Emerging market CEOs and the Catch22 conundrum they face
First generation entrepreneurs in emerging markets (and a few second/third gens as well) are facing a conundrum today. It’s reached a stage where for most $1-5 billion companies it’s almost become a Catch22 situation.
Do they invest in building the business or do they invest in building the organization?
In order to avoid any misconception, let me clarify the terms I am using:
Building the business would mean growing topline, adding capacities, growing into new markets, strengthening domestic and other established markets, growing upstream and downstream across the entire value-chain of the business, strengthening the higher bottomline generating portfolios and generating future product/service lines. This would include both organic and inorganic strategies.
Building the organization would mean investing in IT infrastructure, building a technology enabled backbone across key processes and functions, investing in talent, building the right culture, raising quality standards for manufacturing and work environment, investing in and raising the levels of HSE (Health, Safety and Environment) and investing in CSR.
To many theorists, academicians and indeed even consultants, it may not appear to be an Either/Or choice and yet for some key reasons, for the specific group of entrepreneurs described above, it is. And we could go seriously wrong in meeting their needs, if we did not understand this challenge.
The situation is very different for mature organizations. Especially the ones in the developed world. They are resigned to far lower bottomlines, most in the lower single digits. They have deep pockets. They have established organizational processes and investing in organization building is factored into their cost and budget principles. Employees have excellent facilities, policies that provide comfort, technology enablement is near 80% or more, staffing is appropriate to size of business, talent is invested in and there is significant budget for quality and HSE.
Compare this to the group I am writing about, and you will find minimal investment in people, shortcuts to HSE are rampant, CSR is a formality in most cases, put in place to please partners who insist on it, while key IT investments are made in risk management and control, all other facets of IT enablement are below par. Employees in these organizations, as a result enjoy far less work-life balance, work in a culture that is not attuned to supporting their needs in balance to the needs of the organization, have thin leadership at the top and middle and everyone is paying a price.
It is no surprise that these organizations struggle to hire and retain talent. The Employer Brand proposition, compared to a more mature organization is extremely weak. The absence of process orientation creates many inefficiencies in the system, and there is many a slip between the cup and the lip. Running these organizations at these scales has become unwieldy and there are not enough hours in the entrepreneurs day, to run them.
These entrepreneurs are not blind. They see this. They know they need to change. So why then, does this become an either/or choice for them?
Most, if not all, such entrepreneurs have plans of doubling and tripling their topline over 3 and 7 years horizons. Given their highly disruptive growth rates (most of them would have grown to such size in a period of 7-15 years), they would not have deep pockets. As a result, the key need for every one of them, is ready access to capital.
Given their expansion plans and the level of investments required, debt is too expensive, and most of them have balance sheets that will not sustain more debt. The only two resources available to them, for capital then, are the capital markets or PE infusions. In either case, they have to show healthy bottomlines, that are attractive enough to investors over other investment choices. And this is where the Catch22 comes in. The primary need then, is to protect the 15+% bottomlines they have been able to manage over the last decade. It is this level of appreciation that encourages the market or the PE players to invest in these companies.
So if you were to look inside the minds of any of these entrepreneurs, you would find that they have a critical appreciation of the need to invest in organization building. Indeed their organizations operate at lower efficiencies without such investment. But each $ channeled into this activity will reduce the profits they are able to demonstrate in a short-term horizon of about 3-5 years, till these investments begin to bear fruit. Each $ invested internally will go towards reducing the profitability %ages that are essential for them to maintain in order to keep the capital markets and PE investors coming back to them for more.
This Catch22 is what is keeping these entrepreneurs awake. In the real world, the choice they make is simple: Grow the business. We will deal with the organization later. Garner as much funding as possible today, and we will figure out how to invest in organization building at a later stage.
So what can be done?
Investors need to balance between long-term and short-term compromises. They need to clearly chart out strategies that enable organization building that keeps pace with business growth. It is no surprise that these organizations are constantly playing a catch-up game that focuses on building the organization as a follow-up to building the business. This is unhealthy. But without the investment community realizing this, and supporting both the needs, we will lose far more than we will gain.
CEOs of today are slave to the quarterly reporting and most of their strategic decisions are designed around the next quarter. It is no wonder then that we have seen a rapid dilution of ethics, and long-term focus in the last 2 decades across the corporate world.
I believe the man who controls the purse strings and key decisions needs to stop idolizing Gordon Gekko aka “Greed is good” and needs to go back to Aesop and learn from the fable of The Goose that Laid the Golden Eggs.
Delayed gratification. Sowing for the future. Reinvigorating the soil. Are all virtues we need to rediscover. The Gordon Gekko’s of the world don’t need to think long-term, but leaders who are building businesses that will outlast them, have only the long term to think about.
- Redefining the Emerging Market Opportunity: Driving Growth through Financial Services Innovation
- Criteria for private equity moving beyond balance sheet