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Group 1 Project Report v2

Group 1 Project Report v2

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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)

........................................................................................................................... 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


ranging from traditional to high-tech items. bolster exports and bring flexibility into India’s 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. Indian SMEs are important to the Indian economic system as they provide second highest employment levels after agriculture. The SME sector employs about 42 million people in over 13 million units throughout the countryi. According to the ministry of MSME. Thus. 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.Introduction Small and Medium Enterprises play a vital role in the growth of the Indian economy. According to estimates. This is possible because of small size of their target market and easy access to . a small 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. in terms of value. Flexibility: SMEs are very agile because of their lean structure and their inherent ability to sense market changes. which are being manufactured by the Indian SMEs. India sees a dominant presence of SMEs in both manufacturing and service sectors. 95 percent of industrial units are in small-scale sector with a 40 percent value addition in the manufacturing sector. they are in a better position to offer personalized services to customers. the sector accounts for about 45 per cent of the manufacturing output and 40 percent of the total exports of India. There are more than 6000 products. Their potential to generate employment. In India.

Thus. This is because banks and other financial institutions have a bias against small loan portfolios. They are often seen as too small by investors or too large to receive support from microfinance institutions and development agencies. RBI formulated guidelines that banks do not insist upon collateral against a loan to SME. Challenges faced by SMEs Low access to funds: The main challenge faced by SMEs is timely and adequate access to funds. These numbers put the lenders at much higher risk. SMEs face the problem of collecting and archiving information for further use. . Also banks are sceptical to lend to SMEs mainly because of lack of transparency regarding their financial conditions.: Statistics say that around 98% of sick units are from small scale industries. SMEs have the advantage of faster and better adaptation to new needs. To circumvent this problem.market place information. SMEs tend to receive very little investment. 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. Lack of adequate systems: SMEs face problems due to lack of standardization and proper planning. Because of lack of proper IT systems. tastes and preferences of consumers. Half of these problems might be attributed to lack of proper IT systems in place. including both foreign direct investment and local private investment.g. Evidence states that a significant proportion of lending to SMEs in transformed into NPAs. 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.

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. . whose product and sales are extremely localized and/or segmented. it is difficult to retain talent in SMEs. 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. which increases their cost and production time. poor communication facilities etc. Capturing a certain scale of operations is very critical in SMEs’ growth path. water supply. the prime infrastructure related problems are irregular supply of electricity. Also. machinery etc. Amongst others. Thus. High costs in development: Local SMEs are at a disadvantage with respect to latest technology. 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. leading to dissatisfaction and attrition. Thus. Similarly.Lack of skilled workforce: Though SMEs help the economy by creating employment locally but because of attractive wages offered by large enterprises. the flat structure of SMEs restricts the prospect of growth for employees and this might hit their career goals. Narrow focus: Trade liberalization has increased the capacity of well-established foreign manufacturers and retailers to penetrate both remote and underdeveloped markets. global competition confronts purely domestic. poor transportation facilities. local SMEs find it increasingly difficult to survive or even maintain their current business position in their respective markets. Against this development. the adopt conventional ways of production.

Capabilities and resources required to emulate large enterprises: Building competitiveness in production: SMEs can be made competitive by reducing the costs in production. . SMEs are more prone to buckle under downturns or misfortunes in business. It should also make conscious efforts to recruit and retain talented pool of workers. The business risks that SMEs are vulnerable to are excessive dependence on single supplier or distributor. This is important because owing to their small size and limited resource availability. late payment disrupting the working capital management. price fluctuations. ignorance of international environmental and IP laws. strengthening marketing and sales strategies to cater to larger group of customers. or wherever they are aware. dependence on single promoter. strengthening product service/quality. SMEs in many cases are either unaware about the possible business risks. To attain competitive position. SMEs should concentrate on building superior technological expertise. 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. have limited financial capability to have a hedged exposure to such risks.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 don’t have an adequate business protection plan to protect them from downturns or business risks. Therefore.

increase participation in international markets. This information should be used to understand consumer preferences and innovate accordingly. the auto components sector in India is dominated by SMEs. with the introduction of STPIs and SEZs. This is not just due to the shortage of funds and investment. infrastructure amongst themselves. SMEs should understand government policies clearly and try to work in close collaboration with various government agencies. Innovation in product offering and quality: SMEs should formalize the information they get from the marketplace in systems. . The SMEs in the auto component sector had formed clusters in 3 regions: Gurgaon. To circumvent this. These clusters provide ideal setting for SMEs to access support systems. enhance cluster competitiveness. Chennai and Pune. but also due to difficulties confronting SMEs in identifying foreign business opportunities. As a result.Cluster formation can enhance the competitiveness and sustainability of the SMEs. and accessing export distribution channels. contacting potential overseas customers. and distribute the fixed costs of Creation of export consortia can also be applied to Catering to international (large) markets: SMEs have poor access to international markets. After export duties are cut down drastically. these small and medium enterprises should look at targeting international markets. SMEs are less likely to be able to export directly and often end up being sub-contractors for recognised companies. For example. disseminate best practices.

SMEs will need better decision-making that can only come from having skilled and experienced senior management. 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. Moreover. they need to work with large enterprises to use physical resources on a shared basis. However. cost and delivery. Difficulty in scaling up due to informal operation systems SMEs that are successful as small ventures may face strategic. .To build this capability. SMEs therefore need to conceptualize and manage the transition from non-formal to formal systems for coordination of their operations. Better Decision-making To scale up and compete with larger enterprises. Also. as an enterprise grows larger. SMEs need to acquire capabilities in Operations Management and Information Technologies in order to scale up successfully. However. 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. SMEs need skilled human resources to improve their R&D capabilities. now there is pressure to deliver on multiple performance dimensions like quality. the operations systems may buckle under the increasing scale and complexity of demand. SMEs face serious talent crunch at the higher levels because their pay package and brand equity can not beat that of the larger players.


Germany and Japan definition of SME is labour-intensive rather than capital-intensive. As most of the incentives are based on these criteria. But as of now this is not taken care by Government of India Links between SMEs and Organised big players: As of now. whereas support to SMEs needs to be one-time. The one-time support can be in the form of cheap loan. There is a need for differential treatment for Urban and Rural SMEs as this should compensate the locational disadvantage. These limit the investment in up grading technology by these firms to receive the incentives. Indonesia. tiny. In most of the other countries like China. Firms do not want to graduate from micro. Government is not facilitating links between SMEs and big players. Growth centres: As of now Governments assistance is at individual level. Assistance in providing marketing support to their products and pricing preference Level Field: In India. Fiscal concession beyond a certain limit acts as a dampener to growth to SME sector. but emphasis should be developing growth centres as an agglomeration of SMEs.Role of Government: Existing policy and drawbacks Government provides various incentives to SME units by reserving few manufacturing goods exclusively for manufacturers of SSI. USA. definition of SME is based on capital investment. excise duty concessions. SSI and medium scale. Financing on concessional terms to micro and tiny units. Other important measures initiated by the Indian government are: . land allocation. Malaysia. access to infrastructure. Distinction between one-time and continuous support: Tiny sector needs sustained support. Small-scale units can produce at low cost with design inputs and quality control being supplied by the large firms. through State small Industries development corporations (SSIDCS) provide raw material.

com/content/23/4/427.pdf+html A New Deal for Small and Medium Enterprises in India . Therefore the policy trust should be on technology upgradation.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. modernisation and technology oriented entrepreneurship. integrate with capital markets and assimilate limited foreign ownership.2 1 2 http://isb.full.sagepub. So SMEs should bring together their technical capabilities.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 SIDBI’s 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.

It was the new product needs of major customers. Our SMEs depends mostly on technology transfer rather than on in-house technological innovations.pdf . accounting and management of the unit. This is the distinctive feature in Japan under which SMEs thrived. But because of high integration with big players. In India. which played a crucial role in the innovations of Indian SME Adaptability: In Japan. Indian SME policy is mostly revolved around technology development. 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. This level of innovation is embedded in the policy of SMEs in Japan. owing to extended recession. Even in the latest MSMED Act 2006. 50% of SMEs develop new products by combining existing technology. to encourage innovation they have introduced The SME Innovation fund4. where evaluation is done based on technology.Comparison of SMEs: India vs. 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. the major industrial structure is the integration of industrial enterprises of varying sizes through subcontracting. SMEs are not highly integrated with big players. and overall 62% of SMEs have developed new products. They mostly have informal agreements with big players and without any partnership they operate on vendor-seller relationship. there is no reference to promoting innovation. Contrary to this.worldbank. Other developed countries 3 Innovation: In Japan. Integration of Industries: In Japan.org/etools/docs/library/49274/yao2. changes in global industrial structure and advances in Information technology had put SMEs in a precarious situation. Even in country like China. A major player guides SMEs 3 4 Nature and strategy of product innovations in SMEs M H Bala Subrahmanya http://info.

Because of this mentoring from Canon. developing a collaborative linkage between SMEs. level field competition. Although there may be a case for selective interventions direct support measures are not the main role for government5. collaboration with its employees for development of new products. But in an imperfect market. Institute/University Collaboration: Institute collaboration is the major support system for SMEs in Japan. 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 David Smallbone . due to no formal links between industries. tax incentives. On an average Sanei took around 6 months to come up with new product. In India. Most of the innovations that happened in SMEs received help from universities.which are integrated to it through various quality measures for example Canon helped SME Sanei to acquire ISO 14001 certification. Whereas 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. cash discounts. lack of R&D infrastructure it takes around 1 year to develop the product and another six months for approval of customers. Infrastructure. Sanei was able to stave off the threat of competition. Indian SMEs are conspicuously dependent on government for keeping off competition. Educational institutions and Big players plays a major role than providing direct supports like subsidies.


unplanned and haphazard manner. They are present in clustered as well as dispersed manner. transportation as well as good communication. 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. and have negative cash flows and untried business models. One reason is that it is not very economic for them to implement large . It is much harder for them to borrow money from banks or to find private investors than for larger firms. Another problem that we have identified is that SMEs does not have standard HR processes like big organizations. Financing is necessary to help them set up and expand their operations. Since SMEs are usually new to the markets. The following reasons have been listed to support: In today’s 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. commercial and residential areas. and invest in new staff or production facilities.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. 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. 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. road. develop new products. Branding plays a very important role which the SMEs need to realize. 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. information and technical inputs. in industrial. Another major problem that SMEs face is to find finances. These clusters lack reliable and infrastructural facilities such as power.

workforce administration etc. enhance business agility. Having a welldefined/structured employee database helps in streamlining transactional HR processes like payroll & employee benefits. expense and capability on the part of SMEsiii. It is very difficult for small scale enterprises to compete with the economies of scale provided by these big organizations. Effective management of administrative work enables HR personnel to focus on strategic and value-adding activities. 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. and merge harmoniously with existing systems and processes. communication and information management. But at the same time it means that they do not have enough capabilities to become ‘world class’ and attract big talents.ERP solutions. SMEs also need to adapt to the technological changes. the cost of transportation and communication has reduced tremendously across borders. But developing these will take a lot of time. 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. Currently. and thus has reduced quantitative restrictions. India is a member of WTO. 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. Due to globalization. SMEs need to integrate such technologies that can fuel innovation. .

Industry-wise analysis .


Key factors enabling the industry to achieve success. 25% of w orld cotton yarn exported fromIndia. D recom endations.Though significant investm are being ents m in the textiles segm the bulk of ade ent. tax benefits IT m on costs incurred for goods and services procured fromdom estic SM tax deductions of up to 20 per Es. D iverse nature and a policy of SSI reservations 2. Regulated m arket that provide better value and m argin to exporters are difficult to penetrate due to stringent regulations 2. Industry face big shortage of m anpow er as skilled personnel m igrate to the M etros for higher m onetary benefits . Customapplication developm ent and IT consulting are m growth ajor drivers. prim are e focus on SM Es 2. benefited fromterm ination of M ulti-Fibre A rrangem ent 3. food law s and regulations 3 Textiles 1. critical services. due to rise in prices of drugs not under control and upw revision in ard prices of certain controlled drugs ow ing to rise in input costs 1. Increasing span of price control. SM are linking up with larger Es players thus enabling clinical trials and contract m anufacturing 5 IT 3. excise s duty and corporate tax rate 3. m arket access. and excise relief 2. The increase in average price of drugs. W inform eak ation channels w regards ith to price and quality A cquisition of SM s by large organizations E seem to be the m logical step towards s ost integrating operations and building the value chain 2. cent of incom offered to all IT e -ITeS professionals w orking w SM ith E com panies 2. D evelopm of pharm ent aceutical SEZ can support the grow of SM s th Es w hich includes availability of developed infrastructure. Outsourcing opportunities are being acquired by m ainly players with better econom of scale ies 2. A vailability of raw m aterials 5. Industry 1 A com uto ponents Current Scenario 1. ranked 2nd after China 2. M ajor revenue fromthe dom estic m arket w only 35% of revenue ith com fromexports to the A Pacific ing sia region. The industry is undergoing a m ajor restructuring and m existing any com panies are expected to m up in ove the value chain to a higher tier A dvantages 1.Fragm ented industry.No. capability to provide high-end. Com petition fromcounterparties in other em erging countries 1. Established quality system s 2 F ood processing 1. Industrial Entrepreneurship M orandum im em s plem ented to help SM financially Es 3. Readym garm ade ents. 428 drugs under price control 1. V olatility in the prices of m etals and other inputs could erode the industry’s cost com petitiveness 4. Cost savings of 25%-30% w hen com pared to global peers 2. To develop global com petitiveness. focus on stringent processes and quality of execution. SM contribute 35% of the Es industry’s turnover 1. Reduction in custom duty. Retail and distribution & banking and financial services are the m prom ost ising verticals 3. D esingning. grow in readym garm th ade ents export 4 P harm aceutical 1. themare in the spinning and w eaving segm ents 3. packaging facilities. Policies are now prom oting the participation of private investors that w ould prom efficiency in food ote processing and agriculture m arketing system s Risks 1. 75% of the m arket is divided betw the sm scale and the een all unorganised sectors 1.S. insulated fromrupee appreciation 1. Inadequate know ledge of technical standards. exports. Sm IT players need to focus on all partnerships and alliances w big ith organizations to grow in a com petitive glabal scenario 2. project m anagem ent m ethodologies and expertise 1. face delays in custom clearance and high transportation s and input costs 1. G overnm initiative for clusterent based developm ent 2. STPI plays developm ental role in prom otion of softw exports. G overnm policies designed to ent encourage investm in installing ents m odern weaving m achinery and trying to elim inating the pro-decentralised sector policy focus 2. A global slow n can derail the dow prospects of the industry 2. Lack of infrastructure facilities in term of s facilities for testing and research 2. SM need to enhance technological and Es organisational capabilities 3. global delivery m odel. capability to provide end-to-end solutions. Tier I m anufacturers taking up greenfield projects overseas 3. and strong. Quality raw m aterial supplies 4. engineering and technical skills 3. Proposals to develop hardwarem anufacturing cluster parks (H CPs) M under National Electronics/IT H ardw M are anufacturing Policy 3. D estic industry need to invest higher om capital in R& and need to innovate due to D the introduction of product patent w hich is difficult for SM s E 3. A daptability to new technology 4. M an-m textiles exports on ade decline. Inefficient m arketing system are s already being targeted 2.

Information about suppliers. Information asymmetry The lack of adequate information is another factor limiting the growth of SMEs in India. Given these constraints faced by SMEs along with other challenges like low access to funds and inability to attract bright human talent. The integration of rural industries with mainstream industries is proving to be difficult because of these reasons. due to inadequate information flow and resources for technical growth. Technological knowledge Technology not only helps in evolving a multi-pronged strategy but also in maximising business opportunities for these enterprises. technical information and market trends are not available at grass root levels. development of infrastructure plays a major role in the growth of SMEs. where 77% of the population lives in rural areas. . most SMEs work on designs given to them by domestic or international buyers. The existing SMEs are evaluated on these parameters Infrastructure facilities In our country. telecommunication and electricity. There is very little innovation happening in the product design development and even the technology being used by SMEs is outdated. But. customers.Conclusion: the future of SMEs in India The factors required for a small enterprise to grow are listed in the table below. New Product Development In India. SMEs in India are lagging behind in growth with respect to their international counterparts. Many parts of the country still suffer from deplorable conditions of infrastructure like transport. we feel that it is difficult for SMEs in India to replace the existing industrial giants in our country.

Exhibits Exhibit 1: abbreviations SME SSI SSIDCS SHG NEF SIDBI Small and Medium Scale Enterprise Small Scale Industry State Small Industries Development Corporations Self Help groups National Equity Fund Small Industries Development bank in India .

pdf ii iii http://www. A paper by KD Raju .tradeindia.com/data/eSSResearchPapers/eSSWPArticle20091126151144.com/smetimes/editorial/2011/May/17/smes-need-to-adopt-newtechnologies625423.php iv http://smetimes.pdf http://www.esocialsciences.html v Small and medium enterprise: Past.org/dataoecd/53/27/37704120.org/story/interviews-106/hr-management-smes-need-to-be-customerfocused-111.i http://www.oecd.smeworld. present and future in India.

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