Such enterprises need to choose between chasing short-term opportunities and building their business in the long-term.
The below article originally appeared in The Financial Express.
Indian promoter-run and family-run businesses have significant growth opportunities in the coming decade. These shall not only help them grow their businesses manifold, but also help create and unlock significant value for their brands and business. The Indian economic environment in the global context presents multiple opportunities for traditional businesses as well as new age businesses. It also provides opportunities to be leading national and global players across various business segments.
However it is not prudent to chase growth for the sake of growth. Chasing top lines, diversifying into multiple businesses, increasing exposure to significant debt and borrowings, etc., creates multiple issues including managing bandwidth, building resilience for surviving economic cycles and more. In the present scenario and in the medium term, value shall be created mainly by building strong business models, which are both scalable and sustainable, supported by strong business teams, processes and governance.
Typically, promoter-led and family business should choose between chasing short-term opportunities and building their business in the long-term. With multiple opportunities and options to choose from, making decisions can pose a challenge even for family-run businesses. It is difficult to arrive at a consensus when faced with multiple ideas and the diverse aspirations of the next generation. The evolution of promoter-led businesses from trading businesses to manufacturing businesses, and then to brand-led retail or services businesses requires that the entrepreneur develop significant leadership skills. In addition to this, it requires developing a better understanding and appetite for the unique risks arising from various growth options, the investments requirements, competition, gestation periods, funding sources, etc., as these vary significantly with the evolution of these business models.
It is therefore essential for promoters to appreciate the importance of strategy and planning. They need to support their own understanding of market opportunities with research data as well as independently identify potential business risks and gaps in core competencies within the organisation to scale up and be successful.
The alignment of products, customers and market choices entails answers to key questions including where they will do business and where they will not, where they will compete and how they will compete, etc. These questions are very important to develop a charter for the future. Developing a credible business strategy and plan to a sufficient level of detail is a very engaging exercise and adds tremendous value in terms of aligning the promoters and their core team to the business model and facilitating a better understanding of the respective interdependencies. The detailed implementation projects and actions that result from proper planning in turn facilitate allocating appropriate resources, monitoring the right performance indicators and achieving the right targets.
The planning process helps in bringing together all ideas and opportunities and follow a structured process of making growth choices. Companies usually struggle at this point and lose momentum after growing to a particular level. Thereafter, it is a struggle to retain and enhance market share, maintain profitability and provide growth opportunities to key internal talent resulting in retention issues.
Managing growth becomes relatively easier once there is a properly developed growth road map and detailed operating model developed in the strategy and planning phase. The most critical element in managing growth is building an organisational culture that reflects the core of the business model and leads to the success of the business growth plans. Developing this culture entails building the core business processes and systems in a manner that the organisation teams take ownership of the process outcomes as well as monitor appropriate tasks, outcomes and performance indicators. Significant investments have to be made in managing the growth phase for people, processes and technology. It is therefore important that these investments are made in a planned and synergised manner so that the business can achieve the desired outcomes. Any failures and wastages result in increased investments, which in turn impact cash flows and returns on investments. Further, it can delay achieving the targeted market share and business position for the organisation in the long run.
There is always a need to focus on short-term business performance improvement programmes within the business which can support the improvement in earnings before interest, taxes and amortisation (EBITDA) and improvement in cash flows. Existing businesses generally have the potential to improve business performance by 5-10 percent on a year-on-year basis. These improvements can result in substantial internal accruals to support systematic investments in future growth and in building the business in new markets, products and services. It can also facilitate the building of people, processes and technology required to implement business plans.
The promoters’ team can gradually evolve from focusing on short-term day-to-day objectives to proactively working towards long-term strategic projects. Managing growth systematically by building up the organisation and teams help the day-to-day activities run on “auto pilot”, leaving the promoter with the time and energy to focus on strategic initiatives.
In order to create and unlock value, it is very important to build scalable and sustainable business models. This entails effort and a focus on their design and implementation. Further, the successful implementation of these models greatly depends on the development of a conductive organisation culture.
Achieving top-line growth and generating profits from the business is a must. Promoters can definitely do this on their own. However, developing a scalable and sustainable business which creates long-term value requires a more focused approach and intent.
The information contained herein is of a general nature and is not intended to address the specific circumstances of any particular individual or entity. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in India.
The author is partner and head, Enterprise Practice, KPMG in India.