Platt Perspective on Business and Technology

Building a business for resilience 6 – growth-emergent bottlenecks and smoothly managing scalability 2

Posted in startups, strategy and planning by Timothy Platt on October 25, 2015

This is my sixth installment to a series on building flexibility and resiliency into a business in its routine day-to-day decisions and follow-through, so it can more adaptively anticipate and respond to an ongoing low-level but with time, significant flow of change and its cumulative consequences, that every business faces in its normal course of operation (see Business Strategy and Operations – 3, postings 542 and loosely following for Parts 1-5.)

I began discussing business scalability in the context of this series, in Part 5, where I offered a very brief and selective, high level overview of some of the key issues that come into play, focusing there on how businesses and the people in them, have to function in the presence of incomplete information and imperfect communications. Then I stated at the end of that series installment, that I would take its discussion at least somewhat out of the abstract here by focusing on a specific essentially universally faced operational and functional area of need: the effective scaling up of purchasing and resource acquisitions processes and procedures as a business grows.

Any business that significantly scales up will come to see pressing need for fundamental process expansion and change, and fundamental reconsideration of the assumptions that underlie them in essentially every area and aspect of its operations, and of its strategy too and at least as that connects to and systematically organizes operations. My goal here is to address that overall challenge and series of challenges, by way of an at least somewhat detailed discussion of how one functional area in a business changes and evolves, starting from how it is carried out at a new business startup stage through to when that organization has to manage purchasing and acquisitions as a large and diverse, organizationally mature business. This means addressing the purchasing and acquisitions process itself, but this of necessity also means addressing business finance, and budgeting and payments for goods and services received too, and how they change and evolve. So I will frame my discussion to follow in those terms too.

And I begin this with a new startup, as it makes its first purchasing decisions. Some startups begin to bring in at least some revenue virtually from day one. And in that regard I note the example of the stand-alone consultant or other service provider as a one person new small business, who in effect paves the way for success by lining up at least a few early clients, before opening their doors as a new enterprise and as part of their earliest pre-launch planning and due diligence. And these new businesses, in effect transition from being startups per se to being early stage businesses very rapidly. But even they still start out expending funds: their starting cash reserves, faster than they can bring in new revenue. They still generally begin cash flow negative, and pre-break even, and even if their prospects for becoming profitable and significantly so are high.

So I begin this discussion with startups and from a finances perspective, and by citing a relevant series that addresses issues that are crucially important here: Understanding and Navigating Burn Rate (as can be found at Startups and Early Stage Businesses, postings 67 and following for its Parts 1-12.)

Essentially every business has at least some purchasing needs and from its beginning. That means expendable supplies (e.g. business cards and basic office supplies.) This often means at least some more long lasting resources such as display cases and shelving, and at least one cash register for a new retail business. This means utilities such as electricity and heating, and online connectivity and phone service, and it can definitely mean expenses such as rent and liability insurance, and legal expenses for formally setting up as a new business. And when a business just begins, all of this cumulative purchasing activity and its cash expenditure collectively forms the burn rate that I wrote about in my above cited startup finances series, eating into those initial starting cash reserves – which have to last until this enterprise reaches a point where it can replenish them from incoming revenue.

Startups always start with small headcounts. Even if they start to grow for that very quickly, with for example additional founders coming onboard, they often begin in effect with just one person who holds to an initial founding vision. Decision making processes can be and usually are very simple and direct, with everyone involved in them coming together to discuss these decisions directly and with minimized opportunity for miscommunications. And the goal is, or at least should be to prioritize and to only make the specific purchases that are essential now, and certainly until at least some revenue starts coming in.

And everything is new, and certainly for that business enterprise, and even if one or more of the founders are personally experienced in startups and in founding them. There is very little if any formal operational process in place – so purchasing, like virtually everything else is carried out more ad hoc than as a matter of following formal procedures already in place, as would be expected at a more established business.

Direct hands-on experience with other, earlier startup ventures can mean starting a new such enterprise with something of a more formal operational framework in place. And that means that less would have to be decided upon de novo and carried through upon, on a strictly ad hoc basis and without the benefit of experientially validated precedence. And this is one of the reasons why repeat startup founders have a higher success rate than do first timers. And starting with some structure and system in purchasing at the beginning is one of the operational areas where this type of pre-planning and pre-development can offer the greatest value. But in general,

• Startups begin without anything like formal operational systems in place, to among other things help them to prioritize what they do and how they would do it.
• Initial purchasing has to be carried out on a more ad hoc basis, and on the basis of whatever prioritization the experience of decision makers there would arrive at – which might or might not be directly applicable to a startup context.
• And operationally, one of their goals besides that of simply making prudent purchasing decisions now, has to be to start to organize and standardize a purchasing decision process for moving forward for this new business.

When a new business first organizes and starts, it has to function in its immediate here and now. But just as importantly, and certainly if it is to succeed long-term, it has to begin building a system of experience-based operational processes for moving forward, so it can act on the basis of experience gained, and so it can gain value from that experience and from lessons learned.

And to keep this discussion focused on purchasing, this set of observations is as crucially important there as it is for any aspect of a business at all:

• As a growing business is going to face a rapidly increasing range of purchasing needs and purchasing decisions,
• And the more complex the array of those needs and decisions, the more vitally important it becomes to have a reliable standardized, consistent decision making process in place.
• Individual, personal experience and ad hoc alone would become overwhelmed by this growing complexity of decision making need.

I am going to continue this discussion in a next series installment, where I will turn to consider purchasing in a more established business that has passed its cash flow break-even and has become profitable. And it has begun to grow and expand in its headcount and in its physical assets and perhaps fairly rapidly in order to capture emerging opportunity, as it begins to build a repeat business customer base. And I will follow that with a discussion of purchasing and resource acquisition in a still-larger and more mature business that has developed a more complex and comprehensive table of organization and a more complex overall structure and system.

Meanwhile, you can find this and related postings at Business Strategy and Operations – 3 and also at Page 1 and Page 2 of that directory. And you can find this and related material at my Startups and Early Stage Businesses directory too and at its Page 2 continuation.

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