I want to expand my business because……it upgrades my social status
Many entrepreneurs want to grow for reasons such as bigger opportunities, addressing a pain point for the society, bringing in novelty etc. However, some SMEs in India aim at growing with an eye on upgrading social status as the primary goal, a risky proposition.
Recently I went to meet one entrepreneur in the Industrial Area accompanying one friend. He has been an entrepreneur for 30 years. He had been successfully running a business of manufacturing critical high precision components using most advanced manufacturing faculties. As the business reaches the stage of full potential, he wanted to upscale the business. He chanced upon a guy, who promised to secure higher funding support at softer terms.
The only condition, he narrated to us, that the new unit should be ready with all the facilities of higher capacity before funding. He borrowed up to Rs 4 crores from private sources to install the new unit. However, the said promised easy loan did not reach him and thereby pushed him to distress. Though the unit was ready and having ready market and staffing, it could not sustain itself as the lenders who advanced short term loans did not allow him to continue operations insisting for payment as per agreed terms.
The situation went out of control. The distress spreads to existing unit as well. The private lenders forced him to shut down the business pending settlement of their dues.
There were many loose ends and many of subject entrepreneur’s actions on the business front could not be explained. The unit was kept under lock and key for four full years.
We were more interested in how this business plan came up. We had spent about two hours talking about various things. It was astonishing that he was repeatedly emphasising about his social life oblivion of the immediate challenge. As the discussion progressed he was more and more talking about the standing of his close relatives in their respective businesses, in the numbers, I mean sales.
We could sense that he was subtly revealing his real reason for aggressive expansion without going the formal channels of finance like a bank. We observed that desire to prop up himself in the social circle is the major reason to start aggressive expansion and resultant killing of his profit making small unit.
Drives to propel the growth of business:
We always presume that economic logic drives the business expansion that is people tend to invest in the business if there is an opportunity for more sales, or more profit or larger market share. However, we have observed among many SMEs that there are elements who believe a higher level of business means elevated social status and do everything to attain that.
Lifestyle businesses or business meant to satisfy desire for higher social status
Emphasis on understanding the motivations of owners towards growth is important. In Personality-oriented approaches to growth reflects how the attitudes and motivation of the SME owner influence growth. It is needless to emphasise that the influence of the growth intentions and attitudes of founders has been found to be critical for shaping the future of business.
No doubt, entrepreneurship brings in higher recognition and enhances social status in the process while growing business. However, what matters is prioritisation. The cases like above essentially reflect this conscious choice to operate as a lifestyle business sadly accompanied by a parallel de-emphasis on the process of sustainable growth or expansion.
Capability versus desire:
As the business grows from start up through the ladder, the capability of the firm will also grow in terms handling a larger volume of business or complexity of the products sold. This will lead to an expansion of opportunity for doing more and more business.
There is an assumption that firms capable of high growth will want high growth. The question is whether capability alone drives the business or something else?
Some want to contain the growth in deference to their life goal. In reality, there are many instances wherein the gap between capability for growth and desire for growth seems large. Many entrepreneurs choose to contain the growth and treat the business just to meet their lifestyle needs.
In India, it is a common sight among small businesses. In fact, many employees of such companies complain that their boss is not interested in growth despite potential market of our products and services.
On the other hand, there are many entrepreneurs who remain restless despite achieving the success in the venture. They are obsessed with intense desire to grow more and wishing to dominate the social space in their peer group. They are out to do anything but unwilling to listen to any sage advice or adhere to prudence.
Social status influences the business on either side of growth paths (growth or no-growth). Lifestyle has gone beyond being a descriptor for those businesses that adopt a low or nil growth strategy for the sake of non-economic objectives. Instead, it embodies the growing group of owners who have what could be called a holistic appreciation of being in business. They choose to live their lives, in their style, through their business rather than for or because of the business. These firms can be a means of expression of people, families, their lives and their personal styles. There is always a significant amount of rhetoric surrounding the characteristics of such a status focussed entrepreneur.
They decide on the growth of business typically only after considering the personal implications rather than the business ones. It reflects a new situation that sees the lifestyle, not as something to be accommodated by the business, but instead, lifestyle is conditioning the business operations of SME owners in India. In the instant case, it is his lifestyle tempted him to expand the business despite severe limitation on the capability side in terms of means to support the expansion.
Social status defies economic logic
Only recently have economists become interested in concepts such as social status. It was recognised that economic theory fails to explain a number of socioeconomic phenomena by ignoring possible interdependencies of preferences across people. The social status of a profession is possibly affected by other people’s preferences or behaviour. In turn, status itself may affect people’s preferences. A person’s status among his peers is no less important than his absolute income level in determining his sense of well- being.
Should we link higher level of business to feel socially acclaimed in peer group:
No, it’s not necessary. In fact, there are great qualities and value statements one can talk about in any business successfully running irrespective of size. Because these key attributes make them successful. It may be an association with the large brand, addressing a major pain point in the society, the way employees are treated, how the nation is benefitted, etc. Every successfully running business definitely has few such statements. Hence one need not look at the size alone to seek social recognition.
Aggressive pursuit of seeking social status can make entrepreneur ignore economic logic. It is obvious for them to evaluate every proposal from the social status angle. It is better to resist such temptation and plan the business in the long term interest of self and family.