A number of Qaiss’s recent posts have been around the issue of young micro-companies that are established without any pre-thought going into them with regards to scalability and future diversification… I’d like to kick start my posts here on IO81 with this in mind.
What is scalability in business and why is it important for entrepreneurs?
A business’s ability to be scalable is essentially a financial criteria and it means that as the business grows and expands the cost of each incremental KD in revenue must be going down. Another way to say this would be that when you increase your revenue’s your costs would be less than your current revenue’s costs (see figure 1). An example of a scalable business is software: the only real cost in putting out software is the tremendous R&D costs and programming, testing and debugging costs, otherwise, no matter how many copies you sell the incremental cost of producing an additional copy is negligible. Hence, provided there is demand, the more units you sell of the software the more you increase your profit margins.

Another thing to consider is that scalability is not the same as ‘economies of scale’, which means that a companies variable costs decrease as the company gets bigger, additionally, it’s fixed costs can be spread over a higher number of items sold. While economies of scale definitely help earnings, they don’t necessarily ensure the operating profits go up as revenues go up.
Consider this:
A young man, lets call him Ahmed, is excited about entering the marketing services industry. Ahmed is acutely creative and has a natural flair for churning out creative idea after another. He believes in his skills and thinks that he has the potential to produce better creative solutions to clients that the run-of-the-mill agencies. He decides to work alone and set up his business in his home.
What’s wrong with this scenario?
No matter how many clients Ahmed sign’s up he cannot reduce his overhead. Mainly his time, the cost of servicing the first client would be similar to the cost serving his fifth. Therefore, reducing his business to a lifestyle business that is not investable nor is it grow-able in its current mode of operation. Should he choose to expand and hire more people, he would lose the unique selling point that attracted his clients to him in the first place – himself.
Sadly, many young Kuwaiti’s are becoming excited and venturing into business’s that are identical to Ahmed’s, whether it be creative work, cake making, fashion designing, etc. Without considering the future implications and challenges of growth on their adopted business models.
What business’s have you seen lately that have fallen into this start-up pitfall?