Scalability is the same thing as scale, right?
In my opinion, not quite! The word 'scalability' is thrown around a lot and even more frequently in the last dozen years or so with so many internet startups. Definitions of such terms are often subjective, but my understanding is this: ‘Scalability’ is the measurement of the capacity of a system to handle growth with as few additional costs as possible.
The increased growth comes from more throughput (volume of units), more complexity (of people and processes), or more infrastructure (required to support the two previous factors). Scalability is measured by the maintenance (or ideally, increase) of profit margins as the company grows. Companies that are 'ultimately scalable' are said to have unimpeded growth and unimpeded improvement in quality as the number of units/people/services delivered increases.
The paragon of scalability might be Baidu or Google. For every additional search term that’s entered into the search bar, there isn’t a large additional cost to perform that service. In fact, these services get better and better the more people use it! If they get bigger their product actually becomes more valuable due to network effects and thus advertisers should be willing to pay more for use of their products. If three hundred people use Baidu or Google, the search results are less helpful (and therefore valuable) than if three billion people use Baidu or Google. Baidu or Google are more scalable than the librarian at your local library: for every request, the librarian must physically go search for a book and thus it is more expensive for them on a ‘per unit’ basis. Thus Baidu or Google are more scalable than the librarian.
A different example might be McDonalds or KFC. For each additional hamburger that a McDonalds franchise creates, there is not much more that the company needs to do to support the quality of the experience for the end consumer. McDonalds could open 10 more stores tomorrow and it would be relatively straight-forward for them to do so without incurring many costs aside from the up-front construction of a new location and preliminary promotion activities. McDonalds could therefore be seen as relatively scalable when compared to a local dumpling shop which only has one storefront. The local dumpling shop likely to do more work to serve the 50th customer of the day on a comparative basis than the McDonalds does. And they certainly need to do more work to serve the 5,000th customer of the day. Whether the 50th or 5,000th burger, the quality is also more likely to be similar at McDonalds than at the local dumpling shop. Thus, on a relative basis, McDonalds could be seen as more scalable than the local dumpling shop.
There might be a few sticking points here that some people may hit at this moment. By seeing Baidu and Google and McDonalds as larger companies, or companies that 'operate at scale,’ they equate “size” with “scalability.” First, the phrase, “operating at scale” is too-often used to describe a company that is simply large but doesn’t have increasing returns from its size. Second, we must remember that scale is a relative concept, not an absolute one. Third, people assume that the bigger the business is, the more money it makes. Whew! That's a lot to unpack - let's look at each one by one:
1. “Operating at scale” is when a company is more sizable or has grown more when compared to a smaller competitor. The phrase is most often interpreted to mean “operating at (a larger) scale (than you are now).” A colleague may ask you, “Will this work at scale?” “Will this scale?” or “Does it scale?” The inferred question is, “Will your plan work at 10 times or 100 times the amount of users?” Let me be clear: This is an amazing and forward-thinking and often difficult question to answer and we should all ask ourselves this more regularly. I believe that those who will be remembered as ‘geniuses’ of our generation are those who are able to design experiences and systems that are able to account for larger and larger groups of people able to access the benefits of a particular good, service, or experience. However, most of the time this question does not get at the heart of the ’scalability’ question: Are margins sustained or improving as the number of users increases?
2. Scale is relative, not absolute. To a smaller player in the industry, LearningLeaders may ‘operate at scale.’ To LearningLeaders, a single university may ‘operate at scale.’ To a single university, New Oriental may ‘operate at scale.’ And so on. In my mind, there isn’t a certain number at which ’scale’ is achieved - it’s a matter of relative size when compared to other contemporary or competitive businesses. Additionally, companies operate in vastly different industries or geographies where the margin profiles naturally differ, so it’s challenging to compare businesses between industries, making scale even more relative.
3. Assumptions of size-to-profit are all too common in business. If a company has one billion RMB in revenues, it must make more money than a company that generates half that in revenues, correct? It’s possible, and in fact more likely to be true than not, but it’s not necessarily true. There are too many examples here to name, but the classic one is Apple. In 2018, Apple only accounted for one third of the global smartphone industry revenues, but it accounted for two-thirds of the industry’s profits! Walmart has double the revenue of Apple, but only one tenth of the profits. Samsung has nearly the same revenue as Apple, but only 60% of the profits. So ‘operating at scale’ does not necessarily mean anything about the gross or net margins of the business.
In summary: 'scalability' often helps companies grow larger, or 'scale.' That makes sense! But simply because a company is large (at scale), doesn't necessarily mean its operations are inherently 'scalable.'
Ultimately, the difference isn't so great that it should be on the top of mind at all times. But I do wish to unpack a bit of how and why this is a confusing concept because of the ability to interchange the words. Is scalability even a good thing? What if I love custom-made things that are one-of-a-kind? Won't those businesses be hard to scale?
Scalability within in company is not necessary in all cases. However, it is necessary if a company wants to continue to compensate the team members more generously over time, to grow the operations and simultaneously invest in improvements, and to make an ever-larger impact in the world. My hope for LearningLeaders is to do all three of those things and so scalability is somewhat necessary in our case.
There are plenty of amazing businesses who thrive with non-scalable economics. Think of the Japanese ramen shop owner who painstakingly perfects their craft over forty years and only opens one ramen shop. Think of the sneaker artist who paints each shoe brushstroke by brushstroke. Think of the single doctor practitioner who sees patients on their own without joining a larger practice. These comparatively bespoke experiences don’t necessarily reflect an inherent scalability within the business model, but rather a desire to maximize quality of every interaction at the expense of margins. (Yet there exist ramen chains, sneaker brands, and medical groups that operate in a scalable fashion.)
To be candid, some days I feel like this is what I would love to do, to only work one-on-one with students for the rest of my life to bring them the maximum benefit I can possibly offer them individually. It feels more natural, in a way. And that’s because I can point to countless examples of tutors or mentors or teachers in the past who have helped individual students. I can even point to examples of tutors or mentors or teachers who have helped small groups of students be successful.
Then I remember that what we’re doing here at LearningLeaders isn’t something that should be hidden under a rock. It’s an experience that needs to see the light of day and one that would benefit so many more students if we shared it with them. I love the customization and personalization of the work that we do because it creates such amazing results with students - and yet, reaching more leaders and empowering them to lead, delight, and inspire may have an even greater effect on the world.
So, scalability isn’t a panacea. It’s not a cure-all. But in our case, I do believe it is necessary for us to play our part in creating a world where everyone is heard, respected, and understood.