performance measurement in SME’s in India
Written By: Dhimaan Duta
What is SME’s?
Small and medium-sized companies (SME’s) are non-affiliated, self-contained businesses with less than a certain number of workers. This figure differs per country. In the European Union, the most common upper limit for defining an SME is 250 employees. Some nations, however, define the maximum at 200 employees, whereas the US considers SME’s to be companies with less than 500 people.
What are SME’s in India?
In India, 63.4 million small and medium companies (SME’s) employ almost 460 million people and contribute nearly 30% of the country’s GDP. The industry also employs about 120 million Indians, accounting for 33.4 percent of India’s industrial output.
Why is SME’s Important for big giants?
Despite the fact that SME’s account for a significant portion of India’s GDP, old inefficient business practices and a low rate of technology adoption have prevented smaller businesses from realizing their full potential. According to Google’s research, which was conducted in cooperation with KPMG, 68 percent of the 51 million SME’s are not linked to the internet. According to the research, the digitalization of SMEs may increase their contribution to India’s GDP by ten percentage points by 2020, bringing it to 46-48 percent. Clearly, India’s SME’s have yet to realize their full potential and go to the next phase of company development. The finance ministry has established a goal of making India a $5 trillion economy, and SME’s are critical to meeting that goal. The only stumbling block is technology adoption, and here is where digital businesses are stepping up to the plate, making solutions available to help SMEs succeed.
After China, India has the world’s largest MSMEs (Micro, Small, and Medium Enterprises). The industry provides a diverse variety of services and manufactures approximately 6,000 goods, ranging from conventional to high-tech. The Indian MSMEs sector is prepared for significant development and integration with major global value chains, thanks to the government’s “Make in India” initiative and a push to attract more FDI. According to government estimates, the country has 63.05 million micro industries, 0.33 million small businesses, and 5,000 major businesses. Uttar Pradesh has the highest number of estimated MSMEs, accounting for 14.20 percent of all MSMEs in the country. West Bengal is in a close second place with 14%, followed by Tamil Nadu and Maharashtra with 8% each. COVID-19’s expansion in India, and the subsequent shutdown, have hampered national economic progress and put a financial strain on companies. As a result, the government has announced changes to the way MSMEs would be classified.
Researchers and practitioners have paid a lot of attention to performance measurement and management (PMM) in recent years. Despite the rising popularity of PMM systems, a variety of issues make it difficult for businesses to deploy them, resulting in the danger of just partial advantages or outright failure. When it became clear that the Balanced Scorecard (BSC) enabled them to improve their performance by linking their subunits and members in a concerted effort to raise the organization’s aims and global objectives, many major corporations undoubtedly began to embrace it. The BSC is a useful tool for selecting a balanced collection of indicators and objectives that represent an organization’s strategic vision, assisting businesses in meeting stakeholder expectations, articulating and communicating strategic objectives, and evaluating their execution. It translates the purpose and strategic objectives into actions, helps members to interact with one another and perceive their contribution to the corporate mission, improves the quality of services given, and provides for constant feedback and learning. It reflects a balance between external measurements affecting shareholders and consumers and internal indicators affecting essential activities like innovation, learning, and growth. However, several studies have found that, despite the numerous benefits connected with the BSC’s application, there are certain drawbacks. Its usage has not been widely adopted in many organizations, owing to a number of obstacles that might impede or limit its success.
The approach of a balanced scorecard
It’s vital to realize that the balanced scorecard method looks at a company from four different viewpoints. These are the points of view:
Seeing the company through the eyes of a client or stakeholder. This assists firms in determining what is working and making required modifications with their consumer base. The number of issues resolved, customer satisfaction surveys, and customer support calls is some examples of metrics to track.
The financial success of an organization is determined by this metric. Sales figures, profit margins, and return on investment are all part of this (ROI). The most significant financial metrics will vary depending on the organization’s unique objectives.
C) Internal Methodologies
Internally evaluating the efficiency and quality of the organization’s performance. This viewpoint on the balanced scorecard aids company executives in determining how effectively internal systems and processes are doing, and whether anything might be improved or altered to boost profitability.
D) Capacity of the Organization
Examining what matters most in terms of performance, from the technology utilized to the culture of the organization to human capital and infrastructure. All of these factors compel business executives to examine objects (that are frequently neglected) and analyze how they are assisting the organization in achieving its objectives. Organizations are supposed to develop key performance indicators (KPIs), objectives, and targets based on these four viewpoints. There is generally a data mining component as well, in which the business chooses the specific data it wants tracking and reported on.
In this light, it appears worthwhile to ponder the following question: What are the primary benefits and contributions of the BSC implementation?
- More effective strategic planning :The Balanced Scorecard is an effective tool for developing and conveying strategy. The business model is depicted in a Strategy Map, which aids managers in considering cause-and-effect linkages among the many strategic goals. The process of developing a Strategy Map guarantees that everyone agrees on a set of interconnected strategic goals. It implies that important facilitators or drivers of future performance, as well as performance outcomes, are identified to build a full picture of the strategy.
- Improved Strategy Execution and Communication: Companies may quickly convey strategy internally and publicly by having a one-page image of it. For a long time, we’ve understood that a picture is worth a thousand words. This “plan on a page” aids in the comprehension of the strategy and aids in the engagement of personnel and external stakeholders in its implementation and revision. It’s important to remember that it’s tough for individuals to assist in the execution of a plan that they don’t completely comprehend.
- Better Project and Initiative Alignment: The Balanced Scorecard assists organisations in mapping their projects and initiatives to various strategic objectives, ensuring that projects and initiatives are closely focused on achieving the most important goal.
- Improved Management Information: The Balanced Scorecard technique assists businesses in developing important performance indicators for their numerous strategic goals. This guarantees that businesses are measuring the right things. According to research, organisations that use a BSC strategy report higher quality management information and make better decisions.
- Reporting on Performance Has Improved : Performance reports and dashboards may be designed using the Balanced Scorecard as a reference. This guarantees that management reporting is focused on the most critical strategic concerns and that firms can track how well their plans are being implemented.
- Improvements in Organizational Alignment: Companies may use the Balanced Scorecard to better match their organisational structure with their strategic goals. Organizations must guarantee that all business units and support departments are working toward the same goals in order to execute a strategy effectively. Cascading the Balanced Scorecard into those units will aid in this effort and help to connect strategy and operations.
- Improved Process Coordination : Balanced Scorecards, when properly implemented, also aid in aligning organisational operations like as budgeting, risk management, and analytics with strategic goals. This will aid in the development of a really strategy-focused organisation.
Anything having advantages definitely come with disadvantages, sometimes low sometimes high. Let’s have a look at the disadvantages as well. While there are several benefits to establishing a balanced scorecard system in your company, there are also some possible barriers and drawbacks.
- It must be customised for the company. A balanced scorecard is meant to give a framework for working, but it will still need to be adjusted for any business that uses it. This can take a long time, and while examples are important, they can’t be duplicated exactly because each company has its own set of demands.
- To be effective, it requires leadership buy-in. To be truly successful, the balanced scorecard system must be applied from the bottom to the top of the business. This necessitates gaining leadership support, which may be difficult at times, not to mention the steep learning curve that comes with implementing a new system throughout the whole business.
- It necessitates a large amount of data. Balanced scorecards frequently demand managers and team members to submit information, which necessitates data tracking. Many people dislike this because they find it tiresome, and it can also prevent them from completing the effort necessary to accomplish their goals.
- It can get perplexing. The balanced scorecard system itself requires considerable time and effort to grasp. There are a plethora of materials and case studies to study, and it’s easy to become overwhelmed by the numerous applications of this approach.
In reality, all four views represented in BSC are interconnected and interdependent. Profitability, for example, is the primary aim from a financial standpoint. Profitability is now only feasible when the customer’s perspective aligns with the aim of customer happiness because only pleased customers result in sales and profits for the company. Customers will be satisfied once again if the company’s internal core operations run smoothly and effectively. Finally, the learning and development viewpoint, i.e. the rate or pace at which learning grows in the company, is critical to the effective execution of internal core activities. A balanced scorecard is a tried and tested approach with many potential benefits, it’s vital to examine your company’s operations and whether or not a balanced scorecard system is worth the cost.