Demystifying 'scale' 10 things we know and don't know about scaling inclusive business

Scale is a term much bandied about in private sector development circles but what do we really know about scaling inclusive business? Here, I summarise ten key lessons. Many of these are covered in more detail in our new series on the subject.

1. Many inclusive business models have not scaled. Some businesses and some models have reached impressive levels of scale in terms of millions reached. Few have reached high scale in terms of market penetration. Some are locally-run small businesses with a social focus and don't intend to scale. Many more do aim to but have not yet got there.

2. Scale of a business can be defined in many different ways:

• numbers of people reached is high and rapidly growing;
• growth of top line revenue and bottom line profit: on the upward slope of the hockey stick;
• geographic spread;
• market share;
• reaching a maturity stage, where the model works, price point is stable, and margins are positive and sufficient to generate return on investment.

Some of the most successful and well known inclusive businesses, for example in renewable energy, are now serving millions of consumers. But this doesn't mean they are generating returns to investors, because their success drives further investment for expansion. So different indicators of 'scale' may not be concurrent.

The following table lists ten inclusive businesses that are reaching significant scale. The 'numbers reached' column is based on readily available data that is not necessarily up to date and therefore these figures are likely to be the minimum number reached. In many cases, however, these numbers are likely to have been multiplied by household size.

3. There is a difference between being at the 'scaling stage' and reaching scale. Most entrepreneurs say they are 'scaling' even if they are only just expanding from a pilot.   So scale terminology is pretty useless unless or until there are better benchmarks.

4. We are beginning to get a sense of what counts as 'scale' for different types of inclusive business, at least in terms of numbers of clients. For a digital-based product or service, particularly fin-tech, scale is unlikely to start below some millions.  For physical products and services, half a million or a million consumers may well be a time to celebrate a milestone at scale.

5. There is a difference between scaling a single business and scaling a business model.

• most entrepreneurs, priority is to scale their business;
• for achieving development solutions at scale, and thus from the perspective of development partners, scaling a model is the priority. So from the perspective of development partners, it matters less whether this is through growth of one/few businesses vs emergence of many similar ones.

6. Scaling and replication are different but overlapping terms.

Routes to scale for a specific business tend to be summarised as:

• growth of core business (more branches, expanded operational structure);
• merger and acquisition: taking over others and adapting them to the inclusive model or being incorporated into a bigger company which will scale the business;
• franchising and licensing: earning a fee from others adopting core components of the business model;
• joint ventures: investing in a partnership that adopts and expands the model, usually in a new area;

Replication is more about a business model being taken up by others.  This includes at least the bottom two bullets above plus: 

• diffusion: supporting others to adapt and incorporate parts of the model in ways that are less formal (and probably less lucrative for the innovator) than a JV, franchise or licence.

7. Scaling is not just about what the business does but what changes in the ecosystem. This has been recognised for some years now, which is why a lot of effort on scaling is invested in developing impact investment, supportive policies, intermediaries, market intelligence.  These are needed both for scaling a business and scaling a model.

8. We know quite a lot about the ingredients for scale within a business. Most are not very surprising, but are not necessarily easy, and are nicely summarised in our new Checklist.   They include leadership, mind-set, compelling value proposition, willingness to iterate, ruthless focus on margins, and more.

9. The assumption that small enterprises are good for innovating and large corporates good at going to scale has not been proven. This isn't to say it won't be, but current good examples of scale have not come from the multinationals.

10. Scale may not be the holy grail for every social entrepreneur, but it is what drives huge interest of impact investors and development partners. Financial returns will come when the huge 'base of pyramid market' is tapped and this is what makes investment feasible.   From a development perspective, meeting the SDGs needs much more than business as usual, meaning current models won't be sufficient and nor will public and donor money.   The aim that entrepreneurs can innovate more cost-effective solutions, crowd in private finance to do so, drives development interest into this sector.

More Information

• Register for the Webinar on November 28th with William Davidson Institute & Hystra
• Gain insight on how to approach four critical scaling challenges and other tools and resources on the topic in our new know-how page on Scaling in BOP markets
• Our new checklist highlights 10 key ingredients for scale, including leadership, margins, client-responsiveness, priority partnerships, legal structure and more.
• Find more publications on scaling & replicating on searchable database SearchInclusiveBusiness.org

This blog is part of the November 2016 series on Scaling and replicating inclusive business models, in partnership with DFID and SEED. Explore with us the key ingredients of a pathway to scale, debates and new ideas on replication, and look at what small companies, large companies and ecosystem actors can do.