Sunday, August 12, 2012

Simple Solutions for Well Known Problems

There have been some interesting publications on the small scale sector in the recent past – trying to understand the reasons behind why small industries perform the way they do. The two books by Phansalkar – How Not to Ruin your Small Industry (Response Books, 1996) – provides the diagnostics, and the next – Making Growth Happen (Response Books, 1999) – provides illustrations of the strategies adopted by enterprises that started small and have achieved the status of large corporations. There is an increasing body of literature on the concept of providing Business Development Services (BDS), largely propelled by the donor community (a fairly well known series is edited by Levitsky and published by ITDG publications). The BDS literature argues that a large part of the failure of small enterprises can be overcome if the enterprises seek external help from “professionals”. We need to look at the book by Padmanand and Patel in this background. The book starts with a premise that Industrial Counsellors could make a significant difference in the management of the small enterprise. How this premise was arrived at is a bit intriguing. The marriage between the small enterprises and the BDS providers is something that has been attempted several times before, but met with reluctance. Several small industrial enterprises have been caught between a series of transaction related problems such as dealing with labour and excise inspectors, managing liquidity, and trying to escape from a myriad of regulatory restrictions by taking advantage of the exemptions granted from time to time. Amidst all these, a large number of enterprises hardly have the time or resources to seek external intervention to solve their problems. The book does not seem to indicate how this mindset could be addressed, nor has it acknowledged any literature in this area.
Having thus established the need for the counsellor, the book then proceeds to talk about various aspects of the small business that could gain from the help of the external counsellor. The book is replete with examples from diverse sectors and contexts on how one could have a positive intervention as a counsellor and save the small enterprise from a suicidal ruin. While there are several anecdotal “tips” for managing the small enterprise – how to plan for capacities, how to analyse costs, find break evens and revitalize enterprises that have gone down the tube, it is not clear as to who the target of the book is. It looks like this is written as an easy guide for people who want to undertake conuselling for small enterprises as a profession. This is the contradiction of the book – if you are going to be an industrial counsellor, you need to have in you much more than what the book can offer. If the reader is not a counsellor, then the question is how would the book be useful – say for instance to entrepreneurs, academics or researchers? The answer is not clear.

The book covers a wide range of topics, relevant to the small industrial sector. Most of these topics are operational in nature, and focus on how costs could be cut. For instance it starts off with an example on how costs could be saved by enhancing credit limits (p.22), and how further costs could be saved by going in for consortium purchase of raw material. This tone of providing “tips” for cost cutting and enhancing the business is sprinkled throughout the book. Since the authors move from one sector of the industry to another – largely focusing on jute, cotton yarn, rubber, coir most of the solutions – though general in nature seem to be deeply rooted in the particular context in which it is being discussed.

The chapter titled Essential Business Analysis and Management Tools covers a range of topics ranging from break even analysis and leverages (p.88) product mix decisions using cost data (p.93) make or buy decisions (p.95) economic order quantity and inventory management aspects (p.100) and cash and profitability management (p.102). Quite a range given that all these are covered in one chapter of about sixteen pages. Each of the topics has elementary examples and do not reflect the reality and complexity of the business. For instance while discussing cash management; the authors say “A portion of the profit should be saved and ploughed back into business as retained earnings…(p.102)” thereby equating profits with cash. Unfortunately elementary literature tells us that under the accrual concept these two could be at variance and therefore one has to worry on how to manage cash. The paragraph goes further to say that “All cash receipts and expenses should be regularly recorded so that one may see the flow of money in the business everyday (p.102).” An important tip, but of little use – what could be more useful is to ensure that the pipeline is not clogged up. So the tip for ensuring a greater cash flow immediately follows “offering a discount at the time of sale if one believes that one could have a cash problem (p.102).” perhaps a bit too simplistic a tool to tell the counsellor to tell the entrepreneur.

The book also talks about forming consortia and networks to overcome the handicap of small size. Yes, the idea of a co-operative purchase is good as long as one treats the other as a partner and a third party (a large enterprise) as a competitor. But is it not true that small enterprises compete fiercely amongst themselves usually in the same segment? What would be the enlightened self-interest for small entrepreneurs to join the networks the incentive systems and the entire game theory of consortia is ignored. The book assumes a simplistic behaviour amongst the entrepreneurs – that they would co-operate when required and also compete when possible.

The chapter on revitalization also has a series of tips on how to manage cost of funds and achieve early break even at a low capacity. Though the authors claim that the examples are picked up from real life data they fail to capture the complexity of the situation in which the enterprises operate. It goes with assumptions that if we cut prices, sales will expand; if we offer discounts, cash would flow in and so on. In reality small enterprises operate in a much more complex environment than this.

While the book has the insights of several sectors in which the small enterprises are working, it fails to live up the expectations of being a useful guide or a text. The style of writing is very chatty and therefore does not give the impression that there is a thread of analysis behind the suggestions given. Each paragraph has a suggestion and these tips range from cash management to branding to staffing. The book is not held together with a central or an overarching theme. It is a bit of a let down after a series of interesting literature that has come out on small industries in the recent past. Even the title of the book is a bit misleading as it talks about managing the small industrial economy, while the detail of the book is on managing the firm. One only wishes that the collective experience of the authors who are otherwise well known in the field of small enterprise could have been put to use more effectively. The book looks like a typical product of a typical small enterprise in India – it tries to be all things to all people, where the entrepreneur is playing the role of a juggler managing multiple fronts and delivering a product where a tremendous amount of effort has gone in, but the market fails to see the utility of the effort.

No comments: