Wikipedia defines scalability as the capability of a system, network or process to handle a growing amount of work, or its potential to be enlarged in order to accommodate that growth.
This is an important concept for investors. In a business setting, scalability defines a system whose performance improves after additional investment proportionally to the capacity added. In other words, a business model can be considered scalable if output and revenues can be increased at a faster rate than the costs associated with generating the increase.
Scalability and “economies of scale” are closely related. The simple definition of economies of scale is, doing things more efficiently and with increasing size or speed of operation. The objective being increasing earnings at faster rate than revenues, thereby improving profit margins.
Clearly, the foregoing represents generalizations. However, a careful evaluation of these concepts, as they may apply to a specific investment opportunity, should be helpful in assessing the potential for the opportunity.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®
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