Economic liberalisation has changed the market paradigm. The marketplace has transcended local, 
regional and national boundaries. The consumer goods segment, in particular, has undergone a 
sea of change with imported goods flooding the markets, and large enterprises and MNC's adopting 
aggressive marketing strategies. The barrier-free movement of goods has fuelled fierce 
competition, with consumer preferences shifting towards imported goods, a rude shock to SME's.

Indian SME's have survived, so far, thanks to government doles like product reservation, price 
preference, fiscal exemptions and subsidised raw materials. With such support systems either 
having been dismantled or gradually being phased out, SME's seem quite rudderless. While some 
may disagree about the way in which these challenges have been imposed, all would agree SME's
would be better-off responding, sooner than later. 

Until recently, small and large enterprises and MNC's operated in different price segments. 
Nirma and Surf, India’s two detergent giants, for instance, co-existed without much 
inter se competition. The scenario has changed. Large enterprises and MNC's have ventured 
in a big way into the lower-price rural segments, squeezing the SME's space. Though various 
studies show that FMCG growth has been more pronounced in volume than in value terms, SME's 
have not been able to withstand such competition. 

While large enterprises rely on scale economies, SME's must rely on innovation and customisation.
SME's have to diversify into innovative products wherein they have inherent strengths to 
compete. High-tech low-volume products, low-shelf life products, and products that need extreme 
customisation are ideal candidates for small-scale production. SME's, the world over, thrive in 
the same product segments dominated by large firms, but catering to niche markets. 

The Indian automotive component industry is a case in point. Be it high quality bakery products 
or components for satellites, there is always room for SME's. It would however, require R&D, 
modern technologies, proper assessment of consumer preferences and continuous product innovation
to succeed. Cheaper finance is a must to propel SME's into the high-tech orbit. 

In mass consumption goods, the sector needs to embed itself into the value chain. Alliances 
between large enterprises and SME's in the form of contract manufacturing, franchising and common 
marketing could be a win-win for both. 

The Chinese model is a classic example of giant enterprises working closely with even tiny 
household producers, to achieve unbeatable cost advantages in the global market. 

The Japanese concept of creating large companies, known as ‘Sogo Sosha’, that market products 
of small enterprises is another good way to spawn innovative SME's. Incentives for such alliances
 must become a policy priority. We need modern retail structures to provide the missing links 
between SME's and mass markets. 

Given the growing global competition, SME's must be considered more as an instrument for lowering
production costs, than for generating employment. They can play a key role in reducing the cost 
of consumer goods by taking their rightful place in the value chain. 

Traditionally, small industries have thrived in clusters. Apparel is a case in point; it is the 
small enterprises that have won the race in the international market. SME's will gain much more 
by reinforcing the strengths of the cluster they belong to. Modern communication technologies 
provide ample opportunities to build and promote cluster brands like Thirupur. 

In a poor country like ours, low-price markets are attractive. A large number of SME's produce 
low- cost, low-quality consumer goods. Unfortunately, they have a hand-to-mouth existence, almost
like their consumers. SME's will have to outgrow this syndrome. Price margins are much higher in 
quality goods, demanded by the emerging new generation of consumers. 

It is the vacuum left behind by SME's in the area of quality, packaging and promotions that lures
large enterprises to enter the market and squeeze out the small players. 

SME's have always had a rightful place in the consumer goods sector. It is time our SME's focus 
on gaining and retaining a strong foothold by virtue of their inherent advantages, and our 
policies support such a shift. 

Mahesh Y. Reddy is additional director, Ficci. The views expressed here are personal, and not
necessarily those of Ficci. Friday, April 01, 20051