“It’s funny” my colleague started. “Businesses always seem to get stuck at the same point, around that 25-30 million mark”. “You know why that is don’t you?” I replied. He has known me long enough now to know what was to come next.
I am sure if you asked them, most businesses coaches and consultants have seen this phenomenon. Maybe it is not revenue, but a specific number of employees or customers that appears to be the limit. A kind of speed hump that businesses need to get over to move to that next stage.
Whether you would like to admit it or not, most businesses suffer from mostly the same problems most of the time. The vast majority of which could quite frankly, benefit from the simple application of good practice. If you are experiencing such a hump yourself, there is an entire range of practical solutions that will probably help. But let us focus on the reasons first…
Bottlenecks and Silver Bullets
If you’ve ever read or heard of the book “The Goal”, then you have probably heard about the Theory of Constraints. Bottlenecks are ostensibly the most visible of constraints in a business. They represent a quick fix or silver bullet that can propel your business into the stratosphere. If only you could keep clearing those bottlenecks out from your processes, that is.
Communication Costs and Wet Blankets
Less visible in most businesses are the communication and coordination costs within it. Rather than one big drag on your business, communication and coordination costs exist more like a wet blanket. Little tiny points of friction that from day to day, you probably didn’t even notice.
Typically, where bottlenecks will scale linearly with your business size, communication and coordination costs will scale non-linearly. They start being a measurable drain on your organisation at roughly 9-10 people and get worse to the order of N2 from there.
Product, Market Niches
The example I like to use for his one is the country bakery. Everyone loves a country bakery. That small town with the tasty pies you pop into to break up a long drive; just divine.
Sooner or later that bakery becomes famous. A known go-to establishment you must visit on whatever trip, and so they choose to expand. They spread to other towns only to discover that outside of their little town, they’re just another bakery.
Nailing a product or market niche does not mean your business is the next thing since sliced bread. Know your market fit!
Socio-Economic & Techno-Economic Feasibility
Lots of business have started out trying to be the next Airbnb of this or Uber of that. Some of them might get lucky but I’d be pretty confident in saying most will fail. Beyond any entrepreneurial spirit of “just giving it a go…” many business models, especially the intermediary platforms and marketplaces, exist in a very narrow band of success.
Outside of that band, the product is just not socio-economically or techno-economically feasible. Or perhaps it might work at a small scale, a large scale, or somewhere in between, but not the others. Part of me wonders if every founder should at the very least, know what a nash equilibrium is.
Macro-Economic Limitations & the rule of threes
I would say there are quite a few pitch decks out there that aim to capture “Just 1 % of the market”. I wonder how many have looked at who has just 1% in their market? In a lot of markets, that would probably put them inside (or just outside) the top 10 of global players. Is that really where they expect they will be?
There is an economic theory called the rule of threes that suggests 80-90% of mature markets end up dominated by 3 or 4 players. The rest get to fight over the scraps, well, sort of. What typically happens is inside that remaining 10-20%, another 3 or 4 players will dominate their respective niches, and so on.
The dominance is typically so strong, it is extremely hard for any new player to displace them. As a result, most disruptors do not do it by attacking the primary market head-on. They follow what I call a beachhead strategy, creating and dominating an adjacent market then expanding sidewise. The successes of Apple, Amazon, and Microsoft are all proofs in that particular pudding.
So, what then?
The real burning question is why do you want to scale your business in the first place? There are plenty of benefits to being small. The least of which is providing the absolute best of products and services to the loyal customer base you have already developed.
If world domination is still your thing, then it is important to understand the mechanics of what’s going on; The challenges of scaling at a macro, micro, and nano level can create hard physical limits around your business. At the end of the day, you could have all the brute force, hard work, and determination in the world. It could amount to nothing if your problem is poor business design.
There is a lot of science behind the inner and outer workings of business. For my part, it is a level of hidden beauty and elegance I have come to really love. A set of rules and theories that describe all those complex interactions of everyday business.
That is not to discredit a level of art and creativity that goes into business. If you are facing a brick wall, however, there’s a good chance that someone has already thought through why. They may have even knocked it down entirely.
Love the reasons. And they are so subtle. Communications is so key.
What are some of the range of practical solutions that will probably help as you allude to early in article?
Hey John,
Like anything, the answer is “it depends”. The first two issues are much easier to overcome than the other three. I’ve used at least the following in the past:
1) System mapping, stakeholder mapping and Persona Value Mapping: Is an effective and visual way of mapping out the way value flow between elements and stakeholders. Mostly in identifying the actual limitations you’re facing
2) Structured communication is extremely effective in overcoming the 2nd point. I’ve also become an advocate of the idea of a “decision management plan”; Looking at the kinds of decisions you make and then tailoring communication systems and processes to streamline them.
3) Problem (re)framing can sometimes be enough. We had a really great result overcoming a product/market niche issue by reframing the problem being solved and adjusting the tech development to suit. For this, we use a couple of practical tools including something I call the tree of whys.
Outside of this, we’ve worked with a couple businesses who were looking at setting up “marketplace” style intermediary platforms. In economic game theory there is a concept called the prisoner’s dilemma which dictates supplier & customer behaviour that enables us to look at tailoring their market dynamics and target market a little.
Thanks.
Also, do you know of any research *(academic or empirical) that supports the claim that bottlenecks scale linearly while size, communications and coordination costs scale non-linearly starting at 9-10 people and get worse to the order of N^2 from there?
Hey John,
Sorry for the late reply, I only just noticed this comment.
There is, I probably even have some specific examples I’d have to dig up relating to organisations, but largely it rests with systems dynamics.
Most “systems” in organisations are linear step wise processes. I do something, and hand it to the next guy. In any linear system the time to complete a set of jobs is equal to the service time multiplied by the number of jobs. That scales nice and linearly right up to the point that the inbound queue grows faster than the rate jobs are completed. From that point, the way it scales depends on how the queue is managed.
Adding people doesn’t necessarily change the linearity of it all rather just changes the maximum rate individual jobs can be completed at.
By contrast, most coordination problems are ones of connected networks. The transaction cost in a connected network is modelled as response time * n(n-1)/2 where n is the number of nodes in the connected network. Essentially, imagine coming in to work and everyone has to talk to everyone at least once in that day to make sure you’re all aligned. If that conversation takes 15 mins and there is 9 of you, then collectively you burn through 9 hours of effort just talking to each other, ie 12.5% or just over the equivalent of 1 FTE. at 8 people, it’s 8.75%.
Once you break 10% things tend to become a lot easier to measure in amongst “noise”. They become more noticeable with symptoms starting to emerge like collaboration burn out. Funnily enough, strict hierarchies can solve (or move) some of these problems, but the modern organisation tends to promote direct collaboration. Relatively simple maths shows that’s not always a good thing.
Having said all that, there is one paper I really like that describes the challenges in organisations quite well, including the impacts on different organisation structures:
Mallett, Jacky. “Limits on the communication of knowledge in human organisations.” Studies in Emergent Order 2 (2009): 1-18.
There are probably others, but I’d have to think about it some more and have a dig through my folders. The mathematics of constraints, queues, and processing was nicely considered by Denning, Buzen and others in relation to computer systems and networks in the 70’s or so. In this context, the problem itself doesn’t change just because the “computer” is a human.
Hope that helps.
Hi Craig. Thank you so much for the reply. I am just seeing this as I am getting back to this idea of why my company can’t scale. Sorry for the much delayed reply. Your explanation makes sense. I follow it in general but have a few more questions regarding your explanation. I am especially curious about this idea that communication issues begin to drain an organization at around 9 people and scales by N^2 from there. Maybe you explained it above and I just didn’t get it. Any way we can arrange a call to talk more about all this?