Relation between Growth of Business & Managerial Capacity- A Riddle for SMEs in India

The managerial capacity constraint has failed many growing SMEs in India. Overcoming this constraint is paramount for SMEs to make growth sustainable.

I have witnessed the failure of an SME in pharmaceuticals space for want of managerial capacity commensurate with the size of business. The firm was initially established as a small manufacturing company by an entrepreneur who had been a very successful retailer of pharma products.

As the business started growing, he started getting a good amount of attention from large pharma companies who are looking for outsourcing their manufacturing functions. As demand for outsourcing grew, he decided to set up the second unit.

He set up a new unit with the large capacity to manufacture diverse pharma products. Everything was going well till the second unit started commercial production.

Once the unit started commercial production, there was immense pressure on entrepreneur as he alone needed to attend many issues ranging from finance, taxation, procurement, marketing, production, etc in both the units. He has not groomed anybody for any roles except on the production side.

He has not comprehended the increased burden in almost all areas due to increased activities in different departments. There was not much time to create a team of professionals either.

Increased pressure upon him started reflecting on his health. His ability to deal with challenges started diminished. With the passage of time, there was more anarchy in the business.

Despite creating most modern & large capacity, he failed to capitalise the opportunity and business remains subdued. There was no other challenges-Industry has been in an uptrend, financially well tied up and operationally well-established controls in place.

However, lack of management bandwidth otherwise called Managerial capacity in relation to growing size was a serious constraint. Eventually business failed and he slipped to distress,

What is the cause?

The above situation is not uncommon among SMEs in India.

The bottleneck to growth a firm experiences because its managerial resources are insufficient to take advantage of its new product and service opportunities is a well known and studied phenomenon.

It is called Penrose Effect. It is taken from Edith Penrose who was doing pioneering work on how firms grow. Penrose theoretically developed the research proposition in 1959 that the finite capacities of a firm’s internally experienced managers limit the rate at which the firm can grow in a given period of time.

Essentially, it states that a firm that grows faster than the abilities of its management is unlikely to succeed.(

Whether going for quick recruitment is the remedy?

No, it’s rarely that a firm can evade the effect simply by hiring new managers to shore up its managerial resources.

It takes time for a new manager to become familiar with the culture of the place, acquire firm-specific skills and knowledge, and work with other employees long enough to develop trusting relationships.

In fact, managerial expertise is often an organisation specific asset that accumulates over time, and can’t necessarily be rushed.

Understanding the concept of growth – important to analyse the managerial capacity requirement

Growth-oriented firms are a significant contributor to a nation’s economic gain, but the concept of growth is different for different entrepreneurs.

Growth can be defined in terms of revenue generation, value addition, and expansion in terms of volume of the business. It can also be measured in the form of qualitative features like market position, quality of product, and goodwill of the customers.

Thus before setting on the next stage to expand the managerial capacity, have a look at the purpose of growth transition you are looking at.

Entrepreneurship and managerial talent-concerns

There’s little return on the effort expended to recognise new market, product, or service opportunities if a firm does not have the managerial capacity to capitalise on those opportunities.

Firms that want to grow must find ways to mitigate the impact of the managerial capacity problem to create and sustain growth.

There are two elements of the managerial capacity problem that must be addressed before a firm can both produce growth and sustain success.

The first concern is that the entrepreneurial forces within the business will be so frustrated by a lack of managerial capacity that they will wither and cease their attempts to drive growth; the second is that it takes time for new management talent to be sourced and brought up to speed to the point where they become effective.

Solutions to the Managerial Capacity Problem:

Growth initiatives must include, from the beginning, recognition of the gaps that growth might show up and strategies for dealing with them.

The solution is not a single dramatic masterstroke; it is an armoury of initiatives from which a firm can choose those weapons most appropriate to its own situation. Few of them are:

a) Developing Management Team: Team of committed managers becomes vital for the growth of the firm. It is a challenge and compulsion for a business owner to attract talented people who will buy into the vision and help grow the firm. As team expands, an organisation develops into layers.

b) Vision & Mission Statements: Vision connects with society and so is the matter of pride for new employees to be associated with.

A mission statement provides clear direction to the employees of a business as well as helping experienced employees mentor new appointees.

c) Incentives- Financial and Non-financial: Financial incentives include bonus plans, profit sharing and stock options. Assisting them to have access to social security schemes of govt, (Ex. Atal Pension Scheme) may help to earn goodwill.

Non-financial includes training, skill development, leadership roles etc can be included.

d) Internal Communications: Communications work quickly and effectively in both directions, to and from the employees of the business.

This has the dual effect of ensuring that everyone in the business has the same information and that it is unambiguous and not subject to erroneous interpretation.

e) Recruit from within the business: People from that same industry comes with expertise that helps to keep the learning curve small and accelerate the transition.

f) Reorienting self:  An entrepreneur, by nature, is rebellious, aggressive and passionate.

However as one chooses to bring in or groom managerial staff, the entrepreneur must transform himself to become an anchor and not keep asserting ownership.That is the source of comfort for managers to perform.

The assertion of ownership in the routine operations will make them demoralised and may end in attrition.  One should learn to be tolerant of mistakes of employees and acknowledge their aspirations. Promote positive work values and culture in the organisation.

g) Hire an advisor: Transition of management style is more of personal adjustment for an entrepreneur. Many of the aspects many not be familiar to him.

It is better to seek the assistance of advisor who has proven record of advising transition. Alternatively one can choose to undergo training programmes (1-2 weeks) in leading management institutions like IIM or ISB. They have designed exclusive programmes for SMEs.

When to initiate the expansion of managerial capacity?- A Chicken & Egg situation

Many entrepreneurs who have planned the growth also confront with another challenge. When to initiate the process of hiring personnel for expanding bandwidth- is it before setting on growth plan or during the process of implementation?

This dilemma is not out of place. Entrepreneurship journey begins with frugality at its heart. Obviously costing is something every entrepreneur is sensitive to.

Establishment expenses bound to go up if they choose to recruit upfront. As a result, it is not uncommon to find many entrepreneurs are postponing to recruit people despite being aware that new growth requires a new set of people. This procrastination is the bane and recipe for disaster.

We suggest that decision to hire or even retraining the existing candidate must be taken well before stepping on the growth.

The cost incurred in such an exercise is an investment in growth and necessary for exploiting the potential of new growth strategy. It gives enough time for them as well as other existing personnel to get familiar with each other and be clear about the role.


It is highly essential that entrepreneurs should understand the managerial and social side of growing company than merely counting in terms of financial numbers.

We emphasise that any growth plan must be preceded by preparation or updating (if prepared) of a strategic plan for growth that set the milestones and measurements.

You may also read the following related posts:

  1. Transition Planning
  2. Planning for Growth: How prepared you are?