10 Reasons Why Small Businesses Fail in India

10 Reasons Why Small Businesses Fail in India

While marketing is a highly specialized, content-driven field, SMBs fail to market their products because they don’t understand modern marketing concepts.

By Rakesh Raman

If you have an instrument that could test the biological attributes of the owners of small and medium businesses (SMBs) in India, you will find that all of them belong to the same species that always remains in the embryonic stage and never develops.

But what is an SMB – also called small and medium enterprise (SME)? Although there are many definitions of SMB floating in the market, I will define SMB from the technology adoption perspective.

If we club the two categories – small and medium – SMBs are those units that use 10 – 100 computers in their companies, employ 25 – 300 employees, and record Rs. 2 crore to Rs. 250 crore (nearly US$ 30 million) sales in a year. Such companies usually operate in the manufacturing and services sectors.

There are an estimated 8 million micro, small and medium enterprises (MSMEs) in India. Out of these, nearly 2 million come in the SMB category. These SMBs employ nearly 120 million people and contribute about 30% to India’s GDP. But I will not comment more on these figures because like bikinis they conceal more than what they reveal.

The truth is that this contribution is negligibly low as compared to developed countries and the employees that work with these SMBs are totally unskilled – almost illiterate.

But what are the reasons of their lackluster performance? Let’s discuss a few of them.

1. First-Time Entrepreneurs

There is a huge population of first-time entrepreneurs who start their businesses either immediately after their academic courses or after working for a few years in a job. These entrepreneurs are totally naïve and except knowing some basics of their own field, they are clueless about the larger business environment.

After a few years, when they realize that they won’t be able to grow because of their umpteen limitations, they satisfy themselves by thinking that whatever they are earning in the business, they won’t be able to get even a fraction of that in a job. So, they keep running their ventures like a roadside hawker.

2. Family Businesses

This is the most dangerous category of business people who inherit the business from their elder family members. They fear change and are never eager to break the archaic traditions of running a business even when the modern environment expects them to apply innovative business practices.

Their basic yardstick to measure the performance of their business is the money made by their ancestors. If they are making more than it, they feel they are successful. As they never come out of the family shell, they fail to see the changing business landscape. As a result, they always remain small, family-run businesses.

3. Workforce

There are hardly any skills available in India, as India’s ranking in the world human development index (HDI), which indicates the level of skills in a country, is at a dismal 132. While it’s said that SMBs employ nearly 40% of workforce, the people that they employ are unskilled. They cannot contribute toward business growth.

4. One-Man Show

Since SMBs don’t work with professionally competent workforce, the entire business is virtually run by a single person who is the owner of the business – sometimes supported by family members who are as incompetent as their workers.

It’s impossible for a single person to take care of all areas of a business because of their biological as well as professional limitations. Consequently, the business either grows at a slow speed or it eventually falls through.

5. Ad Hoc Working

Most SMBs in India don’t have any business processes in place. They don’t even understand the utility of making business processes. The business owners run their businesses with raw gut feeling. As there is no coordination among different departments, their businesses are extremely inefficient which adversely affects their financial performance.

6. Computerization

While it’s extremely important for businesses to use integrated computerized platforms in the form of ERP (enterprise resource planning) systems to automate their business processes, Indian SMBs can’t do that because they don’t have any manual processes which could be computerized.

At max, they use some financial accounting software which can’t achieve overall business efficiency. It’s like driving a car with one wheel while other wheels are missing. Obviously, you can’t expect such businesses to grow.

7. Communications

Almost all business owners and their employees lack communication skills. As they can’t write properly, e-mail use is rare. Most of the internal communications are verbal. Even for external communications, they prefer to use phones, where instructions are unnecessarily repeated resulting in wastage of time and resources, and the entire message gets diluted. This is among the reasons that make SMBs highly inefficient and unproductive.

8. Sales & Marketing

Most SMBs don’t understand the difference between sales and marketing. When they hire people for marketing, they expect them to sell their products. While marketing is a highly specialized, content-driven field, SMBs fail to market their products because they don’t understand modern marketing concepts. And it’s extremely difficult to sell without systematic marketing support using traditional as well as digital channels.

9. Cost & Investment

Similarly, most SMBs don’t understand the difference between cost and investment. When they are expected to spend money on resources that can achieve higher business growth for them, they think it’s cost for them and ignore it. But actually this is investment that would bring them returns. In the absence of thoughtful investments, their businesses stay stagnant.

10. Selfish

Most SMBs are selfish. When they earn from their businesses, instead of plowing back into the business to expand it, they prefer to make personal assets – like swanky cars and palatial properties. As a result, they themselves become richer but their businesses continue to totter in a poor state.

These are some of the indicative factors that are impeding the growth of the SMB sector in India. While SMBs don’t want to take any corrective measures to grow, they have become their own enemies. And that’s the truth.

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By Rakesh Raman, who is a national award-winning journalist and founder of the humanitarian organization RMN Foundation. Earlier, he was writing an exclusive edit-page tech business column (named Technophile) regularly for The Financial Express (a daily business newspaper of The Indian Express Group). He had also been associated with the United Nations (UN) through the United Nations Industrial Development Organization (UNIDO) as a digital media expert to help businesses use technology for brand marketing and business development.