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QuestionsCategory: Business QuadrantMust a scalable system always be an IT system?
Wilfred Yang asked 1 year ago

Hi
I find the module on scalable systems a little confusing as it seem to allude that an IT system is the key to a company rapidly expanding and delivering its product/services to regional/global audience. 
Firstly could you define scalable systems in the context of the investment quadrant. When we say scale, are we referring to the size of the network (e.g. Walmart has 11,500 stores in 27 countries), or are we referring to how fast a company can ramp up production (which was the case mentioned in the videos for Zara & Uniqlo) or can restock its stores (which was the Walmart warehousing example in the video).
My take is the IT system alone does not guarantee scalabilty. If we were referring to network size, it involves building stores. In this case, scalability depends on whether it can successfully penetrate the new market, and whether it has the means to fund the construction of new stores. When scale is dependent on network, it takes decades to achieve this.
If we were referring to ramping up production or inventory management in the warehouse, the IT system can help to identify products that have a stronger demand but it depends on whether your production line or supplier can keep up. Scalability here would then depend on how extensive your production capabilities are (e.g. many factories, ability to switch production line to push in-demand products) or the ability of your supplier to keep up.
Secondly, where do find information that will help us determine how scalable a business is. Annual reports would typically share about segment performance, and possibly outlook/business plans for the future. I have yet to come across an annual report that delves into whether it employs a JIT system, and how many production facilities it has etc.
Hope you can shine some light on this topic.

2 Answers
Jieren Zheng answered 1 year ago

Scalability can be non-software like Amazon or a franchise like Mcdonalds.
I would think that is more towards a business model as a whole, generally the lower startup cost to grow the easier it is.
Hope it helps.

Victor Chng replied 1 year ago

Thanks JR

Jieren Zheng replied 1 year ago

Welcome :) Your explanation was loads better!

Victor Chng answered 1 year ago

Hi Wilfred,

This is the definition for scalability on investopedia

A system that scales well will be able to maintain or even increase its level of performance or efficiency even as it is tested by larger and larger operational demands.

When I talk about scalability in Investment Quadrant is based on their model whether they can maintain the efficiency when they scale up. Hence, to understand whether the company is scalable, I always like to ask this question.

“How many customers can the business service in an hour”

For instance, a medical doctor business can only serve about 3-5 patient in an hour while Amazon business is able to serve millions of customers in the same hour. In this sense, we can agree that Amazon is definitely more scalable than medical doctor business. On the other hand, having scalability does not mean that the company is able to grow or perform well. Scalability is only part one of the formula. The complete formula is as below:

Multi bagger = Scalability + Long Runway

So for a stock to give you multi-return (Multi bagger), they must have scalability and long runway (in other word “Volume”). Let go back to Amazon, in this case, the company have scalability and long runway. Their long runway comes in a form of E-commerce sales is only about 10-20% of total retail market in US. Hence they are still a long growth runway for Amazon business to keep running especially during the covid situation.

I hope I clarified your questions. Do keep asking if you still have doubt, I am more then happy to answer it. :)