By Nitin Pangarkar
A common struggle for SMEs is the issue of achieving growth. Multiple stakeholders including investors and employees want these firms to aggressively scale - after all, high growth potential is often a key factor attracting them to the SME in the first place.
But SMEs face a dilemma, especially when it comes to achieving growth through diversification. Although expansion into new areas reduces dependence on one sector, it brings with it a different set of challenges.
Chief among these is increasing management complexity and the possibility of failure because the SME may be venturing outside its area of competence rather than sticking to what it knows best.
Both sets of challenges come to the fore because SMEs often misunderstand diversification as being involved in weakly correlated (and sometimes even unrelated) sectors which have very different key success factors. These are commonly compounded by a lack of management depth in SMEs - either of specialized or of highly-experienced managers.
Last year for example, Asia Euro Holidays, a Singapore based travel agency, was forced to close down after it incurred large losses in a property-related diversification away from its core business.
Recently, we had an opportunity to meet Wong Shih Jon, founder of V3 Teletech, an SME founded in 2002 with 35 employees. The firm offers mobile services to optimise and schedule supply chain management and tracking of transportation fleets. The core of its business focuses on telematics – the long distance transmission of computerised information to improve processes efficiency and resource utilization.
V3's strategy boils down to two key points:
1. Develop and hone expertise in engineering and development related to telematics and mobile-related applications.
2. Deploy that expertise in varied applications.
V3's core technology has been used to develop three broad solutions—workforce assignment and mobility, fleet management, and waste and utility management.
Each of these can be used in multiple industries—for instance, fleet management technology can be used in the field of logistics (managing expensive equipment such as trucks), construction, oil and chemical and law enforcement (e.g. parking summons), among others.
The key advantage related to this strategy is that the same expertise is leveraged in multiple industries and applications, thus reducing the complexity and the challenges that typically come with diversification. This has allowed V3 to survive intense competition from international players (including much larger MNCs) as well as powerful local competitors (such as the government-linked NCS).
But the choice of diversification based on a strong core expertise in telematics is only one of the factors behind the firm's longevity and success.
V3 pioneered both the adoption of cloud-based telematics systems and the implementation of recurring revenue models, at least within Singapore. The latter resulted in a very predictable revenue stream, yielding high margins because the software required little maintenance and hence low recurring costs.
The subscription based model also allowed V3 to gather valuable feedback from customers, in turn enabling it to improve its products and strengthen relationships with customers.
Building these relationships and in-depth customer knowledge has further strengthened V3's position against its competitors - be they larger MNCs who are higher priced yet may be lacking in localization; or smaller players from developing countries, who are unable to offer a similar degree of customization and may not get the customers' business despite lower prices.
Unlike many SMEs which focus on technology but not on the broader strategy and customer value proposition, V3 prides itself on offering novel solutions of which technology may be just one part – which can even help reduce their customers' new investments.
For example, partnering with Karcher, a producer of cleaning equipment, V3 offers a completely automated cleaning machine that doesn't require an operator. V3's module can be retrofitted on existing Karcher machines, thus eliminating the need for the end user to buy machines.
Another example of the deployment of V3's technology is in waste management, offering a system that detects how full waste collection bins are. By reducing unnecessary trips by an employee for emptying the bin when it is not full, V3's solution allows its customers to optimize manpower utilization. This is an important benefit for industry customers facing a labour crunch and higher government levies on foreign labour.
Thus V3 is harnessing its technology to address real issues for the customer - be they the shortage of manpower or the need for cost efficiency.
In summary, V3 Teletech is an example of a company that has remained true to its technological core while successfully deploying its solutions in diverse industries.
For firms large or small this approach of leveraging a strong core in multiple applications has a lower likelihood of failure than diversifying into unrelated sectors. Yet it is especially relevant to SMEs because they may lack the managerial depth and resources to manage a diversified company.
BBA students Lim Xue Ting, Lee Jun Ting and Loh Ying Cong contributed to this article.