Without structure, small companies just can’t grow. Professor Christoph Loch, Hanadi Jabado and Professor Stelios (Stylianos) Kavadias explain why.
At the dawn of Amazon in the mid-1990s, the logistics were a mere skeleton and books on stock were scarce. Indeed, the legend has it that sometimes Amazon’s staff would go to a nearby bookstore and buy the book ordered by a customer, and ship it! Had they grown this business without automated processes, every additional million in sales would have required hiring proportionate number of people, plus more people to manage all of these people, and so the cost of complexity of this business would have grown more than the business itself – a classic example of scale diseconomies.
Such scale disadvantages are a real threat to growth. Think back at Mike (in our third article), and his software business. Mike turned into IT consulting to keep the business afloat, but merely to grow a consulting business, one is bound to suffer from disadvantages of scale (body count plus coordinating more and more people and clients!). So, once more a growth trap.
How can SME CEOs get out of this trap? Well, one way is to accept that you are a service provider (e.g. IT consulting) and then “processise” the business: choose clients belonging to comparable groups with similar problems (“standardise” the clients) and then serve them with almost the same (that is slightly tweaked) service (“standardise” or “productise” the service). Through such a well-defined “menu” of templated services, your sales people and your operations crowd becomes more productive across more clients.
An alternative option for CEOs like Mike is to redefine their strategy towards a product company. Mike can develop software products and then sell them to many customers. Note how the “same” product implies that the sales process is de facto standardised. Then, the more customers buy the same product, the higher is the scale advantage. The development cost is spread over more customers. Crossing above a critical mass of customers, can enable further investments in the architecture of the product, and through a modular architecture, introduce variants that look quite different to different customers.
Whichever the option above, one thing becomes apparent for growing SMEs: it is not only the market opportunity and strategic position that matter, but also how the cost position and delivery capability (speed) change with the scaling up. This can mean, for example:
- sales templates (allowing sales people to effectively explain the service to customers and choose among standard variants, so the CEO does not have to greet and woo every customer!)
- delivery/logistics templates (delivering all customer offers through the same standard process without sacrificing quality and efficiency),
- costing and tracking templates (so that the costs of all actions can be measured and improved over time, and order delivery monitored and also improved)
- HR templates (so that the SME learns to train, motivate, assess and develop employees without having to reinvent the wheel for each one of them),
- and all these processes should be automated with technology wherever possible and appropriate without losing quality of service.
Of course, not all scale advantages look exactly the same across different businesses. SME top management must engage in careful process analysis and planning to ensure that any addition brings scale benefits, and not complexity explosion.
This requires a change in the SME’s culture: first, the CEO and senior management must trust, and accept, that “processisation” is needed; yes, if we treat every customer and every order individually, we can do better, but this would be economically not a viable option. Second, the employees must be convinced of the same – that the intent is not to turn them into de-skilled footsoldiers, to the contrary: standard practices bring professionalism. Employees can then put their effort in delivering at the highest level, and improving over time, rather than firefighting at all times. Employees must realise that it is the firefighting that is demeaning, not working within a robust process.
Putting processes in place is often perceived as losing the true spirit of a real business and turning into a big faceless corporate. Beyond individual perceptions, the reality is that the lack of transparency puts the business at a risk of imploding as it allows errors, delays, cost overruns and fraud . Without structure, small companies just can’t grow.
This article was co-authored by Professor Christoph Loch, Dean of Cambridge Judge Business School (CJBS); Hanadi Jabado, Executive Director of the CJBS Entrepreneurship Centre; and Professor Stelios (Stylianos) Kavadias, Academic Director of the CJBS Entrepreneurship Centre, as part of a series on SME for growth.