16. 1. 201516. 1. 2015Dr. Paritosh Basu, Sr. ProfessorDr. Paritosh Basu, Sr. Professor

NMIMS School of Business ManagementNMIMS School of Business Management

Financial Activism and Strategic Cost Management in MSMEs

1

Our today’s M

SMEs are to

morrow’s M

NCs and TNCs

Our today’s M

SMEs are to

morrow’s M

NCs and TNCs

All images are from feely available internet sources

2

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

3Let us build it bit by bit - Let CMAs play the rightful role

MSMEs - Store House of Unlimited Potentials

“Value has a value only if its value is valued”

Graphical Analysis : Grant ThorntonExtensive research prompts that this is the latest organised data available from any source

4

5

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 the issue is not – ‘Make inin India’ or ‘Make forfor India’Tasks for CMAs is to approach the whole subject with 6WH Principle 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 Line4P Bottom Line principles

And How - How do we ensure sustainability with a risk based approach

CMAS to facilitate informed judgement, planning, execution and monitoring

Manage Issues and Perceptions Propositions for Financial Activism in MSME Sector

6“Ghumiey achhe sishur pita sab sishuri antare” - There is a parent within every child

Gurudev Rabindaranath Tagore

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

Data Source: Estimates of IFC 2010

7

Financing of SMEs – Issues and Perceptions … 2

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

8

9

Enormity of Fund Requirement and Issues

Graphical Analysis: Grant Thornton, India

Equity - 6. 0Equity - 6. 0

Debt - 26. 5Debt - 26. 5

Self and Informal - 25. 5 (78%)Self and Informal - 25. 5 (78%)SourcesSources

Formal - 7.0 (22%)Formal - 7.0 (22%)

, 2010

Nos. in INR trillion

Don’t challenge your Limits, Limit your Don’t challenge your Limits, Limit your ChallengesChallenges

10

% a

ge C

han

ge in

Retu

rn

% age Change in Turnover

Zone - A

Zone - B

Target - Where to go from where ??

Conduct trend analysis > Conduct trend analysis > Map present position Map present position > > Fix strategic intent Fix strategic intent > > Initiate Action Initiate Action

Yesterday

Today

Tomorrow Business performance management is all about making sense of

• What is happening now and

• What should happen in forward path

11

Window for Introspection Regret Matrix AnalysisRegret Matrix Analysis Select ‘The Project’ through the process of eliminationSelect ‘The Project’ through the process of elimination

Regret Matrix Table (Graded Assessment of Parameters - Example)

Project ROCE(%)

Price Sensivity

MarketShare

Social Desirability

A 12 M M H

B 16 L VH L

C 20 VH H M

D 14 H L H

VH = Very High H = High M = Moderate L = Low

Selection will depend upon ‘Certainty Equivalent’ of evaluating factors12

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 InnoventionismTM be the Mantra for SMEs

13

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 14

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

Source: Unknown

Successful Successful Value Creation Value Creation presupposes presupposes

positivepositive attitude and attitude and

approach approach towards towards

business business 15

Let us begin the Journey for the destination called MNC16

Strategic Cost Management in MSMEs and CMAs’ RoleStrategic Cost Management in MSMEs and CMAs’ Role

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 17

Strategic Management – Perspective and Approach .. 2A 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 18

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

InnoventiveTM ideas cannot be monopolised – Mix Innovation with Invention

19

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 : Value at each step of end to end operation

Technology : Reduce human intervention for quality and speed

Complexity : Multiplicity in processes design destructs value

Thinking time reduces working time - Let us think at all Thinking time reduces working time - Let us think at all steps steps 20

Revisit the Answers to Questions under 6WH Principles before each annualbusiness planning exercise and mid-course corrective actions to catch up

Source: faculty.css.edu/dswenson/web/Powerpoints/ChangeDrivers.ppt

Does Strategic Approach mean any one of the following?Assess your ogrnisational realities

21Exploring failure is the most useful result of failure Exploring failure is the most useful result of failure

22

The Story of A Ship Repair and Itemised Bill

Challenges and Imperatives Emerged and Emerging Environment

23

24

Introspect and Reposition the Business and Products

Competitors

The Organisation Known Not Known

Known

Not Known

** 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

PublicKnowledge

UniqueStrength*

Blindness Unexplored**

““The only limit to our realisation of tomorrow will be our doubts of today”The only limit to our realisation of tomorrow will be our doubts of today”

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 25

26

Corporate Risk Profile – The Role of IAs in Risk Exposure Mapping

External Risks External Risks – Reforms, Market, Technology,Competitor, Natural, Legal, Regulatory, Political

Image Erosion

FinancialCurrency Exchange

Liquidity

Credit

Direct and Indirect TaxesExternal Reporting GAAP Conversion

Planning

Fraud

Cost ofCapital Info.

Relia-bility

Operational & Environmental

Customer Success

Goal Congruence

Health &SafetyHuman

Resource

ImageErosion

BrandErosion

Product / Service Failure Pollution

R&D

Strategic

Leadership, Product Profile, Product Life Cycle, Business Portfolio, Business

Model, Communication, Organ. Structure, Business AlliancesSecrecy

Compliance

CMAs can help mapping every MSME Unit’ and / or its CGU vs. applicable Risks and recommend mitigation actions with an approach for sustainability also

27

4Rs - Right Task at Right Time with Right Process and for Right Value

Dramatic improvements in systems and procedures for (Seven Seas) Quality - Competitive differentiation of products and services Cost - Leadership in product’s lifecycle management Volume - Competitive advantage besides being the first mover Relation - Delight of both internal and external customers Speed - 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

Are your frameworks ready to

touch and draw strength from each

of the corner stones?

Objects that cannot be measured cannot be managed and controlled for sustained value creation!

Corner Stones for Strategic Management

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 dropped, including, manpower yet ring fence talents

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

28

29

The Ultimate Criteria

SocietySociety

EnterpriseEnterprise BenefitsBenefits HarmsHarms

BenefitsBenefits

HarmsHarms

Win - WinWin - Win Parasite Parasite

MartyrMartyr TerroristTerrorist

ParasiteParasite – Not be able to suck for long– Not be able to suck for longTerroristsTerrorists – Killed in no time– Killed in no timeMartyrMartyr – Bleed to death– Bleed to deathSuccessful StrategySuccessful Strategy – Create a win-win situation– Create a win-win situation

Factor for differentiating a product - Service to the societyFactor for differentiating a product - Service to the society

Propositions for Strategic Cost Management

Bite the root

Reach the Apex

30

31

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

Revisit Fundamentals of Value Addition

Make ‘Cost Management’ a way of life and not an event driven initiative

Value creation = Utility / Cost, or Result / Cost = >1Value creation = Utility / Cost, or Result / Cost = >1 Max. Value = Max. Utility / Min. CostMax. Value = Max. Utility / Min. Cost

Generation of value through minimisation of value destruction

Review and repeat

32

33Time has come for CMAs to Play this role

of a friend philosopher and guide

The Eternal Truth

Further ThoughtsFurther Thoughts

34

“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’!”

Thank YouThank You35