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Section 1: What is Agile Scalability?
Agile scalability is not just about rapid growth. Growth is the concern of all companies. In any industry, your existence is measured by numbers—user acquisition, profit margins, growth rates, etc. However, growth alone is not agile scalability. Agile scalability means prioritizing speed over efficiency in conditions of uncertainty.
You might ask yourself why anyone would pursue agile scalability. After all, agile scalability combines this unpleasant uncertainty with a much higher chance of failure, greater embarrassment, and far more significant consequences. Additionally, implementing agile scalability is difficult. You have to convince investors to give you money unless, like Microsoft or Google, you can secure the funding for exponential revenue growth. Worse still, you must have enough reserves to survive the many mistakes you’ll make along the way.
Despite all these potential obstacles, agile scalability remains a powerful tool for entrepreneurs and other business leaders. If you accept the risks of agile scalability that others won’t, you can move faster than them. If the prize of winning is big enough, and the competition you’re in is intense enough, agile scalability becomes a logical and even optimal strategy.
The Five Stages of Agile Scalability
The most obvious, glaring, and impactful change that scaling brings is the number of people the organization employs. For this reason, we define the five stages of agile scalability based on the number of employees in the organization. This categorization is done in base-10. Keep in mind that while the base-10 system helps create clear categories, the real world is often messier. For example, a startup with a close-knit team of about twenty employees might feel and act like a family (Stage 1 of Blitzscaling). So, these definitions are merely a helpful set of guidelines.
The five stages of agile scalability are as follows:
Three Techniques of Agile Scalability
The three key techniques are:
Initially, you design a business model that is capable of rapid and agile growth and needs to scale. Then, you implement an agile scalability strategy that prioritizes speed over efficiency in conditions of uncertainty. Finally, you apply management innovation techniques to handle the damages and challenges that arise after rapid growth and massive scaling.
Among the three main techniques of agile scalability, the first and most fundamental technique is designing a business model with the capacity for exponential growth.
True value creation occurs when innovative technology enables the use of innovative products and services within innovative business models. While the business models of Google, Alibaba, and Facebook may seem obvious—and even inevitable—today, when they first started, they were not widely accepted. How many people in 1999 knew that placing small text ads next to something resembling an electronic business card catalog would lead to the most valuable software company in the world? Or that launching a shopping mall for the emerging middle class in China would result in a $100 billion business? Who would have predicted in 2004 that the dominant media form for people would become staring at a small screen or handheld computer to see what their friends were talking about?
Big companies and large businesses often seem to have bad ideas at the outset because business model innovations—by definition—cannot refer to an established business model and demonstrate why they work.
Growth Driver 1: Network Effects
In today’s interconnected world, more companies than ever can leverage network effects to create excessive growth and profits.
Here, we will use a simple, non-specialized definition of network effects:
“A product or service experiences positive network effects when increased usage by each user increases the value of the product or service for other users.” Economists refer to these effects as “economies of scale on the demand side” or, more generally, “positive externalities.”
The secret of network effects is that they create positive feedback loops, leading to superlinear growth and value creation.
The resulting phenomenon, known as “increasing returns to scale,” often leads to a final equilibrium where a single product or company dominates the market and captures most of the industry’s profits. It’s no surprise, then, that smart entrepreneurs aim to create network-effect startups (and savvy investors want to invest in them).
One key element in utilizing network effects is aggressively seeking network growth and adoption. As the impact of network effects increases exponentially, they place downward pressure on user adoption at smaller scales. When all of your friends are on Facebook, you feel the need to join. But conversely, if none of your friends are on Facebook yet, why should you join? The same applies to the first users of businesses like eBay and Airbnb.
In network-effect businesses, you can’t start with small numbers and hope to grow gradually; until your product is accepted in a specific market, network effects have little value for potential users. Economists say that when the demand curve meets the supply curve, the business must pass through the “inflection point.” Companies like Uber subsidize their users to manipulate the demand curve to reach the inflection point faster; the trade-off is that once you pass that point, short-term losses may enable long-term profitability.
Growth Driver 2: Distribution
Many people in Silicon Valley focus on building products that are, in the famous words of the late Steve Jobs, “insanely great.” Great products are undeniably positive—but the cold, unromantic reality is that, nearly always, a great product with excellent distribution outperforms a great product with poor distribution.
Distribution is a critical growth factor for agile scalability because if the goal is to claim market leadership in a market where the winner takes the most share, distribution determines how quickly and at what price you can achieve that leadership.
Distribution techniques can be divided into two broad categories: utilizing existing networks and rapidly going viral.
Growth Driver 3: Market Size
Judging market size, or what presenters and venture capitalists often refer to as the Total Addressable Market (TAM), is not easy. Forecasting TAM and how it will grow in the future is a major source of uncertainty in agile scalability. But as we will see in the case studies of Airbnb and Uber, accurately forecasting and investing accordingly, while others are still paralyzed by fear, can provide an opportunity for extraordinarily high profits.
Growth Driver 4: High Gross Margins
Most of the valuable companies we focus on in this book have gross profit margins above 60%, 70%, or even 80%. In 2016, Alphabet had gross profits of $54.6 billion on $89.7 billion in sales, resulting in a gross margin of 61%. Facebook’s gross income from $27.6 billion in sales was $23.9 billion, yielding a gross margin of 87%. In 2015, LinkedIn’s gross margin was 86%.
High gross margins are a powerful growth factor because, as mentioned earlier, not all revenues are created equal. Businesses with high gross margins are attractive to investors, who often pay a premium for the profitability of such businesses. Most operational challenges in businesses scale with revenue or sales volume, not gross profit.
Growth Limiter 1: Product/Market Fit
The only true way to prove product/market fit is by getting the product into the hands of real consumers. However, entrepreneurs can and should do their research and design their business models to maximize their chances of achieving product/market fit.
Growth Limiter 2: Organizational Scalability
To truly transform the world, you inevitably need to build a large organization. However, agile scalability in organizations with linear revenue scaling is nearly impossible. How many legal or management consulting firms prioritize speed over efficiency? If your organization is going to successfully scale with agility, it must be able to scale its employee processes, from hiring to onboarding training to management.
Growth Limiter 3: Operational Scalability
If you can’t scale your operations to meet demand, a well-designed scalable business model won’t be sufficient. Entrepreneurs often avoid the operational scalability challenges by claiming that “managing explosive growth is a top-level problem.” While high-level issues are still challenging, it may be better to grapple with growth-related issues than to simply ensure payroll doesn’t fall behind. However, both of these issues can still destroy your company. The wisest innovators incorporate operational scalability into their models rather than sidestep these challenges.
Proven Patterns of Business Model Testing
Often, business models of rapidly growing companies consciously or unconsciously follow proven patterns that align with growth factors and bypass growth limitations.
Fundamental Principles of Innovation in Business Models
The core principles of proven innovation patterns in business models are larger principles that can help refine these patterns or even create new ones. These principles themselves are not business models, but they often strengthen technological innovation and act as drivers for innovation in business models.
Section 3: Innovation in Strategy
Choosing whether or not to scale agility is a strategic (and difficult) choice, and for this reason, we want to explore when and how founders and CEOs make such decisions and how this decision changes both their company and even their own role within the business.
When should I start agile scalability?
Here are a few factors to look for if you want to determine whether it’s the right time for your company to pursue agile scalability:
When should I stop agile scalability?
Although agile scalability is a powerful strategy, it is not a permanent one. Simply because no market is unlimited, no business can grow forever. You scale agilely when your market is large or growing rapidly — or ideally, both. If your market stops growing or reaches its upper limit, you should stop scaling agilely.
By definition, since agile scalability involves inefficient capital use, it only makes sense when speed and momentum matter. Agile scalability is like afterburners on a fighter jet, allowing you to fly two or three times faster than normal, but burning fuel at a dizzying rate. It’s not something you turn on and never turn off.
Can I decide not to scale agilely?
Agile scalability requires capital — either from investors or cash flow — to fund the company’s relatively inefficient growth. If investors want to move fast and invest a lot, there’s a higher risk that a competitor will also decide to scale agilely.
The same is true if the business model generates high-margin revenues to fund growth. Therefore, the safest time to decide not to scale agilely is when your business model has relatively low margins, and investors are not keen on funding it. Many small or “lifestyle” businesses fall into this category, which makes their decision to avoid agile scalability quite logical. However, markets can change quickly.
Agile Scalability is Iteration and Continuous Improvement
Successful agile scalability is a stage in serial problem-solving. Each of the five stages requires different solutions for the same underlying problems: people, products, financing, and so on. Every time you overcome a problem, it’s not solved forever; it’s only temporarily fixed. As the company continues to grow, you’ll need to solve that same problem again under a new set of conditions, likely much different than before.
How does the agile scalability strategy change at each stage?
As we saw in the discussion of agile scalability in different economic environments, speed is always relative. What represents lightning speed at one stage may be just average speed at another.
At the “village” (hundreds of employees) and “city” (thousands of employees) stages, the speed of competing organizations varies widely. Some will be content with optimizing for efficiency, while others will focus on speed. At this stage, agile scalability is less about pure aggression and more about pursuing a differentiated (yet still aggressive) strategy.
How does the role of the founder change at each stage?
The role of the founder in the agile scalability process changes at each stage (and the role of employees relative to the founder will likely change too). As the organization grows, the specific skills necessary for leadership evolve as well.
Note: From Strategy to Management: When a company scales agilely, traditional management techniques no longer suffice when the company doubles or triples in size. Successful scaling businesses need to implement managerial innovations as discussed in section 4.
Section 4: Managerial Innovation
One of the key features that distinguishes global giants from companies that collapse from within before dominating the market is the ability to evolve and optimize managerial practices at every stage of growth. The proven techniques we will explain in this section fall into two main categories: the eight crucial transitions that guide a company through agile scalability, and the nine counterintuitive and unexpected rules that upend conventional wisdom in traditional management to cope with the dizzying speed of agile scalability growth.
Scaling a company agilely is not an easy task; if it were, everyone would be doing it. Agile scalability, like most valuable things in this world, is counterintuitive and unique. To succeed, you need to break many of the management rules that were designed for efficiency and risk minimization. In fact, to achieve aggressive growth objectives in the face of uncertainty and change, you must follow a new set of rules that contradict the teachings of business schools and defy the “best practices” commonly accepted in startups or classic corporate management.
While agile scalability is most commonly associated with advanced technology, its principles are useful for any industry where opportunities can reveal strong growth factors (market size, distribution, gross margins, and network effects) and overcome growth limitations (product-market fit and operational scalability).
Although rapid growth driven by agile scalability is often synonymous with scrappy startups, it can also occur within more established organizations. None of the growth factors, growth limitations, or proven business models require the business to be independently owned, privately run, or a venture capital-backed corporation. Even if your organization cannot offer stock options that make employees wealthy, if agile scalability is successful, you can and should adopt and adapt agile scalability lessons to grow quickly and take advantage of first-mover scaling benefits.
Pursuing agile scalability in a larger organization has both advantages and disadvantages compared to startups. Being realistic is crucial—startups inherently have certain advantages in agile scalability. The core of agile scalability is speed and risk-taking, and startups, which have less to lose, tend to be more agile. Established companies seeking to scale agiley must find major advantages to overcome their inherent disadvantages in terms of speed and risk appetite.
Although we have focused on agile scalability in the business world, the fundamental principle of sacrificing efficiency for speed can be applied to any field when dealing with uncertainty. Now, how can the factors of growth and growth limitations in agile scalability be interpreted in non-business contexts?
In the nonprofit world, new metrics for market indicators must be found since we can’t rely on financial metrics like revenue. Often, the best metric may simply be the number of lives improved, but other metrics like “healthy life years” or “reduced carbon footprint” could also serve this purpose. While the metrics may differ, the principle of market size still holds—if there isn’t a large enough market, agile scalability doesn’t make much sense.
In non-profit sectors, distribution is just as important as it is in for-profit companies. Regardless of how effective your “product” (whether a social service, political candidate, or anything else) is at improving the lives of those who choose it, its impact is directly proportional to your ability to execute an effective distribution strategy.
Since many nonprofits don’t charge for their services, gross margins are irrelevant in this context. However, we can use metrics aligned with the spirit of gross margins, such as economic impact. On a macro level, gross margin is a measure of impact per dollar, and the greater the impact per dollar, the more inclined a nonprofit should be to adopt agile scalability.
Network effects are relatively rare in the nonprofit world. While large humanitarian organizations like the Red Cross or United Way exist, their market position is largely driven by economies of scale rather than actual network effects. However, it’s still worth considering whether network effects can be leveraged because, if possible, they can have a tremendous impact.
For most of the 20th century, Seattle, Los Angeles, and Silicon Valley were very distinct and different industrial hubs. While Silicon Valley’s specialty was computing, Seattle and Los Angeles both had strong aerospace and defense industries, and each ecosystem strengthened its leadership positions in coffee (Seattle) and entertainment (Los Angeles). However, in the 21st century, Seattle and Los Angeles have become hubs for advanced technologies, increasingly intertwined with Silicon Valley.
Agile scalability in emerging ecosystems brings both different challenges and opportunities. Emerging ecosystems often lack many of the platforms available in established ecosystems like Silicon Valley or the broader U.S. market, such as payment systems, transportation vendors, and professional service providers (lawyers, accountants, etc.), as well as experienced CEOs and aggressive venture capitalists. This makes agile scalability more difficult and leads to slower growth rates. Therefore, leveraging existing platforms is much easier than building your own platform.
On the other hand, when successful, building your own platform represents a major competitive advantage that often increases over time, leading to faster long-term growth.
China might even be a better ecosystem for agile scalability than Silicon Valley. Like Silicon Valley, China has an entrepreneurial culture that encourages risk-taking, a highly developed financial sector willing to fund aggressive growth, and a wealth of high-tech talent. But China’s market is huge and, thanks to its incredible recent growth, also highly prone to disruption.
Overall, it seems that technology leaders in China are learning valuable lessons from Silicon Valley. When I travel to China and give talks, I notice that my audience is very familiar with what’s happening in Silicon Valley. Most senior Chinese executives speak and read English and stay up-to-date with the latest English-language news. How many senior executives in the U.S. or Europe read Chinese or are aware of developments in China? If you’re waiting for innovations to make their way into English-language press, possibly because Silicon Valley companies are doing so, you’re giving lightning-fast scale-ups in China the opportunity to enter the global market a year ahead of you.
The greatest opportunity for both Silicon Valley and China is to collaborate and combine their strengths. It’s uncertain what kind of wealth and progress might arise from a future partnership between leading innovators in these two ecosystems.
If you find yourself in a position where competitors are trying to use agile scalability to take your business down, there are three main options for defending yourself: defeat them, join them, or avoid them.
Fans of the late Muhammad Ali may recall his “rope-a-dope” strategy from the famous boxing match against George Foreman. In this strategy, you let your opponent punch as much as they want; when they’re exhausted, you counterattack to defeat them.
Option 2: Join them
If it seems that your market is ready for agile scalability, one obvious reaction is to undertake agile scalability yourself. The problem with this, especially if you’re an established company, is that you may lack the technology or expertise to compete head-to-head. You might be able to buy the technology or expertise, but that comes with its own risks.
Option 3: Avoid them
The last and often most “successful” option is to concede your current market to the agile scalers and use your existing assets to move into a new, less vulnerable market. Seeing yourself as the target of an agile scalability competitor can and should be intimidating, but if you choose the right response, you’re not doomed. But you need to act quickly; the speed of agile scalability means that hesitation is essentially the same as doing nothing.
In an ideal world, agile scalability in organizations would embody all the virtues society might expect from its businesses— a diverse and inclusive workforce, a strong sense of responsibility toward shareholders and stakeholders, the creation of numerous middle-class jobs with good pay, and senior leaders who are ethical role models and community leaders. The harsh truth, however, is that despite all the benefits of agile scalability, agile-scaled organizations are responsible for many of the same wrongdoings that plague other types of companies, and, in fact, even when they try to act responsibly, they face certain inherent challenges.
Agile-scaled companies almost always operate in highly competitive markets where they must grow faster than their competitors to survive and thrive. At best, they relentlessly focus on business objectives, making it difficult to achieve broader social goals. At worst, they attempt to grow as quickly as possible by any means necessary.
We believe that the responsibilities of agile-scaled companies go beyond simply maximizing shareholder value while complying with the law. Society provides the framework within which you live and operate your business; thus, society rightfully can claim a responsibility in your success.
However, responsible agile scalability is more than just an ethical obligation— it is also good business strategy. Often, regulation arises when the government believes an industry is not acting responsibly. Smart agile-scaled companies realize that responsible behavior and self-regulation can delay or neutralize government regulators.
An essential aspect of responsible agile scalability is the ability to distinguish between different types of risk. Agile scalability always involves risks, but not all risks are the same. Our proposed framework for assessing risk uses two separate axes: known vs. unknown and systemic vs. non-systemic.
Uncertainty is not in itself risk; it simply generates unknowns, and unknowns are not inherently negative.
However, when uncertainty combines with the possibility of a negative outcome, you create risk. The magnitude of the risk depends on the likelihood of the outcome and the magnitude of the potential negative result. Therefore, you must distinguish between systemic and non-systemic risks.
When faced with a known/systemic risk, you must invest significantly to mitigate or eliminate that risk. Even an unknown/systemic risk requires a strong response—you must diligently study the risk to turn it from unknown to known while taking clear actions to mitigate it. In contrast, if you’re dealing with a known/non-systemic risk, you can perform a simple cost-benefit analysis or prioritization to decide on an action, and if the risk is unknown/non-systemic, it may not even be worth analyzing— it’s likely a small fire that will burn itself out.
Once you’ve determined that a risk requires a response, you need to consider the nature of that response. We believe the potential responses of agile-scaled companies can be broadly divided into three categories.
At the initial stages, during the “family and tribe” phase, responsible agile scalability means clearly defining the company’s mission and using it as the basis for a culture that values being a responsible part of the broader community. You must envision a future in which your company has grown into a global giant, and then assess the potential impact of that success.
As the company becomes more successful and enters the “village” stage, it’s time to ask yourself, “What things, if not corrected now, will be functionally impossible to fix later during scaling?” Specifically, balancing spirit and speed is difficult at this stage because the company is likely fully focused on growth, and if you hesitate to fix things, you might move too slowly and allow someone else to capture the first-mover scaling advantage. This is why we ask what is “impossible” to fix, rather than what is “hard.” Even if an immediate action is challenging, you can still commit to certain actions that will solve issues in the future, being very clear about what leads to those actions.
If the company succeeds and grows into a “city” or “nation” stage, it must take on the social responsibilities of a large, established company, which are quite different from the responsibilities of challengers. Think back to when you asked yourself, “What problems can I solve later?” Well, later is now. If you’ve previously ignored issues like social, criminal, and economic justice, you must now realize that you are a role model, and you’re expected to repeat and improve on those issues. If you don’t actively take on these responsibilities, they will be solved passively— after new laws and regulations are put in place to change your behavior. Like it or not, when your company reaches the “city” or “nation” stage, you need to start thinking like a mayor or president.
Saba, focusing on the development of individuals and organizational mechanisms, helps its clients move from good to great and experience self-actualization and sustainable growth in their professional and organizational journey.
Address: Seyed Jamaluddin Asadabadi Street (Yousef Abad), between Alley 10 and 12 – No. 94 – 5th floor – Unit 18.
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