How disruptive thinking can drive profits for SMEs
Globally, Small and Medium Enterprises (SME) account for over 90% of all businesses and over 70% of total employment. At an aggregate level, their contribution to the GDP of their respective economies ranges from around 60% in the high-income OECD economies to around 20% in the low-income non-OECD countries. Irrespective of the above, governments the world over are continuing to focus on improving the competitiveness of the SMEs through efforts to increase their productivity and share in the national income. . To remain competitive and successful in today’s global market, SMEs need to leverage the current dynamics in the business environment and embrace non-linear strategies. Disruptive thinking, as a non-linear strategy, plays a key role in dealing with this dynamic and can help SMEs adopt newer processes to accelerate growth. . Unlike incremental thinking, disruptive thinking allows SMEs to explore new markets and industries. While incremental thinking focuses on granular changes that are often horizontal and affect the current plane of innovative techniques, disruptive thinking is unique to SMEs because it helps them enter new market niches and target a neglected section of people.
Definition of Disruptive thinking
Harvard Business School Professor Clayton Christensen defines disruptive thinking as the thought process through which SMEs with fewer resources target segments overlooked by incumbents and deliver a unique and more functional product or service at a lower price. Subsequently, the entrants move upmarket with these offerings, thereby appealing to incumbents’ mainstream customers.
Disruptive thinking involves challenging assumptions, looking for new and creative ways to do things, and considering unconventional ideas. For example, disruptive thinking occurs when SMEs in rural areas offer jute or bagasse packaging to disrupt the plastic dependencies. Take the example of Netflix, which is a leader in Streaming Services globally. Initially, Netflix started off as a DVD mailouts to movie buffs in the US, a segment that was not adequately served by the then leader Blockbuster. Six years after inception, Netflix decided to disrupt its own model by embracing the digital platform as a distribution channel for its movies. Currently the company has over 2.41 Million subscribers and has an annual revenue run rate of close to US $ 8 Billion.
Need for disruptive thinking for SMEs
Traditional global economies have been built and sustained using scale as a major force multiplier for improving productivity and aggregate output. Consequently, while the growth of SMEs has been impressive, it continues to deal with structural challenges and an environment that is more favorable towards the large businesses. As a result, the traditional factors of production – Land, Labour and Capital – have been skewed in favor of big companies. The arrival of the Information economy has had a salutary effect wherein the small companies could now have access to Information as an asset to drive the businesses. Secondly, in times of external threats to business – pandemics, wars etc. – the impact on the SMEs is typically much higher than on its larger counterparts. In many economies, SMEs have adopted a survival and lifestyle mode to deal with the daily challenges of growth that include capital shortages, human resources challenges including hiring and retention and market outreach challenges. Against this backdrop, disruptive thinking keeps SMEs from slipping back to the survival mode and propels them to the developmental mode. For example, Netflix, an erstwhile SME, has diversified beyondits streaming media to cover smart televisions; but, to diversify and cover the gamers (who are mostly online), Netflix created an in-game section. Some of the other reasons SMEs must disrupt are as follows:
SMEs should challenge their status quo to not only adapt to changing market conditions but also to embrace them in order to develop novel and more sound products. When it comes to diversification, SMEs can adopt disruptive thinking to tweak their engineering process and challenge the way a product is created. This can change the size and scope of products across the industries that SMEs serve and enable them to offer products at a lower cost but at truly differentiated quality and functionality parameters. Companies that have already diversified through disruptive thinking have an extra cushion to ease the transition to a post-COVID-19 world. A truly disruptive thinking has been adopted by Apple Computers since the days when it almost went bankrupt. Since then, Apple has been at the cutting edge of disruption (ipods in 2001, iTunes in 2003,iPhones in 2007, iPads in 2010,) which has led to it becoming the first business in the world to cross One Trillion Dollars in market capitalisation in 2021.
Digital economies are posing a set of challenges to SMEs. Competition for talent, already intense, will push the SMEs to look at smarter alternatives. Emergence of Artificial Intelligence (AI) is a potential disruptor that needs to be adopted by the SMEs to deal with the resource-driven shortages. Another interesting strategy for the SMEs could be to dovetail with the startup economy to pursue disruptive tactics while keeping the existing lifestyle business insulated. . SMEs need disruptive thinking to deliver high quality with optimum resources to thrive in this dynamic environment. Disruptive thinking can help SMEs with new product concepts, new materials, and better organizational plans. It can also help SMEs to influence social and technological changes in the organizational environment.
Much of the disruption emerges from the recognition of a need in the market and the inhouse challenges that the SME faces in the status quo. With the rise of ESG as a key driver for businesses, startups have an inherent advantage over the traditional large businesses who have fairly rigid structures and carbon-heavy assets to dismantle. The SME can and must integrate Sustainability into the operating framework of the enterprise. Sustainability also appeals to the overall sense of ‘purpose’ of the enterprise that the SME will be able to integrate within its structure and its workforce. Switching to a more ‘green’ source is also much faster for the SMEs and the ensuing efficiency could work in their favor by impacting their financial metrics.
Application of Disruptive Thinking in SME sectors
Financial planning and analysis
CFOs require disruptive thinking to create financial models that can extract data from different sources and manipulate them to create targeted plans for loans, collaterals, and more.
Additionally, disruptive thinking allows SMEs’ FP&A teams to analyze macroeconomic trends, develop product-level projections, and calculate the return on investment (ROI) on their marketing expenditures to find chances for business growth. The CFO of an engineering company in India used the pandemic to create IT infrastructure for different categories of employees and their need to come to the factory for work. Post-pandemic, the company continues to leverage the same infrastructure and has achieved a 25% reduction in its operating expense. This has allowed them to focus on creating new products for their customers which was earlier going slow due to resource issues.
AI and IoT
A recent survey shows that 61% of the professionals agree that adopting AI within the workplace has increased the workforce’s productivity. But to do this judiciously, they need to understand Ai’s nuances through disruptive thinking. For example: Disruptive thinking can allow SMEs to use no coding frameworks to create efficient dashboards for clients.
The Internet of Things (IoT) paves the way for a connected enterprise paradigm in which all business operations are digitized through disruptive thinking. This helps create systems to leverage technology to create more efficient processes and reduce manual errors.
Firms offering returns-based pricing have introduced the true disruption, which is currently taking place in the consultancy industry. Time-based pricing is still common, though. Consulting has been sluggish to adopt outcome-based or value-based pricing compared to other human inputs-based businesses like the legal sector. SMEs need to utilize this, which will be a new norm in the consultancy sector because of disruptive thinking.
An SME struggling with high overhead costs can use disruptive thinking to find ways to streamline its operations and reduce expenses. This could involve rethinking traditional business models, implementing new technology, or finding new suppliers.
Budgeting Systems, GAAP Conversion, Control Architecture, Risk Management Framework, etc., can help SMEs to track their business finance and operate it effectively. So, disruptive thinking also helps in the long run for operational efficiency.
Examples of disruptive thinking for SMEs
Netflix is the first company that comes to mind when discussing disruptive businesses. Netflix, a model for all emerging small businesses, was first just a seed of an idea. When Netflix first launched, it was a DVD rental service. At this point, the company competed with Blockbuster and LoveFilm.
All of that changed in 2007 when Netflix decided to alter its business strategy completely. To progressively move away from mailing DVDs in the mail, the firm introduced the pay-per-view online video streaming service that many of us are familiar with today.
This decision dramatically impacted the DVD rental market. A prime example of disruptive innovation supported by digital technology is Netflix’s transition to a streaming-based business model. Alternative and competitive businesses could not compete, while Netflix realized the benefits of its innovative thinking. Hence, if SMEs see an idea that disrupts the conventional market, they should take the necessary plunge and execute it before someone else does.
Since its founding in 2008, Airbnb has caused a resurgence in the hotel sector. Although we’re sure you’ve heard of it, the business operates an online home rental marketplace. It was created by two people who could not pay the rent on their flat. They thought it would be a good idea to set up a makeshift bed and breakfast in their living room using a blow-up bed.
Since then, it has gained enormous popularity among travelers worldwide, enabling users to travel to their ideal locations for just a small portion of the cost of conventional hotels. More than 9 million visitors were hosted by Airbnb in its first five years of operation, illustrating the company’s quick ascent to popularity.
As Clayton Christensen said, Disruptive innovation and thinking needs smaller businesses to utilize their scarce resources to disrupt big markets dominated by big players to create new services accessible to larger markets.
After its 2010 San Francisco launch, Uber quickly became one of the world’s most valuable and well-known brands. Uber is less expensive than regular taxis, but that isn’t what has won over millions of users. Uber’s approach to the market and business model gave them the biggest edge when trying to disrupt an established market.
Uber made a system that didn’t believe it could or needed to change simpler. Their expertise in an industry that, in some ways, took customers for granted allowed them to meet modern consumers’ expectations successfully.
Uber made ordering a cab easier, removed any doubt about when the taxi would come, boosted user safety by providing driver names and car models, made the service cashless, and ensured that a single app would function in all cities and countries. Additionally, they did this by creating a service that no one knew they needed but that everyone enjoyed. Hence, SMEs need to use disruptive thinking to make user experience seamless and unified on a global level.
As we may have seen, disruption occurs in many ways. Any SME requires a unique model and innovation to cater to the previous challenges seen in various segments. These challenges could be in the financial department or the entire managerial strategy.
Financial players in the organization need to identify ways of sealing holes to mitigate losses. Thus, there is a need to think outside the box and embrace systems that safeguard the company’s returns! It’s good to know that the effects of disruptive thinking are positive, and businesses need to focus on this now.