An SME perspective into the key trends impacting business
Change is an evolutionary process that continues to float around all businesses. There comes a point of inflection in every journey of a business entity where the awareness of this process of change helps the leader to take decisions that enables entities to remain competitive and ahead of the rest.
However, lack of awareness, mostly found in SMEs sector, catches the Leaders by surprise, as they continue to map their future confined within the parameters of acquired knowledge & an array of experiences. The ones who are receptive to change and ready to transform, focus on raising efficiencies, attract right talent, inculcate financial discipline & compliance.
In process, you embrace the change, as an opportunity, and secure the future you aspire.
“If you do not change direction, you may end up where you are heading.” —Lao Tzu
Major trends* impacting the small and mid-sized enterprises:
*list is not exhaustive and cover major broad level trends
The above developments and trends throw up both challenges and opportunities to the SME’s enterprises. Before moving ahead and understanding these in details, let us take a glance on the existing framework of the SME’s in the country and redefine (for our understanding from these trends’ perspective) the scope of SME classification.
These businesses worth under Rs.10 crore in terms of investment in plant and machinery are mostly businesses run by families as a legacy. However our discussion takes into account enterprises which may fall outside this classification and include a range of businesses from start-ups to medium sized enterprises
The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, governs the coverage and investment ceiling of MSMEs in India. The table gives the classification based on the investments in the plant & machinery or equipment.
SMEs in India constitutes 45% of the country’s output and employs 60 million people.
These businesses worth under Rs.10 crore in terms of investment in plant and machinery are mostly businesses run by families as a legacy. However our discussion takes into account enterprises which may fall outside this classification and include a range of businesses from start-ups to medium sized enterprises which are run by promoters and not professionals. These may be start-ups or mature businesses which are managed by successive generations of promoters. The promoters in these enterprises are involved in the routine running as well as strategic decision making.
| SME classification as per MSMED Act 2006 | ||
| Type | Manufacturing Enterprise | Service Enterprise |
| Micro | Upto Rs.25 Lakhs | Upto Rs.10 lakhs |
| Small | Rs.25 Lakhs to Rs 5 Crore | Rs 10 lakhs to Rs.2 crores |
| Medium | Rs. Rs 5 Crore to Rs.10 crores | Rs.2 crores to Rs.5 crores |
Strengths of SME’s:
Challenges to SME’s:
1. Stricter regulatory & compliance regime
SMEs are comparatively more dependent than larger companies on their industry specific practices and, due to their internal constraints, are more vulnerable to regulatory and policy decisions. Demonetisation and Tax reforms like GST implementation are examples of the policy changes and are in indication of future changes to come as well. Ease of doing business and tax reforms are at the centre of India’s growth agenda as the country pitches itself as the leading investment destination among global emerging markets. Tight control Mechanisms are being envisaged in Banking, Capital Markets, and Companies act etc. indicating that business-as-usual approach will fail in these changing times.
Limited access to formal finance has been an established fact and with enhanced regulations and tighter banking norms it will get even more challenging. Its high time for SME’s to accept these inevitable changes and embrace it like an opportunity instead of threat by implementing disciplined systems to keep up with regulatory changes.
2. Digitalisation-AI, Big Data, Social media
The digital economy opens a range of new opportunities for scaling up, reducing costs, enabling the creation of new business models. SMEs can draw many potential benefits from digital technologies, such as better access to skillsets, markets, wider collaborations and widespread communication. It also leads to greater access to disrupting technologies and applications. Also digitalisation is opening up an opportunity for SMEs to level the playing field and compete with larger players. The need of the hour is for SMEs to take the lead in adopting digitalisation and make it an integral part of their business strategies. Those that are successful in understanding the power use of digital, data analytics, AI and harnessing it across their businesses will lead this new wave of growth.
3. Opening up for More Opportunities –Global Trade & Collaborations
With the latest technology advancements, integrated global network and access to knowledge & information, SMEs going global would emerge as industry leaders. Global trade now is a necessity that SMEs cannot afford to ignore. It will help SME’s hedge the risks of downturns in domestic and world market. The changing landscape of global trade made it imperative for Indian SMEs to adapt and work around towards catering needs of the world and not just restricting to domestic market. SME’s need to think like a global brand, they must think outside the domestic market and see the whole world as one big market. This will enable them to pace their operations to meet the requirements of global trade.The business ecosystem is opening up to partnerships and collaborations. While this trend has been in practice for large corporates it is slowly catching up with the SME segment as well. Going ahead, competitors will collaborate more and look around for businesses which might help leveraging synergies for business growth.
4. Managing Human Resource
It is difficult to find right talent, further efforts are required in nurturing it and much more in retaining it over a period of time. Besides the tangible aspirations like salaries or the size and brand value of the employer, it is the intangible aspirations which score over the other motivational factors. The age profile of human resources (demographics) and other socio-economic factors provide a very complicated set of challenges. The only way to meet this challenge is to focus on recruitment, training, up skilling and creating a good working culture. Keeping employees happy means fulfilling their career aspirations, supported with commensurate remuneration and allowing freedom to apply their knowledge and skills.
The way forward:
Founders or owners of SME businesses usually have specific expertise, while growth often requires an expanded skillset to channel the emerging complexities: from commercial (e.g. marketing), to project management (e.g. logistics, organisations of events), financial & Compliance control (e.g. capital and cash flow management, Banking, internal control etc.) and strategic thinking skills (e.g. Planning, Goal setting etc). Smaller firms may face a particular challenge in this regard, as their limited human resources are focused on day to-day running of the business and leave the business owners with little time for strategic planning and self-development.
Up skilling of existing human resources, including management, is key for SMEs to undertake future growth strategies. Hence, internal policies that support skills development and enable them to attract and retain qualified personnel are essential for their desired growth. To seize market opportunities and grow, SMEs need to be able to access domain knowledge support and implement it in their operations by leveraging latest technology and management tools.
In order to overcome the challenges they face by virtue of the size of operations and new trends discussed above; SME’s should seek professional support and training from professionals who possess strong technological knowledge and market & commercial expertise which can complement the promoter’s vision for growth and sustainable business.
Ultimately, how enterprises tackle these changes will be critical for their future productivity and growth. It will require significant changes in approach to be able to develop and deliver a world class enterprise which has the ability to seize the fast changing domestic and global opportunities.
