Tuesday, July 20, 2010

On 'Breaking Out'

Most of my life, I worked for SMEs. For those entities which is below the radar of business press, but still employ most of the people [more than 80% of all workers in Britain] and generate most of the output. I know it is a broad range, which include self-employed accountants as well as mid-sized companies with 150 employees, but they are the real movers-and-shakers of an economy. Besides, it is also true that most large companies were SMEs when they started; those which were not, were usually public corporations which got sold out.

The problem is that SMEs don't think much. That's so counter-intuitive; the SME mythology, as spun out in the Silicon Valley lore, SMEs should be full of ideas. They are the new world: The anti-thesis of big bad industrial companies. However, the truth is quite the opposite. Some SMEs are plain oppressive. They are more 'fordist' than anyone else. The environment is often akin to boiler room than start-up utopia. The SMEs often seem chained to ONE idea, their founding one, no matter what changes in the world. Instead of being innovative, most of the time the environment is uncritical, based on anecdotes and received wisdom and the strategy is driven by 7 O'clock news and morning tabloids, but not much else.

This is particularly critical for medium size organizations, which has grown out of its initial core and face an increasingly complex business context. This is a life-and-death question for some SMEs, those in businesses where scale matters. In some businesses more than others, scale makes a difference: You can't just afford to remain small in those sectors. This is where the unavoidable pull of bigness invades the insular SME agenda. The problem is, even then, SMEs can't escape their foundational constraints; they become bigger, but still don't think. It is like a downs syndrome baby, they never grow up; what was great at the start-up stage, soon becomes ugly and out of place.

Indeed, there is this concept of break out which I learnt from Dr David Crick, my dissertation supervisor in Birmingham City University. David's work was primarily on SMEs, with a particular focus on Asian entrepreneurs. His thesis was that the minority-owned businesses usually grow in their own ethnic environments till a certain point; then, some of them break out and compete in the open, multi-ethnic market. These are the break-out successes we see in the newspaper or TV and their owners get the peerage. People like Lord Karan Bilimoria or Sir Ghulam Noon belong to this category. Countless others stay small and keep operating in their original market, like my corner shop owner and the owner of the brilliant Indian takeaway or the cab company on the neighbourhood high street - they never bother about scaling up or breaking out.

However, there are companies which are in industries which demand scale, education is one, manufacturing can be another; in these industries, benefits of scale are all too obvious. You end up competing face to face with larger companies. The contracts you sign require financial strength. Smarter people work with you if you get bigger and afford to pay their salaries and offer them security. The good companies in these sector invariably grow with time and reach the break-out period, and whether or not they can break out, often becomes critical for their ongoing survival.

Break out becomes important for survival because at this threshold level, most companies are often too big to survive on their original, narrow, customer base. This is the twilight zone of corporate size, where you are not big enough to break out nor small enough to maintain close customer contacts and offer employees that unrestricted access and freedom. I am not just talking about David's research sample here: This is more or less true for most companies I know, whether minority owned or not. So, not breaking out is not a choice here: Unless the company works on a niche or inextricably local, every company grows to reach its size of incompetence, a point where it must reinvent itself and be ready for a wider market, or degenerate into a rumbling mess, either within the lifespan of its founder or shortly after it.

Being in smaller companies, I have been endlessly engaged in these debates and learnt a lot from them. I have seen that very few companies want to remain small consciously, but those who do are usually driven by deep values and passions of the founder and usually do well in meeting their original objectives [not necessarily in terms of financial profit, but in terms of satisfaction of the owner and those around him]. Most others want to be bigger, but get stalled by either of three factors: Let's call them the fear of loss of control, the difficulty with perspective and the loyalty trap.

The fear of loss of control is the most rational of these problems. Most people who opt to stay small consciously do so for this reason. The ones which want to be big - either for market reasons or personal ambitions - get stalled because the founder often can't let go.

The lack of perspective is very real in an SME environment, particularly inside a growing one. The environment is often frantic and the resources short. So, the whole work culture is here and now, without any opportunity to stop and think. Indeed, I have seen SMEs which sincerely believe that talk is cheap and action is what is needed. It is not far from reality in the SME environment, but this becomes a big problem as the company reaches the break out stage. The thinking becomes critical, the perspective crucial to be able to move forward.

The loyalty trap is again one of the good things of the SME environment which comes on its way at the break-out stage. The small enterprise is all about loyalties, to a particular set of customers, a small community and above all, to a set of employees. These are all good things, key values that sustain a small enterprise. But, when the context changes, these things need to be redefined; not set aside, redefined. But since, in most cases, these are not a set of strategies but personal relationships, mostly with and by the founder, they are less transitory in nature.

Considering all these, the key to success in an SME environment, while it is small but as crucially when it reaches the breakout stage, is LEADERSHIP, the sense of purpose in the leading man/woman and the commitment to the business. In all cases, where the business is driven by a deep sense of purpose and a commitment to the objectives of the business [which isn't, and can't be, making money], the question is relatively straightforward. I have noticed that these people who knew what the business is about and what they want to do never failed to decide whether to remain small, or, in other cases, whether to scale up effectively, build a new set of relationships and let go off some of the details they have handled for long enough to know it by heart.

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