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