A recent Harvard Business Review article declares that “scale now trumps differentiation” in firm strategy. And LinkedIn Founder Reid Hoffman has warned, “you have to move faster, because competition from anywhere on the globe may beat you at scale.” Yet despite such attention from practitioners and the media, there has been little discussion of global scaling in the business literature.
In a recent paper, we propose the following definition: Global scaling is a logic of multinationalization that seeks rapid growth through the replication of a global business model (i.e., a model based solely on non-location-bound firm-specific advantages) across foreign markets. Although scaling is a term that is often used as a synonym for growth, separate bodies of academic literature have highlighted different facets of it. Following are four perspectives on global scaling that we believe should be integrated to achieve successful scaling at a global level.
1. The Economics Focus: Economies of Scale
Economies of scale are cost advantages associated with greater output volume, typically the decrease in the cost per unit of output that is associated with an increased volume of output. Thus, a firm that is scaling is increasing profits by increasing output volume and reducing per unit cost. The ‘outcome volume’ is usually sales, but it can also be the number of customers.
While profitability is the ultimate goal of global scaling, an intermediate objective might be augmenting a user base that can be monetized later. Here, the same argument applies, but it relates specifically to customer acquisition costs: There are economies of scale when the per customer acquisition cost decreases as more customers are acquired.
When international growth provides the opportunity to increase sales (or user acquisition) without a concomitant increase in costs, firms can reap these economies of scale and increase profitability. The caveat ‘without a concomitant increase in costs’ is key, because international expansion can be costly. Fast multinationalization, in particular, can limit the firm’s ability to absorb expansion, leading to inefficiencies, and so it is important to understand the costs associated with entry into new markets.
2. The Entrepreneurship Focus: Rapid Growth
The entrepreneurship literature emphasizes the magnitude and persistence of firm growth in terms of sales or headcount. Rapid growth is always time-limited, since permanent rapid growth is unsustainable. Scaling is normally operationalized as a growth rate exceeding 20 per cent per year over a three-year period — although it is not unusual for globally scaling firms to exceed a 40 per cent compound annual growth rate.
In the entrepreneurship literature, scaling is undertaken for market dominance rather than cost reduction. Market dominance not only increases revenues, it also confers reputational advantages. When a market is characterized by network externalities, early market dominance can also provide advantages such as technological dominance and dominance in establishing a loyal base of customers. These are competitive advantages for scaling firms because they reduce constraints in sustaining competitiveness, and they also increase the prominence of the firm in local foreign markets.
Uniformity enables rapid growth by minimizing the
time and resources required for local adjustments.
Access to foreign countries is essential for persistent rapid growth, especially if the domestic market is small. Both the economics and the entrepreneurship perspectives see a global business model as a non-location-bound firm-specific advantage that facilitates replication across foreign countries. The difference between the economics and entrepreneurship perspectives is that the latter focuses on the uniformity of the firm’s value proposition and value-creating and capturing mechanisms across markets. Uniformity enables rapid growth by minimizing the time and resources required for local adjustments.
There is no assumption within the entrepreneurship perspective that scaling is related to firm profitability in the short to medium term. Many firms concentrate on acquiring ever more customers in order to achieve market domination in the present so as to garner monopolistic rents in the longer term. What is assumed is that scaling is expensive, and so firms need to tap into external ‘patient’ capital to achieve rapid growth. Reliance on external capital suggests that a third objective of global scaling may be the generation of exit options so that investors can reap the rewards of their investments.
3. The Strategic Management Focus: Replication Strategy
The replication strategy literature offers an explanation of firm growth that is explicitly related to geographic expansion and so of relevance to global scaling. This literature contends that firm growth is based on large-scale execution of an established business model through replication in new sites, foreign markets in the case of global scaling. The key to a successful replication strategy is having to make only minimal adaptations to the business model for its use in different sites.
Past research has shown that multinationalization is often accompanied by pressure to localize in order to respond to country-specific demands. However, a global business model can exist in the absence of strong and diverging pressures for local adaptation when there is uniformity in the firm’s value proposition and activity system across countries and regions.
Thus, the extent to which a business model is global reflects the extent to which it is replicable across geographic space, as well as the extent to which it represents a non-location-bound firmspecific advantage facilitating global scaling.
Firms that follow a replication strategy ‘front-load’ the exploration of opportunities to develop a business model which can be replicated on a large scale. Such front-loading is consistent with practitioner insights on the importance of finding productmarket fit and a viable business model before scaling.
4. The International Business Focus: Globalness
A fourth body of literature on which we base our conceptualization of global scaling is the international business literature on globalness. The term ‘global’ has become contentious in that literature, with some arguing that it has been applied too readily to firms that are regional but not global, and suggesting that some thresholds should be applied to determine if a firm is truly global. Such discussions beg the question of what differentiates global scaling from domestic scaling or regional scaling, and even whether the label ‘global’ should be used at all. We contend that the label is appropriate because the foundation on which scaling rests — economies of scale, rapid growth and replication — is inherently geographically unbounded. Thus, globalness is one objective of global scaling.
Facilitators of Global Scaling
The international business and entrepreneurship literatures suggest facilitators of global scaling that are both internal and external to the firm. Following are documented facilitators of rapid international growth and of replication.
INTERNAL FACILITATORS OF RAPID GROWTH. A large body of entrepreneurship research shows that the human, social and relational capital of entrepreneurs and entrepreneurial teams, especially their experience, are associated with the higher growth of their firms. The international entrepreneurship literature echoes these findings and shows that, in young and inexperienced firms, individual-level characteristics such as experience can compensate for a lack of firm-level experience, and that this can facilitate rapid international growth. We therefore expect entrepreneurial teams with greater human, social and relational capital to be more likely than less well-endowed teams to view global scaling as a desired outcome and to be better able to achieve it.
Similarly, we expect teams with greater global ambitions at start-up to pursue global scaling. Again, the international entrepreneurship literature shows that many firms develop from start-up the competencies well-suited to their domestic market. This can result in ‘domestic inertia’ through path dependencies, making subsequent internationalization difficult. On the other hand, when entrepreneurial teams have global ambitions from the outset, they are likely to prioritize the development of a global business model, making it more likely that the move from domestic to international customers will be planned for.
Rapid growth requires large amounts of capital, and so tends to be unprofitable. Accordingly, outside investment, normally from venture capitalists, is usually required to fuel global scaling. These investors can share experiential knowledge with the entrepreneurial team and provide valuable social, relational and reputational capital. They can also fuel global ambitions, as we saw with the global scaling of Indian hotel chain OYO, where an investor recommended faster and more aggressive global scaling earlier than the firm’s founder had considered. Further, venture capitalists typically require an exit strategy, and may therefore prefer international growth to product line diversification, so as to make the firm a more attractive acquisition target.
EXTERNAL FACILITATORS OF RAPID GROWTH. Firms located in an entrepreneurial ecosystem can draw on ecosystem support for specialized human capital, funding and the indirect resources which aid the development and implementation of scalable business models, such as advisors, mentoring programs, partners, technology provision and workspaces. Also, at the ecosystem level, global cities ease the cost and friction of geographic expansion by reducing the liabilities of foreignness and outsider-ship when establishing subsidiaries. Not only can this support rapid international growth, but it can also facilitate replication by lessening pressure to adapt operations locally. For instance, allowing the multinational enterprise (MNE) to work with the same service providers across borders and to draw on common norms for managing a cosmopolitan workforce.
Similarly, there are market-related factors that facilitate global scaling. It is easier for firms to internationalize rapidly when there are competitive pressures to do so, and when the global market itself is growing rapidly. For example, the global scaling of restaurant franchisor Freshii was facilitated by the high worldwide growth of the fast-casual category of restaurants. Freshii stands out in this regard because it is not in a high-tech industry, unlike many other companies used as examples of globally-scaling firms. In fact, a recent Brookings Institution study of Inc. Magazine’s list of 5,000 fast-growing businesses in the U.S. shows that, while high-tech firms are more likely to be characterized by rapid growth, the majority of rapid-growth firms are not in high-tech industries. To our knowledge, similar data are not available for globally-scaling firms, but these numbers suggest that such firms may be present in a variety of industries.
Domestic market size may also facilitate global scaling. Firms that are founded in small domestic markets may internationalize early, as international expansion is the only way they can grow. Freshii could not have achieved its growth ambitions based on the Canadian market alone. Leaders of growth-oriented firms in smaller domestic markets are more apt to develop internationalization-related competencies earlier than firms started in large domestic markets, and we therefore expect them to prioritize international markets when developing their business model. This means that the firms in small domestic markets may attempt to scale globally earlier than firms in large domestic ones.
In contrast, firms that are founded in large domestic markets, such as the U.S. and China, may have sufficient demand in their home market to be able to scale domestically. This could delay consideration of the needs of foreign markets when developing a scalable business model. However, being able to evolve the business model on a large scale domestically, and garnering a reputation as an industry leader, may facilitate subsequent global scaling, although later in the firm’s life. An example of this is Qualtrics, which was recognized as an industry leader among online survey software providers when it started to scale globally at the 12-year mark.
Finally, if network externalities are important, global scaling is facilitated by the presence of non-location-bound, or crosscountry, network externalities. Due to network and/or herd effects, the value of an offering for a market participant rises as their number increases, regardless of their geographic location. If there are cross-country network externalities, growth in one country market can increase demand in others.
INTERNAL FACILITATORS OF REPLICATION. Prior research suggests three internal factors that are likely to facilitate the replication facet of global scaling. The first is having digital products and processes, since digital objects can be replicated quickly and cheaply. Digital platforms can enable localization in a replicable manner, such as local offerings on the Airbnb platform. For globally-scaling firms, it is likely that digitization of processes supporting downstream activities, close to the customer, are particularly consequential for the feasibility of global scaling, because they are associated with greater pressure for local adaptation and so are more difficult to replicate.
There is high public visibility of digital platforms that have globally scaled successfully, and indeed digital products and processes facilitate replication, but this does not mean that digitization is either necessary or sufficient for global scaling. A firm can scale globally without a digital market offering, as shown by two examples we have already given: Indian hotel chain OYO and Canadian franchisor Freshii. And digitization is not sufficient to achieve global scaling. This is illustrated by the case of mobile money service provider M-Pesa, which scaled within its home market of Kenya but was unable to repeat its success in other markets.
Freshii could not have achieved its growth ambitions
based on the Canadian market alone.
As affiliations with local market actors may be part of a firm’s global business model, we point to a second factor likely to impact replicability: reliance on local partners. Replicability will be facilitated to the extent there is a common way to establish and maintain effective partnerships across countries. Returning to Freshii, there is a standardized way to select and manage franchisees. An extreme example of complex local partnerships hindering global scaling is Temptime, which offers a miniaturized monitor that indicates whether a vaccine has lost its potency due to heat exposure. Because of the complexities of setting up and managing international distribution partnerships with public, private, and non-governmental organizations, globally scaling the adoption of this life-saving technology took decades.
Third, global scaling is likely to be facilitated by the extent to which a firm can assimilate new employees from different cultures. Research shows that fast assimilation of newcomers is important to a firm’s ability to grow rapidly. In particular, it is important for firms to find replicable ways to manage an increasingly large and diverse workforce and to support effective collaboration across national boundaries. To this end, the leaders of both Freshii and Qualtrics worked hard to establish a strong organizational culture across locations and a tight person–organization fit with each new hire or franchisee.
EXTERNAL FACILITATORS OF REPLICATION. The nature of the market can facilitate the replication facet of global scaling in at least two ways. The first has to do with whether the firm is in an established market or is creating a new one. In an established market, there are established business model types that new firms can adopt. Again, Freshii and Qualtrics are examples, with the former adopting a known franchising business model and the latter a known software-as-a-service one. Of course, it is still necessary to identify opportunities with homogeneous user needs and to overcome the challenges of global scaling — but being able to adopt a well-known business model, rather than having to invent a new one (as was the case with Netflix), may enable firms to start global scaling earlier.
A market structure that favours globalization is a second facilitator of replication, and by extension, of global scaling. Competition in global markets takes place on a worldwide basis, and so firms face competition worldwide, whereas it occurs on a country-by-country basis in multidomestic markets where competitors are local. Replication is facilitated in global markets because competitors are (at least partially) the same across markets, and customers are seeking standardized products and processes. In the business-to-business sphere, the latter may include MNEs looking for a common supplier worldwide. Further, during a firm’s period of rapid growth, marketing activities are important in sustaining competitive advantage, and having to localize pre-sales and post-sales processes for multidomestic competition may impede global scaling.
The nature of government policies and regulations is another aspect of market structure. Government regulations put in place to help local firms get established in the home market will lessen the global nature of the market and hinder global scaling if they are difficult to replicate in other countries. Two examples of this are Kenyan banking regulations in the case of M-Pesa and the barring of Google in China in the case of WeChat.
As indicated herein, global scaling entails a distinct logic. It embodies tensions between growth and control, stability and change, and replication and adaptation. We hope that our integrative approach to strategic scaling and our review of its internal and external facilitators will be helpful to entrepreneurs and other leaders who have set their sights on expanding their business globally.
Becky Reuber is a Professor of Strategic Management and coordinator of the Strategy Area at the Rotman School of Management. Esther Tippmann is a Professor of Strategy, Leadership and Change at the Cairns School of Business at the National University of Ireland, Galway. Sinéad Monaghan is an Associate Professor of International Business and Global Strategy at Trinity Business School, Trinity College Dublin. This article summarizes key insights from their paper, “Global Scaling as a Logic of Multinationalization, which was published in the Journal of International Business Studies (August, 2021).
Share this article: