What Keeps Indian Enterprises from Growing

Among the reasons: Treating the business like a family, and an aversion to risk, says B V Krishnamurthy

Posted on Bangalore Calling: May 1, 2008 6:52 AM

In the last one week, I have had the privilege of interacting with over 300 entrepreneurs from the small and medium enterprises segment. 70% of them have been in business for at least a decade; 40% have completed two decades. Yet they are still "small"—in revenues, profits, employees. 15% have global aspirations but do not know how to achieve that goal.

Small and medium enterprises account for 80% of Indian businesses (3 million small and medium enterprises and counting), produce over 8000 products, contribute 35% to industrial output, 40% to direct exports, and employ nearly 30 million people. And yet, they continue to remain small even after 20 or 30 years. Given a choice, they still want some form of protection. The forces of competition, rapid technological change and globalization mean very little to these otherwise successful enterprises.

What are the challenges faced by entrepreneurs in scaling up and making it to the big league? How much of this can be attributed to the external environment and how much to the entrepreneur's mindset itself? Based on the responses I have, here are the major constraints:

Treating the business like a family—almost literally: this might come as a surprise to those in the developed countries, but promoters of small businesses develop an emotional attachment to everything about the business, including the people. The leadership style is patriarchal. A significant majority have not fired anyone in their business. Performance orientation is lacking and a comfort with the status-quo is palpable.

Inability to prioritize: entrepreneurs engaged in small businesses are in a perennial "fire-fighting" mode. Everything appears to be a crisis. Considerable time and effort is expended on trivial matters often at the expense of growth, creativity and innovation. Strategy is conspicuous by its absence. Not surprisingly, the business remains small.

Inability to delegate and empower: the CEOs of small businesses find it extremely hard to delegate. Even after two decades, they want to be the ones to sign a cheque even if it is for only a few dollars. They want every little detail in every domain—how many units were produced, how many were sold, how many people were absent for the day, how many phone calls were made. As a result, they lose sight of the big picture. They are unable to envision a grand future. They cannot dream big.

Aversion to risk: what we witness in small businesses can be termed "Destructive Paranoia". There is a constant dread of what might happen next. Competition seems to send a chill down the spine. Getting into uncharted territory is anathema. Obstacles or downturns, that are bound to occur in any business, are looked upon as bad omens. This kind of hyper-conservatism blocks the generation of new ideas.

The learning curve—what is that?

Entrepreneurs running small and medium enterprises fail to keep pace with change—be it technology, be it customer expectations or processes that can transform their businesses. One is astonished to see the number of entrepreneurs who feel a sense of "mission accomplished." That is a euphemism for tunnel vision—I have a house, a car, a decent bank balance, business is OK, why should I bother learning new tools, techniques, and new ways of doing?

Sure, there are external constraints as well. Finance is a major issue and interest rates are high. Again, though this problem appears to be external, it has more to do with the mindset. small and medium entrepreneurs seem to think that the only way one can obtain finance is through debt. The fact that some of the best organizations in the world are zero-debt companies comes as a surprise to them. Nearly 95% of small and medium enterprises are either proprietary firms or partnerships. Just 6% are in the corporate sector and here again, a vast majority are closely-held (not listed on any stock exchange). Equity is seen as being both risky (sharing ownership) and difficult (who will subscribe to our shares?).

The paradox of the scalability challenge is that the entrepreneurs are highly talented people. They have worked hard to make a success of their ventures. If only they could shed their inhibitions, think big, let go of all but the most critical decisions to others, develop human capital, embrace change instead of resisting it, list their priorities, tap the capital market, link up with transnationals or similar entities in forming clusters for driving down costs and improving visibility globally, and learn constantly, they have the potential to be the next set of billionaires from an emerging economy.

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