Quarterly Journal on Management
From the publishers of THE HINDU BUSINESS LINE
Vol. 2 :: No. 2 :: August 1998
Starting up and managing a small business is no joke. People who start up their own businesses typically come from two extreme backgrounds: one is the business family background and the other is a steady professional family background. People from both backgrounds find it very difficult to establish and manage an enterprise. Typically, people from different backgrounds face different kinds of basic problems.
The biggest problem that entrepreneurs from the business family background face is the problem of information. In most cases, members of the younger generation in the family want to put up new ventures, and the problem of information comes in when they want to diversify into a new business, one that is unconnected to their family's business. One example is that of the floriculture industry. In this industry, which gained prominence in the first few years of this decade, most of the first investors were from business families that wanted to diversify.
M. Srinivas, Managing Director, Blooming Meadows Ltd, when asked why he chose to start up a floriculture company, replies, ``We knew it was something new... we got to know of it through different publications... and everyone was getting into it. It was a wave.'' K. S. Ramakrishna, Managing Director, Karuturi Floritech Ltd, and Vice-President, South India Floriculture Association, has a similar tale to tell: ``The original family business was the electricity cable business, which was dependent on government spending. I thought it was killing my creative instincts and I wanted an activity in which I could grow independently. We had a lot of options from textiles and infotech to meat and vegetable processing... but we finally settled on floriculture. It was going back to the basics... Our family is basically from the farming background.''
Now, entrepreneurs in that industry are still fighting for survival and, and are not established players who have been in business for the last half-decade, for the simple reason that most of them thought that buying up real estate and importing technology was enough. What they failed to realise was that it is most difficult to manage businesses -- big or small -- without professional experience, whether first-hand, or hired. Thus, Lesson #1: Professional experience -- first hand, or hired -- is not to be scoffed at.
Taking the case of the same industry -- floriculture -- one more problem was that, as entrepreneurs, people completely failed to study their would-be environment. Floriculturists today complain of lack of adequate infrastructure -- lack of sufficient refrigeration facilities at airports, lack of sufficient power etc. Make a checklist of what internal and external infrastructure is required, and if certain key elements are missing, find out if you can manage to internalise the key elements. For instance, you find that cold storage facilities at the airport are not enough: Can you manage with a refrigerated container or truck, and more importantly, is that solution worth it? Thus, Lesson #2: Study your would-be environment thoroughly and carefully.
Another major problem is marketing. Ramakrishna says that getting into the floriculture business was very tempting at that point of time because `apparently' no marketing was required and all the sales were through the auctions. Srinivas agrees that the auction route of marketing does not work too well for the Indian growers: ``margins are very low when you go through the auction... 35 per cent of the revenue goes to the commission agent and for handling and clearing the consignment, and another 35 per cent goes towards freight. That leaves just 30 per cent within which we have to manage our operating costs and have a low profit margin.'' Ramakrishna adds that the auction system is efficient only for the large European growers. Now that some floriculturists are looking at direct channels of marketing, they have started to realise what kind of logistics intensive business they are in. Thus, Lesson #3: Marketing is NEVER easy. There is NO short way out.
There are also other lessons to be learnt from the experiences of entrepreneurs in the floriculture industry. Srinivas says that the per unit size for this industry is very small in India compared to world standards. Indian entrepreneurs, therefore, are not able to utilise economies of scale to compete with SMALL growers from other countries. Another disadvantage that Indian growers have is that small competitors from other countries, such as Israel, market their produce directly through co-operatives. Thus, Lesson #4: If you can't make a dent in the market individually, storm the market collectively. CO-OPERATE.
Ramakrishna says that collaborations with foreign companies is not a very wise option for players in the floriculture industry: ``collaborations are not worth the paper they are written on!'' And Srinivas adds: ``Buyers are not willing to give contracts at fixed prices because Indian flowers are very new in the market.'' Thus, Lesson #5: If you are new to the market -- individually or collectively -- be prepared to take a beating.
Srinivas also says the government is not responding to any of the many demands of the floriculture industry -- like an international airport at Bangalore, and better and more cold storage facilities, and better power supply. Ramakrishna says: ``We need better land holding rights and policy initiatives.'' He also adds: ``Getting into institution driven industries is bad advice.'' Thus, Lesson #6: Double check the viability of the project without looking towards government hand-holding and promises.
Ramakrishna says that overcapitalisation of the units is the biggest financial problem most floriculturists face today. How did this come about? Many floriculturists raised capital for acquiring/leasing more land for operations but had to spend the money on lesser areas because prices started shooting up after the first units came up. Others had problems when they had to use the funds meant to acquire land for buying/importing inputs for operations. (Prices of imported inputs had suddenly shot up in that period). This meant that companies were heavily capitalised but actually had a much smaller scale of operations. Thus, Lesson #7: Use capital effectively. Dream, but be realistic about what you can do and what you need.
In spite of adverse conditions, floriculturists manage to survive. How? Break the traditional mould and find new ways of finding/exploiting the market. One way has been to undertake direct exports rather than through auctions. Srinivas cites the example of floriculturists from Israel who market directly through a co-operative and marketed under a single brand name. On the contrary, Indian flowers are not branded, he adds. Ramakrishna says that he manages by exporting to what his industry calls `non-traditional' countries -- countries other than Holland -- and to Japan. He adds that presently India is the largest exporter of flowers to Japan, but the costs of marketing are very high at 40 per cent. Indian growers have also broken out of the seasonal mould and grow flowers all the year through to accommodate non-traditional markets. Thus Lesson #8: IMPROVISE. Find alternative solutions before you decide to call the whole thing off.
One more problem that small businesses in India generally face is that they do not have appropriate economic scales. Small businesses do have to recognise the fact that they need to be able to process at least a critical quantity, generally known to MBA and costing students as EOQ (Economic Order Quantity). Large companies that source inputs from small businesses would not like to handle lots of small scale units for a single component or system. These large companies need small units that can service their requirements efficiently, read as the ability of the small business to serve as a single source, or at most, one of the few sources for a single component. Also, from the small business' point of view, some sense of scale is required to be able to deliver efficiently to large companies.
Indian small businesses find it very difficult to get into arrangements with foreign small- and mid-sized businesses because the foreign business thinks that even a mid-sized Indian business is very small by its scale. S. Thyagarajan, Regional General Manager, The National Small Industries Corporation Ltd, says that when SSIs were suggested as component vendors to foreign automobile manufacturers, players like Ford and Hyundai felt that SSIs in India were really small. Thyagarajan adds that when NSIC identified organisations in the UK and Germany for technology transfers, a German gear company actually ended up with a medium-scale partner for what the German company envisaged as a small scale effort. Thus, Lesson #9: operate on realistic scales. If lack of capital constrains a decision on scale, look for a better project: DON'T COMPRPOMISE on economic scale.
Then, of course, we have small businesses that are based on service and not on manufacturing. One of the fastest growing sectors with small businesses is the software industry. Dilip Panicker and Srikanth Manchikanti started Siri Karya Systems Private Limited in 1994. Both of them hold B Tech Degrees in Electronics from IIT, Madras. Often, businesses based on techno-capitalism are started by professionals who have considerable knowledge and/or experience in that field. Panicker worked in the Madras Computer Labs before starting Siri Karya and Manchikanti worked in the US for eight years, first for JNB, in back-end banking, and later, was on his own, before the two of them decided to come together in 1994. The company works on projects for US clients and recently launched a full-page imaging product.
Panicker believes that ``Knowledge is most important for us'' as well as the ability to learn quickly and leverage concepts and ideas into products. The main stumbling block to this, of course is, as Panicker puts it, ``When you are small, they don't care.'' He cites market reach and funding as the main problems for technocrats trying to start a business. Fortunately for him, in his business, it is possible for him to deliver through the internet. Siri Karya offers a small product free on the web, which gives the company a lead as to who is interested in the full and complete version of the product. Panicker says that this also helps the company's services business. Lesson #10: Have a presence in the Web, whether you have a web based strategy or not; and if you can offer a product or part of the product through the web, even better: do it.
Siri Karya has tied up with a US company to market its full-page imaging product. Panicker says ``We know how to build it; they know how to sell it.'' Reinforce Lesson #4: CO-OPERATE. But co-operate effectively. Look and leverage synergies rather than individual competencies. Manchikanti and Panicker believe that building relationships with all stakeholders is the best way to run the business. Siri Karya builds effective relationships with clients as well as employees. The company needs to build relationships with its employees because of the typical small business problem: retaining employees. For instance, all the employees are encouraged to play football within the office premises once a week. Panicker says that the attrition rate at Siri Karya is lower than the industry levels. Panicker and Manchikanti insist that the best way to grow is to have clients who can grow.
Yet another professional who left a good career to start his own business is T. Kannan Jagan, Managing Director, Value Software Technologies Pvt Ltd (VAST). Jagan qualified from IIT and IIM, worked in the steel industry from 1976, then joined TCS, set up its overseas offices and then quit to start VAST, with his wife, in 1991. His background is that of a typical TamBrahm, and his family and friends balked at the idea of his venturing out on his own. He set up VAST in his rented house at Bangalore, with a borrowed telephone and two PCs on a dining table. But what he remembers vividly about the ``bootstrap operation'' was the lack of recognition of his track record as a senior professional. Thus, reinforce Lesson #3: Marketing yourself as an investment is never easy.
Jagan says that he was actually planning to market multimedia tools when multimedia was not even thought of for computers (early in 1990-91). His project fell through because venture capitalists were reluctant to back him, and he finally fell back on doing projects. Why did he compromise on his original idea? ``Well, it's not enough to just have a good idea. You have to know how to sell it. We were keen on setting out on our own and we started doing projects... Projects were what we knew best.'' Thus, Lesson #11: If you do have to compromise, shift your sights to something you do well.
Most start-up companies have trouble finding young talent. However, Jagan says that he had no trouble because he went to his Alma Mater to scout for people and his track record helped. Also, in the software industry, it is easier to recruit if projects are new and interesting. Jagan insists that he ``exploits the grapevine first. For the last six years VAST has been hiring mainly from unsolicited walk-in applicants. We have had just one ad in the Deccan Herald, and that too was only in the beginning. Now, VAST is in a situation where it recruits one out of every hundred applicants after the preliminary screening has taken place. Another advantage for our employees is the training that we provide. Typically, they learn in one and a half years what would take them 5 years in larger companies.''
Jagan has also been a victim of the chicken and egg syndrome for getting his first projects. Almost all the people he approached asked him if he had had any experience on his own. And foreign companies asked him if he had any experience at home. He then decided to concentrate on domestic business for five years, and since June 1996, he has partnered with a UK company to work on projects for international clients. Thus, Lesson #12: Shore up domestic experience before you approach foreign customers, especially in services. Then, Jagan suddenly adds: ``I have brand name customers. That's also very important when you have to show your track record.'' Thus, Lesson #13: Try to add brand names to your client list.
Jagan has one more piece of very practical advice for entrepreneurs, what he calls `address value'. He asks entrepreneurs to set up a good office, at a good address. He says: ``The first office that we set up outside Bangalore was at a prestigious address at Nariman Point. Forget the fact that my office there was half the size of the room we are sitting in.'' (Incidentally, the room we were in was quite small, about 120 sq feet or so). He adds: ``It looks good on your letterhead. We got our first order from ICICI, and later we realised that the address value was phenomenal.'' Thus, Lesson #14: Set up a good office at a good address.
S. Ravichandran and G. Gopalan, Directors, Aqua Chemicals and Systems (Mfg.) Ltd (ACS), and three other chemical engineers who had worked together earlier for another company, together set up ACS, a water treatment company, when they felt directionless and let down after their employer's philosophy changed. Two of them left first, and started selling computers -- for HCL -- for a quarter. Then, they decided that water should be their focus, and the three other engineers joined them at that point of time. ACS was set up in February 1990 with their life earnings and the entrepreneurs faced the same problem that most professional entrepreneurs face -- finance.
For these people, the main problem was that they did not have a track record as a company (the chicken and egg conundrum again!), though they did have experience as engineers in a good company. Ravichandran says that they fortunately had a couple of good contacts -- consultants and customers -- who took a risk (in their perception) by giving ACS a break. Ravichandran adds: ``Our products and services are required by companies across industries, and we found it very difficult to break into each industry segment.'' Thus, reinforce lesson #3: Marketing yourself is NEVER easy. From 1990 to 1993, the company concentrated on building up its customer base and, Gopalan adds, ``More importantly, we were also building up our infrastructure in parallel.'' Thus, Lesson #15: It is not enough if you just dream big, you also need to anticipate your infrastructure needs and build it up.
Gopalan says that the company owes a lot to its committed employees. Its turnover grew from Rs. 11 lakhs in its first year to Rs. 20 crores last year. This is in a company where the directors knew nothing about HR for the first few years (they were all engineers), and Gopalan took up the HR cause while the company was growing up, and they were hiring more senior people. Now, ACS has an internal training programme for recruits, and as Ravichandran puts it, ``HR came out of necessity... and having been employees ourselves, we knew what they would expect.'' In ACS, Gopalan says, ``Anyone who is willing to learn is encouraged and facilitated to learn. For instance, we had this steno who took an interest in the technology while preparing reports and all that, and who wanted to learn more. We trained him, and he is now a project engineer with us.'' Thus, Lesson #15: Train people, and encourage talent without feeling insecure.
As far as finance goes, ACS had the same problems of hand-to-mouth existence in its early days, and then, now, is growing basically on ploughed-back earnings. The company, as always, faces some working capital margin problems, and as Ravichandran says, ``Earlier, our problems were small, and now, they have become big problems. Fortunately, we have good relationships with our vendors and suppliers and they support us.'' Thus, Lesson #16: Build relationships with all the stakeholders in your business. Many of them can help you in many different ways.
ACS has quite a presence in the water treatment market: it is present all over Asia, with projects in Indonesia, Malaysia, Bangladesh, Dubai, and Vietnam. And, it has a few brandname clients too: Both Pepsi and Coke are clients, as well as Walls' in Sri Lanka. What is most surprising in the company's turnover is that nearly 30 per cent of its turnover comes from repeat orders. Ravichandran says that this has been possible only because ACS ``exploits learning capabilities, and updates its technology as and when changes take place.'' He adds: ``This is also because of our focus: We stay with water and waste treatment; we stay with the single concept. We are a one stop shop for treatment products and we will always be specialists.'' Thus, Lesson #17: Focus is important for learning, which will improve your ability to satisfy your customers.
One fact of life in the small-business world is that, if you are in a competitive market where there are large players and small players, you'd better have one of two advantages: One, the ability to provide variety at a very short cycle, or two, the ability to offer unbeatable price. The first advantage is a natural advantage if and only if you can offer minimum EOQ scales mentioned earlier to large buyers. The latter advantage is more difficult to achieve unless you are in a high-tech area and you use proprietary technology to offer the product at an unbeatable price. Of course, in some industries, small industrialists try to wrangle a cost advantage by stinting on payments to employees, but that is not a truly sustainable advantage.
There are also small businesses that refuse to take up business with large consumers for the simple reason that their clients worm out a very low price for their products. But having at least one such client is useful to a small business in two ways: One, you can find out really how much you can squeeze your costs because your large client is going to demand rock-bottom price, and two, large companies like to maintain relationships, which means that if you can offer quality products at rock-bottom prices, you can expect repeat orders that are fairly regular. In fact ACS, discussed earlier, has this sort of relationship with Coke. Ravichandran says that ACS likes to operate in a sort of stable environment and although Coke squeezes him on costs, it is attractive to him as a client because of the repeat orders.
The point is this... there is nothing to be ashamed of in being or managing a small business. Nobody made it big without being small at some point of time or the other -- even the wealthy started off small. And most of the people who have become great, treasure their experience in managing a small business. And what is most wonderful is that now companies that want to be agile and `cool' places to work in behave like small companies do, and what's more, encourage entrepreneurship within its ranks.