Many a business in the last few years, especially in the DTC and broader start up scene worshipped at the altar of scale in the belief that it fixes all business ills and that in extremis it can turn even unprofitable businesses profitable.
The pursuit of scale for scale's sake is, I suggest, suspect and is not in itself a winning strategy.
The pursuit of scale can also in some cases like food and beverage hospitality for instance bring serious challenges to the very quality of the offering which helped the founders make the business successful in the first place, as the restaurant which carries the chef's name is in many cases unlikely to have said chef in the kitchen of multiple venues at the same time. Being a big fish in a small pool may also be safer and more profitable than being a minnow in the ocean, not to mention the agility that smaller businesses often have.
The survival of businesses is not guaranteed by size of turnover alone , but rather by profitability ,growth prospects and free cash reserves.
The publicised quest for scale has also allowed some entrepreneurs to hide ambitions for selling out and making a fortune rather than seeing their loss making but highly valued and leveraged start up business actually scale and turn a profit and become financially viable.
Seeking scale through merger and acquisition has also traditionally had a mixed track record; buying market share is not of itself necessarily a good thing , it depends on price paid, cost of borrowings and overall portfolio growth prospects rather than real gains in productivity and cost savings from scaling up. The end of a decade long period of interest free risk capital is now consigned to history which puts more pressure on making good choices around leverage.
The notion of perpetual growth which is itself a core principle of corporate capitalism is currently also the subject of wider discussion under the heading of whether degrowth is the next shiny new thing.
The rise in interest rates, the squeeze on disposable income and the effects of the pandemic have inevitably also had an influence on the trajectories of many a business , but don't explain the rise of the siren call of scale.
A little common sense examination suggests that scaling up when it means increased productivity ie producing more with the same means of production can indeed improve profitability by reducing unit costs; by that basic metric it should be clear that bigger is not necessarily always better. As an example Some high profile Restaurant chains run by celebrities have been high profile casualties in recent years, because the fundamental cost structures and opportunities for increased productivity are limited.
I'll close by suggesting that there are ways scaling can help a business , both scaling up or something that is considered less sexy namely scaling back; the key for me is that the scaling improves unit profitability.
Please do tell me what I've got wrong on this or any other of the marketing topics I've blogged about , available at :
fmcgbrandbuilder.blogspot.com
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* with apologies to the work of 10cc
