ASPIRATIONS AND REALITIES

ASPIRATIONS AND REALITIES

IT was during my early days as a management consultant that I was faced with these issues from many SME owners. In fact one of my classmates TEEVEE who had started his own enterprise before I did and was partially a motivating force for me to take the plunge one day accosted me with a statement: Why should I struggle to work very hard to run a small business to earn very little when with the same amount of effort if I run a large business I can earn more!! Very logical and obvious statement. But he also made another observation in the same breadth. He said he found many old timers from business community backgrounds seem to be making more money with little effort than what he can ever imagine he could do with his expertise as an IIMB product. More valid observation.

It was obvious that in business if you want to make more money then you must definitely have more capital if everything else is equal. So capital is definitely a necessary condition. But is it sufficient? Obviously no. But the answer to what is THE sufficient condition is not a simple one. This I learned over a period of time when I had to interact with many of the small and medium and sometimes even large enterprises on the path of managing growth and many of them floundering and some of them succeeding.

The pattern of issues I did come across varied over time due to a phenomenal changing environment one witnessed from 1992. So I will try to group them into 2 categories. Observations made before 1992 when reforms were announced in India and post 1992 when reforms started to have an impact on many Indian businesses particularly the small and medium ones. The issues faced by the larger businesses were of a different kind compared to the SMEs. 

In this post I will present some interesting observations I made when working with SMEs before 1992.

Before 1992 I noticed there were 2 types of small businesses which were active. One type of businesses were floated by those who came from a family with a tradition of trading and the new generation had moved into manufacturing as an extension of their trading strength. For this group of businessmen the problem of raising capital was never there but they faced other problems of transition from a trading mentality supported by family members to a manufacturing milieu where they had to work with specialists and professionals and also use of technology and machinery and other resources combined with a plethora of governmental regulations.

The other types of businesses were promoted by professionals with a background in the technology or industry where they have worked and leveraging their expertise to start a business without any previous background in running a business. This group of SMEs were also strongly supported by various governmental schemes to raise money and basic infrastructure but their main limitations used to be raising money independent of public financial institutions unlike the traditional family owned businesses which had resources through their community network. This group also had to deal with a large number of governmental regulations. 

In fact in those days most of the businesses were subject to permits and inspections and there was a popular slogan called license permit raj prevailing along with an inspector raj to enforce these rules under license permit. At one point of time any business with a manufacturing operation had to deal with more than 27 government agencies every year to be in business!! And a large number of problems faced by SMEs had some link to these interfaces with government agencies and naturally this had a cost impact on the business which affected the small businesses most.

There were certain statutes and government schemes favouring small businesses below a certain size and this prevented many of them from growing as these incentives would disappear when they crossed certain size limits leading to splitting of a large business into several small businesses to remain below the size desired to benefit from these incentives with hilarious complications affecting their growth. 

Looking back before 1992 the environment was not conducive to growth for small businesses and I realised this quite early and one of my approaches was to get them to focus on making money and optimise within their existing capacity. Moreover most of these businesses had captive clientele and market was not a major problem in a shortage economy and the only way one made money was being very efficient in operations. Most of the cases I came across where the unit was losing money despite a captive customer base was due to not keeping an eye on the small expenses. I remember once Mark McCormic, the founder of the famous The Professional Management Group, observed that it is important to keep an eye on the pennies if you don't want to lose money in your business!! And how true this observation was I noticed working with small businesses in the early days.

One of the reasons small businesses succeed is the passion of the entrepreneurs for their business. For its success they would do anything that needs to be done right and no compromises. This personal passion is their strength when they are small and a weakness when they try to grow. In the initial stages they would have assembled a group of people who were willing to work with them since they had no other option. And most of them turn out to be very good errand boys for the entrepreneur and some of them graduate to be trusted right hand men. Now when they start on the process of growth, I found many of these trusted men would take advantage of their proximity to their master to ensure no newcomer finds a place in the firm firmly. Moreover the entrepreneur instead of establishing good systems and processes would like the newcomers to take instructions from him on all aspects of work and try to convert them to another set of errand boys. Since he also was involved in all aspects of business as a small business, he would like to be involved in all aspects even when the size and complexity of operations required him to delegate. On many occasions I used to notice that the combination of the trusted lieutenants cultivated before and this desire for micromanaging typically would lead to very few new employees of any competence willing to stick with the firm.

Another personality dimension of the entrepreneurs is their feudal attitude towards employees. This was perfectly alright with the older employees who had grown with the entrepreneurs. But this was a big problem when they had to recruit younger generation specialists to manage their growth. Many of these youngsters had the confidence that they could get a job if they left this firm and were not prepared to work based on absolute loyalty which the older generation employees had perfected into an art!! The entrepreneurs used to such abject fawning from his older employees would find it difficult to deal with the younger employees and there would be significant instability in manpower retention.

The salary structure was very restrictive in those days. So in order to compensate for that employees would be given fancy designations in a small business even though the work content was not reflecting such designations. In one organisation I was asked by the owner to conduct a study to reorganise the structure. It was amazing to see for such a small set up they had a very deep hierarchy starting from supervisor at the lowest level to vice president reporting to the owner who called himself Managing Director. In between they had close to 12 different designations. When I asked everyone to write down what work they did, in every function right from the supervisor to VP mentioned the same work content with an additional sentence that they supervised and controlled the lower level!! This was before the days when Business Process Management concepts had become fashionable and every small business wanted to structure itself similar to large organisations around functions when they started growing.

Most of the small units would have started with limited resources committed to providing good office space and other comforts normally taken for granted in a larger enterprise. When a small business starts doing well the first priority of the owner would be to impress everyone with outward signs of success. Hence he would start committing himself to providing a good office space and proper facilities for employees. In many cases these were planned without any proper financial analysis of the impact of such commitments on the cash flows and method of funding. Typically working capital would be diverted for these infrastructure related expenses and very soon they would land up in a mess with cash flows affecting the growth plans. In most of the cases referred to me by banks for diagnostic study this was one of the causes of incipient sickness.

There were many other observations which were specific to the units studied but the ones discussed above were common patterns among many small units I had the opportunity to interact with. In the next post I shall discuss the post 1992 scenarios both in small business context and some of the corporations which were successful during the license permit raj and how they floundered when the liberalisation opened up the Indian economy to global competition.