group 1 project report v2

8/3/2019 Group 1 Project Report v2

1/23

Future of SMEs in India: Opportunities and Challenges

A report submitted to

Prof. Deepak Sinha

as part of academic requirement for

Course titled

Corporate Strategy

by

Group 1

Aravind V (1011157)

Neha Rani (1011186)

Chaitanya Kumar P (1011305)

Sagarika A (1011348)

Sylvia Grace (1011366)


2/23

Contents........................................................................................................................... 1

Future of SMEs in India: Opportunities and Challenges ......................................1

Contents ................................................................................................................ 2

Introduction ........................................................................................................ 4

Advantages of SMEs ........................................................................................... 4

Challenges faced by SMEs .................................................................................. 5

Capabilities and resources required to emulate large enterprises: ....................7

Role of Government: Existing policy and drawbacks .......................................11

Comparison of SMEs: India vs. Other developed countries ..............................13

The Role of Government in SME Development in Transition Economies David

Smallbone ............................................................................................................ 14

Do SMEs in India have the potential to become giants in next few years? .......16

Industry-wise analysis ...................................................................................... 18

Conclusion: the future of SMEs in India ............................................................ 21

Exhibits ............................................................................................................. 22

Exhibit 1: abbreviations....................................................................................22


3/23


4/23

Introduction

Small and Medium Enterprises play a vital role in the growth of the Indian economy. India

sees a dominant presence of SMEs in both manufacturing and service sectors. According to

the ministry of MSME, asmall service enterprise is one where the investment in equipment

is between ten lakh and two crore rupees and a medium service enterprise is one where the

investment in equipment is between two crore and five crore rupees. A small manufacturing

enterprise is one where the investment in plant and machinery is between 25 lakh and five

crore rupees and a medium manufacturing enterprise in one where investment in plant and

machinery is between five crore and ten crore rupees. According to estimates, in terms of

value, the sector accounts for about 45 per cent of the manufacturing output and 40 percent of

the total exports of India. The SME sector employs about 42 million people in over 13

million units throughout the countryi. There are more than 6000 products, ranging from

traditional to high-tech items, which are being manufactured by the Indian SMEs. In India, 95

percent of industrial units are in small-scale sector with a 40 percent value addition in the

manufacturing sector. Indian SMEs are important to the Indian economic system as they

provide second highest employment levels after agriculture. Their potential to generate

employment, bolster exports and bring flexibility into Indias business environment drives the

Indian policymakers to concentrate on SMEs.

Advantages of SMEs

Customer service:

SMEs understand end customers needs better given their proximity to them. Thus, they are

in a better position to offer personalized services to customers.

Flexibility:

SMEs are very agile because of their lean structure and their inherent ability to sense market

changes. This is possible because of small size of their target market and easy access to


5/23

market place information. Thus, SMEs have the advantage of faster and better adaptation to

new needs, tastes and preferences of consumers.

High labour productivity:Workers in SMEs are more motivated in than those in large enterprises because of their

continuous interaction with employers and very closely knit workforce.

Challenges faced by SMEs

Low access to funds:

The main challenge faced by SMEs is timely and adequate access to funds. This is because

banks and other financial institutions have a bias against small loan portfolios. To circumvent

this problem, RBI formulated guidelines that banks do not insist upon collateral against a

loan to SME.

Also banks are sceptical to lend to SMEs mainly because of lack of transparency regarding

their financial conditions. Evidence states that a significant proportion of lending to SMEs in

transformed into NPAs. This makes banks/other Financial Institutions (FIs) to be risk averse

until they get detailed financial information about the concerned small/medium enterprise.

For e.g.: Statistics say that around 98% of sick units are from small scale industries. These

numbers put the lenders at much higher risk.

SMEs tend to receive very little investment, including both foreign direct investment and

local private investment. They are often seen as too small by investors or too large to receive

support from microfinance institutions and development agencies.

Lack of adequate systems:

SMEs face problems due to lack of standardization and proper planning. Half of these

problems might be attributed to lack of proper IT systems in place. Because of lack of proper

IT systems, SMEs face the problem of collecting and archiving information for further use.


6/23

Lack of skilled workforce:

Though SMEs help the economy by creating employment locally but because of attractive

wages offered by large enterprises, it is difficult to retain talent in SMEs. Also, the flat

structure of SMEs restricts the prospect of growth for employees and this might hit their

career goals, leading to dissatisfaction and attrition.

Lack of proper infrastructure:

Low access to funds is often transformed into poor infrastructure. These infrastructure gaps

are different for SMEs in urban and rural areas. Amongst others, the prime infrastructure

related problems are irregular supply of electricity, water supply, poor communication

facilities etc. Similarly, poor transportation facilities, especially in rural and semi-urban areas

have been cited as constraints encountered by small enterprises in gaining rapid access to

newer and larger markets.

Narrow focus:

Trade liberalization has increased the capacity of well-established foreign manufacturers and

retailers to penetrate both remote and underdeveloped markets. Thus, global competition

confronts purely domestic, whose product and sales are extremely localized and/or

segmented. Against this development, local SMEs find it increasingly difficult to survive or

even maintain their current business position in their respective markets.

High costs in development:

Local SMEs are at a disadvantage with respect to latest technology, machinery etc. Thus, the

adopt conventional ways of production, which increases their cost and production time.

Major problem with Indian SMEs is that they operate at very low scale of production and this

hinders their capacity to reduce the costs of products and engage in technological upgrades.

Capturing a certain scale of operations is very critical in SMEs growth path.


7/23

Less R&D:

SMEs have rich knowledge of local markets but they do not have the required expertise to

innovate rapidly and provide new market offerings.

Inadequate business protection plan/ Inability to withstand downturns

or shocks

SMEs dont have an adequate business protection plan to protect them from downturns or

business risks. This is important because owing to their small size and limited resource

availability, SMEs are more prone to buckle under downturns or misfortunes in business.

Therefore, it is very important to identify possible negative shocks or business risks that are

most predominant among small firms and take appropriate measures to minimize those risks

by suitable business protection plans. The business risks that SMEs are vulnerable to are

excessive dependence on single supplier or distributor, late payment disrupting the working

capital management, price fluctuations, dependence on single promoter, ignorance of

international environmental and IP laws. SMEs in many cases are either unaware about the

possible business risks, or wherever they are aware, have limited financial capability to have

a hedged exposure to such risks.

Capabilities and resources required to emulate large

enterprises:

Building competitiveness in production:

SMEs can be made competitive by reducing the costs in production, strengthening product

service/quality. To attain competitive position, SMEs should concentrate on building superior

technological expertise, strengthening marketing and sales strategies to cater to larger group

of customers. It should also make conscious efforts to recruit and retain talented pool of

workers.


8/23

Cluster formation can enhance the competitiveness and sustainability of the SMEs. For

example, the auto components sector in India is dominated by SMEs. The SMEs in the auto

component sector had formed clusters in 3 regions: Gurgaon, Chennai and Pune. These

clusters provide ideal setting for SMEs to access support systems, increase participation in

international markets, disseminate best practices, and distribute the fixed costs of

infrastructure amongst themselves. Creation of export consortia can also be applied to

enhance cluster competitiveness.

Catering to international (large) markets:

SMEs have poor access to international markets. This is not just due to the shortage of funds

and investment, but also due to difficulties confronting SMEs in identifying foreign business

opportunities, contacting potential overseas customers, and accessing export distribution

channels. As a result, SMEs are less likely to be able to export directly and often end up

being sub-contractors for recognised companies.

To circumvent this, SMEs should understand government policies clearly and try to work in

close collaboration with various government agencies. After export duties are cut down

drastically, with the introduction of STPIs and SEZs, these small and medium enterprises

should look at targeting international markets.

Innovation in product offering and quality:

SMEs should formalize the information they get from the marketplace in systems. This

information should be used to understand consumer preferences and innovate accordingly.


9/23

To build this capability, they need to work with large enterprises to use physical resources on

a shared basis. Also, SMEs need skilled human resources to improve their R&D capabilities.

This capability can be built by tying up with education institutions and other service agencies

and impart superior training to their employees on best business practices in the sector of

their operation.

Difficulty in scaling up due to informal operation systems

SMEs that are successful as small ventures may face strategic, operational and organizational

challenges in managing their growth to the next level. Most of the SMEs have an informal

operation systems in place that may be sufficient to cater to low-volume needs. However, as

an enterprise grows larger, the operations systems may buckle under the increasing scale and

complexity of demand. Moreover, now there is pressure to deliver on multiple performance

dimensions like quality, cost and delivery. SMEs therefore need to conceptualize and manage

the transition from non-formal to formal systems for coordination of their operations. SMEs

need to acquire capabilities in Operations Management and Information Technologies in

order to scale up successfully.

Better Decision-making

To scale up and compete with larger enterprises, SMEs will need better decision-making that

can only come from having skilled and experienced senior management. However, SMEs

face serious talent crunch at the higher levels because their pay package and brand equity can

not beat that of the larger players.


10/23


11/23

Role of Government: Existing policy and drawbacks

Government provides various incentives to SME units by reserving few manufacturing goods

exclusively for manufacturers of SSI, through State small Industries development

corporations (SSIDCS) provide raw material, Financing on concessional terms to micro and

tiny units, excise duty concessions, Assistance in providing marketing support to their

products and pricing preference

Level Field: In India, definition of SME is based on capital investment. As most of the

incentives are based on these criteria, Firms do not want to graduate from micro, tiny, SSI

and medium scale. These limit the investment in up grading technology by these firms to

receive the incentives. In most of the other countries like China, Indonesia, Malaysia, USA,

Germany and Japan definition of SME is labour-intensive rather than capital-intensive.

Distinction between one-time and continuous support: Tiny sector needs sustained support,

whereas support to SMEs needs to be one-time. The one-time support can be in the form of

cheap loan, land allocation, access to infrastructure. Fiscal concession beyond a certain limit

acts as a dampener to growth to SME sector. There is a need for differential treatment for

Urban and Rural SMEs as this should compensate the locational disadvantage. But as of now

this is not taken care by Government of India

Links between SMEs and Organised big players: As of now, Government is not facilitating

links between SMEs and big players. Small-scale units can produce at low cost with design

inputs and quality control being supplied by the large firms.

Growth centres: As of now Governments assistance is at individual level, but emphasis

should be developing growth centres as an agglomeration of SMEs.

Other important measures initiated by the Indian government are:


12/23

1) Increase in composite loan from 2 lakh to 50 lakh 2) Lending through non-banking

financial companies 3) New insurance scheme to provide security to lenders (This scheme

popular in Malaysia as Credit guarantee Corporation is very successful in supporting SME)1

4) Funds through 50,000 SHGs to fund micro enterprises 5) Custom duty rationalisation 6)

Increase in project limit under NEF to 50 Lakh 7) Loan limit under credit-linked capital

subsidy has been raised to 1 crore for technology up gradation 9) Under SIDBIs program

SME can avail funds at 2% below prime lending rate 10) Better coordination between SIDBI

and commercial bank branches 11) 497 specialized SSI branches have been set up to fund

SSI

Two aspects of globalisation has been threatening SME survival 1) SMEs seeking to compete

beyond national boundaries 2) Domestic SMEs subjected to impending competition from

across the border.

So SMEs should bring together their technical capabilities, integrate with capital markets and

assimilate limited foreign ownership. Therefore the policy trust should be on technology

upgradation, modernisation and technology oriented entrepreneurship.2

1 http://isb.sagepub.com/content/23/4/427.full.pdf+html2A New Deal for Small and Medium Enterprises in India


13/23

Comparison of SMEs: India vs. Other developed countries 3

Innovation: In Japan, 50% of SMEs develop new products by combining existing

technology, and overall 62% of SMEs have developed new products. This level of innovation

is embedded in the policy of SMEs in Japan. Contrary to this, Indian SME policy is mostly

revolved around technology development. Our SMEs depends mostly on technology transfer

rather than on in-house technological innovations. Even in the latest MSMED Act 2006, there

is no reference to promoting innovation. Even in country like China, to encourage innovation

they have introduced The SME Innovation fund4, where evaluation is done based on

technology, accounting and management of the unit.

Integration of Industries: In Japan, the major industrial structure is the integration of

industrial enterprises of varying sizes through subcontracting. This is the distinctive feature in

Japan under which SMEs thrived. In India, SMEs are not highly integrated with big players.

They mostly have informal agreements with big players and without any partnership they

operate on vendor-seller relationship. It was the new product needs of major customers,

which gave an immediate push to the innovations of Japanese SME whereas it is the constant

touch with the customers, own perception of entrepreneurs and periodic visits to international

exhibitions, which played a crucial role in the innovations of Indian SME

Adaptability: In Japan, owing to extended recession, changes in global industrial structure

and advances in Information technology had put SMEs in a precarious situation. But because

of high integration with big players, they came up with the following strategies 1) Specialize

in developing new products and new technologies 2) Implement process innovation that

incorporates inventions and intellectual know-how 3) Manufacture high value products as

well as develop new products as demanded by the customers. A major player guides SMEs

3

Nature and strategy of product innovations in SMEs M H Bala Subrahmanya

4 http://info.worldbank.org/etools/docs/library/49274/yao2.pdf


14/23

which are integrated to it through various quality measures for example Canon helped SME

Sanei to acquire ISO 14001 certification, collaboration with its employees for development of

new products. Because of this mentoring from Canon, Sanei was able to stave off the threat

of competition. On an average Sanei took around 6 months to come up with new product.

Whereas in India, due to no formal links between industries, lack of R&D infrastructure it

takes around 1 year to develop the product and another six months for approval of customers.

Indian SMEs are conspicuously dependent on government for keeping off competition.

Institute/University Collaboration: Institute collaboration is the major support system for

SMEs in Japan. Most of the innovations that happened in SMEs received help from

universities. In India, this is completely a non availability

The other major inferences from this comparison are below

1) Internal capability development is crucial for long term success 2) External support is

more crucial in a developing country 3) Only product innovation can sail SME through the

competitive environment 4) Product innovation facilitate SME to grow in Size

Conclusion: Policy related changes that affect the overall environment of doing business like

financial institutions, Infrastructure, level field competition, developing a collaborative

linkage between SMEs, Educational institutions and Big players plays a major role than

providing direct supports like subsidies, cash discounts, tax incentives. Although there may

be a case for selective interventions direct support measures are not the main role for

government5. But in an imperfect market, government support partially substitute for the

market to serve the role of a financial intermediary

5

The Role of Government in SME Development in Transition Economies DavidSmallbone
http://isb.sagepub.com/search?author1=David+Smallbone&sortspec=date&submit=Submithttp://isb.sagepub.com/search?author1=David+Smallbone&sortspec=date&submit=Submithttp://isb.sagepub.com/search?author1=David+Smallbone&sortspec=date&submit=Submithttp://isb.sagepub.com/search?author1=David+Smallbone&sortspec=date&submit=Submit


15/23


16/23

Do SMEs in India have the potential to become giants in next

few years?

The growth of SMEs is India has come up in an uncontrolled, unplanned and haphazard

manner. They are present in clustered as well as dispersed manner, in industrial, commercial

and residential areas. These clusters lack reliable and infrastructural facilities such as power,

road, transportation as well as good communication, information and technical inputs. They

need to strengthen their competitiveness which is not an easy task. Though sometimes they

perform better than their larger counterparts it is extremely difficult for them to compete with

them on a bigger time frame. We strongly feel that SMEs in the current scenario are not ready

to compete with the large organizations at least in the coming few years. The following

reasons have been listed to support:

In todays competitive world it is not only important for the organizations to provide

excellent products and services but making the presence known also is an important factor.

Thus it is extremely difficult for the small and medium enterprise with their limited

capabilities and capacity to compete with existing large organizations to make their presence

known. Branding plays a very important role which the SMEs need to realize.

Another major problem that SMEs face is to find finances. It is much harder for them to

borrow money from banks or to find private investors than for larger firms. Financing is

necessary to help them set up and expand their operations, develop new products, and invest

in new staff or production facilities. Since SMEs are usually new to the markets, and have

negative cash flows and untried business models, they present a greater risk to the banks and

thus the financing is much difficult for any SME which is trying to create innovative

productsii.

Another problem that we have identified is that SMEs does not have standard HR processes

like big organizations. One reason is that it is not very economic for them to implement large


17/23

ERP solutions. But at the same time it means that they do not have enough capabilities to

become world class and attract big talents. Effective management of administrative work

enables HR personnel to focus on strategic and value-adding activities. Having a well-

defined/structured employee database helps in streamlining transactional HR processes like

payroll & employee benefits, workforce administration etc. But developing these will take a

lot of time, expense and capability on the part of SMEs iii.

SMEs also need to adapt to the technological changes. They need to make a lot of changes as

technology plays an important part to move up the value chain and provide with business

strategies to provide opportunities. SMEs need to integrate such technologies that can fuel

innovation, enhance business agility, communication and information management, and

merge harmoniously with existing systems and processes. Currently, there is only limited

adoption of the technology by SMEs in India which makes it very difficult for them to

compete with existing big organizations in the marketiv.

SMEs are facing huge competition from the international organizations. Due to globalization,

the cost of transportation and communication has reduced tremendously across borders. India

is a member of WTO, and thus has reduced quantitative restrictions. It is very difficult for

small scale enterprises to compete with the economies of scale provided by these big

organizations. There is introduction of exclusive policy for small industry but that has

reduced the number of items reserved for small industry manufacturing from 842 in 1991 to

239 in 2007v.


18/23

Industry-wise analysis


19/23


20/23

S.No. Industry Current Scenario Advantages Risks

1 Auto components 1. Government initiative for cluster-

based development

2. The industryis undergoinga major

restructuringand many existing

companies are expected to move up in

the value chainto a higher tier

1. Cost savings of 25%-30%when

compared to global peers

2. Desingning, engineeringand technical

skills

3. Adaptability to newtechnology

4. Availability of rawmaterials

5. Established quality systems

1. Aglobal slowdowncanderail the

prospects of the industry

2. Tier I manufacturers taking up greenfield

projects overseas

3. Volatility inthe prices of metals and

other inputs could erode the industrys cost

competitiveness

4. Competitionfromcounterparties inother

emerging countries

2 Foodprocessing 1. Diverse nature and a policy of SSI

reservations

1, Inefficient marketing systems are

already beingtargeted

1. Lack of infrastructure facilities interms of

facilities for testing and research2. 75%of the market is divided

betweenthe small scale and the

unorganised sectors

2. Policies are nowpromoting the

participation of private investors that

would promote efficiency in food

processingand agriculture marketing

systems

2. Inadequate knowledge of technical

standards, packagingfacilities, food laws

and regulations

3. Quality rawmaterial supplies

4. Weak information channels withregards

to price and quality

3 Textiles 1. 25%of world cottonyarn exported

fromIndia, ranked 2nd after China

1. Government policies designed to

encourage investments in installing

modern weaving machineryand trying

to eliminatingthe pro-decentralised

sector policyfocus

Acquisition of SMEs bylarge organizations

seems to be the most logical step towards

integratingoperations and buildingthe value

chain

2. Industrial Entrepreneurship

Memorandums implemented to help

SMEs financially

2. Readymade garments, benefited

fromterminationof Multi-Fibre

Arrangement

2.Thoughsignificant investments are being

made inthe textiles segment, the bulk of

themare in the spinningand weaving

segments

3. Man-made textiles exports on

decline, growthin readymade garments

export

3. Reduction incustoms duty, excise

dutyand corporate taxrate

3.Fragmented industry, face delays in

customs clearance and hightransportation

and input costs

4 Pharmaceutical 1. SMEs contribute 35%of theindustrys turnover

1. Development of pharmaceuticalSEZs cansupport the growthof SMEs

whichincludes availabilityof developed

infrastructure, market access, exports,

and excise relief

1. Outsourcingopportunities are beingacquired by mainlyplayers withbetter

economies of scale

2. Increasingspan of price control, 428

drugs under price control

2. SMEs are linkingup with larger

players thus enablingclinical trials and

contract manufacturing

2. Domestic industry need to invest higher

capital inR&Dand need to innovate due to

the introductionof product patent whichis

difficult for SMEs

3. The increase inaverage price of

drugs; due to rise inprices of drugs not

under control and upward revision in

prices of certain controlled drugs owing

to rise ininput costs

3. Regulated market that provide better

value and marginto exporters are difficult

to penetrate due to stringent regulations

5 IT 1. STPI plays developmental role in

promotion of software exports; prime

focus onSMEs

1. DITrecommendations; taxbenefits

oncosts incurred for goods and

services procured fromdomestic

SMEs, tax deductions of up to 20 per

cent of income offered to all IT-ITeS

professionals workingwithSME

companies

1. Small ITplayers need to focus on

partnerships and alliances withbig

organizations to growina competitive

glabalscenario

2. Customapplicationdevelopment

and ITconsultingare major growth

drivers; Retail and distribution &

banking and financial services are the

most promisingverticals

2. Proposals to develop hardware-

manufacturing cluster parks (HMCPs)

under National Electronics/IT

Hardware ManufacturingPolicy

2. To develop global competitiveness,

SMEs need to enhance technological and

organisational capabilities

3. Keyfactors enabling the industryto

achieve success; capability to provide

end-to-end solutions, global delivery

model, focus onstringent processes

and qualityof execution, capabilityto

provide high-end, critical services, and

strong, project management

methodologies and expertise

3. Major revenue fromthe domestic

market with only 35%of revenue

comingfromexports to the Asia Pacific

region; insulated fromrupee

appreciation

3. Industry face bigshortage of manpower

as skilled personnel migrate to the Metros

for higher monetarybenefits


21/23

Conclusion: the future of SMEs in India

The factors required for a small enterprise to grow are listed in the table below. The existing

SMEs are evaluated on these parameters

Infrastructure facilities

In our country, where 77% of the population lives in rural areas, development of

infrastructure plays a major role in the growth of SMEs. Many parts of the country still suffer

from deplorable conditions of infrastructure like transport, telecommunication and electricity.

The integration of rural industries with mainstream industries is proving to be difficult

because of these reasons.

Information asymmetry

The lack of adequate information is another factor limiting the growth of SMEs in India.

Information about suppliers, customers, technical information and market trends are not

available at grass root levels.

Technological knowledgeTechnology not only helps in evolving a multi-pronged strategy but also in maximising

business opportunities for these enterprises. But, due to inadequate information flow and

resources for technical growth, SMEs in India are lagging behind in growth with respect to

their international counterparts.

New Product Development

In India, most SMEs work on designs given to them by domestic or international buyers.

There is very little innovation happening in the product design development and even the

technology being used by SMEs is outdated.

Given these constraints faced by SMEs along with other challenges like low access to funds

and inability to attract bright human talent, we feel that it is difficult for SMEs in India to

replace the existing industrial giants in our country.


22/23

Exhibits

Exhibit 1: abbreviations

SME Small and Medium Scale Enterprise

SSI Small Scale Industry

SSIDCS State Small Industries Development Corporations

SHG Self Help groups

NEF National Equity Fund

SIDBI Small Industries Development bank in India


23/23

ihttp://www.esocialsciences.com/data/eSSResearchPapers/eSSWPArticle20091126151144.pdf

iihttp://www.oecd.org/dataoecd/53/27/37704120.pdf

iiihttp://www.smeworld.org/story/interviews-106/hr-management-smes-need-to-be-customer-

focused-111.php

iv

http://smetimes.tradeindia.com/smetimes/editorial/2011/May/17/smes-need-to-adopt-new-technologies625423.html

v Small and medium enterprise: Past, present and future in India. A paper by KD Raju
http://www.esocialsciences.com/data/eSSResearchPapers/eSSWPArticle20091126151144.pdfhttp://www.oecd.org/dataoecd/53/27/37704120.pdfhttp://www.smeworld.org/story/interviews-106/hr-management-smes-need-to-be-customer-focused-111.phphttp://www.smeworld.org/story/interviews-106/hr-management-smes-need-to-be-customer-focused-111.phphttp://smetimes.tradeindia.com/smetimes/editorial/2011/May/17/smes-need-to-adopt-new-technologies625423.htmlhttp://smetimes.tradeindia.com/smetimes/editorial/2011/May/17/smes-need-to-adopt-new-technologies625423.htmlhttp://www.esocialsciences.com/data/eSSResearchPapers/eSSWPArticle20091126151144.pdfhttp://www.oecd.org/dataoecd/53/27/37704120.pdfhttp://www.smeworld.org/story/interviews-106/hr-management-smes-need-to-be-customer-focused-111.phphttp://www.smeworld.org/story/interviews-106/hr-management-smes-need-to-be-customer-focused-111.phphttp://smetimes.tradeindia.com/smetimes/editorial/2011/May/17/smes-need-to-adopt-new-technologies625423.htmlhttp://smetimes.tradeindia.com/smetimes/editorial/2011/May/17/smes-need-to-adopt-new-technologies625423.html

group 1 project report v2

Documents