Successful organisations clearly understand that the primary purpose of any business is to create value for their key stakeholders - customers, employees, suppliers and, of course, investors - and that the interests of these groups are closely linked. Therefore, sustainable value cannot be created for one group unless it is created for all.
What do we mean by value creation?
An oft-used term, it has different manifestations for different stakeholders. Let us try and illustrate some generic points.
For the customer, it means creating an offering that they find consistently useful. This can only be based on understanding key consumer needs at an ever-increasing speed and precision, coupled with product and process innovation that has a swift go-to-market path.
Companies can only achieve this if they tap the commitment and imagination of their employees. Value, therefore, must be created for those employees in order to motivate them to achieve their higher objective. Value for employees would mean being involved in decision-making and working in an environment that is fair, practices equal-opportunity, and is meritocratic. Employees also value meaningful work, excellent compensation opportunities and continued training and development.
For suppliers, value is not just commercial – it is the continuous partnership that enables long-term development for their organisation, which creates value.
Finally, creating value for investors would, of course, mean delivering consistent high returns on their capital. This generally would require both strong revenue growth and attractive margins. These, in turn, can be achieved only if a company delivers sustained value for customers, hence the cyclical nature of the exercise.
How can SMEs make this happen?
Interestingly, SMEs are best geared to understand this concept, as it is built into their DNA. As erstwhile startups, SMEs established their first connects with stakeholders through a tangible value-creation promise. Unfortunately, after surviving the startup phase, not many of them engage in the critical incremental value creation through forms of existing market extension, product improvement and enhancements, customers relationship interfaces and quality improvements, to name but a few. The issue doesn’t lie at their end – they were never built in the first place to move to Stage 2, since their primary focus was often survival and transition to the next level. Also, the complexities of value creation increase, requiring an altogether new set of skills.
So, what next? How does one buck the trend?
As an SME, to create significant value, the organisation must focus around three broad areas:
a. Building Human Capital, by getting in skill sets not previously available to the SME
b. Bringing innovations in systems and processes that it adopts, even if they are incremental
c. Creating consumer loyalty of the client base that it enjoys, and not just bringing in new clients
Based on my prior experience with such organisations, I have noticed the following patterns, though not necessarily applicable to all.
- Most SMEs tend to score low on systems and processes.
- Most promoter-driven SMEs tend to score high in the skill set inherent to the promoter, which defines the DNA of the firm.
- Broadly there are few clients, which these SMEs acquire in the initial growth phase of the organisation, primarily driven through network and closed user groups.
For such SMEs, significant element of value creation happens:
a. In the short term: By getting new clients, who add significantly to the topline
b. In the medium term: By creating efficient systems and processes geared towards better resource utilisation
The skill set of the promoter is usually good enough to create a particular threshold level of growth, as far as customer acquisition goes. It is also a priority for SMEs, since fewer, bigger clients are easy to maintain and build. However, creating and developing systems and processes normally results in significant bandwidth accretion for the SME, and sometimes the effort is abandoned or delayed, resulting in a critical component for the future being left out.
This is where Private Equity expertise can be a significant value creator for SMEs. These can exist across several horizontals, depending on the environment, sector and need of the specific SME. The relevant ones commonly include demand generation through cost-efficient marketing mediums, technology interventions that bring cost leadership, and financial innovations to build a sustainable edge in the market place. PE professionals, especially on the operating side, with their diverse area of expertise across industries and sectors, can bring learning from different organisations that can bring forth a radical change in the way SMEs compete, collaborate and create value for their stakeholders.
(Mohit Ralhan is Managing Partner, Indus Balaji Private Equity)
To become a guest contributor with VCCircle, write to firstname.lastname@example.org.