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The Scaling Hurdle PART 1

May 18, 2020

The automotive and captive finance industry is characterized by a rapid transformation – traditional business models and sales structures are undergoing major upheavals and force Original Equipment Manufacturers (OEMs) and Captive Finance companies to re-innovate continuously. To keep up with the innovative pace of competitors within the own sector and disruptors from other market segments, as well as to secure the own market position, they have acquired and/ or built up a growing number of mature start-ups that have proven product-market fit.

Yet, many companies encounter difficulties in scaling up the value and innovative strength that is amassed in start-ups and leverage it to a corporate scale.

Interestingly, while there is a rising understanding of digital transformation, there is little evidence of excellence in scaling efficiently across the corporate value chain.

Why do OEMs and Captives partner with start-ups (and vice versa)?

Fast adaptation to change is crucial more than ever – technologies, business models and processes overtake each other rapidly. OEMs and Captives (as part of their OEMs) are known for their tendency to have bureaucratic and time-consuming decision-making processes. Start-ups, on the other hand, are very flexible due to faster processes, and agile work approaches, which reduces time-to-market and allows them to adapt to disruptive changes quickly.

While OEMs and Captives need start-ups to speed up innovation, start-ups benefit from OEMs’ size that allow them to keep their operations running and therefore to grow and scale.

Before elaborating on the importance of efficient scaling, it is important to highlight the difference between growth and scaling first.

What’s the difference between growing and scaling?

The most common understanding of successful businesses refers to their ability to grow. This can, among many other aspects, refer to growing their product & service portfolio, revenues, client base or market share. However, growing and scaling refer to two different concepts and should be focused on at the right time.

Growing in a business context means that resources are added at the same rate that revenue increases. Typically, we would think about growth in linear terms: as a company adds new resources such as capital, people or technology, revenue is increasing at the same rate. With every new product or service the start-up develops, more resources are added to sustain growth. Output increases, but so do the costs.

Scaling on the other hand means that revenue is growing at a larger rate than the added resources. In a way, it means that a company is becoming more efficient in doing their business. The more efficient the operations, processes and use of resources, the easier it is to scale. Scalable processes or solutions are those, that do not require extra effort while having significant impact on the output. While the business is growing, costs only increase at an incremental rate.

Scaling and growing do not have to contradict each other.

At one stage, a company needs to grow and needs to increase the resources at the same rate as the revenue grows. At other stages in a company’s lifecycle, it will be more important to focus on existing operations, make them more efficient and scale them to increase revenues without requiring as many resources as before – also to become future-ready for further growth opportunities.

Why and when is efficient scaling necessary?

While greenfield start-ups are a great opportunity to experiment knowingly taking into account financial and operational risks, mature start-ups need to take the next step as they have reached product-market fit.

What exactly does that mean? There are signs that a company needs to watch for that indicate that it is time to take the next step and scale. Especially, following key questions help to identify the right time to scale:

  1. Do you have the right operating model in place?
    Especially start-ups often struggle to focus on their own operating model. However, as the business starts to grow, it becomes more and more important to focus on things like structures, governance and capabilities.
  2. Do you have enough demand?
    It is important to understand market trends and forecasts – just because a business may be booming now, doesn’t mean it will be sustainable in the future. Thinking of various scenarios of what could happen and how to respond to it, is crucial.
  3. Do you know your customers’ expectations?
    Customers’ expectations should always be the top priority. Which sound so easy, becomes often a pitfall as naturally companies fall into revolving business around the own needs and wants.
  4. Are you capable to manage customers’ requests?At a specific point in time the business capacity needs to be extended – the client network needs to grow while at the same time the nurturing of the existing customer base is crucial as well. When new clients are turned down or existing clients are not approached on time this may be a sign to scale, as obviously there is not enough capacity to manage the rising interest into the existing business.
  5. Are you surpassing your goals?
    If set goals are surpassed, it is important to reevaluate them – scaling could be a solution. Goals should not be set too comfortable but rather be challenging, yet still achievable.

What are typical challenges companies face with scaling their portfolio of mature start-ups?

The relationship between automotive manufacturers and mature start-ups is not an easy one and indeed, many of them face challenges when it comes to scaling up the value and innovative strength of their start-ups. As a consequence, the collaboration between the two is often difficult and inefficient.

There are many different reasons for this such as significant differences in structure, size, pace of innovation and company culture.

This article is part one of our blog series “The Scaling Hurdle”. In the next articles we will discuss the typical challenges OEMs and Captives face when scaling their start-ups and focus on the framework conditions that need to be considered for efficient scaling.  

This article is co-authored by  Justina Löwen and Evelyn Gabrysch.