Many entrepreneurs who diversify are finding difficult to sustain the new venture. The source of pain lies in the poor planning at the beginning.
Recently I met an entrepreneur from Maharashtra who has been very successful in his business of textile fabric manufacturing. The present turnover exceeds Rs 200 crores. The journey started with a small capital about 40 years back and it reached the significant level today due to perseverance and extremely sensitive to the quality of products. He is highly respected for delivery of his products on time and rigorous approach to quality control.
About three years back, he took a decision on diversifying the business to make presence felt in all across the textile value chain by setting up a new unit on ginning. The strategy was well conceived to make their presence felt across the value chain and in turn because it would help them to maximise the profitability, & ensure the quality all across the value chain.
He set up a ginning unit in the very prominent cotton growing area. The investment exceeded 15 crores. His penchant for quality is reflected in the kind of machinery selected.
The unit started off well. One of the family members was made as CEO who was to be introduced to business leaders as a part of a succession plan. The unit is fully geared up for full capacity utilisation. The raw material was abundant in the area. An expert in procurement from a leading public sector undertaking was taken as a consultant for aiding in the procurement of quality cotton.
There was no constraint in any area. The project was well funded. However, the expected outcome in terms of turnover or profitability was elusive for more than 18 months. The unit had been incurring losses since the beginning. There was no proper internal control. The elders of the family left it to the scion of the family to lead the business and kept themselves away hoping that he would do the justice. Even whenever they tried to intervene there was no receptivity to allow them to review the situation.
The elders were made to watch helplessly at the unsatisfactory conduct of the business in their new unit which is an awkward situation to them because they themselves had set up business at the young age and meticulously developed it over the period of four decades.
By the year-end, the true picture started emerging. There was no money left to buy the cotton. No money to pay salary. Delay is witnessed in servicing the term loan. The utilisation of working capital facility with the bank reached peak level. However the stock level or receivables level (against which the limit is sanctioned) is at the lowest level.
Disappointed at the turn of events, the promoters were contemplating to shut down the business and sell the same at slump price.
Reasons for failure:
Alarmed by the sudden disclosure of sordid situation in the business, the elders started analysing the reason for the bad performance of their business
The major cause of the poor performance is….:
Procurement of low-quality cotton at an exorbitant price had been going on unabatedly without heeding to advice from production and marketing teams.
There was no system of accountability. The organisational structure and business processes are not well defined. Setting standards and tolerance limits was not given attention.
CEO did not give enough attention to reign in the activities of the procurement section which was allowed to have unbridled freedom. It may be due to inexperience and lack of knowledge on the importance of internal control and keeping the closer watch on the performance of various designated officials.
Secondly, CEO himself was showing laxity in attending office like showing up for few hours and that too very irregular in the timing of the visit. Further, he has been operating from home which is about 200 km away from the factory. This has created a communication gap between him and the other employees.
The business is closely held family venture however, the elders did not exercise enough oversight even at the back end like asking their group finance head to seek regular reporting from the accounts manager of the new company. If that were to be in place, it would have red flagged the events then and there. Corrective measures could have been implemented before the situation deteriorated.
What were serious issues, now considered obvious:
There were mistakes on the part of elders. They were very successful as entrepreneurs and not experienced the crisis like situation as above because they themselves took care to attend to every detail to ensure that their venture does not suffer anywhere. The secret of the success was they were giving serious attention to all the issues, however, minute it may be.
They were little lax in the new venture because they thought it is an obvious job of their CEO and he would take care of his own volition.
He is the younger one in the family, the affection may have prevented them from monitoring the performance.
Had elders of the family put proper business management policy and risk management system while handing over responsibility to the younger one of the family to head the company, it would have prevented the catastrophe, now being faced by them.
Also, it is the best way of implementing transition planning because going forward, the younger ones will have to be moulded to lead the diverse business.
What would have averted such a situation?
“If you fail to plan, you are planning to fail!” ― Benjamin Franklin
It is well said and contextually relevant here because a business started without a plan to make it successful, may not succeed at all. However experienced the promoters are, however strong the net worth, business, every new business need to be approached as if it is a new experience.
During our interaction with the family, I could clearly make out that there was no sufficient thought process and had a very hazy picture at the beginning itself. The business was initiated in a very haphazard way from the beginning.
A well-prepared DPR would have averted this situation. A professionally prepared detailed project report(DPR) would shed light on various dimensions of the business; be it industry, management, business operations as well as financial aspects.
Please read: Planning for growth: How prepared you are?
However experienced the promoters are, they need to treat every new venture as unique and plan need to be personalised for the context- nature of the activity, location, customers etc. That will mitigate the chances of failure.
Many SMEs are facing challenges in the areas of operations risks despite being well funded and supported by successful, business families. A methodical approach to planning for new business will mitigate the risks and will be rewarding. It applies to all the businesses irrespective of size.