Scalability

What Is Scalability?

In financial markets, scalability refers to financial institutions' ability to handle increased market demands; in the corporate environment, a scalable company is one that can maintain or improve profit margins while sales volume increases.

Understanding Scalability

This concept is closely related to the term economies of scale, wherein certain companies are able to reduce their production costs and increase profitability as they grow larger and produce more. For situations when increasing production increases costs and lowers profits, it is called diseconomies of scale.

Example of Scalability in the Tech Sector

Some tech companies, for example, have an amazing ability to scale quickly, making them high growth opportunities. The reasoning behind this is a lack of physical inventory and a software-as-a-service (SaaS) model of producing goods and services. Companies with low operating overhead and little to no burden of warehousing and inventory don't need a lot of resources or infrastructure to grow rapidly.

Even companies that are not directly related to the technology industry have a greater ability to scale by utilizing specific technologies. Customer acquisition, for example, through the use of tools like digital advertising, has become a lot easier.

Even banking institutions can implement digital advertising strategies to increase signups for online banking services, increasing their customer base and revenue potential. Other technologies that help with scaling include labor-saving technologies such as automated warehouse management systems used by large retailers including Amazon and Wal-Mart.

Special Considerations

At its core, a scalable business is one that focuses on the implementation of processes that lead to an efficient operation. The workflow and structure of the business allow for scalability.

All scalable companies have an established group of leaders, including C-level executives, investors, and advisors, who provide strategy and direction. Scalable businesses also have consistent brand messaging across their divisions and locations. A lack of brand enforcement sometimes causes companies to lose sight of their core value, thus decreasing scalability. Yahoo is an example of this. After the company scaled up quickly, it lost sight of its core business and has floundered.

A scalable company has effective tools for measurement, so the entire business can be assessed and managed at each level. This management leads to the efficient operations described above and helps with capital budgeting.