By Tambu Ndoro
HARARE - SMEs in Zimbabwe contribute approximately 90% to the growth of the country as per a report in 2011. However, they remain largely informal as banks are unable to provide long-term loans. In response, the Zimbabwe Government is raising US$50 billion from the sale of Government Treasury bonds.
It is only a short-term solution. This makes the transition of an entrepreneurial business (start-up) to a high-growth business extremely difficult. The current liquidity crisis in Zimbabwe is not simply a problem with our financial system. Instead it reflects the lack of innovation management systems in the country’s pinned growth sectors.
Some executives I have met are paralyzed with uncertainty, seeing it as a threat; whilst others see it an opportunity. Zimbabwe’s liquidity crisis has called into question not only how companies will survive to live another day but also the requirement of leadership capabilities and sustainable organizational model to thrive in the future.
The irony is the financial crisis is not a new phenomenon to the global market economy. It stems back all the way back to the Panic of 1837. So, if history keeps repeating itself, why are we always trying to reinvent the wheel, instead of driving lessons learned at a macroeconomic and microeconomic level?
Why is it that when all has been said and done SMEs are the ones placed with the burden to progressively grows faster in their business lifecycle, so that they generate and contribute value addition to restore liquidity in the market? This is because, so often, during the good economic times Banks, venture capitalists and investors are willing to invest in both SMEs and high growth enterprises.
According to study by Bain of US companies’ performance, during 1996 - 2001, monitored 74,000 acquisitions, 57,000 alliances financed by Banks and venture capitalist. It reflected a total value of acquisitions to be $12 trillion.
However, most of these acquisitions did not create the value expected. Many are said to have destroyed value. Market value declined by ‘10% over the 5 year period after the financial merger transaction was completed; share price dropped from 0.3% to 1% and 48% of alliances had failed within 24 months,’(Applegate, Herald 2009).
This is due to the fact that though large firms were happy to acquire the innovations and emerging growth business from the SMEs that they acquired, the leadership and organizational model of the acquiring company most times stunted growth causing most acquisitions to not deliver the value expected.
If that is what has happened before, why do we continue to see a scenario where by banks and investors continue to put their money in such organizations whose leadership and organizational model is questionable, during the liquidity crisis? The transition from an entrepreneurial SME to a high growth business is always laden with difficulty. So, what is the solution?
Lead with ‘Disciplined’ Innovation
Research shows that during the liquidity crisis companies adopt short-term strategies that are necessarily unhealthy to the viability of that entity. For example in the case of IBM during the IT bubble in the 1990s, Lou Gerstner, CEO at the time discovered that the majority of IBM employees focused ‘on selling current products serving current customers, and executing current operations,’(Applegate, Herald 2009).
In addition, IBM’s innovation mechanisms where non-existed, therefore they were unable to identify and nurture new business opportunities; marketing and advertising approach to gathering and using market insights was insufficient for emerging markets; IBM lacked well-organized processes for selecting, experimenting, funding and termination of new business growth; if however identified or funded, many IBM ventures failed due to poor execution.
As a result, a business lifecycle approach to leading innovation was developed. This approach to innovation enabled the company to foster leadership and organizational capabilities needed at varying business stages, thus understanding the consumers’ needs long-term rather than short-term needs and identifying opportunities to adopt them; growing the business in a way that allows the business to generate cash, resources and capabilities for future business transformation.
In essence, IBM’s approach recognized that different categories of innovation have different risk profiles and required different leadership to manage risk during the implementation stage. Using the insights of the IBM case, how can investors be encouraged to invest in the Zimbabwe markets; enabling the SMEs to move from informal to formal sectors? There are 3 critical aspects that Banks, Venture Capitalists and Investors should consider looking at in addition to political uncertainty when it comes to investing in the Zimbabwean market:
1. Assess the SMEs Know-Your-Customer (KYC) Strategy
How well does the business venture/SME understand its customer?
SMEs/Business’ need to use the crisis to go back to the drawing board to thoroughly understand how their customer’s use their products and services. This enables the business to reduce their exposure in the market in managing customers that do not create value to the organization.
By thoroughly understanding how customers use your products or services, a company can better anticipate what future breakthroughs are required and determine where to place their market research.
A practical approach to understanding the customer is to adopt the ‘Pilot phase’ approach used by B2B programs, or ‘Test Wells’ approach used by oil companies when prospecting for oil. Through this process, investors are able to manage their risk exposure in the SME. As a result, managing and facilitating the process of a SMEs migration from operating informally to operating formally in a sector.
2. Leadership & Organizational Model
Does the leader possess Entrepreneurial competencies to be able to identify and exploit business opportunities in the high growth sectors? Research conducted by UNDP, World Bank, IMF and other international organizations shows that Entrepreneurship and Business Training is critical in fostering SMEs that can contribute effectively and meaningfully in African countries.
In the past, Banks only invested in SMEs whose leadership had undergone Entrepreneurship training via specific training providers. Though, the approach provided bank loan incentives, it was limited in analyzing or assessing the execution of the SMEs strategic plans. Thus, Investors need to insist on obtaining the SMEs leadership and organizational model in achieving its market penetration.
That is, in addition to Entrepreneurship training, how often will the company hold ‘Strategy Leadership Forums’ to enable their business to challenge their own strategies? How often will they monitor and evaluate their causes of performance and opportunity gaps in the market. How often do they develop actions plans? These insights need to be a requirement in the SMEs Business Plans.
3. Business Transformation
Does the existing organization structure have the capabilities and the resources to manage the opportunity of growth when it happens, since it chooses to perform in a high growth sector? For an SME (start-up) either in the informal or formal sector means having the resources and capabilities to manage your current customers.
However, if an SME’s goal is to move into a high growth business, for example, the diamond business in Zimbabwe is thriving, how can they contribute meaningfully and effectively, in a way that they create value addition in the procurement and distribution of diamonds in the sector? This requires SMEs to develop mechanisms and incentives for themselves to keep up with trends and disruptive innovation taking place in the industry globally.
In addition, investors need to be able to identify SMEs that actively participate in identify emerging business opportunities and breakthrough innovations in relations to their sectors and provide financial support to enable them to achieve it.
This means, that SMEs that are able to identify new ventures, but also have the insight to protect those new ventures from current internal budgetary constraints should be supported to avoid starving these new innovative oriented projects that offer creation of employment, improved education systems, new market development, profitability to the SME of which Government benefits via managed and calculated tax reforms.
In essence, the liquidity crisis requires a paradigm shift in the way we have always done business. Being part of the global community means that SMEs not only require financial support but also knowledge support as the world we live in requires new leadership and organizational models that are flexible in responding and exploiting new market opportunities.
This means, as a business Owners if your staff/employee identifies an business opportunity, do not think along the lines of ‘Who asked you to think?’, ‘They are trying to take my job,’ or simply put them through the lengthy political organizational system of approval where various stakeholders need to be onboard to finally take advantage of the opportunity.
Thus, SMEs need help not just to survive to thrive: life after the liquidity crisis; SMEs are in fact, the innovation management systems that continuously provide engine for growth in the country. They need access to formal market place which means that SMEs must be nurtured via economically sound policies, and their transition to becoming high growth business’ needs to be managed.
In addition, business’ that reach the high growth stage, that is, they have outgrown being SMEs, need to be monitored to ensure that they continue to deliver value (resources and capabilities) to the markets they serve.
Tambu Ndoro is a strategist at Hanga Consulting and principal director of Ndoro Resources. She can be contacted via email firstname.lastname@example.org