Could SMEs set the benchmark for good business behaviour?

When does the business focus shift from the needs of the customer to the needs of the shareholders and investors?

Every year, about 50 million businesses start up around the world. More than 500,000 businesses start up every month in the US. Even in Australia, about 30,000 new businesses start every month.

Most of these are micro and small businesses. Over time some will grow to be medium and potentially even large businesses.

Ultimately every business starts to serve customers – without customers there isn’t a business.

In the light of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry I’m curious about how and when the focus shifts from focusing on the needs of the customer to focus on the needs of the business — and shareholders and investors.

When it’s a one-person microbusiness their entire focus is on the simplest of terms — to gain and keep clients and make money. Pretty much the same underpinning business model as the large corporates.

Small and Medium Enterprises (SMEs) are often in business for so much more than just profit.

When asked to rank the measures of a successful business, research participants in the NAB Moments that Matter painted a surprising picture.

Only one in 3 (32%) rated high profits as an important measure but this was well behind other things such as financial management (58%), positive word of mouth (56%), productive staff (49%) and happy staff (45%). Only 11% ranked large turnover as a measure of success.

It would be easy to believe that corporate success is only measured in terms of profit.  Perhaps it is this measure of commercial success that drives a range of behaviours as highlighted by the Royal Commission.

Most Corporations follow to some degree the teachings of Professor Michael Porter, Harvard Business School: reduce competitors by erecting high barriers to new entrants, creating strong customer loyalty through branding, and reduce the clients’ perception of competition through product differentiation – just to name a few of the strategies.

I’m curious at what point in the business life cycle do SMEs potentially risk crossing into the bad behaviour being described by the Royal Commission?

As a business grows and starts taking on the strategies necessary to ensure financial success, how do they maintain their alternate focus and protect themselves from building bad behaviour into their systems and processes?

The banks and insurance companies may not have started out with the intention of misconduct; it’s like the wearing away of a sharp rock in a stream, it happens over time.

SMEs hold themselves as separate and different to Corporations so I believe it is helpful to examine how they can stay “above” institutionalising misconduct in their business.

Rod Sims, Chairman of the Australian Competition and Consumer Commission (ACCC), gave a major speech a few months ago in which he offered several economic reasons for the behaviours of Corporations.  His reasons are helpful in comparing Corporations with SMEs when it comes to opportunities for bad behaviour and the subsequent impact of this misconduct on the customers.

I offer my own personal comparisons, from the customer’s perspective.

1. Meeting customer needs may not be the main way companies succeed.

Corporations: As a customer of a Corporation it is easy to feel invisible and this happens because many Corporations are fixated on reducing the impact of potential competitors. They raise barriers to entry, defend their current position and the customer needs are often lost as the Corporate focus is on the competition.

SME: Meeting the customer needs is what guarantees their success. Without customers, there is no business and many SMEs choose to niche as a way to succeed.

Comment: Because they are not large enough to eliminate their competition SMEs differentiate through creating and owning their own market niche.

2. Executives are under considerable share market pressure to increase short term profits and increase share price.

Corporate: Shareholders expect solid, reliable and high dividends. Executive bonuses are attached to meeting targets. Executive lifestyles are attached to receiving bonuses. Employee KPIs at every level are set around sales targets. As we’ve seen at the Royal Commission, this enables, and to some extent encourages, the bad behaviour.

SME: The business structure is different, so while there is no share market pressure, there is pressure to make profit for the business to remain viable, to pay employee wages and pay suppliers and to provide income for the business owner.

Comment:  The underpinning motivation for ongoing financial viability is internal rather than driven and motivated by external pressures.

3. The poor behaviour is unpunished by the customer.

Corporation: Even if the customer knows they are not being treated as well as they might wish, it’s very common not to “punish” the corporation by leaving due to “too difficult and/or too costly”. I’m sure we’ve all had days when we wanted to change banks and “it’s just too difficult” so we stay. It can also be extremely difficult to actually compare the offerings between the Corporations due to complexity of contracts and bundles.

SME: In many cases the SME knows they are extremely vulnerable to being punished by their customers. At any point in time customers can choose a different business, and clients can choose not to extend or renew contracts. The SME is ever vigilant to the risks of how they are seen and perceived by their clients.

Comment: Both Corporations and SMEs know that how they handle complaints can develop and exaggerated the level of loyalty. If an SME is engaging in some form of misconduct and they fess up, “fall on their sword” and apologise it is generally perceived as being genuine.

When the same situation happens with a Corporation it’s often seen (by the Corporation) as “Oh it’s too bad we’ve been caught and now have to change our ways” which is happening now with the Commission. The customers are more cynical and angry with Corporations than with SMEs.

4. It can be a race to the bottom vs a race to the top

Corporations: Once the edge is gained through poor behaviour there is a belief that “everyone else is doing it, so we have to as well in order to compete” and worse “there is no reward from the market place for staying true.”

SME: We’ve seen this same behaviour in some industries where similar “race to the bottom” thinking and behaviour has gained traction over time.

Comment: In the SME world the “race to the bottom” actually provides opportunity to “race to the top” – and especially today through social media and creating a niche following through holding firm to the “higher ground.”

5. Loyal and long term customers feel badly treated when new customers pay considerably less than they do. This is both common, and legal.

Corporation: This practice is seen by existing customers because the advertising makes it so very obvious. As mentioned in point 3 above, some times the customer doesn’t know about the bad behaviour. When a client is paying $100 a month and they see a billboard ad for “New customers can sign up for 2 years for $50 per month” they feel “badly done by” and “ripped off.”

SME: Ultimately this is a tried and true method used by businesses to attract new clients and SMEs use it extremely effectively. It may not be as obvious to other customers and in fact may not “bother” other customers to the same degree.

Comment: For example say a local yoga studio has a few hundred clients. They all love the studio and the teachers and the clients want the studio to succeed. The studio offers an introductory special. Existing clients are more likely to encourage their friends to take up the offer and come to the yoga studio as well and less likely to feel “ripped off.”

The customer is invested in the success of the yoga studio. This is common across SMEs to a significantly greater extend that in Corporations. The customers want “their” small business to succeed.

6. Executive loyalty to their company results in them sailing closer to the edge of what’s legal than they might in their private lives

Corporate: Corporations are governed and equipped with teams of people to help understand what is legal and what is not. When the lawyers say “it’s not illegal” is this then seen as permission, and a green light to go ahead even though it may be based on a dubious premise.

SME: Most SMEs are running their businesses with significant focus on what they need to do every day to stay viable. Depending on the size of the business, legal and HR compliance is sought through engaging outside professional expertise.

SMEs often don’t know what they don’t know therefore do not actually seek advice and may inadvertently engage in misconduct. That said, of course ignorance is not a legal defense.

Comment: Most SMEs are consistent between how they are as a person and who they are as a business person.

As I worked through Sims points I realised that the reason most SMEs are in business is so very different to Corporations.

Ultimately Corporations are in it for profit. There is a strong belief in the community that the Corporates make their profits through and are generally guilty of bad behaviour, “they are all the same” and ultimately the customer feels they don’t really matter to the Corporation. Corporations are actually made up of thousands of people and they each have their own and varied reasons for being in their roles and certainly not everyone is guilty of misconduct.

SMEs are seen as being the ones who really care about customers and are more customer centric – because it’s about SME viability

As we see more and more people starting and running businesses is it possible to think that small business might set the benchmark for what constitutes good business behaviour?