More than 90 percent of businesses in India's MSME landscape are micro enterprises. In a self-perpetuating loop, lack of capital access discourages business transformation, and unwillingness to grow and scale restricts capital avenues. Businesses, therefore, are caught in a limbo between sinking or floating, always triggered by external events. Let’s look at how MSMEs can break this harmful pattern.
Much like humans, the life cycle of a business evolves in stages - infancy, adolescence, youth, and adulthood. Through constant nurturing and soothing growing pains that address different demands at each stage, companies should ideally graduate from being micro enterprises to small scale, medium and then exit the MSME sector to become large. The Growth Institute describes the four stages - start up, grow up, scale up and industry domination eloquently in this piece.
The decision to grow or scale from one stage to the other depends on the philosophy and the values defined by the leadership – some leaders envision their business as a legacy that has a lasting impact on the way our world functions. Others are content with being a tightly knit passion or family business that can satisfy the economic and creative needs of the founder and a handful of employees. Several enterprises fall in between these extremes.
What’s important to remember here is that no matter at which stage of development an enterprise is at, the question of whether to grow or scale will always arise. The inability or unwillingness to address the ‘what next’ is what leads many micro enterprises to plummet in the dreaded Valley of Death (when a startup is operational but yet to see profits) or remain dwarfs – after infancy, they grow in age but not in size or turnover.
Interestingly, the Economic Policy 2018-2019 addressed the issue succinctly when it pointed out that dwarfs – small firms employing less than a 100 people, form half of the manufacturing units in the country, but generate only 14.1% of the employment. The document laid out the need for a ‘recalibration’ as the grandfather-like aged policy and regulatory framework was inhibiting firms from breaking out of the small-scale mold.
In the Indian MSME context, growth is a mindset problem as it is a structural one. When we diagnose stunted or sick firms, we find that the causes are both environmental (structural challenges like access to finance, infrastructure, ease of doing business, availability of raw materials and other resources) and inherent (mindset). While resolving policy paralysis is dependent on political will, setting onward looking business goals is entirely the responsibility of the leader.
Why should a business plan for growth? Why can’t it just be content with floating in tune to the ebb and flow of market mechanisms? The COVID-19 paneic is a classic example of how unprecedented environmental factors can strip a small scale, stagnant firm of its misplaced notion of stability. Carrying on with a ‘business as usual’ attitude without considering the finite nature of business operations will leave a company unprepared to absorb the shock of events such as these.
Then, is the question of market realities. When you get complacent with your position in the market, it disincentivizes you to invest in innovation that can take your product or service to the next level. Even if you maintain dominance by buying market share, it will only be a matter of time before you are dethroned by a young, hot-blooded company that foresaw something you didn’t, despite your firm’s age, market presence and customer relationships.
At this juncture, it is critical to understand the difference between growth and scaling. People often interchange these terms, but there is a marked difference in what they mean.
Growth is an expansion strategy of a business that increases revenue, but with equivalent incremental rise in cost. Growth is a cost magnet, because you are dedicating additional or specialized resources to achieve those revenue figures, either by introducing customization in your offering to attract customers or hiring new people to manage a new client.
On the other hand, scaling refers to the exponential expansion of the topline (revenue) accompanied by a marginal increase in the cost. Scaling is possible when you are geared toward making profit – it is a structured commitment to design your business in a manner to achieve what economists call ‘economies of scale’, i.e., driving profits by creating commonalities.
In scaling, you actively remove customizations to produce or deliver mass products or services that enable you to shrink cost by negotiating for better raw material prices, seek cheaper labor or hire only specialized resources to execute specific functions that accelerate scaling.
The Valley of Death is not for startups alone – in fact, the entire business trajectory is made up of intervals of Valleys of Deaths, where you will plunge into, unless you decide to migrate to the next natural stage. Therefore constant evaluation is crucial. If you hit a roadblock, where you are unsure of the next step, you must seek an impartial counsel, where an expert can guide you to see the blind spots you may have missed.
It is also possible that you do not see any room for further growth, and scaling is not something you would want to pursue. Planning your exit strategy then becomes the logical conclusion to this phase of your entrepreneurial journey. When you sign off on a respectable note, it gives you the right foundation to explore other avenues of entrepreneurship. You should know when to hang up your boots and pass the baton to the next able player!