?
Being able to answer Yes to this question is important because once scale-up begins, "managers must maintain momentum, secure the resources required to fund growth, and withstand the competitive retaliation their success invites." The goal is to create a virtuous cycle in which success attracts potential partners, employees, and customers, which breeds further success. Achieving this positive dynamic very likely will require some tough decisions, such as shedding some existing business in order to free up resources for the new undertaking.
If you would like to read more of Sull's work on managing in undertain markets, there are a couple of articles in the MIT Sloan Management Review that provide rich food for thought: "Disciplined Entrepreneurship" (Fall 2004) and "Closing the Gap Between Strategy and Execution" (Summer 2007).