What is keeping SME owners of HVACR industry awake at night?

ITM Group Media’s Executive Editor Subhajit Roy, in conversation with Arup Majumdar, CEO of Trariti Consulting Group on how the HVACR industry can cope with the challenges and opportunities brought about by COVID-19. TCBU will be releasing a series of 5 reports on this topic through candid one-on- one discussion with Arup Majumdar.

Subhajit: We will be discussing a range of topics and issues that are facing businesses in turbulent times, specially focusing on the issues faced by the small and medium enterprises (SMEs) in India in the HVACR market. Over the last decade, these enterprises have been able to survive and thrive through various economic ups and downs and have managed to grow at a relatively stable rate. The unprecedented challenges thrown up now have created both a crisis as well as an opportunity. It is time to step back, reflect, and prepare to face the future. We will be discussing this topic in a series of articles with Arup Majumdar, CEO of Trariti Consulting Group. He has talked about the disruptive revolution, and so let’s start with the topic of disruption.

Arup: I am glad to talk about this topic. 20 years back, I first read an article published in the Harvard Business Review on “Disruptive Technologies”. It was an eye opener to understand the implications of disruption on businesses. We were facing a market slowdown of the Asian financial crisis – all the markets were down, and there was little we could do about it, if we stayed with our original way of doing business. But we applied the learning of “Disruptive Technologies” and introduced a radical new technology in the HVACR industry and made a quantum jump in business results. It involved developing a strategic mindset to approach a potential market threat or opportunity. As it turned out, the disruptive technology we introduced, allowed us market entry and expansion to an adjacent white spot, and significantly improved the profit mix of the company.

Subhajit: That is great to know. How would you relate to disruption in a broader perspective?

Arup: In a wider context, I think there are 3 major disruptions that we might face in our lifetime. Each of these disruptions will bring a paradigm shift in the way we live and the way we conduct business. It will have profound implications. You can label these to be as significant in their impact as “invention of the steam engine”, “industrial revolution”, or the “Internet revolution” etc., and I would label this as a “disruptive revolution”. Each revolution is a cusp point, where we leap from one phase to the next phase, bridging a wide gap that is wide enough to make a significant difference in the way we live and conduct business.

Let me explain the 3 ways we look at “disruptive revolution”.
The first form of disruption is disruption by natural cause, like disease – COVID is an example.

The second form of disruption is: Disruption by the rapid adoption and acceleration of the technology landscape – Artificial Intelligence, network connectivity, IoT as examples.
The third form of disruption is: changing awareness or preference in customer buying behaviour. Embracing these disruptions with agile and innovative approaches, and embracing a new way to live life, will define the future.

Subhajit: That’s interesting. Let us deep dive to get your views on the first one: disruption by COVID. This is challenging everyone.

Arup: Out of the 3 disruptions that I talked about earlier, disruption by disease is the most urgent one, that requires us to put the car light on low beam focus. Let us for a moment put ourselves in the shoes of a company that had been sailing smoothly all along. Then suddenly comes up a barrier. The man at the top, Managing Director, is befuddled.

What is keeping him up at night? Is it growth, market share? Is it profitability? Is it the motivation of people? Is it the cost of production? Is it customer retention? Is it the agility to respond to market challenges? Is it his competitive position? Are your departments working in silos and you are unable to align all efforts, especially with social distancing? Or is it basic survival.

The first advice is to embark on a transformational journey.

Subhajit: The word “transformation” seems hard to grasp, it seems as if a major surgery needs to be performed. How well can a SME perform such a surgery?

Arup: I agree that the word “transformation” may sound like something that’s out of reach, fuzzy and nebulous. But it is actually not. Transformation is all about numbers.

Let me share a story. During the SARS epidemic (similar to COVID-19), when all the markets were down, as a sales account manager, I was stuck. I did not know how to grow sales. When I assessed each of my key accounts, I realised that my share of wallet had potential to grow. I could take away some market share from competitors, which we did not do earlier, as the price points were lower. We decided to play with the price, offered special rebates. We knew that the competitor would respond with a lower price offer, which they did. But we had taken a step ahead before they reacted. We sat with our customers in discussions with their sales team (not the procurement team) to understand what could help their sales team in selling more. We became a part of their solution and not a problem. Brainstorming was held to jointly find out ways to grow sales. Even though the competitor offered lower prices, we got the business.

So, the learning is: Look at each and every element of your P&L. Reflect on what can be done. There are 10 short-term actions that can be taken by any SME to improve business performance. Each action touches either the revenue line or the cost line in the P&L.

The revenue line includes: 4 lines in margin improvement:
1. Pricing actions.
2. Margin improvement through rebates or discounts.
3. Increasing sales force effectiveness.
4. Identifying “white spots” to grow the business.

The cost line includes 6 areas of cost reduction:
1. Cost reduction through procurement.
2. Cost reduction through “design to value” of existing products.
3. Reduction in manufacturing footprint through creative means.
4. Cost reduction (and sales increase) through supply chain improvement.
5. Reduction in SG&A
6. Improvements in cash-based items (accounts receivables, payables).

The above 10 steps are short-term concrete actions that can be taken methodically.

Subhajit: How would you address the actions to be taken on the sales front? Cost reduction and optimisation is in the hands of the enterprise but sales increase is more difficult in tough times.

Arup: Sales leadership is critical at this stage. Sales focus has to be razor sharp now, like a tiger on the prowl.

Focused efforts will be needed to convert prospects to new customers, innovative go-to-market strategies need to be brainstormed, planning and prioritising customer accounts has to be done for retention of customers, qualifying customer opportunities to ensure higher conversion rate, positioning products or services for different customer segments and revving up CRM building blocks for improved sales productivity and excellence – all these are specific activities that have to be addressed. This is where team collaboration and leadership is key.

While you are doing all these activities, you have to reflect on the “why”. Why did you let this happen? What was in your control that you did not focus or invest enough time in, to build up the resilience of your business? There is one fundamental answer. You probably did not have a well-structured strategic planning process.

Subhajit: What do you exactly mean by Strategic Planning Process?

Arup: Planning is a core activity for any business, and it is done at different levels of depth in organisations.

Large companies make it a very extensive exercise while SMEs tend to do it in a less structured informal way. SMEs do recognize the value of strategic planning, but mostly due to resource constraint, where typically the decision maker is a single person, it takes a lower priority as there are more urgent pressing issues at hand. It also touches at the heart of the organization structure, as to how much is delegated with accountability, and how much is centralized. With the new generation coming on board, we are increasingly seeing the involvement of the second generation. We have seen the impact a strategic planning process can make, across many organizations. The important word here is “process”. It means imbibing a culture of planning that becomes the gene of the organization and every member of the company thinks and plans around this process.

Subhajit: What are the elements of this process?

Arup: There are five elements to this process.The first is a 3 – 5 years plan that focuses on the top line. Every company should have a well-defined roadmap on future top-line scenarios. The building blocks are: addition to the top line by organic market growth, pricing action (can be a plus or minus), mixing of product portfolio, share gain or losses in certain existing segments, revenue growth coming from new product introductions, new offerings including service bundling.

The second is to look at the same time horizon but focus on the bottom line. If the top line does not hold as per plan, what are the cost levers that need to be pulled at the right time to ensure you deliver consistent bottom-line performance. There are mostly operational cost levers.

The third element is the next-year plan, quarter by quarter. Plans should not be built on a hockey stick pattern – a soft first and second quarter and a heavy third and fourth quarter. Look at historical sales cyclicity to ensure that the plan is well-balanced. Identify the levers that need to be pulled, quarter by quarter, if the bottom-line plan does not hold. Don’t wait for the last quarter to do the miracle recovery on cost-reduction. By the time you implement the cost reductions, it is too late in the year.

The fourth element is your HR strategic roadmap. Identify your current skill set and the pool of talent you have. Define the competency needed for the future. Create the plan to have adequate bench strength to support your growth initiatives, either internally or through external hires.

The last and the fifth element is to look at a time horizon that is beyond your planning cycle. What are the megatrends that will influence your industry. How are you planning to prepare for the trends that are clearly giving you the pointers for R&D investment, investment in upskilling your people, so that when the time comes, you are ready to face it?

Subhajit: That is great to know. In our next article we will focus on how to specifically go about the transformation journey that is so critical for all our SMEs. It starts with the fundamentals – building a winning team.

Authored by
Arup Majumdar, CEO, Trariti Consulting Group