INSME's Interviews

"Helping SMEs to measure the impact of innovation"

INSME: The Enterprise Performance Improvement Centre (EPIC) that you manage develops business performance management solutions for SMEs. So your experience represents a privileged observatory on SMEs' capability to face growth and competitiveness.
Based on your experience, what do SMEs need to perform well in this respect within a globalised economy? How do you see EPIC’s activities assisting these enterprises in tackling these issues?

Dr. Golovanov: I was impressed by the actual presence of the globalisation issue in SME entrepreneurs’ real life while being in UNIDO missions in Uganda in 2000, Egypt in 2001 and Colombia in 2002-2003.  During the workshop and on-factory-site meetings, fish production entrepreneurs in Uganda showed clear awareness about new coming EU regulations regarding food and fish product import. In Egypt shoe manufacturers closely watched their main Italian and German competitors’ activities which impact their export potential. In Colombia many shoe manufacturers kept close look at the demand and marketing strategies of key international players like Bata, which subcontracted many of them, carefully analysed journals of Italian designers to keep-up internal domestic export production with trends both in shoe and textile sectors, looked for contacts with major importers from USA, Mexico and European Union.

Our assistance to the entrepreneurs in increasing businesses’ competitiveness and facilitating growth is aimed to be a practical one: we help them measure their businesses and start improvements. Each SME is a socio-economic system with it own resources and development trajectory. Having actual key performance indicators in hand, entrepreneurs can start systematically improve competitiveness, productivity, quality and become sustainable. One can hardly have such complex system like enterprise running in an efficient way without monitoring its business results.

INSME: Do you think entrepreneurs and small business owners are conscious enough of the demands posed by globalisation and the way to cope with these demands?

Dr. Golovanov: Not all of them. Well, in each country there are entrepreneurs proving excellent examples of well managed business developments strategies. They accommodates carefully planned and systematic improvement of productivity, quality, competitiveness, work based training of personnel in professional skills, setting up world class manufacturing principles and practices including updated knowledge and on-time updating of the production profile by innovative products.

But this is a minority. Most entrepreneurs are in daily routines (customers, supplies, management of internal processes, etc), some have feeling of growing heat but lack skills and options to initiate appropriate “defence” or “counter-actions”. They are mostly people with technical background learning how to run business during their own life experience.

That is why the issue of methods for SMEs to tackle globalisation draws the attention of the entrepreneurs at the relevant events run by Industrial Associations and Chambers. People want to learn.

In this view, the UNIDO methodology and software tools (Pharos–Business Navigator, Produce Plus and FIT-Financial Improvement Toolkit) are available to support entrepreneurs in strategic and production management.

Particular key performance indicators (KPIs) available in the software can be used for measuring and monitoring of developments at each step with business targets identified by entrepreneurs. All these help to keep control over the business development and avoid negative outcomes.

One may consider this methodology as a component of business culture which improves enterprise potential and increases probability of success in any important development such as for example introduction of new technology, industrial engineering innovations, world manufacturing principles and practices.

The methodology and tools are highly effective when applied by educational institutions e.g. vocational training in World Class Manufacturing Principles and Practices, Production Management, Strategic Management, Project and Operations Management Progression in modalities of Work Based Training, Foundation Degrees, etc.

INSME: Can you describe in short the peculiarity of the UNIDO methodology and tools you have just mentioned and the way they can help small entrepreneurs in strategic management and business improvement?

Dr. Golovanov: Yes, certainly. Pharos – Business Navigator software is a personal management information tool providing easy way to measure and monitor enterprise performance. It is made to be simple in each operation including amount of data required to collect, data entry, analysis of most important business performance indicators, defining business targets, planning production profile, simulating business decisions. Pharos was used in many UNIDO projects and programmes worldwide.

The vision of a business and business navigation is achieved in Pharos by viewing key indicators as lighthouses with green or yellow or red colors, by viewing various indicator graphs and benchmarking reports. The business navigation is supported by providing performance indicators of the enterprise with reference to costs, performance, quality, competitiveness, products, customer sales.

The Produce Plus module allows enterprise management monitoring, controlling and evaluating company production performance in detail. Produce Plus' six major traffic light indicators make it possible to compare current results with previously defined targets. The reports allow detailed analysis of production parameters such as product costing, labour and equipment efficiency, internal production standards.

The Financial Improvement Toolkit (FIT) is supplementary tool for strategic performance evaluation presenting time series of annual financial statements by Fixed and Current Assets, Liabilities and Equity, Income Statement.

The UNIDO tools were used in many UNIDO programmes for the last 10 years including Bahrain, India, Russia, Slovakia, Kenya, Uganda, Tanzania, Zambia, Ethiopia, Zimbabwe, Egypt, Palestine, Colombia, and Lebanon. Produce Plus software was used in Manufacturing Advisory Services in UK where multiple applications and considerable experience had been developed since 2000.

INSME: Can you highlight the benefits of this methodology? You say it’s a methodology aimed at improving productivity, competitiveness, quality, sustainable growth. But can you be more specific on how this translates into concrete benefits for small enterprises?

Dr. Golovanov: Of course I can. Concrete benefits are quite a number and they can be listed as follows:

1. Obtaining knowledge tools and practices to monitor and measure businesses, optimize decisions, eliminate inefficiencies systematically and maximizes use of available resources by the entrepreneurs.
2. Becoming more transparent and better prepared for national and international investors, increasing export potential.
3. Facilitating entrepreneurs’ capacity building in introduction and managing of innovations and new technologies.
4. Providing human resource developments, capacity in performance management, facilitating path to ISO 9000 standardization and meeting WTO requirements, decreasing SME mortality.
5. Delivering unique content and providing comprehensive package of services at acceptable cost level resulting in important Knowledge Capital gain.
6. Providing effective way to boost economic performance and sustainability of industrials sectors.
7. Providing measured and documented results with vital economic and industrial statistics to entrepreneurs, organizers and donors.

We observe the increased demand worldwide for the solutions facilitating SME productivity, efficiency, quality, competitiveness and sustainability indicating that it is “right time” for wide application of the methodology, tools and experiences in various countries.

This demand can be now addressed in a very practical and effective way. It is result of extensive joint developments and enthusiastic support by several UNIDO officers which contributed to basic methodology, know-how and implementation practices. These are Mr. Gerardo Patacconi, Mr. Otto Loesener and Octavio Maizza-Neto, former Director of Quality, Metrology and Standardization Division, now retired.

INSME: UNIDO Training Programmes for SMEs are based on the idea of “continuous improvement in business”.
Can you please explain this concept and tell our readers how it can be concretely applied in SME management and how the training programs based on UNIDO’s Business Performance Management Software might be relevant in this area?

Dr. Golovanov: The procedure of continuous improvement is a simple one. The following steps can be identified in it:

1. Measuring current business results (e.g. by UNIDO software)
2. Identifying problematic areas having actual measurements data
3. Formulating optional solutions which can potentially solve problems and bring improvements (new machine, production profile, production team change, imposing controls, etc)
4. Evaluating the options including impact of uncertainties and risks by simulating the major outcomes (business development scenarios)
5. Selecting the best (most effective) option
6. Implementing the best option in practice and monitoring it
7. Returning to Step 1

In other words an entrepreneur starts where he is at a particular moment of time, obtains key business measurements and formulates optional outcomes which can improve the situation based on the results of measurements. Then he compares options obtaining additional information and selects the best one considerably decreasing the probability of negative outcomes.

If developed as a routine practice, it creates a new culture of running the business, knowledge capital to control business development effectively using IT tools. Actually it was the conclusion of many entrepreneurs in different countries which successfully took part in upgrade programmes.

INSME: Policy makers at all levels (national, regional, international) all agree that innovation is a key factor to compete in a globalised economy and maintain or foster growth rates in the long run.
What's the link between innovation processes within a small-medium company or a productive sector and the principle of "continuous improvement in business"? We guess it's a positive link, but can you explain it at length?

Dr. Golovanov: Among various complex aspects of this issue there is one which influences many others.

Imagine a captain of a ship sailing to some destination. If he/she has skills and measurement tools to navigate the way with minimum timing, fuel and other on-board resources, decision risk in stormy situations decreases and thus the ship and its team has much better chances to reach the target compared to others who does not have all these.

The vast majority of entrepreneurs leading their enterprise ships to a "promised land of success" do not have business navigation skills and do not use any relevant measurement tools. They just run life experiment and learn by trial and error. It is far less efficient way of getting to “promised land”.

Let’s take new engine in a ship which makes possible to sail faster. It is rather costly but brings new opportunities. Can it help reaching the destination in hands of captain with lack of navigation skills and measurement tools? No. And unfavourable result becomes more costly. The larger the ship is, the more negative the final impact can be.

The continuous improvement process allows introducing methods, tools and develop practices, which prepare entrepreneurs to handling new technologies in a more controllable and predictable way. It is known that starting the business is relatively easy. However it is more difficult to make it sustainable for a long time under all challenges entrepreneur faces.

Have a look at SME mortality statistics in different countries for example. Lack of knowledge in business navigation and performance management as well as absence of simple IT tools are among key factors of SME mortality.

After all the international experiences obtained on-sites for the last 7 years, I am convinced that the educational / training programmes, updating entrepreneurs knowledge in performance management and continuous improvement as well as projects supporting work-based training are very effective ways to improve results of technology transfer efforts.

Entrepreneurs just become better prepared to handle and manage the innovation process, capable of controlling the change.  It is one of the preparatory stages before new technologies are brought into enterprises life.

INSME: When a company innovates or an innovation occurs at industry level, the need to measure the impact of innovation on business performance is particularly felt.
How can information tools for business performance measurement, like the ones developed by UNIDO, help in this regard?

Dr. Golovanov: I have already mentioned the importance of creating new business culture by relevant training. If achieved there are two main stages:

1. Identification of innovation options, simulation of consequences before they actually take place and selection of most effective one considering all major business development factors and risks.
2. Measurement and monitoring of the actual process after the innovation took place comparing the realities with initial assumptions.

Both stages’ implementation can be supported by special Pharos modules such as benchmarking reports and production scenario / business development simulations. 
Business benchmarking report provides possibility quickly review 7 key performance indicators: Net Profit (Pre Tax), Expenses Overall, Sales Revenue, Overall Added Value, Overall Added Value per Employee, Labour Ratio, OEE (Overall Equipment Efficiency).

The graphs are in easy to analyse formats such as time series and Radar allowing review both absolute and relative values of change compared to values calculated for some reference date, e.g. just before innovation was introduced. The UNIDO Business Benchmarking Report allows easy printout of the document providing relative change in percent (avoiding showing absolute values of sensitive information). The other indicators available in Pharos such as profit margin, various costs, quality of production and customer deliveries, customer sales may be used for additional analysis of results if necessary.

Answering the entrepreneur demand, we started feasibility study of new module contributing to definition of the enterprise performance: Enterprise value estimation. The module would help in initial evaluation of business value depending on key enterprise performances. The estimation may allow the basis improving identification current actual market value in case of business sale, application for credits, etc.

Production performance navigation in Produce Plus software allows measuring the following indicators: Production, Quality, OEE-Overall Effective Efficiency, Efficiency/Performance, Costs, Labour Performance.

Along with Produce Plus diagnostics it would provide entrepreneurs and consultants with documented status of production before and after the innovation took place.

All these of course require some learning efforts by entrepreneur. The reward is much better controllability of business and prompt awareness of potential problems before they grew up became apparent and irreversible.

INSME: Small-medium entrepreneurs are said to have an empirical and unstructured approach to management. So perhaps they could be sceptical in adopting a more formal approach like the one proposed by the continuous improvement methodology.
How can organisations providing business support services to SMEs (such as business associations, chambers of commerce, development agencies, etc.) help in making them accept this approach, given its proven results?

Dr. Golovanov: Scepticism and careful perception of innovations are natural for entrepreneurs who have a variety of life experiences and high risks. I had many opportunities to discuss the issue with entrepreneurs and consultants in different countries. All agree that these problems exist, little is done to address them. The potential results can be very attractive and the issue is a very important one.

For example the UNIDO Programme in Colombia in 2002-2003 resulted in 6-7 year savings of business developments in average for those who effectively developed continuous improvement practices. The result became possible after improving use of internal enterprise resources and decreased probability of making incorrect decisions by managers. They had obtained tools and know-how to evaluate business development options and implementation results. All these took place after significant contribution into entrepreneurs learning by Dr. Oswaldo Rossi, UNIDO International consultant and Director of Inter-Metro, San Paulo, Brazil and his measurements of improvements.

While being in India last week within the delegation of the Dr. Fischer, Austrian President, I had many meetings with several well known industrial associations and entrepreneurs e.g. FICCI. All counterparts indicated that the content of these UNIDO Programmes is unique; the IT tools are well suited for managers with diverse backgrounds or limited performance management skills and reasonably priced.

For example: one single user license fee for complete set of UNIDO tools is less then 900 EURO, decreasing progressively upon each additional enterprise license. The implementation of the training and upgrade programmes in collaboration with national and international counterparts allows delivery of complete package of services under highly attractive prices.

I have to mention that not all goes easy and straightforward. Some entrepreneurs are not yet ready to learn and implement methodology, change lifestyle, introduce new business culture and practices. They may think that all is running fine now, why to spend additional time,  money and learning efforts? They tend to ignore the fact that while there is continuous fight for each additional percent of net profit in their real daily life, about 10% or more can be hidden in various inefficiencies and losses unknown to management. We had 24% improvements in Colombian Programme proving that people had losses previously and were not aware or capable to identify and recover them otherwise. And in the times of change and increased competition it is wise being prepared for handling the change effectively.

The organisations providing business support services to SMEs can benefit by adding the developed solutions to their existing projects and programmes. We would be happy sharing our know-how and assisting in training of the trainers / consultants in these organizations enabling further delivery of the unique service package to local enterprises.

The main issues to address include:

• Setting up formal framework including national coordination and implementation supervision
• Formulating the service package adjusted to local needs and key priorities
• Identifying the financial sources in addition to enterprise participation fees to maintain the Programme budget
• Fixing the ordering-supply procedures for the software.

Training of the trainers can be made locally or in Europe, e.g. in Austria. After the training and certification, further implementation support for national programmes can be run locally. The variety of options can be considered in delivering relevant services to SMEs including training programmes, vocational training, educational channels (like SKYCHANNEL Project by SKYNET), on-line e-training, etc.

February, 2005 Copyright © INSME 2005

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