Scalability vs productivity in business growth

For decades, business orthodoxy held that market leaders were simply more productive. The firms that grew largest, fastest, and most profitably were assumed to have cracked the productivity code. But a fresh study by researchers from the University of Pennsylvania and others upends that logic: it’s not just productivity—it’s scalability that sets the winners apart.

The findings suggest that firms like Amazon succeed not because they produce more per unit of input, but because their underlying technology allows them to expand output with comparatively smaller cost increases. This subtle but powerful distinction challenges the way strategy teams, investors, and policymakers interpret firm performance—and what kind of businesses they choose to support.

Productivity remains a critical measure, but it peaks early. The new research reveals that while productivity correlates with revenue growth initially, it tends to plateau in larger firms. Scalability—technically defined through “returns to scale” (RTS)—doesn’t. For the top 5% of firms, RTS outpaces peers by nearly 10 percentage points. These companies stretch inputs further, turn operational capacity into market reach, and maintain growth without proportionate cost spikes.

This cracks open a strategic blind spot. Many small and medium firms invest heavily in productivity upgrades—lean teams, process automation, time-use optimization—without realizing their growth ceiling is set by how well their model scales. In contrast, scalability-oriented firms structure their inputs, tech stack, and logistics with expansion already priced in.

So why don’t more firms build for scalability from day one? The answer lies in how capital and incentives are distributed. The study shows that scalable firms typically require more upfront investment in systems design, input selection, and modular infrastructure. These are not tactics that pay off in the short term—they’re architectural decisions with long payback cycles.

Moreover, financing mechanisms tend to favor firms that show early productivity gains rather than scalability potential. Venture capital chases growth stories, but often overlooks the distinction between scaling revenue and scaling operations. Policymakers, too, tend to fund SMEs based on headcount or immediate output, not based on their RTS profile.

This creates a strategic misalignment: capital flows to efficient firms that don’t necessarily have the architecture to grow large—and skips over the scalable firms that could dominate if given time and runway.

The study’s cross-validation using US firms reinforces the pattern: scalability outperforms productivity at the top. High-RTS companies were not only more likely to survive, they delivered higher output per dollar of input even as they grew. Their strategic edge wasn’t just in cost control—it was in compound efficiency.

These companies also made smarter input decisions. Rather than optimizing everything, they selected inputs that scaled well. Instead of squeezing every dollar for maximum productivity, they structured operations for maximum throughput flexibility.

Contrast this with traditional firms that optimize for today’s revenue rather than tomorrow’s expansion. Their processes become rigid, their cost base grows linearly, and when demand spikes—they choke.

This isn’t just a technical academic insight—it’s a shift in strategic paradigm. Strategy teams need to stop evaluating companies purely on current productivity metrics. The question isn’t “How efficient is this firm now?”—it’s “How well will it scale when demand 5x?”

For policymakers, the implication is even sharper. Financial frictions hit scalable firms harder, meaning current subsidy and grant systems may be structurally biased against the most impactful firms. This raises critical questions: Should financing access criteria include RTS profiling? Should tax structures be tilted toward firms with latent scalability rather than current output?

As for investors and boardrooms, the lesson is clear: productivity makes you profitable. Scalability makes you dominant. And those two don’t always overlap.

Scalability vs productivity isn’t an academic debate—it’s a strategic fault line. The firms that understand this difference early are already structuring their future. Those who don’t are just chasing efficiency while their competitors quietly build engines that can run twice as far on the same fuel.