Overcoming scaling up challenges for Asian Small and Medium Enterprises
We are consulting an Asian Small and Medium Enterprise (SME) in the Electronics industry that is being run by the second generation of the Founder. The Founder started the business around 20 years back and ran it successfully as an owner managed business, building the family’s wealth along the way. A few years back, he introduced his well-educated daughter into the management of the business and she too got used to operating the business in the family’s unique style.
Recently, the Founder retired from the business and has let his daughter take over the reins of this 60 person operation. This has coincided with a dramatic shift in the business environment, which has become very dynamic with the advent of digital. The daughter sees huge opportunities in the new digital age and is trying to shift the course of the business to become a digital business by launching a digital platform, getting customers to sign up, scale up globally, and attracting outside investment or do an IPO. However, changing course is not proving to be easy!
Why is this so?
In this instance, we see three main reasons for the situation. Firstly, while the business volume has grown substantially over the years, the owners have not correspondingly invested in building the business infrastructure. In their desire to run a very tight ship, they have not invested in setting up a robust platform from which to grow. As a result, the business appears to be creaking at the seams from the demands of the shift into the new digital world, which is demanding substantial investment in time and resources. This is quite contrary to the thrifty approach adopted by the owners in the past.
Secondly, the business does not have the depth of talent to support the changes necessary. Most of the employees in the organisation have always looked up to the founder or his daughter to make all the key decisions. At a time when the owners are looking for help, they realise that they don’t have much capability within the organisation to discuss, guide and / or challenge their decisions.
Thirdly, the corporate culture is stuck in the past. While the owner wants to move and shift direction, their style of management and the corporate culture that they have employed over the years is their lasting legacy to the business. The employees in the business find it difficult to shift course and be nimble to respond to the external environment because of this ingrained corporate culture. As a result, key initiatives move slowly and often stall.
Those of you who have worked in Asian SMEs will be familiar with what we have described above. You will realise that running a large business is very different from running an SME. The key for success in these situations is to try and build a unique business model that draws from the strengths of both an SME type business as well as a large Corporate.
What are these changes and how do you go about making them?
To make the transformation succeed, the initial steps that need to be taken by the business are crucial. We are highlighting three steps that should be taken that can help steer the SME in the right direction. You should note that these three measures by themselves will not complete the transformation; but they will help create the right environment for the transformation to happen and succeed.
1. The mindset and resolve of the owner
As a fundamental prerequisite, the owner needs to have a strong mindset and determination for the business to grow out of such challenges. Only then will the transformation begin to happen. This mindset change involves having a clear vision of where the business is heading towards, the critical path for the transformation, and the willingness to invest time, material and resources for the changes to happen and succeed. The owner needs to fully believe that the investments in time and money will pay back handsomely in ROI terms.
2. Hiring of key talent
The next thing the owner needs to do is to bring in critical talent into the organisation. Often, it may be difficult to find good talent that is willing to join a SME. In such circumstances, it will be a good idea to make a start by bringing on board trust-worthy consultants / advisors, who not only provide their experience in running the business but also provide a robust challenge to management’s decisions, and also contribute to recruiting talent using their network. Over time, the goal will be to bring together a competent leadership team into the business that will be able to prepare and execute an operating plan that is consistent with the business strategy.
3. Putting in place the basic elements of good Corporate Governance
This is all about the owner slowly letting go of the day to day running of the business to a team of competent professionals. The goal will be for the owner to get into the ultimate position of being the shareholder who contributes to the overall guidance and strategic direction of the company while the running of the business is entrusted in the hands of professionals who understand that their responsibility is to deliver results in accordance with the agreed strategic plan. This cannot be achieved overnight and will take time. To enable this, the company will need to take several measures such as setting the right tone at the top, eliminating management override, updating policies and procedures, putting in place a performance management system for employees, upgrading the Human Resource and Finance functions, improving the system of internal controls, adopting and implementing robust technology solutions to run the business, and conducting formal management team meetings to manage risks and run the business in a coherent manner.
While the number of tasks to be performed may appear daunting, the owners need to realise that this journey will be fun and exhilarating when undertaken together with the right consultants / team. Further, successful execution will benefit the company in numerous ways including better market reputation, higher valuation and most importantly, a lasting legacy for the owner.
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