Challenges Faced by SMEs in Developing Countries

Small and Medium Enterprises (SMEs) are an integral part of any economy and play a vital role in supporting a stable economic environment. They are crucial in upholding the growth and existence of economy especially that of developing countries. SMEs are driven by combined efforts of private entrepreneurs, government and financial institutions.

Developing financial sensibilities
One of the key elements for an SME’s success is access to finance. In developing countries, SMEs face a number of hurdles while achieving the financial resources for building up of their businesses. Finance is crucial for any SME to acquire or absorb innovative technologies. Their expansion to global markets or association with other firms is also related to the availability of finance. Traditionally, SMEs find it difficult to avail credit or equity. Even maturities of commercial bank loans offered to them are limited to a very short period. Similarly, lower interest rates are extended to a very few companies.

SMEs are often considered to be high-risk borrowers because of insufficient assets and their vulnerability to market fluctuations. They are also very much susceptible to mortality. The existence of an information asymmetry caused due to lack of records in accounting and inadequate business plans often make them a difficult choice for creditors and investors. Also, the high cost of transaction or related administrative costs of lending small amounts make lending to SMEs a risky proposition. Even then, banks turn out to be the biggest supporters of SMEs. It has also been proven that banks would benefit commercially from lending to SMEs. 

Plan your finance and take the right ladder to growth

Find the right investors
Besides assistance from banks, SMEs can also rely on private equity firms which are experienced and expert in their businesses. They would prefer to invest in businesses which have a potential to grow. Many SMEs do not prefer such investments because of the interference by the equity firm members. However, there are certain investor firms who prove to be a viable option for funding as they use their own money for funding various initiatives.

Society has seen a new spurt of CEOs and successful entrepreneurs who are investing in new ventures and ready to support upcoming SMEs. These investors also provide their expertise to the firm and support them with their management skills. Bombay Stock Exchange (BSE) has already kick started its SME platform with the Rs 8.5 crore initial public offer (IPO) of a non-banking finance company (NBFC), BCB Finance. This has set high hopes for Indian SMEs who can now raise domestic capital for their own requirements through this way.

Alternatively, since SMEs have a bigger scope of getting their funds from banks, they can improve their credibility. Another solution offered is maintenance of better business plans, improved credit ratings and maintaining reliable financial information which would help banks and financial institutions in having more confidence in lending to SMEs.

SMEs can also go in for mergers with other firms to complete their fund requirements. Mergers also provide them opportunity to enter into international markets and form strategic alliances to expand their business and enter new productions. SME sector of any country is expected to drive the growth of any country’s economy and offer a significant opportunity for various investors to contribute in the future of a country.

Know Your Customer for Higher Growth

The customer is the key entity that drives the market. If a company is able to understand the various dimensions of its customers including social, functional or emotional factors, it would be equipped to design a better product for it. Customers expect excellent products at optimum prices and are also willing to pay as per the product or service. For example, for a hypermarket chain, the behavior of its staff, the pace of its service, maximum discounts on the prices, availability of variety of products will determine its success amongst the users. With a tough competitive market, the SME with a better understanding of its users would have a better chance to outstand others. 

The success of an SME is identified by its grasp of the market, which is in turn driven by the needs of the customers. Thus, knowing the customer becomes imperative for any SME. Every company must develop its own program to understand their customers. The company, the nature of its users and the type of products or services it has to offer are some of the important considerations while planning the program. 

How Well Do You Know Your Customer?
A customer knowledge program should make the SME aware of customer emotions and experience about their products and goods. It should also educate them about the customers’ needs and expectations and also present the market perspective for their products. For example, a company selling shoes should realize factors such as material preferences, designs, looks, climate conditions and average shoe sizes of the population, before even manufacturing any product.

Communicate with the Customer
Communication is the key word in a Know Your Customer (KYC) program and it should consist of interactive surveys, information feedback forms from the customers to know their needs from time to time, et al. Customers need to be visualized as the best brand ambassadors of any company's products/services. Their problems need to be assessed in a regular manner and for every purchase. They need to be offered more for being loyal to the brand. For example, a paints company could provide customers with a sample booklet for choosing colors and in return, request them to fill out a form regarding their preferences in colors, materials from that particular company. This way, both agencies are benefited from the mutual exchange. Presently, the world wide web provides the SME to have a better connect with users directly.

Through the KYC program, the customer also needs to be assured that his inputs are considered for developing the existing products into better ones. Many companies conduct product surveys and often reward the customer for participating in it. These programs also help SMEs enter into a new market or launch a new product in an existing one. They also save a potential company from causing itself any damage through a new service or product.

Key Objectives of KYC
Some of the key objectives of a KYC program include verifying the needs of the customers, monitoring changes in their preferences, manage risks regarding new initiatives, etc. In short, the existence of a stable KYC program contributes to the growth and success of an SME. So, when are you improving a KYC program?

The Merger Benefit for SMEs

The Indian economy is bubbling and along with that are the big players. Pleasantly, this time round a lot of SMEs are also joining the bubbly bandwagon. A primary reason for this growth is the way smaller enterprises are taking to business decisions like mergers and acquisitions.

The Pretty Picture
A burgeoning number of Indian SMEs are entering into mergers and acquisitions with various players from India and worldwide. The numbers have nearly doubled over the last two years alone. At this juncture, one needs to thoroughly understand the advantages of mergers for a particular SME. With a merger, an SME can acquire a greater set of resources for itself which can include manpower, machinery and other innumerable assets. In turn, this can boost its efficiency which can lead to an increase in its output and also lead to a reduction in the cost of producing a particular product or services. This reduction in the expenditure and improvement in the output can convert to better business growth for the enterprise. 

How Mergers Help
Mergers can help an SME in covering/removing its weaknesses in the long run. For example, any SME that is lacking in its R&D is advised to merge with an agency with strong R&D skills which can boost the productivity of both enterprises. Similarly, in the global context, mergers assist SMEs in penetrating new markets. Any Indian SME can also partner with agencies from foreign countries to facilitate retail for both their brands within India. Besides bringing a host of new technology and products into the country, it would also introduce better management, practice and culture to the agency. Both the agencies stand to gain from merger and it provides foreign SME with the know-how about Indian market and its demands for the coming times. Also, while SMEs go into mergers, they get into some fruitful partnerships regarding proprietary rights for products which can benefit the end user. IT sector is a clear example for such mergers where SMEs combine to offer a variety of products for the user. This also opens new markets for the SMEs and also contributes to innovation and propagation of a particular merger.

Reverse Mergers
In many cases, mergers also help SMEs in rising out of debt and works as effective exit strategy for many companies. Many SMEs can also enter into reverse mergers whereby a private company can merge with a public enterprise and form a public entity with a control exerted by the private company. With a reverse merger, private companies can exert better control on an existing public company and still run an enterprise with a public existence. There are a number of examples in India itself where an SME has acquired a larger status through its timely merger with another SME. Most of these mergers are found to be from the manufacturing sector although service sector is also joining in this process. The option of  leverage buyout financing and acquisition funding process which is supported by private equity houses prove to be some of the reasons for the sudden spurt in mergers amongst SMEs. Mergers prove to be one of the best ways for an SME to grow and expand. With the advent of globalization, it has become a more opportune growth for SMEs.  

Imperatives of skill development

Human resources are significant for the growth and development of SMEs and they should be managed well. It is extremely important to provide good training to employees. Every company has its own standards and so training employees is inevitable.  To save time and money, companies often tend to compromise on training of workers. It’s time to take this routine practice through a test.

Get the Industry In
Institutes are busy training people according to academia. It is time the industry steps in to tell the academia what they really require. Industries are now coming together with private universities to see how they can come together to develop a talented workforce that is employable. This has been a challenge so far and the attempts being made are few and far between.
 

Training on the Job
All leading companies train their workers because it is the single-most effective tool that has no substitute. Recruitment of the workers for white and blue collared ones is especially important and companies need to ensure that they are absorbed aptly into the company. Recruitment should be taken seriously and skilled HR capabilities should be employed to ensure right people are employed. 

Remunerating Well
People should be paid well and in accordance with their ability and skills. This not only ensures that they do a good job, it also means people stay with the company for a longer time. Of course, it is important to ensure that the person being recruited has a nice reputation and a good past record. Standards of recruitment should be high and competitive individuals should be given the right opportunities.    

What’s the Big Difference?
Say a company has sources technologically advanced machinery, but if the workers are not skilled and trained properly then the machinery would lie unproductive. So training of the employees is a must. They should go through training to hone their skills and to improve their performance. 

Human resources are the most powerful investment for any company. The workers should be managed intelligently and work should be assigned as per their capabilities. They should be encouraged to perform well for better productivity for the company and greater success for the person. Dedicated and hard working employees should be rewarded and they should be promoted with time. The training method should be interactive so that the employees can share their problems with the head. 

Unskilled workers are the biggest hurdle for the growth of a company. Therefore, they should be trained to generate more output and to meet their targets in a minimum time. The skilled work force tends to be more efficient and thus contributes in a big way to the advantage of the firm. Good workers add to the reputation of the company. It should be kept in mind that the employees who are given a healthy working environment are your biggest assets. 

Intelligent management of human resources is the key to success. A team of experienced and new workers should be engaged so that the freshers can learn. The leader should have a positive attitude to inspire workers to perform better and to the best of their ability. Adequate channelizing of resources makes it possible to reduce wastage and to raise turnover. So, skill development is crucial for the success of SMEs and a must-do for a productive tomorrow.

Expert Speak: Mr. GK Pramod

Fundamentals of Business Scalability for SMEs

The Indian Small and Medium Enterprises (SMEs) are carving a niche for themselves in the growing economy of the nation. While their success is fortifying the economy further, it has become imperative for them to maintain a positive growth trajectory.

With this optimism, we will talk about how the Indian SMEs can have an effective business growth (discussed elaborately in the previous blog) with the vital 'Sutras' – Scalability, Sustainability and Profitability'.

We will have a glance and understanding of the Sutras in a practical way by referring to relevant case studies. This will make the entire process of understanding the Sutras more interactive and alive. We will begin with Scalability in this blog and understand its importance.

Scalability

If a Microlevel Entrepreneur is able to increase his/her business by duplicating his/her product/services without affecting the quality of the product/ service is called Scalability.

Importance of Scalability

• Scalability helps Microlevel Entrepreneurs to increase turnover first, and profitability next

Do’s

• Look at scaling up the business, only when the existing business unit becomes sustainable

Dont’s

• Making huge investments in new outlets may be too much of a risk for a Microlevel Entrepreneur

Case Study

We will discuss two case studies – Service business & Product business, to illustrate scalability in a better way.

1. Case Study-1 (Service Business): Mr.Ramesh Patil is a Microlevel Entrepreneur from Belgaum in Karnataka. He is running a Photography and Videography business.

The details of Ramesh Patil’s business organization unit are as follows:

1) Name of the entrepreneur: Mr. Ramesh Patil

2) Name of the organization : OM Shiva Videos

3) Nature of business : Photography & Videography

4) Details of turnover for the past 3 years:

Analysis:

Can Mr. Ramesh Patil create more number of Videography and Photography businesses providing the same quality of service to his customers?

If the answer to the above question is “Yes”, it is called a “Scalable Business”.

If the answer to the above question is “No”, it is called a “Non-Scalable Business”.

In this case Mr. Ramesh Patil can create more number of outlets. Hence this is a Scalable Business.

Challenges in Scalability in Service Business

When you scale up the business you need to ensure that the quality of the service remains the same in all outlets.

2. Case Study-2 (Service Business): Ms. Usha is a Microlevel Entrepreneur from Mysore in Karnataka. She is selling natural fresh juice.

The details Ms.Usha’s business organization unit are as follows:

1) Name of the entrepreneur: Ms.Usha

2) Name of the organization: Sushruta Fresh Juice Centre

3) Nature of business : Natural fresh juice

4) Details of turnover for the past 3 years:

Analysis:

Ms. Usha is a Microlevel Entrepreneur selling natural fresh juice in front of the parks in Mysore in Karnataka. She started one juice centre in a Maruthi van. Today, she has 4 to 5 juice business outlets across Mysore. So, her business is a Scalable Business.

Challenges in Scalability in product business 

If it is a product business, then marketing the product and reducing the price will be the two main challenges.

Scalability: Comparison between Product and Service business

Dear Microlevel Entrepreneur, do you think scaling up Mr. Mr.Ramesh Patil’s business (service business) is easier compared to Ms. Usha’s business (Product business)?

If we observe closely, scaling up of Mr. Mr.Ramesh Patil’s business (Service business) is more difficult compared to Ms. Usha’s business (Product business).

In a service business it becomes very difficult to maintain the same quality of service at all the business outlets. Even if Mr. Ramesh Patil hires a new person, say, by name Mr. Basappa Hallimatti, there will be a difference in the quality of the service provided by Ramesh Patil and Basappa Hallimatti. It is not that scalability is not possible in a service business. It is very important to adopt proper methodology and quality process in all the OM Shiva Videos outlets run by Ramesh Patil.

Bottom line to remember about Scalability

Once the existing unit starts making profits, it is better to scale up the business. Scalability brings stability to the business.

We will continue with the next Sutra – Sustainability, in my next blog. Hope this blog will be of help to the aspiring and existing entrepreneurs. Kindly leave your comments and queries.

The blog has been authored by Mr. GK Pramod, Co-founder, The Second Gear - MBA for Non MBA's Mentoring Module Concept.

To contact the author, e-mail at gk@tothesecondgear.com

Expert Speak: Mr. GK Pramod

Business Growth & its Relevance for SMES

As a Small and Medium Enterprise (SMEs), we all talk, dream and think about business growth to achieve higher goals in life. But it is as imperative to understand the meaning and relevance of business growth.

We all have our own definitions and meaning of business growth for our company depending upon the business requirements or the success achieved so far or may be the failures from which they have learnt. The sphere of business growth might include increase in turnover, heavy investments, hiring more people, et al, but this is not all. Business growth has a broader spectrum in terms of achievement which a company aims for.

Let us understand the concept with an example so that we may be able to define the business growth strategies for our respective companies.

Ramesh Patil’s Case Study (Service Business):

Mr. Ramesh Patil is a Microlevel Entrepreneur from Belgaum in Karnataka. He is running a Photography and Videography business. The details of Ramesh Patil’s business organization unit are as follows:

1) Name of the entrepreneur:                 Mr. Ramesh Patil

2) Name of the organization:                  OM Shiva Videos

3) Nature of business:                            Photography & Videography

4) Details of turnover for the past 3 years:

 

According to Mr. Patil, the definition of Business Growth would envelopes:

a) Growing the business

b) Increasing the turnover

c) Investing in buying new digital cameras

d) Hiring more people

But if we see Mr. Ramesh Patil’s case, he is only considering very few points related to Business Growth leaving the other vital parameters regarding Business Growth which are mentioned below:

a) Increasing profitability

b) Increasing market share

c) Opening more business outlets

d) Pumping more finances in to the business

e) Diversifying into advertising, publishing, editing and other business areas

Dear Microlevel Entrepreneurs, let us combine and analyse all the points related to Mr. Ramesh Patil’s Business Growth of his Photography and Videography business.

Importance of Business Growth:

a) A Microlevel Entrepreneur gets motivated by Business Growth

b) Business Growth helps in increasing in turnover there by profitability

c) Increasing the customer base

d) Increase market share and market size

e) This helps the Microlevel Entrepreneur to move from Microlevel to Macro level

Key Points to Remember:

a) Prioritize Business Growth Strategy
b) Give importance to existing business and simultaneously sensibly plan for the product/service diversification in the near future

While we have discussed Business Growth in this blog, we will continue in the next blog with the must practice three ‘SUTRAS’ that makes the business growth strategies more effective. Hope the blog has been insightful.

The blog has been authored by Mr. GK Pramod, Co-founder, The Second Gear - MBA for Non MBA's Mentoring Module Concept.


To contact the author, e-mail at gk@tothesecondgear.com

Kindly leave your comments and queries.

Expert Speak: Mr. Ajay Wahi

How can SMEs retain, preserve and spread hard-earned knowledge


This same problem arose last month – how did we solve it then?

What do you mean you don’t know, why didn’t we capture the solution? Now we have to waste time to re-solve the same problem!

I remember such an issue arising – I wonder who solved it then. Let’s find out, and give it to that same person to solve this time as well.

Do these words sound familiar to you? Probably they do, and you are at your wits’ end to find a way to stop reinventing the wheel every time an issue needs to be fixed.

To overcome such a problematic situation, what I practice is to create a Global Learning Repository (GLR). This is a centralized storehouse of Learnings which can be accessed by anyone at any time, though the right to add Learnings to the store exists only with team leaders. This is to ensure that learnings are correctly recorded in an organized manner so they can be retrieved easily. And these learnings can originate from any event in the company.

When our Development department resolves a difficult bug, or efficiently designs a product, or is faced with a choice of many ways to architect a product and eventually decides on one approach, it is important to record these events so that the next time such a situation or choice arises, employees have access to relevant previous choices or decisions made, and the justification for those decisions.

Sometimes our Professional Service department, which needs to access certain internet sites to customize our products for clients, finds some sites very difficult to negotiate. It certainly helps to have a record of which sites are difficult so that we know this ahead of time for similar tough transactions in the future.

Assume you are about to close an important deal, and only have a 50% chance of winning it, because you have a strong competitor. The Head of Sales calls a meeting of everyone involved in the deal to brainstorm on how to close the deal in our favour. So the relevant salespeople, technical people, commercial people etc. are all called for the meeting. You brainstorm and analyze your product and your competition with respect to the client’s needs, and evolve a strategy that wins you the deal. It is very possible that a similar situation might arise in the future, with the same product and/or type of client and/or competitor. If you have a GLR, the lessons from the first case would be available on record for the other sales person to refer to in the future, saving you time and energy, and winning the deal again. Naturally, without the GLR, you would need to repeat the same exercise, losing time, effort, and efficiency, by which time the deal itself may have been lost!

The GLR would have the entire history of all learnings and how they were resolved the very first time they occurred. Learnings can be from critical situations, mistakes made, complex problems resolved, out-of-the-box thinking on the part of a bright employee and so on. For instance, if an architect designed a house on a hill station after heavily researching the direction and strength of sunshine in both winters and summers, it would make sense to add the relevant research to the GLR so that such projects in the future would have access to this research. Thus, similar houses would be designed faster, increasing revenues and hence profits for the builder.

Now that you understand the need for a GLR, let us see how to manage it, because a disorganized GLR is as bad as not having one! It is vital to manage the GLR correctly. As CEO, you must decide upon the form in which learnings will be stored. You may store the records of all learnings in spreadsheet form or you may like to use free software tools like Tweet etc. For the GLR to be useful, it is essential to categorize learnings correctly. You could choose to sort all the learnings by product or by learning types or by person or by skill types or any other criterion. Next, you need to decide who can enter learnings into the GLR; only team leaders have this authority at our company. This is important to ensure that learnings are placed correctly in the relevant category else the entire concept will fail because learnings are irretrievable!

Summary
Create a GLR, decide which tool will manage it (spreadsheet, Tweet etc), create categories to record learnings , decide who can enter learnings, and finally see how these learnings can be shared with the rest of the employees. But where do the inputs for the GLR come from?

The inputs for the GLR come from 2 sources. The KTs you would conduct (see Learning 23) are all learnings that need to be recorded in the GLR for future references. Similarly, all learnings which come from out-of-the-box thinking need to be recorded in the GLR for future reference.

Caution: The GLR must have learnings correctly categorized and entered in order to be useful to employees.

Employees must be thoroughly trained on how to enter and access information into/from the GLR.

Sum-up: Having a GLR saves time and effort, allowing quicker, correct results.

With GLR, the experience of all employees, even if they have long left the company, can be mined for the benefit of the company.

The contributor of this article is Mr. Ajay Wahi, author of management books like and the award for the BEST SME of the year goes to... and  Get Noticed Get Promoted.

He can be contacted at 9810027979 or awahi2010@gmail.com

Software for Start-ups: Increasing Your Chances of Success

What has technology to do with business success, well quite a lot! Technology around is changing the way business is conducted today. We are seeing changes in almost every sphere of business. From communications to sales. From operations to supply chain. Many start-ups look for various pieces of low cost/ free business software to manage their businesses, but at a start-up stage, when you are just planning your business, what you really need is software to help you manage your plans, to structure your business better. You don't necessarily need an office/ accounting software at this stage.

Lets help you structure your business!

Starting a business is a whole management process in its own self. Getting a whole part while initiating a business right is absolutely crucial. An entrepreneur does not only have to just get up and start executing, there is much management and planning which goes into creating a powerful business.

The business planning software by winweb helps you do just that. The screen capture above shows how you can use the winweb software to structure your initial ideas and hence come up with a clear business model. 

What does the software help you do?

• business goals planning
• intuitive graphs for easier analysis
• business analytics
• SWOT analysis
• cash-flow planning

And not just this, the winweb business planning software helps you structure many other things for your business like your Go To Market strategy. What decisions you need to make and what are the criticalitie(s) involved. Example, in your marketing the software helps you understand what areas to explore as shown in the screen capture below:

Team IndiaMART Knowledge Services is committed to create new opportunities or SMEs to grow. To know more about how you can leverage the internet and new media technologies, drop in a comment to this post and our team of experts will be happy to help!