Article By Samir Sathe
Transformative leadership at the grassroots level is the need of the hour in India. It is not in the boardrooms of large enterprises, it is not in the brilliant minds of the intellectuals and educationally well-trained professionals advocating from the ivory towers, it is not in the pockets of the billionaires but it is in the heart of a micro-entrepreneurs that would need to undergo a massive transformation. It is the heart of the small business person that needs to transform significantly. Among them, family businesses which account for a majority of the 75 million small businesses exhibit a character of exactly who they are. Families.
Family Businesses and Fire Fighters
The relationship between the enterprise and the entrepreneur symbolises that of a child and paren. Besides, most of these businesses are running into 3rd or 4th generations. We know that over 70% of the transformations fail and evidence also suggests that it is 3rd or 4th generation where the wealth creation of the enterprises slow down dramatically, and in several cases, the enterprises face an existential crisis. Transformation failures are more pronounced in these cases. We focus on one of the most critical ingredients to prevent the failures and turbocharge the enterprises to be healthy and wealthy. It is the role played by transformative leadership. And it is accentuated when it comes to transformative leadership in crises.
The tussle between generations, stakeholders where emotions play a major role could become nasty and particularly harmful in crises. The leaders deal with the situations daily. Customers delaying payments, suppliers knocking doors, demand slows down, physical lockdowns in COVID, disenchanted talent, job losses and crippling cash conditions are daily occurrences. That is when one realises the meaning of pressure and deep scars, it leaves on the entrepreneurs. It is hard to fight the fires, remain calm and stoically do daily chores with a composure. Crisis management is focused on containing the damage, isolating the traumatic impact from healthy components of one’s ecosystem and keeping the morale of the employees up with a periodic dose of hope. The leaders play a remarkable role in keeping businesses alive. That is their motive. In family businesses, as I mentioned, it is akin to a parent saving a child from dying. The emotions run high; the stakes are higher; the desperation is acute and hopes flicker often.
In short, crisis management leaders, whom I prefer to call the firefighters (by no means any disrespect to a real-life firefighter who saves lives!), contain, maintain and even sustain.
Family Businesses and Transformative Leaders
Transformative leaders go beyond crisis management. What do they do differently? These leaders contain, maintain, sustain, of course. But they focus on changing the status quo. They want to see the world, as it ought to be and not as is. They challenge the paradigms, are almost like jailed innocent victims who are restless to break the boundaries of existing confinement of the prevalent situations. While firefighters think of fighting fires, transformative leaders think of preventing them. While firefighters focus on ensuring damage is minimal, transformative leaders begin to prepare for another fire almost in parallel. Transformative leaders manage the current and shape the future by building capabilities that would allow them not only to fight future shocks from external or internal situations but also put in systems to be able to forewarn them of the impending dangers. The firefighters live for the day and worry about the future without necessarily preparing for it. The transformative leaders transform themselves, their people, their customers, their ecosystems and shape the outcomes so that they are prepared to change the future not only to face it.
Firefighters react and are satisfied when they successfully ride over the crisis while transformative leaders react, respond and are proactive about seeing the future and bolstering their capabilities to live better tomorrow, so that they would not run into facing a crisis.
An Example of Differences between the Two Approaches Dealing with Working Capital Woes
Exhibit 1: Working Capital Woes fought by Fire Fighting Leaders.
Take the example of a working capital or funds crunch that most of the MSMEs are facing today depicted in exhibit 1. The description of a problem statement indicates what fires are fought when one deals with cash flows issues. The approach the firefighters take is to manage the crisis well. One would notice that most of MSMEs in firefighting mode, are crying for help as they need funds to survive. They would negotiate hard to stop or delay or lower the payments to suppliers and fight for exactly the opposite when they negotiate with their customers. They also work their way when they want funds infusion to support the running of businesses. Surviving for today and ensuring funds are obtained so that they do not have to worry about cash deficit in future. That Is what firefighting is. Please note that they have tried to provide funds for the future operations thinking they have planned for serving future. The primary task of the firefighters is to manage the status quo.
That is, unfortunately, not transformative.
Transformative leaders manage all the above and in addition, simultaneously think of having visibility of what working capital woes are all about, study the chief causes of the trouble, find the root causes, the factors that significantly correlate with the challenge of working capital faced by them and then they begin to address and correct the causes and correlated factors that were responsible, in the first place, for the crisis. They do not stop there. They would then try to do a deep dive into preventing causes and factors. Take a look at exhibit 2 that describes the approach that transformative leaders take. The apparent working capital challenge compels the transformative leader to investigate, and he/ she discovers that the enterprise needs to build capabilities to address the underlying challenge of the poor life-time value of customers and suppliers. This sets in motion the capability build-up by the enterprise ultimately better prepared to spot long term opportunities and win. The primary task of transformative leaders is to change the status quo and choose the situations they want to be in.
Exhibit 2: Working Capital Woes managed and studied by Transformative Leaders.
That is transformative.
Vicious and virtuous circles
Exhibit 3: Vicious and Virtuous circles
The firefighters eventually become less competitive as they have no visibility of the external or internal stimuli to respond to and not react to when the crisis strikes. Their energies and time are invested in living for the day. Time never stops. They turn almost blind to both future challenges or opportunities and as a result, loose scale and margins turning them into being unfit. This is a vicious circle, and finally, it renders the MSMEs unfit. We all know that it is the survival of the fittest as Darwin put it in 1869-fifth edition of the famous book ’Origin of Species’ (the expression was actually coined by the philosopher Herbert Spencer and suggested to Darwin to be included in the fifth edition by a fellow scientist A R Wallace). Firefighting MSMEs therefore, fail to ‘adapt’ since they simply are unfit to survive eventually. Now consider that most of Indian MSMEs in beyond 2nd and into 3rd or 4th generation where the wealth destruction or slowdown of creation is maximum. Therefore it is incredibly important for MSMEs to have visibility into the future, and they not only manage the short term but also prepare for the long term.
The virtuous cycle is what transformative leaders lead. They manage short term, prepare for long-term, seek to understand the weak signals of the forthcoming challenges, spot the opportunities and then build their capabilities (finance, talent, etc.) to ensure they are fit enough to survive, thrive and scale up faster.
Transformative Leaders and Enterprise Performance
Exhibit 4: Fire Fighting and Transformative Leaders Perform Differently
The difference between the enterprise performance managed by transformative leaders and firefighters is clear in its message. See exhibit 3, which demonstrates that transformative leaders yield far better returns on performance, both top and bottom line and live longer than the enterprises managed by fire fighters.
What do you want to be? Firefighters or transformative leaders?
Samir Sathe is Executive Vice President, Wadhwani Advantage at Wadhwani Foundation