Strategies for success for SMEs

PATHOM YONGVANICH

Thailand's smallest caps are performing less well compared to their larger peers. Their TSR, both in the short term and over three, five, and 10 years, has significantly lagged both large and medium caps.

Running a small or medium-sized business is clearly a tricky balancing act. How much time should be devoted to addressing day-to-day challenges versus thinking about long-term growth and trajectory of the business? How much time should be spent on investor relations and managing the share price?

The ideal answer is all of the above. For small-cap companies, however, the initial focus should perhaps be EPS growth, stability and the development of adequate management systems. Once systems are in place to ensure the "fundamentals" are well managed, then the natural shift toward managing investors' expectations, or P/E, should be taken.

Successful strategic planning is not a mysterious process available only to an elite group of top-performing, large- and medium-cap companies. Developing value-creating strategies can and should be done by all managers regardless of the size and state of their business.

What can the smallest-cap companies and SMEs do to improve their planning process? There are a number of lessons in the best practices of larger firms and best-in-class smaller firms.

1. Think strategically and question the norm: In many instances management continue to do things just because they were done previously without asking themselves why they are done. The decision to open a new store, produce or discontinue a product line, change a price, enter new markets or reposition your product are all strategic decisions. The first step starts with a mindset change to question the norm.

2. Create the time to plan: Make planning part of the annual, if not quarterly or monthly business cycle. Agree that every January, April, August, etc, depending on your particular business or industry, is when management will sit down and spend one or two days thinking about the medium- and long-term issues affecting the business, including the market, competitors, technology, and so on.

3. Enforce some discipline: Once a strategic roadmap or framework has been created, don't leap at every opportunity that comes your way. One of benefits of developing an overall strategic framework is that management can now ask the question, "Does this new opportunity, be it growth, acquisition, investment, etc, fit within the longer-term framework developed and agreed in Number 2 above?" Before taking time or spending any money considering an opportunity, place it within the strategic landscape previously formulated and assess its relevance and priority for your business.

4. Take SWOT seriously: Be realistic about your business's capabilities and those of your competitors. This involves examining your company's strengths, weaknesses, opportunities and threats. Don't expect growth in those areas where you are weaker than competitors, unless your strategy contains actions that will increase your capability in the identified area, e.g., hire a new person, send managers for additional training etc. Make this capability improvement part of your overall plan with clear milestones.

5. Do the numbers: Before spending a lot of time or money pursuing a particular strategy, run some numbers in a spreadsheet. Ask yourself, "What do I need to do to make this value-creating or cash flow-positive for my business?" Be sure your calculation captures all of the true costs, both operating expenses and any return you require on invested capital. Quickly discard opportunities or strategies based on nonsensical assumptions or radical changes in the behaviour of the marketplace or rivals.

6. Bridge the communication gap: How many times has this happened in your business? The accounting/finance department knows the numbers but does not understand the business, while the operations department understands the business but has no grasp of where the numbers come from. Enforcing proper communication is key. Otherwise, the plan becomes just a piece of paper and the old saying, "garbage in, garbage out" will quickly come true.

7. Document your strategy into a plan: This does not have to be a 50-page document but should cover the targets, actions and associated financials over a three- to five-year period. Focus on the planning efforts that give you a reference against which future opportunities can be evaluated. For an SME this might just be a five- to 10-page document that you revisit quarterly or annually or when new opportunities arise.

The key to a successful planning process is to remember that what works for one company does not necessarily work for another. The most critical thing for SMEs is to develop a process that ensures there is time spent thinking about how to reach long-term goals.

SMEs can benefit greatly from adopting the principles described above. Putting in the time and effort to develop a strategic plan ensures the business is better prepared for challenges, and that opportunities and threats have been identified and appropriate responses formulated ahead of time. A great strategy is no guarantee for success, but it certainly is key step in getting there.

Pathom Yongvanich is the Managing Director of PYI and Director of Op8. He can be contacted at pathom@pyi.co.th or 081-866-1449.