Success in business is about a few things going right and other things not going wrong. Most business issues can be controlled to a certain extent but others will involve an element of luck and timing.
However, with better positioning, management and a resilient balance sheet, luck becomes far less important. Joe Carr identifies six key success factors to support SMEs to reach the bar of superior performance and to stand out from the crowd including how to:
✔ Maintain a sharp focus
✔ Bring more to the party
✔ Build resilience and financial discipline
✔ Right size your organisation
✔ Increase your international outlook and extend your geographic footprint
✔ Manage for today and lead for tomorrow
1. Maintain a sharp focus
It is increasingly important that SMEs are very clear on their target position within the sector in which they operate and that they have a very strong understanding of the dynamics and changes within that sector. Certainly, the recent experiences of many SMEs involved in sectors such as construction and property, serve as stark lessons in terms of positioning, understanding and predicting market trends and risk management. For some SMEs that want to maintain a sharp focus, this will mean hard choices, particularly for those that have not taken a long term and strategic approach to markets and market position.
2. Bring more to the party
For some SMEs, the operating model is still very traditional. It is based on a simple shop, service, trade or profession with very little value added through brand, technology and unique ‘know how’. For SMEs to compete and succeed into the future, they will need to bring more value to what they do. On the one hand, competition is increasing through greater globalisation and the growing application of smart strategies by leading SMEs. On the other hand, there is a much more discerning and demanding consumer base, both across the B2B and B2C segments. To address this, SMEs need to focus on innovation products, business models, in process for speed and cost efficiencies and also through technology by placing technology at the heart of the business to ensure a competitive advantage.
3. Build resilience and financial discipline
Some SMEs appear to be naturally cautious, some are open and neutral, while others have taken on borrowing with what appears in hindsight to be reckless abandon. With many SMEs, certain important aspects of the company’s affairs, for example: financial discipline, a resilient balance sheet, a sustainable funding plan and tight working capital management, were in many cases never formally managed or monitored prior to the crisis. Such lessons emerging from the crisis must not only be learned but also hardcoded into practice for future generations.
The access to finance debate, which is very prominent for the SME segment, must focus on the lessons learned from the financial crisis to ensure SMEs have adequate funds for their business in the long-term. SMEs should ensure that their working capital policies and procedures are rigorous; this includes having clear guidelines on how to accept or reject new customers, price negotiation and credit terms in an effort to reduce the prospect of excessive bad debts and cash flow difficulties.
4. Right sizing your company
SMEs are often seen to be at a disadvantage in terms of scale and structure in comparison to larger firms that generally have more access to capital, larger teams of specialists, economies of scale and a greater ability to take risks within larger and diversified portfolios. There are however, benefits for SMEs in terms of agility. Often SMEs are able to react quicker to a fast changing market and customer requirements, are closer to their customers, develop stronger personal relationships with their clients and make decisions quicker than larger firms.
Rather than simply bigger being better, the more useful lesson is to “right-size” your organisation. If a company is staying small, it needs to ensure it maintains a niche focus and that it is deeply rooted in supply chains and the wider ecosystem to ensure the benefits of critical mass can be leveraged. This may involve outsourcing non-core activities and developing strong partnerships with others as an alternative to internal organic growth. SMEs must ensure that they are linked to important sectoral clusters and ecosystems to enhance value chains and remain abreast of sectoral innovations and best practice.
5. Increase International Outlook and extend the geographic footprint
SMEs are often fully dependent not only on domestic demand within the national economy, but also domestic demand at much more local levels. For those that choose to stay local they must ensure that they in some way stand out to be seen. This could be through leveraging local benefits such as the supply and retailing of local produce. SMEs that are involved in a simple, shop or trade service, dependent on the local economy, are likely to remain small and are at risk from unpredictable demand and the threat of new competition. While many of these businesses may remain sustainable and successful they are subject to high sustainability threats and the risk appetite of these businesses should generally remain low.
SMEs should consider extending their footprints to ensure sustainability and improve competitiveness. The extension of geographic remit, however for most small businesses, may be far from opening overseas offices, but rather rooted in better deployment of technology to enhance international marketing and sales, linking in to industry clusters including state support for growth and internationalisation. Many more SMEs will have to work through the identified barriers to internationalisation or they might find international competition coming to them instead.
6. Manage for today and lead for tomorrow
In the mid to long term, sustainable performance for SMEs can only be achieved when the management team devotes sufficient attention and resources of the company to all of the fundamental challenges of today as well as the thinking, planning, investments and changes required to lead the business to a better future. This is a very difficult but crucial balancing act. Some of the key characteristics that help to achieve this include:
✔ Long term orientation - long term approach to business planning
✔ Risk based planning - cautious risk based approach to opportunities
✔ Competitive focus - strong desire to be the best and compete at a high level internationally
✔ Core business focus - strong clarity on market position and focus on quality of product offering
✔ Financial discipline - financial management strongly integrated with business planning and risk management, a considered, non-speculative approach combined with strong control over fundamentals including tight working capital management
This article first appeared in Accountancy Plus magazine Mach 2015.