Ravi Kumar Pillai
Ravi Kumar Pillai

Small Business at Crossroads

Ravi Kumar Pillai

Ravi Kumar Pillai

The global economy today resembles a ship caught in a storm, struggling to steady itself. Small and Medium Businesses (SMB) are critical in both developed and developing economies for the revival of grass root job creation and the investment cycle. They are key stakeholders in most economies. They contribute nearly 60% of employment and 40% of GDP in emerging economies. These numbers are significantly higher when micro-business entities, mostly in the informal sector are added. In the developed economies, especially in Europe, new job creation takes place predominantly in small and medium business which contribute as much as 90% of net addition to jobs.

In business as in personal life, obesity feeds lethargy and inefficiencies. Big businesses today find substantial value in lean structures, agile processes, and frugal approach. The larger players are keen to replicate small business mindset and methods in their operating models. The globally admired enterprises enable teams to pursue ‘intrapreneurial’ spirit. They see themselves as a network of SMEs within the larger framework of corporate strategy. They create a project driven culture and transformational spirit across the corporation to remain alert, alive and nimble.

Smart technologies are bound to optimize the headcount across the organized sector. Innovation and niche productization would drive business and employment in the small and medium business domain. Technology would bridge the gap between large and small businesses, providing a level playing ground where smaller and adaptable players would have significant strategic advantage.

While elephants can learn to dance too with effort, rabbits can spring to greener pastures with grace and ease. Process-wise and culturally the small business approach is winning over the structured, ‘command and control’ management style. Small business is responding to the pressures of economy and technology with deftness where big business might struggle to maneuver the relatively more rigid processes and procedures.

The primacy of Micro, Small and Medium Enterprises (MSMEs) in the development journey of India at this juncture, when the economy is reeling under internal strains of the unexpected formalization, through GST and push for digital transactions. The impact of global economic headwinds is felt at every level of the economy; SMEs are no longer insulated from the mainstream economy or far removed from the effects of the global economic downturn.

The sheer size and impact of MSMEs make them central to any discourse on job creation, rural development and entrepreneurship. The sector is too unwieldy, diverse, plagued with infrastructural, financial and human capital deficiencies.

The Government seems to have realised the significance of MSMEs in shoring up the economic scenario in the country. Nitin Gadkari, the Minister for MSMEs recently elaborated the Government’s commitment to increase their present share of 30 per cent of GDP to 50 per cent in the next five years.

It has never been the lack of lofty pronouncements or extensive legislation which held back India’s potential for breakthrough economic performance. Execution slippages resulting from process complexities, uncommitted leadership and widespread corruption in public services have been the bane of our economy.

Out of 60 million MSMEs in India, 90 percent are micro entities, mostly in informal sector and at the margins of survival. Clubbing the micro and small businesses with SMEs into a broad classification robes policy making of its focus. Our MSME strategy should re-focus on the strategic segment of the small and medium enterprises with sound business and operating models and the drive to move up the value chain.

If we look at Europe, Scandinavian countries, US and Canada, more than 50% of SMEs have 100 plus employees. Segmenting SMEs from the vast mass of informal micro businesses would correct the strategic imbalance and enable promising small businesses to grow.

SME success depends a lot on the ecosystem. The most effective business ecosystem is one that evolves organically, is self-regulated and facilitates a collaborative culture. Government-patronized and bureaucratic ecosystems tend to degenerate into economic dampeners instead of enablers. It reinforces a culture of nepotism, opacity and machinations. A collaborative ecosystem empowers small businesses to tap emerging opportunities. A closer look at Finland and other Scandinavian countries, Israel and the Far Eastern economies highlight SME ecosystems as the critical success factor driving small business vibrancy and resilience.

Expertise in diverse fields such as design, development, infrastructure and legal/regulatory support, supply chain, talent management, branding and logistics make the ecosystem the bulwark for small business growth. A healthy and supportive ecosystem facilitates synergies among large and small businesses as also between SMEs and academia, research labs and Government Departments.

A glaring example of the difference between Government-led and industry-evolved ecosystems is provided by the hardware and software landscapes in India. Software has by far remained less regulated and driven by voluntary initiatives of the industry. NASSCOM has evolved into an effective collaborative platform for members. Hardware manufacturing sector has remained under direct and stricter regulatory control and restrictions on capacity, employment, closure of establishments etc.

No wonder India never got to compete effectively for the global opportunity in the booming electronics manufacturing, which became the preserve of China and Far Eastern economies. We had similar demographics, intellectual capabilities, entrepreneurial orientation and cost advantages, yet could not be competitive globally due to bureaucratic interventions, inspection-license culture and back-breaking compliance requirements. The results are obvious before our eyes – Indian software industry thrived and grew into world leaders; the hardware sector failed to get noticed, reeling under the weight of crippling controls and guidelines.

Time has come to adopt less government and more governance, putting value on self-regulation and faith in the genuineness of business intentions of enterprises. The improvement in ease of business needs to get translated into the mindset of regulators and administrators.

In economies where SMEs have succeeded, we see seamless collaboration between small and large businesses. Digital technology advances and the keenness of big business to seek cost optimization have led to the emergence of diverse and rich global supply chains providing great opportunities for the smart SMEs.

Small Business growth story across the world has been crafted by a few path-breaking high-impact companies. These are companies whose sales have at least doubled within the most recent 4-year period and employment has grown 2X within the period. Avenues for business transfers through mergers, acquisitions and restructuring of ownership should be part of a healthy SME ecosystem. India has to learn from and improvise the best practices in developed economies which encourage SMEs to consolidate, divest and exit with ease and transparency, while taking the support of social security net to protect employee interests. When the larger ecosystem accommodates and nurtures small businesses, the latter stretch themselves to achieve escape velocity to become breakout successes.

Globally, the big names in the digital business landscape all started small and grew their economic value addition over a span of a decade or two. They forged linkages with larger players at home and abroad across the value chain. They have thus acted as catalysts in shaping the global SME ecosystem.

In the digitalised business scenario, services sector has assumed predominance as the possible domain for startups and small businesses. With automation and smart technologies, manufacturing is increasingly being driven by big business with small enterprises playing collaborative or business partner roles rather than that of prime producers. More and more strategic support functions such as analytics, branding, marketing, legal, talent management etc. are joining the league of the expanding domain of outsourcing industry.

Global value chains provide opportunities for innovative SMEs to leverage the local expertise and provide global delivery at competitive pricing. The digital business scenario is crumbling barriers to innovation and reach, providing an opportunity for small businesses with expertise in niche specializations to go global.

It looks like B2B, more than B2C, is the path to scale up Indian SMEs enabling them to compete with the best-in-class players anywhere and win. Indian SMEs need to look beyond today’s pains and be ready to meet the new wave of opportunities. The transformation of SMEs, to succeed, has to be driven by the stakeholders themselves.

*Ravi Kumar Pillai is CEO and Principal Consultant of Cherrypick India Consulting and Business Solutions Private Limited, Trivandrum. He can be contacted at ravikumarpillai9@gmail.com

Facts and views expressed in the article are that of the author