Often, we ask, is this idea, startup or Innovation scalable? Astronomical successes and failures make us bewildered with unanswered questions. How did mobile phones succeed in rapidly diffusing and reaching everyone’s hand? How did tiny Startups Microsoft, Apple, and Intel grow as mega-corporations? Similarly, why have we been witnessing increasing penetration of semiconductors and software? Scalability is at the core of the rise of innovations, startups, ideas, and businesses.
Scalable refers to the expansion propensity of entities, such as a business, idea, innovation, startup, or technology, in offering growing performance without experiencing proportionate cost escalation. For example, Apple is a scalable business because it has succeeded in increasing unit sales, revenue, and profit. Similarly, Microsoft Word is scalable software because Microsoft simultaneously improved functionality, performance, customer base, revenue, and profit. For the same reason, semiconductor is a scalable technology because Transistor has been experiencing higher performance at decreasing cost due to additional ideas.
At the root of scalability is the role of ideas in improving performance and reducing costs simultaneously. It happens because some ideas can enhance the quality or fitness of Getting jobs done while reducing the need for material, energy, labor, and space. For example, lithium-ion batteries in our mobile phones are getting lighter while offering longer talk time. Besides, the perceived value keeps growing with the customer base offering scalability due to suitable ideas, particularly in the digital space. Such an effect is known as the network Externality Effect. Google and Facebook are notable scalable successes due to the positive Network effect. Scalability could also be improved by developing a family of products around the core components or software assets. For example, Apple’s reuse of the same software assets in the iPod, Apple Watch, iMac, and MacBook has created scalability through Economies of Scope.
Genesis of Scalability
In economics, scalability refers to decreasing per unit cost with the increasing volume as capital expenditure gets divided into growing units. On the other hand, scalability in telecommunication refers to Economies of Scale on both supply and demand sides. Due to the high fixed cost of setting up the network and negligible marginal cost for connecting each customer, the cost of serving each customer keeps decreasing with the growth of the customer base. It’s the supply-side economies of scale. Besides, due to the growing customer base, telecom services’ perceived value exponentially grows due to the opening of additional communication channels. It’s called the positive network externality effect or demand-side economies of scale. Further cost advantage could be obtained by sending multiple services over the same network, creating the scope effect. Hence, the telecom industry naturally tends to be scalable–bigger, better, and cheaper.
However, for the above two reasons, Apple, Microsoft, Amazon, Google, Panasonic, Sony, or Toyota could not make their business scalable. For those reasons, tiny startups did not scale up to large corporations. Similarly, the idea of personal computers, transistors, word processors, smartphones, or digital cameras did not scale up for the above reasons. Instead, the underlying cause has been a flow of ideas to make their ideas, innovations, and businesses scalable.
Setting up large plants and copying Apple 1 or iPhone 1, Apple did not scale up. Similarly, Sony did not find a scalable growth path by setting up a large plant to keep copying licensed transistors or electronic image sensors. Microsoft did not scale up by copying and promoting MS-DOS or text-based word processor. Instead, a flow of complementary ideas offered them a scalable growth path. Ideas must open the window of improving the quality and reducing the cost per unit of value.
Scalability in business
To improve business scalability, firms invest in ideas for enhancing products and processes of production and delivery. Their scalability success is rooted in ideas of enhancing the quality and saving material, energy, labor and time. For example, by keep producing the car of the 1940s, Toyota could not have scaled up its automobile business. Similarly, Panasonic could not have scaled its battery business by making the same batteries.
Scalability in startup entrepreneurship
Startup success stories like Microsoft, Intel, Apple, and Sony started the journey as a cottage industry. However, instead of making copies of matured products, they pursued reinvention. The technology core they chose was scalable. Primarily, the semiconductor technology core was highly scalable for making transistors better performing and less costly due to adding ideas. Hence, microchip companies like Intel and Motorola succeeded in offering increasingly better-performing microprocessors to power personal computers (PCs) without proportionately increasing the price.
Consequentially, software and PC makers like Apple and Microsoft started releasing increasingly better-performing machines and software, respectively. Most importantly, due to the zero cost of copying software, both Microsoft and Apple got the opportunity to reduce the price per unit of software with the growth of the customer base. Like these startups, Amazon’s idea of eBook became scalable due to the reinvention of making books in digital form and distributing them over the Internet.
Scalable Business Ideas
Not all business ideas are equally scalable. For example, Electrical Vehicles idea pursued by Teala is not very scalable. On the other hand, business ideas of reinventing goods and services as digital content and software are highly scalable. Ideas of changing hardware with electrical and electronic devices are also scalable. Similarly, ideas of creating positive externalities are also highly scalable. For example, the idea of reinvention of audio and video cassettes as digital content and streaming them over the Internet has become highly scalable as the cost of copying is zero. Hence, both Spotify and Netflix have become highly successful in generating growing revenue and profit from offering higher-quality content at a decreasing price.
Software ideas have a strong material, energy, time and labor saving role. Besides, network externality effect could be created through software ideas. Furthermore, zero cost of copying keeps reduceing per unit cost with the volume. Hence, the software business is highly scalable. However, the same software must be sold to many customers to leverage the scale advantage. The challenge is to create an increasing willingness to pay among a growing number of customers. Hence, substantial R&D investment needs to be made in adding new features and improving existing ones. Besides, adequate promotional and distribution channels should be set up to sell sufficient units. Otherwise, additional R&D investment may increase the cost due to failure in reaching the minimum efficient scale point.
Scalable innovation and scalability of technology
Scalable innovations are amenable to getting better and experience small marginal replication costs. For example, iPhone or digital camera innovation has been scalable. The underlying reason is that successive releases have been offering increasing value, and the marginal cost has not increased proportionately. However, the technology core must be scalable to make innovation scalable. Semiconductors, software, and wireless broadband have recently become highly scabble technologies. As a result, innovations out of them are showing growing scalability.
Making ideas, innovation, startups, and businesses scalable
Irrespective of greatness, all technologies and innovations emerge in embryonic form. For example, Motorola Dynatec, Apple I, Sony’s OLED TV in 2007, Fairchild‘s Transistor in 1956, and Vydec Word processor were primitive. Hence, companies and startups pursuing them could not make money, even by selling them at a very high price. For example, Motorola could not profit from selling Dynatec at $3995. Similarly, Fairchild did not become rich by selling transistors at $150 apiece in 1956. Hence, at the beginning, ideas, innovation, startups, and businesses are not scalable. At the early stage of the life cycle of ideas and innovations, startups and businesses cannot find scalable track.
For finding a scalable path of growth, there are three primary challenges: (1) creating a flow of ideas around a suitable technology core for improving the quality and reducing material, energy, and labor, and creating positive externalities; (2) due to the need of growing R&D and increasingly sophisticated machinery, a growing number of units must be sold for reaching the increasing minimum efficient scale, and (3) outperforming the competition for attaining price-setting market power. Hence, making ideas, innovations, businesses, and startups scalable is far more than offering subsidies for selling growing units of primitive emergence or setting up large plants.