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Indian SMEs suffer from a management deficit

26 August, 2014

India has developed a well deserved reputation as a provider of high quality management talent to the leading global corporations. The top and middle management teams of the leading global consumer, financial services and technology firms have a strong representation of people who trace their roots to India. 

However, despite the apparent managerial and technical aptitude of the Indian professional class, Indian corporations have an insignificant presence on the global stage. Barring a few exceptions from the IT services and pharmaceutical industries, India has not produced enough globally competitive businesses. The country, despite possessing a sixth of world’s humanity, contributes less than 2 per cent of the world’s exports. 

In contrast, Germany, a country of 80 million people, is the third-largest exporter in the world. Germany has achieved this success despite having one of the highest labour costs in the world. The German Mittelstand  (SME sector) has been a critical factor in that country’s economic success. Despite their small size, these firms have a strong commitment to quality, modern management practices and a spirit of partnership between labour, management and ownership. 

The Indian corporate sector, particularly the small and mid-sized firms, suffers from low productivity and competitiveness. India’s poor infrastructure and infamous red tape deservedly get some of the blame. However, there are other factors that impact the potential of India’s businesses and these factors have nothing to do with the government. These deficiencies include lack of management depth and hierarchical top-down organisational structures. 

There is a ‘management deficit’ in India. For family businesses or entrepreneur-led firms, that constitute a significant percentage of Indian firms, much of the blame lies with the founder/CEO (affectionately referred to as ‘promoters’). Many of these ‘promoters’ centralise all power and decision making, do not delegate and do not provide their key employees with additional incentives such as stock options or performance driven bonuses. The employees get a fixed pay cheque regardless of the company’s success or failure. So there isn’t much incentive for employees to outperform. 

At our firm, when we evaluate Indian businesses for a potential investment, one of the key assessment tools is to observe the interaction between the promoter and those who directly  report to him/her. We get nervous when the senior managers endorse all of the boss’s crazy ideas and there are no disagreements in the executive room. 

Unfortunately, in a majority of cases, it appears that management teams are overly acquiescent in the presence of the promoter. The actual job functions of senior managers are miles apart from their titles. The CFO is actually the bookkeeper and the head of sales is an ‘order taker’. The real CFO and the real head of sales is the promoter; he/she is the one who makes the critical financial decisions and deals with key clients. 

However, not all the fault lies with the promoters. Perhaps some of the responsibility lies with the Indian education system that stifles open communication, team-work and creative thinking. 

The problem of top down management is less prevalent, though not completely absent, in large professionally run businesses. Professionally managed Indian firms (or Indian arms of MNCs) such as ITC, HUL and Infosys have emerged as strong talent factories where employees at every rung of management are encouraged to demonstrate initiative and accountability. 

With the improving macroeconomic situation and a business friendly government, the stage is set for the Indian SME sector to make its presence felt, produce globally competitive products and become a jobs engine for India.  The government needs to do its part by improving infrastructure, reducing red tape and just getting out of the way. The private sector needs to respond by replacing antiquated and hierarchical corporate cultures with dynamic bottom up organisational structures.

(Mukul Gulati is the Co-founder and Managing Partner of Zephyr Peacock Management India Pvt Ltd.)

To become a guest contributor with VCCircle, write to shrija@vccircle.com.


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2 Comments
Venu Madhav . 3 years ago

This is very true. Entrepreneur CEOs are a bane in some of these enterprises as they actually tend to become the bottleneck for all decisions and then complain about not meeting the timelines. Unless these guys open up the future is dark!!

David James . 3 years ago

Agree. It is with supreme irony when managers who call me “over qualified” are not qualified to do so.

Indian SMEs suffer from a management deficit

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