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Tackling the growth-efficiency feud

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Tackling the growth-efficiency feud

By Boh Wai Fong

 

Many Singapore firms, both small and large, often have the twin goals of ensuring efficiency in their operations, while creating growth opportunities for the firm through innovation.

However, these twin goals of innovation and efficiency often compete with each other, requiring focused resources and energy, resulting in unsynchronised operations and discrepancy in meeting objectives. In fact, we often hear small and medium-sized enterprises (SMEs) complain that they face significant resource constraints, which limits their ability and energy to innovate. Hence they can only afford to focus on improving the efficiency of their current operations and processes.

Firms face a dilemma when they struggle to find a balance between innovation and efficiency. This is well captured by management advice in their need to be ambidextrous - to exploit the opportunities that they have and increase their efficiency, while exploring new possibilities and investing in innovation for future growth.

Exploitation entails leveraging existing information and competencies to increase efficiency in a firm's current approach and processes. Exploration, on the other hand, is the pursuit of new knowledge, risk taking and experimentation leading to innovation.

Management research has shown that the most successful firms are ones that are able to balance exploration and exploitation.

The standard advice doled out to firms on how they can balance exploration (focusing on innovation) and exploitation (focusing on efficiency) is to structure them in a way that some units focus predominantly on exploration, while others emphasise exploitation.

Google, for example, followed this advice in creating a new corporate structure. It created a parent company called Alphabet to manage different units, including its core business such as Google Search, which helps the company to continuously exploit its innovations to provide resources to fund units such as Google X, which focuses on exploring breakthroughs like the driverless car. The separation of units to focus on exploration versus exploitation allows each unit to develop and hone a set of capabilities that are suitable to nurture innovation or efficiency. Such advice about structuring different divisions to focus on innovation exploration versus efficiency exploitation may work for large, multi-national firms, but it means little for SMEs which do not have the manpower to scale multiple divisions to focus on different goals.

Nanyang Business School is conducting an ongoing research and training programme focusing on innovation in Singapore SMEs and startups. It has interviewed and assessed 83 SMEs and startups. Preliminary findings have revealed several interesting ways in which resource-constrained SMEs and startups adeptly cycle between exploration and exploitation to achieve both innovation and efficiency.

One key practice is to use current opportunities to build resources and cultivate the capability to allow firms to expand to adjacent sectors. This was the approach adopted by a Singapore consulting firm which had initially focused solely on advising clients on strategic issues, but soon realised that clients often recruited another brand consultant to help implement the recommendations provided. As the firm's CEO realised that his team was sufficiently creative and experienced to move into brand consulting, he began to expand its services to help other companies implement the strategic recommendations generated in the initial phase of the consulting engagement.

He then became aware that the successful clients with strong brands would often choose to franchise their brands, especially looking for overseas franchisees. This created another adjacent opportunity for him to expand, as he cultivated the necessary resources to help broker overseas franchising opportunities for his most successful clients.

Another example is a local firm that started by providing entertainment systems for coaches travelling between Singapore and Malaysia. By observing existing clients, the company saw an opportunity in customers' complaints regarding insurance claims and misbehaving drivers. The founder figured that he could provide a vehicle monitoring system with his expertise, experience and available products by restructuring hisexisting resources in a novel way. This allowed him to move into an adjacent sector, and he subsequently expanded the customer base to include heavy vehicles such as freight trucks.

These examples illustrate the resourcefulness of firms that were able to explore and innovate by moving into new sectors while exploiting current opportunities and increasing efficiencies in the process.

Sometimes, as firms move from an exploration phase to an exploitation phase, even small companies often need to restructure themselves internally in order to facilitate the focus of the phase.

For example, a small retail firm dealing with shoes and bags was originally in an exploration phase, trying to understand the tastes and needs of female versus male customers, and had organised employees along these two groups. As the company grew and scaled up, it became clear that inefficiencies were surfacing due to organisation issues. The firm moved quickly to restructure into specialised teams - product development, marketing and sales - which oversaw both men's and ladies' needs. Initially, team members had difficulty adjusting themselves to new roles, but the CEO ensured that evidence of improved efficiencies would be shared quickly among team members. For example, with the new structure, retail clients could easily communicate with one designated contact, and the sales persons in charge of specific retailers could make a one-stop visit to meet their clients. The evidence of improved efficiencies made the team more receptive to the new organisational structure.

An information technology solutions firm also adopted a similar approach. The CEO had observed that an internal technical team had become inefficient - a result of lack of competition, as the sales team had done their job well by marketing the products and services offered by the technical team. To increase the efficiency of the team, the CEO boldly decided to spin off the technical team into a separate subsidiary and to delink the sales team from the technical team, so that the sales team would be able to sell products and services not only from the spin-off technical subsidiary as well as third-party vendors. This forced the technical team to operate at the same level of efficiency as other competitors.

These examples showed how small local firms, despite the constraints faced regarding manpower and financial resources, are able to position themselves for growth and success, if they have the resolve and resourcefulness to balance innovation for growth (exploration) and efficiency (exploitation).

About the author

The writer is associate professor of information technology and operations management, Nanyang Business School, NTU. She is conducting a training cum research programme that helps key decision makers of Singapore SMEs and startups evaluate where they stand compared to others in the industry, with respect to their innovation skills, capabilities and decision making preferences. Participants of the programme are then invited to a workshop that enables them to understand how to make sense of their profiles. All interested SMEs and startups can contact Prof Boh about the study.

This commentary was published in The Business Times on 29 December 2015.

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