Business Model Innovations in SMB: roles Boards play

Across world, as Small and medium business (SMB) grapple with cheaper imports, raising costs of doing business, and slowing down of customer confidence, their boards get worried about growth and profitability.  Many SMB Boards businesses realize they have been prisoners of their past. Their business model and its components (including sales, marketing and organization) that served them well in the past have not kept pace with current environment.  Board have a significant role in redefining the business model of the company, directing and supporting the required changes to build a strong future.

1.    Foreseeing newer “friction”

SMB Boards are not only to meet the regulatory and corporate governance requirements they are also custodians of the company’s growth. Since the executive management is involved in execution, Board has a major role in looking ahead of emergent market and technology conditions, and identify where “friction” exists and how their company can benefit. They also have a role in preparing the executive management and owners to see the trends in horizon and preparing them for exploration and commitment.

2. Recasting to address “emergent friction”

In many SMB, executive management is often engulfed with day to day working and may not have a visibility or understanding of how to repackage a service or rewire a product with some alliances. Board can initiate discussions on productization of services, bundling of experiences and unbundling of groups. Business model innovation is an evolutionary model, happens in multiple stages. To start with, Boards must seek “leverage points” around existing capabilities and resources to address “friction spaces” in the market. Boards may realize moving away from manufacturing to trade and services highly profitable and executable business model innovation. In some cases the boards may find morphing from a product manufacturer to a “service marketplace offering after-sales for many producer” better business model to pursue.

3. Exteding the engagement model

As industries evolve, business relationships evolve from multiple vendors to strategic partners. With evolution of industry, Clients would like to reduce the total transaction cost of managing multiple vendors and prefer to engage one partner. What this means is that SMB has to evolve from a vendor relationship to partner management mode. Boards have to support executive management in knitting together deeper engagement models that can be more of the “managed form”, including BOT, BOOT and others.

4. Engaging and exploiting ecosystem

Often SME fail in deriving competitive advantage from ecosystem players including academia, industry associations, government bodies and standard setting organizations.  Board have a critical role to play as the gatekeepers and enablers in initiating programs on external linkages. Ecosystem play can be for fine tuning existing services, or acquiring certifications or standards or even access to key technology or access to restricted markets. Country of origin effects, technology credibility, fund raising challenges, or market access dissipates with appropriate use of ecosystem for business model innovation. Boards may play a major role in scripting the engagement, defining boundaries, revenue sharing and market signaling approaches.

5. Talent and expansion

What we have observed is talent (both internal and external) is a key for business model innovation. Internal leadership is required to relieve the senior executive management pursue newer models, and ensuring BAU runs with improved profits to sustain innovation is key.  Boards play a key role in identifying and suggesting alternate platforms and approaches to hire and grow talent.

6. Prioritize and risk management

Corporate risk management is a major charter for Board.  While it can’t be involved in actual day-to-day risk management, Board plays a crucial role by its oversight and foresight role. Board must evaluate the comprehensiveness of the risk management policies and procedures adopted associated with the business model innovation. Boards must ensure the business model innovation has a nice balance between growth and profitability, financial and risk. In some cases, for related business model boards set a max limit of 20% of the net profits as a seed investment to prove the concept and viability. Boards must seek clarity on outputs and outcomes from the business model innovations.

Given limited executive management bandwidth, Boards do have a stellar role to play in the business model innovation charter of the small and medium business (SMB).  Some Boards, have even nominated an independent director to drive these changes along with senior executive management team so that legitimate expansion and de-risk options can be pursued. In some cases, Boards have approved a skunk team, shielded from day to day work, to explore newer business models and rewire their business. Whatever the approach used, Boards have a role to play in supporting and directing business model innovations while assuring the investors and stakeholders a profitable, sustainable and de-risked business.

Dr TR Madan Mohan and D Balasubramaniam

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