Quarterly Journal on Management
From the publishers of THE HINDU BUSINESS LINE
Vol. 2 :: No. 2 :: August 1998
Small is Wonderful!
Every few miles on the seemingly endless interstate highway system in the U.S. luminous signs guide weary, tired drivers off the highway to hotels, food, and petrol stops. Any driver taking a food exit, as these are called, will come upon a cluster of restaurants that is the same no matter where - McDonald's, Pizza Hut, Wendy's, Arby's, Taco Bell, Roy Rogers, Dunkin Donuts and other similar ones.
Looking at the glow signs, ergonomically designed seating areas in these restaurants and uniformed employees, an average person could easily tell these are successful businesses.
Transplant the same driver (let's keep him Indian for the sake of an argument) to a stretch of road between Madras and Cochin, say. Looking for a place to stretch out he is more likely to come upon a hastily scrawled sign on a piece of cardboard, stuck to a bamboo pole driven into the soft earth by the side of a modest highway, announcing hot idlis, dosas and coffee around the corner. The restaurant may be just a shack with a couple of benches and tables. No glow signs in sight.
Does he think of this shack as a business?
Unlikely, doubtful. The suggestion might even elicit a sneer!
The driver's ambivalent attitude (and most of ours too!) to the shack is a sign of how current day vocabulary and associations have robbed a genuine business and millions of similar ones of their legitimacy.
Our Western modes of education and training teach us to look at men in suits, air-conditioned offices, high-rise buildings, and neon glow signs as the proper elements of a business. The rest don't fit in.
Naturally the institutions we have created to encourage and support business are primarily designed to cater to men in suits, transacting business on cellphones and computers.
This is not a tirade on big business but an argument in favour of supporting their lesser capitalist cousins - the smaller businesses.
Perhaps one of the least understood roles of small businesses is their job creating capacity. Most big businesses are judged by their return on investment and profitability.
But for the millions of people like the road side shack owner, flower and fruit vendors, barbers, cobblers, auto drivers, and so on, the country's unemployment figures would truly boggle the mind. All these people are not only taking care of themselves, without depending on the government in any way, but in some cases creating jobs for others like them.
What is required is a system that will encourage this sort of entrepreneurial talent. This is not yet another subsidy scheme that would make the liberalising folks gnash their teeth in despair.
It works here in the United States, where small businesses, like the McDonald's by the highway, are at the leading edge of the biggest economic boom in recent history.
The U.S. Small Business Administration was created 45 years back to nurture the then mom and pop stores, not very different from the road side shacks in today's India. The statistics are impressive. According to the agency two out of every three new jobs today are created by small businesses, 38 percent of the country's GDP comes from these businesses, more than half the country's workforce is employed by small businesses, and these firms represent 96 percent of all U.S. exporters.
The system is rather simple. Any business owner, new or existing, who has been turned down by a commercial lender can apply for a loan and ask for a federal guarantee to cover the loan. The federal government guarantees up to 80 percent of such loans. Since the government guaranteed debt is a sovereign debt the lending institution covers its risk by selling the guaranteed portion of the loan in a secondary market.
Till date, the agency has guaranteed nearly $50 billion worth loans. The funding for such guarantees comes from budget appropriations. Depending on the failure rate the agency determines how it can leverage each dollar of budget funding it receives. A dollar of budget funding may be used to guarantee $ 100 of loans if the failure rate is only one percent.
More impressive than the financial dexterity the system allows the various players, is the support network. The agency has offices all over the country, more than one in certain cities. Each office is a virtual consulting office. Market research reports and business planning guides for virtually every industry is available off the shelf. An association of retired business executives offers free advise on starting and running a business. Big businesses like IBM and Apple donate computers and printers to help new business owners develop their business plans.
The generosity of the big businesses in supporting the effort is not pure altruism. They realise small businesses often train thousands of salespeople, accountants and other technical workers. For big corporations, helping small businesses run well often means access to a well-trained workforce. The agency estimates that small businesses train 67 percent of the workforce in basic on the job skills.
One of the biggest forces behind the success of small businesses in the United States is the franchising concept. A successful business recipe is transplanted across the country through this route by thousands of small business owners. The risk is spread out and individual initiative is put to the test. Of course the laws make sure the rights of both the franchiser and franchisee are protected.
Will all or any of this work in India? Perhaps none of this will. The point is not to copy and paste a successful formula. The U.S. example is only illustrative of how it's possible to organise support for small business.
It's time to bring millions of self-supporting small businesses into the mainstream economy. Too many people with workable ideas are intimidated by talk about ROI, earnings estimate and cash flow. The only recourse left to them is to go to Shylock like moneylenders, who even in modern times demand their pound of flesh.
The system has to be patient enough to work with different ideas and flexible enough to lend as little as Rs. 1000 to even a flower vendor for her working capital and not drive her to borrow from a money lender by pledging her family jewels. It is possible to teach and any one can learn the basics of managing a good business as long as the teachers refrain from spouting jargon. After all economies, trade and wealth existed long before ROI, cash flow and B-school graduates became fashionable.
The awful truth is we are obsessed with size. Big business is more glamorous than a grimy two-man toolshop or foundry. It's often said as a joke that if you wanted 30 million the bank manager would wine and dine you so he could lend you that money, but if you wanted 30,000 or may be even less, you had better find some greedy pawn broker.
The mainstream media and the schools ought to take the blame for not learning to respect the honest work and enterprise of a large class of small businesses. Why surely a city newspaper or a business paper can give away less than one column length for a small business story once a week, if only to highlight the pathetic conditions under which the owner manages his business? And school kids won't be worse off for learning how an ice-cream or soda vendor outside their school conducts his business.