Transcript Slide 1
16. 1. 2015
Financial Activism and Strategic Cost Management in MSMEs
Dr. Paritosh Basu, Sr. Professor NMIMS School of Business Management
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All images are from feely available internet sources
Discussion Flow
MSME – Store House of Unlimited Potentials Financing of SMEs – Perceptions & Issues Don’t Challenge Your Limits – Limit your Challenges Strategic Cost Management in MSMEs and CMAs’ Role
MSMEs - Store House of Unlimited Potentials
Extensive research prompts that this is the latest organised data available from any source Graphical Analysis : Grant Thornton
“Value has a value only if its value is valued”
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Conference Theme – Aligning the Context of This Paper
Conference Theme
"Role of CMAs-Mission - Make in India"
Sub Theme for the Session * Improving bottom line through improving cost competitiveness For MSMEs the issue is not – ‘ Make in India’ or ‘Make for India’ Tasks for CMAs is to approach the whole subject with 6WH Principle and facilitate the process for MSMEs 1. What Product and / or Services and at what cost 2. Why Competitive, strategic or first mover’s advantage is considered available 3. When When should activities be started first and when to move for scaling up 4. Where Where should the next three milestones be positioned for planning ahead 5. Who Who should be the business partners and stake holders 6. Which Which are the primary goals aligning with 4P Bottom Line principles And How How do we ensure sustainability with a risk based approach CMAS to facilitate informed judgement, planning, execution and monitoring
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Manage Issues and Perceptions Propositions for Financial Activism in MSME Sector
“Ghumiey achhe sishur pita sab sishuri antare” - There is a parent within every child
Financing of SMEs – Issues and Perceptions
Circa 85% of SMEs in emerging markets suffer from credit constraints About 70% of all SMEs in emerging market do not use any formal credit
Generally informal sector meets financial requirements with stringent terms
SMEs exit or disappear due to business failure, bankruptcy, or other reasons
Approximately 23.7% in two years, and
52.7% in four years
Financing assumes material role, experiencing high growth prospects including opportunities for takeover
SMEs can hardly fund expansion by internal cash generation, hence explores external sources
Financing of SMEs – Issues and Perceptions
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In credit filtration process SMEs are not in priority list except in focused FIs
Lack of successful track record creates a perception of greater credit risks
SMEs lack substantial asset base (collateral) to provide as security against loans – More so for service providers
Limited exposure to Direct Equity financing sources
Less appetite of PE investors for SMEs Reluctance by SME to dilute their share holding
Data Source: Estimates of IFC 2010
Credibility plus lack of timely and adequate access to finance
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Enormity of Fund Requirement and Issues
Equity - 6. 0 Debt - 26. 5 Sources Self and Informal - 25. 5 (78%) Formal - 7.0 (22%) Nos. in INR trillion
,
2010
Don’t challenge your Limits, Limit your Challenges
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Target - Where to go from where ??
Zone - A
Yesterday
Tomorrow
Business performance management is all about making sense of
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What is happening now and
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What should happen in forward path
Today Zone - B % age Change in Turnover
Conduct trend analysis > Map present position > Fix strategic intent > Initiate Action
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Window for Introspection Regret Matrix Analysis
Select ‘The Project’ through the process of elimination Regret Matrix Table (Graded Assessment of Parameters - Example)
Project
A B
ROCE (%)
12 16
Price Sensivity
M L
Market Share
M VH
Social Desirability
H L C 20 VH H M D 14 H L H VH = Very High H = High M = Moderate L = Low Note: Prepare the Project Report with rightful due diligence
Save Drops in Operations and Create More Values
Recommendations for Operational improvements
Integrate India with Bharat Integrate MSMEs with Global Value Chain
Implement ‘National Skill Development Mission’ Bring ‘Resources for Value Generation’ closer to Human Capabilities for all pervasive growth* Establish ‘Proactive Technical Advisory Center’ in each District Unlock full potential of ‘Green Logistics’ and ‘Scrap Recycling ’ Encourage Communion formation for minimisation of value destruction * The first step towards inclusive growth
‘Let Innoventionism
TM
be the Mantra for SMEs
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Facilitate Operations though Shared Services Model
Recommendations for Financial Activism
Establish Metal and Agro Bazar in each state
Promote PE and Angel Investors
Introduce full value chain for Finance: L/C Limit > Buyer’s Credit > Term Loan > Escrow Facility for Collection and Loan Repayment Establish structured facilities for providing ‘Factoring Services’ Promote ‘Shared CFO Services’ with IT facilities using Cloud Computing Encourage large scale sector to integrate with ‘Toll Manufacturing Models’ MSMEs form 40% of Banks’ asset base - Let large corporates be incentivized for sourcing from MSMEs Let pervasive Risk Management be the way of life Let CMAs facilitate the process through Shared Services Model
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Source: Unknown
How to approach the process of value creation 1 .
Half filled with water 2 .
Half empty 3. The glass is full - half filled with water and half with air Successful Value Creation presupposes positive attitude and approach towards business
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Strategic Cost Management in MSMEs and CMAs’ Role
Let us begin the Journey for the destination called MNC
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Strategic Management - Perspective and Approach
SM is a disciplined process with strict timelines for
Developing and executing series of competitive moves
Aligning resources committed to the unified goal Shedding-off outmoded ideas and management tools
Competitive moves are derived from
Demands and imperatives of external environment and
Internal strength and capabilities of present and future
An effective SM process with focused objectives include
Introspection of internal realities with critical questions
Formulation of plans and sensitisation of all concerned
Evaluation and monitoring procedure
Enterprise risks management (ERM)
Assessment of ‘Value in Risk’,
Probability of occurrence
Mitigation actions and efficacy assessment ‘ Strategic Cost Management’ is a process of dealing with emerging realities
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Strategic Management – Perspective and Approach .. 2 A few Learning Points Peter F Drucker, “ In the post capitalist society it is safe to assume that anyone with any knowledge will have to acquire new knowledge every four or five years or else become obsolete” Stephen Haeckel “ If you cannot know what your customer will want or competitor will offer next year – or even who your customers or competitors will be – you cannot develop an effective plan for achieving …” Taiichi Ohno “ True efficiency improvement comes when we produce zero waste and bring the percentage of work to 100 percent” Edgar Schein “ Changing something implies not just learning something new but unlearning something already there … overcoming resistance to change” Keep away from people who try to belittle your ambitions - Mark Twain
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Strategic Management - Perspective and Approach .. 3
Intent for competing through
Cost Leadership Product / Service Quality Differentiation Committed Propositions for ‘After Sales Services’
Learning points from Big Brothers
Karsandasbhai identified latent demand of robust detergent powder for lower rung = Rest is success story for Nirma
‘A voice call for three minutes at cost of a postcard’ = Brought in revolution in Indian Telecom
3M made Cello Tape indispensible for packaging just by adding a desk-top cutter = Sales accelerated in multiples
Maruti Suzuki started with family car = Integrated after sales service followed by high value cars
Mont Blanc = Product differentiation and sustainability
‘Bata by Choice’ strategy failed = Now products for all Innoventive TM ideas cannot be monopolised – Mix Innovation with Invention
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Strategic Perspective and Approach ... 4 Strategy influences cost management perspective Scale : Volume of operations Geography : Expanse of operations creates location value Dependency : Degree of in-house dependence for inputs Key Driver : Key activity that drives major part of costs Experience Technology : : Value at each step of end to end operation Reduce human intervention for quality and speed Complexity : Multiplicity in processes design destructs value Revisit the Answers to Questions under 6WH Principles before each annual business planning exercise and mid-course corrective actions to catch up Thinking time reduces working time - Let us think at all steps
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Does Strategic Approach mean any one of the following?
Assess your ogrnisational realities
Exploring failure is the most useful result of failure
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Source: faculty.css.edu/dswenson/web/Powerpoints/ChangeDrivers.ppt
The Story of A Ship Repair and Itemised Bill
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Challenges and Imperatives Emerged and Emerging Environment
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Introspect and Reposition the Business and Products Competitors The Organisation Known Not Known Known Public Knowledge Unique Strength * Not Known Blindness Unexplored ** * Unique strength will lie in knowing what the competitors do not know ** Strive to move to the unexplored area to achieve a state of readyness for proactively delivering what the society will ask for tomorrow “The only limit to our realisation of tomorrow will be our doubts of today”
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Challenges
Offer the perceived right value for money to customers Cost = Product Value as per customer – Cost of Capital – I Tax
Reach to market restricting volume of operations Inability to source working capital due to
Uncertain business cycle and growth In sufficient operating surplus for debt servicing Longer value chain between inputs to value realisation
Non availability of management bandwidth leading to
Lack of business plan >> Keep managing as future unfolds Unstructured management >> Frequent emergencies Slackness in risk management >> Frequent crisis Dependence on a few trusted souls >> Sub-optimal results Less time for thinking and honing application proficiency Loose ends in governance and compliance of regulations Fight more than once and win the battle, if not in first fight
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Corporate Risk Profile – The Role of IAs in Risk Exposure Mapping
CMAs can help mapping every MSME Unit’ and / or its CGU vs. applicable Risks and recommend mitigation actions with an approach for sustainability also
External Risks – Reforms , Market, Technology, Competitor, Natural, Legal, Regulatory, Political Currency Exchange Financial Credit Planning Cost of Capital Liquidity Customer Success Human Resource Operational & Environmental Goal Congruence Strategic Leadership, Product Profile, Product Image Erosion Structure, Business Alliances Health & Safety R&D Secrecy Image Erosion Product / Service Failure Pollution Brand Compliance Erosion External Reporting GAAP Conversion Fraud Info.
Relia bility
Corner Stones for Strategic Management
4Rs - Right Task at Right Time with Right Process and for Right Value
Dramatic improvements in systems and procedures for
(Seven Seas)
Quality
Cost
Volume
Relation
Speed - Competitive differentiation of products and services - Leadership in product’s lifecycle management - Competitive advantage besides being the first mover - Delight of both internal and external customers - Respond to changes in market, and environment - Turnover of resources, Supply-chain
Flexibility - Peaks and troughs and multidirectional expansion
Sustainability - Develop enduring substance to sustain all above
Discrete modelling of performance linked incentives
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Emerged and Emerging Imperatives - Move on
Be aware of risks at every decision point
Be aware of organisational realities - Quick fix solutions yield only short term results
Prophesise for long run and bring in collective wisdom
Treat every data and information as strategic asset
Throw away ‘Executive Summaries’, critically examine details
Be dispassionate for what is to be manpower yet ring fence talents dropped, including,
Do not ignore small operations and wastages
And the list goes on for specific realms of organisations Understand steps in ‘Value Chain’, know strategic cost drivers
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The Ultimate Criteria Factor for differentiating a product - Service to the society
Society Enterprise Benefits Harms Benefits Win - Win Parasite Harms Martyr Terrorist
Parasite Terrorists – Not be able to suck for long – Killed in no time Martyr – Bleed to death Successful Strategy – Create a win-win situation
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Reach the Apex
Propositions for Strategic Cost Management
Bite the root
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Revisit Fundamentals of Value Addition
Value creation = Utility / Cost, or Result / Cost > 1
Max. Value = Max. Utility / Min. Cost Add value by minimising value destruction
Do not over leverage and focus on cash management
Remove sub-optimality > The best is still far away
Assess value in risk, probability of occurrence, appetite, and efficacy of mitigating measures Spend with cerebral application of ‘Profitability Index’
Generate capabilities and facilitate access to opportunities
Comply with every bit of regulations and legal stipulations
Develop superior capabilities and attitude effective for both
External, and internal environment Change management Sustained value generation skill and not ownership Ultimate criteria for occupying the Driver’s seat
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Make ‘Cost Management’ a way of life and not an event driven initiative Review and repeat Reacted with a knee jerk mode Incentivise implementation / Innovation Identified Strategic Drivers of Cost Assessed Organisational realities and capabilities Questions to answer Have we ..?
Analysed to have - Nice, Essential, Must Checked Scalability of Plans Planned OCM Process bit by bit Value creation = Utility / Cost, or Result / Cost = >1
Max. Value = Max. Utility / Min. Cost
Generation of value through minimisation of value destruction
The Eternal Truth Time has come for CMAs to Play this role of a friend philosopher and guide
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Further Thoughts
“The essence of management lies in dropping the last letter and make it ‘Manage Men’! It is still better to drop the last two letters and make it ‘Manage Me’!”
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Thank You
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