The purpose of any organization is to enhance the value to all stakeholders. The stakeholders can be customers, employees, suppliers, financial institutions, government, and statutory regulation bodies, and so forth even though the value expectations of each stake holders are different, it can be met only when the business is creating surplus in the form of profit. The central challenge for business is to generate profit in a sustainable manner irrespective of outside factors like competition, macroeconomic condition, supply demand balance etc. While large companies are capable to handle any adverse economic climate, the most affected business segment is small and medium businesses. The reason could be their business management process is not robust enough to handle adverse situation.
Irrespective of the economic environment and competition, it is possible to make sustainable profit if the business head conducts the business in line with the following seven principles.
- Drive business with numbers
- Communicate business target to team
- Delegate and Review key performance indicators (KPI)
- Keep the cost structure lean
- Invest in People
- Focus on big picture & be flexible
- Process mindset
Principle 1: Drive Business with Numbers
The renowned management guru ‘Peter F Drucker’ said “What is measured, improves”. You cannot manage what you do not measure. In business, any outcome can be quantified and measured. For example, you can measure your entire year effort in terms of sales achieved or the profits achieved.
Setting a business goal with numbers brings the following benefits:
- You are mindful of what exactly you require
- It drives behavior and action
- You can also measure your performance against the target set at any point of time and take corrective action
We have observed that that almost all business owner or leadership team have the top line and bottom line target for the business every year. But that alone does not drive the organizational action to achievethe result. You need to have target measurements for all the supporting functions like manufacturing, purchase, quality, service, new developments, sales and marketing. If you have goals for each function with clear quantification in line with your top line and bottom-line, it will bring more focus down the line in the organization.
The point is that it is not only sufficient to have measure at top line and bottom-line and you need to have measurable across the functions and across the activities. Once you start to look at your entire organizational performance in terms of measurement, you become aware of the direction it is going and you can able to take action at the earliest.
Principal 2: Communicate Business Target to Team
Communication to all stakeholders is very vital to the business profitability. It may look strange or soft issue, but from our experience with small and medium business houses, we have found that lack of communication or poor communication process within and outside the organization affects the daily deliverable.
When we refer the term communication, it ranges from sharing business targets to the routine day-to-day sharing of key information within a team. We have witnessed in most of the SME‘s the day to day functional information is held up with a few people and never communicated to the relevant people. Any held up information or delayed communication only makes confusion, speculation and in turn low work performance.
Most of the SME’s business owners are not communicating their goals, business aspiration to their second level and down the level. In addition, top management is not showing enough interest or effort to communicate the business challenges, past performances etc to team. One of the reasons could be the inner fear about sharing the goals or not having awareness about the power of shared goals.
The advantage of shared goal and challenges is that it will bring the possibility of achieving faster than if they do not. The benefits of having regular, systematic communication process are as follows:
- It brings top and first line people together and it increases relationship
- When people are involved, engagement increases
- There is scope of idea generation to meet the business challenges
Depending on the organizational size and structure, communication process need to be structurally designed at each level.That can be regular meeting forums, reviews and reporting.Management should also ensure the communication process through regular, systematic reviews, suggestion scheme, cross functional activities, personal touch etc.
Principle 3: Delegate and Review Key Performance Indicators (KPI)
In most of the SME business, the business owner or top management team will be performing all the work even though they have second level support. The reasons could be lack of delegation skill, the tendency of doing all by self. This attitude will affect the growth and the engagement of people. Even management delegates the responsibility to down the level, but they will be lacking on monitoring the progress with key performance indicators. Both delegation and tracking people performance through KPI reviews should work hand in hand. Delegating responsibility without measurement or measurement tracking without people ownership does not serve the organization to accomplish business ends. As we have discussed in principle 1 on driving the business with numbers, each function, activities, and person in the organization must be measured with key indicators. Management must review the key performance indicators (KPI) against the target.
As we said in Principle 2, through the effective communication process, those KPI ‘s can be reviewed. In the absence of measured KPI and delegation, meetings become one way communication.
The benefits of tracking and reviewing KPI’s
- It reflects the status of the organizational performance at any point of time
- Brings people together on common goals and enhances engagement
- Allows the management to take counteraction on time to bring back the performance
Principle 4: Keep the Cost Structure Lean
One of the key reasons, the business struggles with profitability or loss is its inability to keep the cost structure lean. Lean cost structure means that incurring the expenses that are essentially required and eliminating unnecessary cost elements or low return expenses. Each expense in the organization must have a reasonable rate of returns. Waste or unnecessary expenses make the cost structure very fat and overall product cost becomes uncompetitive in the market especially in the buyer’s market.
Approaches to keep the cost structure lean as follows:
- Track the each expense
- Get convinced about each expense and its return on investment
- Set the cost efficiency target for each cost element
- Continually look for waste elimination opportunities through lean system thinking
One of the trap most of the SME business slips is an increasing overheads due to asset acquisition and utilization. From our experience with hundreds of business owners, they are very enthusiastic in going for expansion when they see the light of opportunities. When there is indication for new business or incremental volume, the tendency of business owners is to add the capacity even at the cost of borrowing. While it may be logical to go for investment when opportunity comes in, but the hidden fact that the existing equipments or facilities are not even effectively utilized 85 % as a rule of thumb for capacity utilization in manufacturing industries. Without effectively utilizing the current asset and adding new assets with the same efficiency loss, the business overhead would become fat. When the business environment is flourishing, the cost can be absorbed, but if the business is in recession or even the competition is aggressive on pricing, the business cost structure will not be attractive in the market. You will be losing the opportunity as well your internal cost will go up. So next time, when you think about investment in capacity or facility, think twice, ensure that you are effectively utilizing the existing asset.
Principle 5: Invest in People
One of the highest return on investment is investing in people. Competition can copy your technology, process, cost structure, marketing strategy and it cannot copy your organizational culture. The positive, winning culture is cultivated only by people working in the organization.
Investing in people consists of four components viz:
- Recruit right people for the position at best cost
- Develop the person’s competency on technical, managerial and behavioral skill
- Engage them through aspirational organizational targets
- Empower them for extraordinary performance
It is common in many SME’s to recruit people of any background just to fill the short-term need. This creates imbalance in organizational requirement and people capability which will affect business profitability. While recruiting people, do the double check that job requirements match with person ‘s potential, past performance to deliver the result. Enhance your standard of expectation from people and your affordability to better pay to attract the best talents.
Most of the SME‘s owners have the wrong belief that providing training and education make the people to leave the organization for a better job opportunity. Remember that if you are not spending your energy, money, time to develop your people on technical upgradation, managerial skill development and positive behavioral aspects, people anyhow stay in the organization and deliver lower performance. One of the research findings on people engagement reveals that people like challenging environment and looks for new learning’s from work. People are leaving the organization when they feel that there is less scope for learning and less challenging environment, even though the pay and perks are relatively better. Engage your team through shared organizational aspirational goal and empower each one doing their job with freedom and accountability.
Compared to any physical assets, only human asset is not depreciating as years go by and this is the only asset brings more returns on investment and profitability to the business. Invest in it…!
Principle 6: Focus on Big Picture & be Flexible
Most of the small, medium business remains in the same category for a longer duration due to the leader’s mindset and their focus on daily routine management. As business owners are pride about their core skill competency and they enjoy spending their most of the time in micro management. Managing a business is all about balancing all aspects of marketing, development, manufacturing, people, sales and finance management. As business owners, you must overview all aspects of business management and ensure that you are taking the organization to the next level with your big picture perspective rather than behaving as functional experts.
Simple rule to remember that learn to unlearn and do not forget that the micro management, which brought you to this level may not guarantee you for next level growth. Hence, focus on business development, exploring new opportunities, people development, and finance management rather than managing your core functional expertise.
Also, be flexible and open enough to accept the latest trends in technology, marketing techniques, customer’s expectation, manufacturing, and quality assurance systems. Change your management practices in line with market expectation rather than only cherishing on legacy, which may not guarantee profitability and growth. Valuing legacy with futuristic thinking does your business fit.
Principle 7: Process Mindset
While the organization is small, it is manageable mentally somehow. But it is difficult to manage all the cross functional deliverable without process based approach while organization is emerging into big. Even in small organization for sustaining the profitability, consistency of process is essential. The process can be manufacturing, customer quality, internal quality assurance, recruitment, development , order fulfillment etc. . Establishing standard processes, educating the people in the process, ensuring process adherence is the prime responsibility of business owners for achieving sustainable profitability and taking the organization to next level growth.
Bringing process excellence approach may take time and energy, but the result is significant and enables you to think on principle 6, big picture thinking, and really taking your business to next level growth…!
“Ganesh babu is the Founder and CEO of Winning Minds Solutions. He mentors small,emerging medium size organisations to improve profitability and to build performance culture to a very large extend.”