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

Revive = Restructure + Rebuild

In a VUCA world, it is not uncommon to see many companies tumbling down the aisle. Mismanagement, poor decision making, commoditization, radical market changes, leadership exits, founder’s demise or even a maverick competitor can make a sure step company loose its steps. Reviving near death companies not only needs restructuring but simultaneous rebuilding efforts.  In our experience of working with companies across verticals we find management may pursue common interim strategies to revive the company.

Firstly, revival plans have to be more directional and dynamic, rather than grandiose. Board and the CEO must have a broad 6 quarter plan, but ensure your planning windows are smaller just 3 quarter rolling plans, and feedback is continuously used to quickly respond to market cues.  View 20,000 square feet but eye what is happening on ground simultaneously.  Assess the product lines, identify core one to invest and drop the “me-too” products. Identify what minimum variants are required to cover the market and limit the variety. Better ensure about 70% of parts and processes are common to gain from procurement and production economics. Identify approaches to become asset light including facility sharing, outsourcing, partial-sell off.  Evaluate options to tap overseas markets including acquiring bankrupt or going out of businesses to gain access to key markets and newer models. Define partner ecosystem that can help increase market reach, and product improvements on a success fee model than investment model. Evaluate methods to shorten supply chains so that they could be served faster and with quality products. Assess methods to lower freight costs including assembly at site options and associated changes that may be required across the company.

On the finance front, conserve cash and invest in quick cash generation activities that may not need any investment (services and spares), cut unproductive capex and cost. Develop a cash management system and forecasting system to manage short term liquidity and efficiently manage working capital. Implement cost reduction and operational efficiency improvement activities. Discover the money your companies is leaving from post sales service and parts on table. Invest in a small team to sell services and spares. Work on your existing customer base and devise campaigns to upsell mandated parts and services. Integrate your post sales process, ensure parts and services are monetized effectively, first call responses are high and customer feedback on services has a positive impact on sales. Identify methods to reduce inventory including parts substitution, supersession or sale.

Identify process bottlenecks and operational inefficiencies. Devise simple systems to improve quality and response.   Investing in customer relations to build relationship capital, but also defend your territories from your competitors. Shed away from centralized hierarchical decision making to flatter organization and an empowered sales team that not only covers the market, but also scans the flourish of ideas and friction at the customer end.  Focus on doing more for less on sales front. Pursue a G5 customer strategy, largest five customers who offer multiple revenue monetization opportunities. Reorganize regional and product specific sales teams. Cross train, consolidate and upgrade sales skills.

Prune marketing costs and direct low cost social media and community branding efforts that help in dampening the negative vibes associated with the products and company. Build a simple reporting system that help in addressing how various units are delivering to mission, whether they are getting the maximum impact they from their expenditures and how effectively they are utilizing their budgets. Discard monthly or bi-weekly published reports and review, instead resort to open oral discussions on subsequent days or weekly that keep information flowing where it needs to go and cutting down the time on review prep work.

 

Team reconstruction is the heart of rebuilding the company. On the leadership front, what is needed is a firm hand with a gentle approach. Be focussed, direction obsessed without being overbearing. Soliciting perspective and opinions is welcome, but it must not paralyze decision making. A quick turnaround requires associates who can take challenges, unlearn, learn and re-learn skills. Team reconstruction is the heart of rebuilding the company. To succeed in turnaround, you need associates who believe the rewiring and can commit the requisite efforts. Ensure rumour wagons are derailed, communicate why things did not work earlier and how things are going to be different now. A tough call, but one required is to sidestep or ease out Smart Alec ‘s who can’t own and drive a team. Re-invigorate the team and ensure you have got the right people in the room to make things work.  Focus on achieving short term results that will have positive impact.  These small wins are essential to rebuilding the company. Rebuild the team by anticipating associates fears, anxieties and expectations. Avoid focus only on sales and numbers, invest enough to rebuild morale. Restructure with re-motivation.

Dr TR Madan Mohan and D Balasubramaniam

From furrows: Independent directors in unlisted private limited companies

Most companies in India are promoter-controlled and promoter-managed. Private limited companies are the most prevalent form of formation. Often the promoter and family constitute the board. In this kind of a set up the largest shareholder also holds management reigns and agency problems that arise in investor led companies does not arise. However, as these companies expand, promoter led companies realize a need for formalization of board not so much from regulatory requirements, but more so develop a mechanism to mitigate self-serving interests and bounded rationality problems.  Management realize while there is no shortage of advice on how to run their companies there is a need to seek our professional, unbiased and consistent inputs to improve the way of doing business.  On boarding independent directors is seen as a first step in improving corporate governance in these companies.  Industry knowledge, prior board experience and networks that can open doors is what unlisted companies seek in their independent directors. The expectation of unlisted companies is apart from the code of conduct laid down under the Schedule IV of the Companies Act, 2013, is that an independent director would:

  • Support board for promoting success of the company
  • Engage deeply in developing and sharpening the business goals, strategy and implementation plans
  • Critically review company’s progress towards the set objectives and revise directions wherever necessary
  • Financial and non-financial process are compliant and fair

From our experience of working with unlisted companies the key contribution of independent director apart from what is listed above is in three areas. Firstly, unleashing the leverage points of the company so it can realize its true value with incumbent resources and capabilities and realign growth plans. Independent director must contribute to redesigning of the strategy, how solid are the products and services, threat of commoditization, revenue streams and new offering.  While strategy on products and services front is the easiest, the challenging part is the articulation and execution of strategy to wean away promoter or management from execution to strategy.  In our limited experience, we see two kinds of dilemmas here. It is not that promoters are unwilling to let go, it is just identification and transition to an outside senior management does not always end up as expected. In some cases it is simply the core rigidity and NIH syndrome, especially in partner led companies. Business development and enhancement is another area unlisted companies seek help from Independent directors. Companies expect independent directors get actively engaged in business development by making right introductions to prospective clients. Connecting to the ecosystem of vendors, OEMs, government agencies, labs and professionals is another area independent director contributes for business expansion. Independent director plays a key role in reviews. An independent director must scrutinize the performance and risks of the business. Other than financial information, Compliance, controls and systems are key areas to review.  Independent director must advice in simplification of reporting (say from an aggregated cost head such as Salary & admin costs to broken down independent cost heads) so that efficient controls can be brought it.  Profitability, de-risk and sustainability form the fulcrum of reviews for independent directors.  Independent directors must evaluate the business model, areas to improve including automation, non-linear options, outsourcing, productization of services and new revenue streams that could be realized by unbundling services and products.  Prodding on reducing people side cost is another area that independent directors can drive innovative hiring and engagement programs. Questioning the dependencies and exploring options to de-risk the company from market, customers and technologies is an area independent directors must contribute. G8 or G10 strategy to focus on few top customers may be a good strategy from reducing cost of sales, it may not be a great approach from scaling up an innovation. Independent directors must help identify standardization of services, scaling up of an offering from a group of customers to market or even help productize. Ability to visualize scale and connecting the dots are key characteristics Independent directors must hone. Independent directors must also prod the company in evaluating the dependence on key people or limited management bandwidth. Independent director also has a key role in dispensing with status quo, i.e., sustainability. By constantly asking for extending the reach and newer offerings, they must prod the company towards recognizing newer friction areas and associated revenue monetization opportunities.  Key to fulfilling the role of independent director in unlisted companies is to consciously remaining in independent zone and prioritizing the change process. Independent directors must share their apprehensions and views freely and be open to receive feedback that helps them to refine their views. Finally, independent directors must learn to stay away from Pal syndrome, staying on the surface and yet unconnected with roles and internal conflicts.

D Balasubramaniam and Dr TR Madan Mohan