Today I am going to talk about business failures in the micro business sector at the grassroots level and what can be done to reduce the chances of these business failures. Entrepreneurship literature is replete with statistics about business failure and mortality. When it comes to small and micro businesses, the numbers are consistently alarming. In the U.S.A. and Canada, it is reported that of all the new businesses started, 20% fail after one year and additional 10% during the second. This climbs to 50% (cumulative) by the fifth year and stabilizes at 65 to 70% by 10 th year. Which means longer-term survival rate or sustainability is only 35%. Scenario in the Indian context is not much different. This statistic is for the “incorporated” businesses. Keeping North American experience in mind, it may be safe to assume that at the micro business and grassroots level in India, i.e. mostly “unincorporated” sector, the longer-term survival rate could be around 30% to 35% only. Survival rate of 50% by 5 th year and stabilization at 35% after 10 years is indeed alarming and signifies avoidable waste of resources– both human and financial. Now we may wonder why many businesses fail. In the ultimate analysis, businesses fail when the number of paying customers and the price they are willing to pay for the product or service is not sufficient to recover all the expenditure incurred in starting and operating the business and create a surplus for the owner. This surplus needs to be commensurate with the efforts and capital employed for the business to be sustainable. In short, business fails when it is not operating significantly above the break-even level. There are many reasons for such a situation of not enough paying customers. Some of the frequently quoted ones include- not meeting quality standards, poor customer service, not meeting commitments, poor inventory management, not managing the cashflow well, costs not under control, insufficient startup funds etc. All these causes can be categorized into (i) poor planning, or (ii) ineffective execution (poor management of day to day operations). While starting a business, certain assumptions and computations are made with respect to different aspects of the business – cost of production, capacity to be installed and equipment needed, startup funds needed, fixed costs, competitive situation, customer needs and demands and many other critical aspects. Obtaining all required information in respect of these, which is authentic or as close to it is as possible, is the main objective of doing the research (both secondary and primary – as appropriate) on different facets of the business. Such vigorous “Homework” helps the entrepreneur evaluate commercial viability of the business. This also helps in minimizing the
2 downside of any potential risk and aids in planning for risk mitigation by appropriate strategy. Most often, the “unincorporated entrepreneur” is not aware of the vigorous homework/research that is needed to be done before embarking on the entrepreneurial journey. At times, even when he is aware of these requirements, he prefers to take a short cut either due to mis-placed over confidence in the business idea or due to lack of knowledge. Irrespective of the reason, result can be disastrous, and business fails. Equally responsible for business failure can be the ineffective or poor day-to-day execution or management of the business. When this happens, visible symptoms include – poor quality of product or service, not honoring the commitments, not managing the cash flow well, poor customer relations management, vendors and employees ill-treated etc. In short, any combination of these symptoms of ineffective execution or lack of vigor in homework will lead to business failure. Time taken to fail depends on the severity and magnitude of symptoms. I Create Model & Its Impact I Create India has, over the last two decades, developed and implemented a practical entrepreneurship development system. Its four-stage process includes creating awareness, providing entrepreneurial skill training, mentoring the entrepreneur in business plan development and handholding after the business is started. The system is designed keeping the grassroots level audience in mind. Some of the characteristics of audience group that have guided the system design are: Lower level of academic achievement Lower strata of socio-economic background First generation entrepreneur Presence of skills (trade, craft etc.,)– through training, hereditary acquisition, hobbies etc. Lack of sophistication in developing a business plan from an idea about a business I Create has developed a practical and audience appropriate process for generating business idea and then taking it to the execution stage or what one may call as “taking it to market”. It is the I HOPE process: I, H, O, P and E – each alphabet stands for a distinct phase of the process of Idea to Execution. First alphabet “I” stands for idea generation. Entrepreneurs are made aware of how to generate business ideas – through identifying problems faced by people and mapping it to own skills, hobbies, domain expertise or other
3 resources to which they have access to come up with possible solutions to solve the problem identified. “H” stands for homework. Once an idea is germinated, it is essential to determine its technical or operational feasibility and commercial viability. Vigorous homework includes identifying and finding out relevant information about target customers, competitors, suppliers, all aspects of costs, rules & regulations etc. Entrepreneurs are made aware of the primary and secondary methods of research to collect required information. Data and information collected during homework needs to be analyzed and synthesized to arrive at meaningful conclusion concerning the commercial viability of the business idea. This is referred to as alphabet “O” – opportunity identification – meaning to ascertain whether opportunity exists for generating consistent profit over a longer period. If the conclusion is in the negative, then entrepreneur is advised to re-look at the model envisaged and make necessary tweaking. Only when the conclusion is in the affirmative is the entrepreneur advise to the next stage. “P”, the fourth alphabet, stands for planning. Once the existence of opportunity to make consistent profit is established, a blueprint for implementation is to be developed. Entrepreneurs are made to detail the various steps of implementation in marketing, production, finance, and all other aspects of the business. “E” stands for execution or implementation. This is the daily grind and most crucial aspect of achieving success in business. Entrepreneurs are made aware of the need for customer care, meeting commitment and quality, cashflow management, cost control etc. This is the critically acclaimed I HOPE © process of I Create, and the entrepreneurs undergo this over a five-day program. Vigor of I HOPE © process, and the subsequent individual mentoring (business incubation) to develop a business plan has benefitted significant number of participants start and sustain their businesses. One key measure of this success is the 96% survival rate after two years of business start with, I Create process compared to the 70% in the other observed cases. For effective startup and sustenance, two kinds of mentoring or incubation are needed.
- Technical incubation – to help in domain related issues and ascertain technical or operational feasibility.
- Business incubation – to help in taking the idea (product or service) to market, after establishing commercial viability. Because of the characteristics of the target population described above their access to information and knowledge essential to ascertain viability of any business they wish to start is limited. So, very often, they end up being an “accidental entrepreneur”.
4 Mentoring for business plan development in the entrepreneurship development process of I Create is indeed the business incubation referred to here. I Create has developed a robust, practical and audience appropriate methodology for this. Late President Dr. APJ Abdul Kalam, who had followed keenly the programs and progress of I Create India and the impact it had created in creating job-creators, had the following to say in August 2011 at a seminar organized by NSDC and AIF: “entrepreneurship incubation institutions need to be developed all over India and the developing world.” For thousands of grassroots beneficiaries to get advantage of this process, we need to create more and more “Grassroots Entrepreneurship Mentors” or GEMS. These are the people from the communities – retired professionals like bankers, engineers and others wanting to join the entrepreneurship movement at the local level. To be effective GEMS, they need to understand what real mentoring is and are trained in the art and science of business mentoring. I Create offers potential GEMs an opportunity to build their capacity through training and sharing the methodology and content. Those interested in joining the grassroots entrepreneurship movement by becoming a GEM may contact I Create India. Details at www.icreateindia.org