John McMahon
Notwithstanding current constraints in credit markets an overarching issue for the small business sector remains a shortage of bankable business propositions, not just a shortage of funding. This begs the question as to what drives bankability (or fundability) and how policy makers and business advisers can stimulate it.
This article argues that bankability, or lack thereof, is a function of four broad factors namely value adding capability, entrepreneurial type, change management capability and “business as usual” capability.
The first factor is value adding capability and the competitiveness it supports which varies hugely between labour intensive, material intensive, machine intensive and knowledge intensive businesses. Business is simple - you add cost and you add value. If you add more value than you add cost you win. This begs the question as to how businesses add value, how much they add, what this says about their competitiveness and its sustainability and what it says about their capacity to add further value. Viewed from this perspective there are four fundamentally different types of business.
Labour intensive businesses add modest value. They compete heavily on cost which is hugely driven by wages. If a labour intensive business doesn’t have wage advantage over the competition it must compensate by adding additional value, perhaps through service, without adding significant further cost.
Material intensive businesses also add relatively little value albeit more than labour intensive ones. They too compete heavily on cost which in this case is driven by material cost. Much retailing is a case in point. If somebody else has lower material costs the response must offset their advantage by adding value they don’t add without adding much more cost.
Machine/skill intensive businesses add higher value. They do so by simultaneously designing out cost while designing in customer value. Each year computer, mobile phone, car and appliance manufacturers and their suppliers, often SME’s, figure out how to give customers even more for less. Whoever does it best wins. The biggest trend in business these days is the extension of machine intensive cost reduction/value adding techniques to services including airlines, hotels, retail (online) and increasingly professional services.
Knowledge intensive businesses add the most value and they do it in one or both of two ways. First is through innovation or design and the creation of “widgets with wings” i.e. unique products or services. Second is through sophisticated marketing which builds “brand power” i.e. the ability to command very significant price premia over the competition. An Apple laptop versus a Dell laptop is a good example of knowledge intensive versus machine intensive in the same product area.
Too many small businesses don’t effectively manage their value adding capability and the competitiveness it can afford to the detriment of their bankability.
The second driver of bankability is entrepreneurial type of which there are four. Each differs from the other in terms of why they start the business, what they bring to it and what they want from it.
“Lifestyle” entrepreneurs start a business to develop a lifestyle which sets them apart. When they achieve the lifestyle they turn off their risk orientation and focus on sustaining what they have rather than growth.
If life had been different “survivalists” would not have started a business they would have got a job. Typically they don’t do risk, even if they have money, and many also lack management capability.
“Controllers” are brilliant doers and as long as they can personally manage every key customer, supplier, staff and financial interaction, life and business is good. But they don’t do trust, especially trust in a bunch of incompetents like the rest of us. This helps to form a glass ceiling through which the business can’t break.
High potential entrepreneurs have a blend of management, entrepreneurial and learning capability which justifies their name.
Bankability is heavily impacted by entrepreneurial type or combination of types in the case of entrepreneurial teams. We can change type if warranted but only if we first know what we are and what we want to be.
A third factor impacting bankability is stage of development and attendant change management issues. From “start-up”, through “cash crisis” to “success” and onwards to “take off” and “maturity “as Churchill and Lewis showed, businesses go through five stages and every business at any given stage faces the same core issues. For start ups the challenge is encapsulated in one word – credibility. They must make themselves credible to customers, suppliers, financiers and in higher value businesses to potential staff. In stage two, “cash crisis”, outgoings exceed incomings. Overheads must be buried in volume. Networks have been exhausted and the business must make itself credible to customers to whom it simply isn’t credible. In stage three the business has been cash flow positive and profitable for a period of years. The question is consolidation and lower risk versus growth and more risk. If the choice is growth marketing strategy is the key.
The ability of a small business to manage this core development and change agenda at each stage in its evolution from stage one to stage five is another critical factor driving bankability. Value adding capability and entrepreneurial type heavily impact options, actions and outcomes at each stage.
A fourth factor driving bankability is ability to manage “business as usual” i.e. to apply good practice in the management of customers, suppliers, money and staff while simultaneously proactively driving revenue, profit, cash and productivity. Depending on ability to manage such practice and performance businesses may be “drones” (low practice and performance), “enthusiasts” (high practice low performance), “movers” (high performance low practice) or “growers” (high practice and performance).
Which they are has profound implications for development potential, bankability and what it will take to realise it.
The four dimensions of our model, when applied as a diagnostic tool to a business, combine to tell a story about that business which defines its bankability. The story tells where the business is, where it might be and what it has to do to get there.
A labour intensive business, run by a survivalist entrepreneur, in stage two (cash crisis) that is a drone tells a very explicit if unpleasant story. Suspect competitiveness, risk aversion, a dearth of customer credibility and passive management of practice and performance all combine to destroy bankability.
A machine intensive business, run by a controller, stuck in stage three (success) that is an “enthusiast” tells a very different but no less challenging story. The assertive aggressive style of the controller will by this stage have created a culture that simply isn’t conducive to continuously taking out further cost while adding further value with massive implications for bankability.
A material intensive business, run by a “lifestyler”, in stage three, that is a “grower” is a very different scenario again. The potential for the lifestyle entrepreneur to have turned off his or her risk orientation and to be focused on enjoying the fruits of his or her endeavours rather than risk it all for further growth is now an overarching factor.
A knowledge intensive business, run by a high potential entrepreneur, in stage four (take off), that is a “grower” is yet a further scenario, and a very attractive one at that.
Eight scenarios, of the many hundreds that are possible, account for a huge proportion of the business population. These are the eight core segments of the business universe. They include: general start-ups, high potential start-ups, the low potential existing businesses, lifestyle businesses, culturally challenged businesses, continuous change businesses, threatened but can change businesses and high potential existing businesses. Each segment represents a different combination of the seventeen parameters of the model (the Forum 21 Model) we have developed. Using a medical analogy these eight scenarios are the common colds, influenzas, high blood pressure, broken limbs, heart conditions and pregnancies of the business diagnostics world. They have relatively straightforward if sometimes painful or emotionally difficult solutions.
There are of course many rarer conditions too. Each condition has its implications for bankability and the steps necessary to be attractive to funding whether equity, loan or grant based.
However it is facilitated, there remains even in these straightened times for business support, a need to support small businesses in better understanding and enhancing their bankability. Traditional approaches to business development planning based on documenting over 20, 30 or 40 pages the “best set of positives” we can possibly tell about our businesses need to be replaced by cold and succinct understanding of where we are, where we wish to be, what we have to do to get there and how we can make sure it actually happens. The value adding capability, entrepreneurial type, change management capability and business as usual perspective on the business development challenge briefly summarised here can provide requisite insight and the platform for bankability transforming change.
John McMahon, Forum 21 Ltd. Cambridge and Dublin