What is Scalability
Scalability is a characteristic of a system, model or function that describes its capability to cope and perform well under an increased or expanding workload or scope. A system that scales well will be able to maintain or even increase its level of performance or efficiency even as it is tested by larger and larger operational demands. 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.
This concept is closely related to the term economies of scale, where 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.
BREAKING DOWN Scalability
Scalability, whether it be in a financial context or within a context of business strategy, describes a company's ability to grow without being hampered by its structure or available resources when faced with increased production. The idea of scalability has become more and more relevant in recent years as technology has made it easier to acquire customers, expand markets and scale.
Technology Makes Scaling a Company Easier
Some tech companies, as an 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.
Elements of a Scalable Business
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.