When I was planning to start my own business, I went around seeking advice. Two of which I recall vividly. Kumar Jaghirdar a seasoned Stock Broker based in Bangalore, told me, "People spend today based on what they might earn in the future, this can be very dangerous if the projections for the future do not turn out to be true." He cautioned me that people can be very optimistic about the future and this was as true in setting up a business as it was in stock trading. The second was given to me by Venkataraman another veteran in the equity markets from Chennai, who said "You need to plan your business with a decent scale and investment; otherwise this journey will not be worth your while." 

I must say that the two voices do look contradictory but actually they make a lot of sense together. Business is a balancing act, stretch yourself too thin and a negative impact can be fatal, keep your dreams too small and chances are you will just not go anywhere.

"If you can dream it, you can do it." are the famous words of Walt Disney. I think as an Entrepreneur one must dream big and only then things will happen. However is this enough? Can one really escape reality? Walt Disney himself went broke a couple of times before he made it big with his "mouse." I am not advocating that going broke is the way forward- there are several who just disappeared into mediocrity once their financial muscle was broken. I have personally seen a lot of such cases especially during the dot-com burst. So how do you decide how much to stretch? How does one make this call?

I think one fundamental way to know that you can stretch more is to look at the value you are creating. If the brick is right you can make a lot more of them and build a castle. If the brick is not of the right quality and strength one needs to be spend time to make it better. Once you know that you have made a winning model, which is not really dependent on the vagaries of the business environment; then scale up.

Ray Kroc was 52 years old and working as a salesman when he came across the Mac Donald Brothers' restaurant. There was a huge queue in front of the restaurant to get Hamburgers. The McDonald Brothers were fairly content with the money they were making. However Ray Kroc saw the value they had created and wanted to leverage that. So at that ripe age he got the McDonald brothers to allow him to sell their franchise to others. In return he kept just 1.4% of sales of the franchise. In the next 6 years he opened 200 outlets, grossing $75million however what McDonald's as a company made was only $159,000/- . It was then that McDonald's looked at getting into the Real Estate side of the Business:- lease land on a subordinated basis, get a mortgage, then build and franchise with the franchisee paying rent to cover the mortgage and deliver a profit. It was at this stage that MacDonald really started making money from each of their franchisees.

There are several lessons on scaling up that come up in this story:-

1)       One does not need to have own funds to scale up. Ray Kroc used someone else's business systems, money etc.

2)       At the heart, there has to be a good value generating engine. The McDonalds Brothers had an excellent system of making a Burger. It was generating value.

3)       To expand or not is really dependent on the entrepreneurs own personality, style and objectives. The McDonald brothers were good at what they did and were living well in their own right. In 1954 when Ray Kroc approached them they were making $100,000/- profit per year from just one outlet. Compare that with what Ray Kroc was able to make from 200 outlets after six years. So Profit has two components, scale (multiplication) and the size of the Margin that you get from each unit. Which takes me to the next point

4)       Scale need not be the only way to make big profits.

5)       Age is no bar for striking it big!

So the key seems to be to get to a winning model, which is right for the entrepreneur's style, and capabilities. This cannot be just wished for. It takes perseverance, doggedness and time to get it just right. Nor can it be got by just spending money. Spend a lot on what is working, experiment with what you can lose.

A booming economy can give an illusion of control, that all the good that is happening in business is because of oneself, one can almost feel invincible with growing profits and sales. How much of this is because of the team, and business processes and the business model per se and how much due to general surge in demand in the Industry?

Finally it is the Entrepreneur's call to make, getting the right Balance to make it big. 

The author is the Chief Catalyst of businessgyan. His area of interest include business strategy and innovation. For feedback and more information, e-mail: www.businessgyan.com/balaji.

Issue BG81 Dec 07

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