Financial Activism and
Strategic Cost Management in MSMEs
16. 1. 2015
Dr. Paritosh Basu, Sr. Professor
NMIMS School of Business Management
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All images are from feely available internet sources
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
Let us build it bit by bit - Let CMAs play the rightful role3
MSMEs - Store House of Unlimited Potentials
Extensive research prompts that this is the latest organised data available from any source
Graphical Analysis : Grant Thornton
“Value has a value only if its value is valued”
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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 – ‘Make in India’ or ‘Make for India’
Tasks for CMAs is to approach the whole subject with 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 Line principles
And How - How do we ensure sustainability with a risk based approach
CMAS to facilitate informed judgement, planning, execution and monitoring
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Manage Issues and Perceptions
Propositions for Financial Activism in MSME Sector
“Ghumiey achhe sishur pita sab sishuri antare” - There is a parent within every child
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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
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Data Source: Estimates of IFC 2010
Financing of SMEs – Issues and Perceptions
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 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
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Enormity of Fund Requirement and Issues
Equity - 6. 0
Debt - 26. 5
Self and Informal - 25. 5 (78%)
Sources
Formal - 7.0 (22%)
, 2010
Nos. in INR trillion
Graphical Analysis: Grant Thornton, India
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Don’t challenge your Limits, Limit your Challenges
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Target - Where to go from where ??
Zone - A
Tomorrow
Yesterday
Today
Business performance
management is all
about making sense of
• What is happening
now and
• What should happen
in forward path
Zone - B
% age Change in Turnover
Conduct trend analysis > Map present position > Fix strategic intent > Initiate Action
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Window for Introspection
Regret Matrix Analysis
Select ‘The Project’ through the process of elimination
Regret Matrix Table (Graded Assessment of Parameters - Example)
Project
ROCE
(%)
Price
Sensivity
Market
Share
Social
Desirability
A
B
12
16
M
L
M
VH
H
L
C
20
VH
H
M
D
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H
L
H
VH = Very High H = High M = Moderate L = Low
Note: Prepare the Project Report with rightful due diligence
Selection will depend upon ‘Certainty Equivalent’ of evaluating factors
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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
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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
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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
Value Creation
presupposes
positive
attitude and
approach
towards
business
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Strategic Cost Management in MSMEs and CMAs’ Role
Let us begin the Journey for the destination called MNC
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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
Strategic Management – Perspective and Approach .. 2
A 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
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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
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
Revisit the Answers to Questions under 6WH Principles before each annual
business planning exercise and mid-course corrective actions to catch up
Thinking time reduces working time - Let us think at all steps
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Does Strategic Approach mean any one of the following?
Assess your ogrnisational realities
Exploring failure is the most useful result of failure
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Source: faculty.css.edu/dswenson/web/Powerpoints/ChangeDrivers.ppt
The Story of A Ship Repair and Itemised Bill
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Challenges and Imperatives
Emerged and Emerging Environment
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Introspect and Reposition the Business and Products
Competitors
The Organisation
Known
Not Known
Known
Public
Knowledge
Blindness
Not
Known
Unique
Strength*
Unexplored**
* 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
“The only limit to our realisation of tomorrow will be our doubts of today”
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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
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Corporate Risk Profile – The Role of IAs in Risk Exposure Mapping
CMAs can help mapping every MSME Unit’ and / or its CGU vs. applicable Risks and
recommend mitigation actions with an approach for sustainability also
External Risks – Reforms, Market, Technology,
Competitor, Natural, Legal, Regulatory, Political
Currency Exchange
Planning
Customer
Success
Credit
Financial
Operational &
Environmental
Goal Congruence
Strategic
Cost of
Capital
Human
Resource
Secrecy
Liquidity
Image
Erosion
External Reporting
Leadership, Product Profile, Product
Image
Life Cycle, Business
Portfolio, Business
Erosion
Model, Communication, Organ.
Structure, Business Alliances
Product / Service
Pollution
Failure
GAAP Conversion
Health
&
Safety
R&D
Fraud
Info.
Reliability
Brand Compliance
Erosion
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Direct and Indirect Taxes
Corner Stones for Strategic Management
 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
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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
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The Ultimate Criteria
Factor for differentiating a product - Service to the society
Society
Enterprise
Benefits
Harms
Parasite
–
Terrorists
–
Martyr
–
Successful Strategy –
Benefits
Harms
Win - Win
Parasite
Martyr
Terrorist
Not be able to suck for long
Killed in no time
Bleed to death
Create a win-win situation
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Reach the Apex
Propositions for
Strategic Cost Management
Bite the root
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Revisit Fundamentals of Value Addition
 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
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Make ‘Cost Management’ a way of life and not an event driven initiative
Review and repeat
Reacted with
a knee jerk
mode
Incentivise
implementation
/ Innovation
Identified
Strategic
Drivers of Cost
Questions
to answer Have we ..?
Assessed
Organisational
realities and
capabilities
Checked
Scalability of
Plans
Analysed to
have - Nice,
Essential,
Must
Planned OCM
Process bit by
bit
Value creation = Utility / Cost, or Result / Cost = >1
 Max. Value = Max. Utility / Min. Cost
Generation of value
through minimisation
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of value destruction
The Eternal Truth
Time has come for CMAs to Play this role
of a friend philosopher and guide33
Further Thoughts
“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’!”
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Thank You
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