Scaling up operations
  Hyderabad, 24 July 2009




             ‘Scaling up of New Enterprise’
Contents


I.     Executive Summary

II.    Why scale up?

III.   Scale up options

IV. Scale up environment

V.     Scale...
I. Executive Summary


1. Scaling up operations should be pursed based on a sound logic and rationale, ‘scaling
   up for ...
II. Why scale up?


1. Scaling up of business should not happen for the sake of scaling up but based on
   sound logic and...
III. Scale up options


Scaling up is generally carried out at the second stage in the life cycle of a product or a
busine...
III. Scale up options


Scaling up of business can happen by design or by default, both processes have their set
of advant...
IV. Scale up environment


Scaling up requires adherence to certain ground rules listed below.


1. The team or person hea...
IV. Scale up environment


The scaling up process is predicated upon four key areas that determine its success or
failure ...
IV. Scale up environment

Sales or demand is by far most critical area of scaling up, regardless of the commitments
made b...
IV. Scale up environment


Resources comprise of both financial as well as non financial resources to make the scale-
up p...
IV. Scale up environment


Supply Chain relatively less glamorous and neglected area of business but important key
to scal...
IV. Scale up environment


Support activities from a criticality standpoint are lowest in the pecking order, however
this ...
V. Scale up process

1.   Planning: Determining the task at hand at a macro level as well as the unit
     economics such ...
Case Study: Subhiksha Retail

             Case Study: Subhiksha Retail
Background
This case study will highlight the Subh...
Case Study: Subhiksha Retail

            Case Study: Subhiksha Retail
Reasons for Downfall
1. Unmindful Expansion across ...
Case Study: Infosys

           Case Study: Infosys
Background
The case describes the set up and successful scaling up of ...
Case Study: Infosys

            Case Study: Infosys
Key Success Factors
1. Robust Leadership team, building a strong bala...
VI. Scale up nuances


Listed below are the common myths and the reality pertaining to the scaling up process.



        ...
VI. Scale up nuances


Generally following mistakes are made by fledgling enterprises while scaling up their
operations. D...
VII. Conclusion


1. Scale up if you have to, however it is not easy, if it was then a number of companies
   would have s...
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Scaling Up Of New Enterprise

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

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Scaling Up Of New Enterprise

  1. 1. Scaling up operations Hyderabad, 24 July 2009 ‘Scaling up of New Enterprise’
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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

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