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What causes the differences in growth between SMEs?

Posted: 17 Dec, 2018

What enables one SME’s growth to take off, and causes another’s to be held back?

From their outset, most small SMEs and family businesses depend very much on the people that work in them.

These people give their earth to the business, and they are rewarded many times over – in increased trust, responsibility and higher pay.

Their workplace effort is very high. They serve the company loyally, year after year. They are highly valued and super-trusted.

However, the business can become over-reliant on them.

Yes, they have commitment and experience, but they don’t necessarily have the skills required for the SME to grow into a larger company.

Ultimately – if the SME has potential – it is the same much-valued people that can hold the business back.

 

Three negative consequences

The people-orientated structure of these businesses can have three negative consequences, with regards to their talent pool, creditworthiness and financial robustness.

First, having grown up through their people, these SMEs and family businesses have traditional working practices and a hierarchical way of operating. So, when new talent joins the firm their ideas are sometimes blocked. Moreover, with little potential for promotion, they leave.

I’m reminded here of what Steve Jobs once said:

"If you want to hire great people and have them stay working for you, you have to let them make a lot of decisions, and you have to be run by ideas, not hierarchy. The best ideas have to win. Otherwise, good people do not stay."

Second, being people-orientated, the individuals at the top can have huge power and influence. And they sometimes abuse it – for personal financial gain, to prevent competition, and to put inappropriate pressure on others.

Third, their poor internal health means that when there is a financial shock – internal or industry changes, changes to their market, or cash flow constraints – they can experience a fall in productivity, financial losses, and a loss of confidence.

True, this might be the game changer for some businesses, and their turning point into higher growth, but for many others, it means the risk of collapse.

 

Critical junction: How to make the transition from SME to a larger firm?

I have seen businesses reach this threshold when working as an interim executive leader – in business turnaround, recovery and transformation of SMEs and family businesses.

When going into these firms, I often find systems that are complex, tangled and inefficient, and processes that are heavily paper-based. Important financial data is ‘dirty’ – and unreliable. Staff turnover is high. Profits are low.

So, how to do these businesses overcome this constraint?

Here’s my experience – and advice.

For small businesses to grow – to make the transition to a higher level – they need to turn themselves around. They need to welcome automation, robust systems and processes, and strong governance practices.

Such changes will enable them to think above and beyond the familiarity of people-orientated, and growth restricting, routine work.

This might sound obvious.

Why don’t they do it anyway, you might ask?

Either they don’t know the brick wall they are heading for, or they don’t learn from others, or they are distracted by what they see as their relatively successful track record … to date.

 

The route to take-off

I saw this transition to a higher level successfully take place when, nearly 20 years ago, I worked at easyJet.

Already it was a fast-growing airline. However, it ratcheted up its potential by moving from a people-orientated business into a more structured operation. It put in place integrated systems, processes, key controls and performance management capabilities, which enabled it to develop into an even faster-growing airline.

Now, of course, easyJet is a FTSE100 company.

 

To conclude, for SMEs and family businesses to grow beyond their constraints, they need a leadership that will make the necessary changes to their business’ strategy, structure and function, putting in place a platform for further growth and success. This leadership can come either from next generations (with new ideas), or from independent successors (also with new ideas) that shareholders introduce to them, to run their businesses.

Then, SMEs and family businesses can take-off and grow exponentially.

 

By Simon C. Jones. © 2018 InTheInterim Ltd.

"The best of interim executive insights and delivery"


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