SMB business challenges and the role of innovation

SMB enterprises face several challenges that impede their full fledged growth. Not in any specific order, the challenges could be listed down as – low capital base, limited business domain knowledge, lack of quality market information, inadequate managerial and technical skills, non-availability of finances and skilled labour or difficulty in accessing markets.

 A recent study (Global Innovation Index 2011) jointly conducted by the Confederation of Indian Industry (CII) and global business school INSEAD ranked India ninth on innovation efficiency up from the rank of 109 in 2009-10. Most SMB innovations are carried out without much pomp and show. The objectives remain that of enhancing competitiveness through reduced costs, better quality, product extension or simply, survival. A small proportion of SMB enterprises also innovate to penetrate international markets. Such innovations are usually a result of external forces or market dynamics. Internal initiatives or motivations, like educational background or work experience play a limited role as compared to the external compulsions to remain competitive, like customer requirements, information given by supplier, channel feedback etc. Most SMB enterprises do not have funds allocated specifically for nurturing new ideas. For SMB enterprises the need to keep the business running and profitable, takes precedence over the need to use innovation as a strategic tool to launch new products or penetrate new markets.

Need to kick-start the innovation engine for Indian SMB enterprises
The main barriers to innovation are excessive government regulation, lack of effective collaboration between industry and research conducted in universities / research laboratories, skills shortage, inability to move beyond the initial successful innovation and poor understanding of market dynamics. Efforts of technology based incubators run by various universities have been able to provide limited impetus to develop student entrepreneurs due to lack of adequate funding and infrastructure, weak industry linkages or lack of a social welfare net to provide sufficient risk mitigation guarantees.

 It is a fact that SMB enterprises driven by innovation register relatively higher growth rates as compared to the ones that do not invest in innovation. They are able to translate their innovations into thought leadership, higher sales and better profitability. This further results in better inventory management and manpower utilization, improved capacity utilization and lower average unit cost of production. Innovation leads to better overall business performance and reduced costs for manufacturing as well as services companies, helps to increase market share and results in overall improved competitiveness.

 A sustained drive to innovate product and / or service design, features, packaging and delivery techniques results in better revenue realization along with improved long term business prospects for the SMB enterprise such as higher investment attractiveness, high employee morale and creation of brand equity.

 Indian SMB enterprises have shown their expertise in developing – many a times informally – low-cost technological innovations, which they can now export to other countries. However, the innovation drive sometimes suffers not because of lack of funds but largely due to a paucity of trained entrepreneurs and technical personnel. It is estimated that only about a tenth of Indian SMB firms tend to partner with government agencies for the purpose of a structured innovation programme (Source: National Knowledge Commission, NKC report, 2007). Linkages and collaboration with universities and R&D labs is also low. This calls for direct government policy intervention and support. The aim should be to encourage technology transfer from domestic R&D institutions to local industry and encourage investments for scaling up business, including the setting up of overseas manufacturing / operations bases. Defraying the cost of such innovation / expansion projects, which are new and ‘risk bearing’ for the SMB enterprise and use technology to develop or improve products, processes or business models can be an incentive. More financial support for marketing and business development of approved projects can create a favourable disposition towards innovation.

 Schemes launched by the Development Commissioner, Ministry of Micro, Small and Medium Enterprises (MSMEs), Government of India cover key areas such as Enterprise and Skill Development, Technology Upgradation, Access to Credit and Marketing Assistance under the MSMED Act, 2006. Under this Act, the Ministry has adopted a Cluster Development Programme (CDP) with the objectives of improving productivity and competitiveness, and capacity building of Micro and Small Enterprises (MSEs). The objectives of the CDP may be summed up as:

 i) Supporting the sustainability and growth of MSEs by addressing common issues such as improvement of technology, skills and quality, market access, access to capital etc.

ii) Building capacity of MSEs through formation of self-help groups, consortia, upgradation of associations, etc.
iii) Creating/upgrading infrastructural facilities in the new/existing industrial areas/clusters of MSEs.
iv) Setting up common facility centres (for testing, training centres, raw material depots, effluent treatment plants, complementing production processes, etc).

 Along with the above, a focused effort to identify the best practices, which have made large firms successful and introducing the same to SMB enterprises, with a sound follow-up and feedback mechanism will go a long way to help the country’s SMB enterprises acquire scale and become globally competitive.

 Facilitation of interaction with larger firms in new and emerging fields will save the smaller firms in terms of R&D costs, bridge the information gap that acts as a detriment to their growth, and help them produce quality products through standardised processes and techniques. SMB enterprises can align themselves with established industry leaders by converting themselves into associates or ancillary units. Once they enhance capacity, they may also be able to sub-contract parts of major projects from their larger partners.

 Thus, a sustained effort to develop a culture of innovation in technology, infrastructure, information, business processes, management best practices, credit and market access would provide budding Indian entrepreneurs an opportunity to earn as well as enhance business capacity to grow and compete on a global scale