Business

Advantages and Disadvantages of Small Scale Industries

Small-scale industries as a norm means businesses that consist of small capital, manpower, and machinery that are involved in the manufacturing or production of goods and services. The mandates mention any companies that have a turnover of Rs 10 crore or less are categorized as small-scale industries. These are governed by the laws about corporations and businesses that are levied to standardize and maintain legal decorum.

Small-scale industries are often the backbone of entry-level economics and provide vital support in terms of nation-building and connecting the grassroots level of the nation as they empower and facilitate the growth of employment opportunities. They help in building the nation from a financial and social standpoint by contributing to various resource utilization and distribution of income.

Small Scale Industries

They are often individually owned or can be partnership-based at times with the owners being a close part of the management team and indulging in the day-to-day operations of the business. They have a lot of advantages overall with a few downsides too. We here take a look at both of these aspects below. Read along.

Advantages of Small Scale Industries

1. Employment Opportunity

Small-scale industries help provide employment opportunities to people and local personnel. Since the business or the industry is of a small scale and is often labor intensive, they present a viable option for employment in the area or the locality in which they are set up. They depend on the human workforce rather than being heavily dependent on the machinery like that of large-scale industries thus creating a job sector for the people. This also allows people to find jobs within their location and not have to migrate to bigger cities for work.

2. Open hierarchy and communication

Small-scale industries employ a limited number of people as they don’t need large manpower to run the organization. Often these small-scale industries are sole proprietorships or partnerships and the owners are directly involved in the operations and management. This allows the owners and the employees to have a clear hierarchy and open communication channels between them which is sorely lacking in large-scale organisations.

3. Minimal Capital outlay

As aforementioned, small-scale industries are those that by definition have an annual turnover of Rs 10 crore or less. This means that the initial investment required for setting up such an industry is minimal and doesn’t need tons of capital to start with. Small-scale industries can be set up by small funds and then gradually grow over time with business expansion and more. It is also an excellent way of building up a new set of entrepreneurs as they can begin their journey into production or manufacturing with limited funds.

4. Close connection with Customers

Most of the consumer base of the small-scale industries are local areas or nearby areas. The onus of a successful small-scale industry is to tap the local market and set up supply chains to cater to consumers nearby. This proximity of the consumer base allows the industry or business to have a direct relationship with end customers and distributors and get real-time feedback for future improvements.

5. Lower Overhead Costs

Small-scale industries operate in a smaller area and have a minimal team and manpower size. Add to that the need for resources like operational and capital, and small-scale industries largely require less overhead expenditure than large or medium-scale ones. This helps keep the final produce price in check and at times can be lower than those of the multinational company products.

Disadvantages of Small Scale Industries

1. Lack of wide moat or financial power

Small-scale industries lack the financial power or the significance of large-scale industries. This also means they cannot create a wide moat as that of large monopoly brands. Such a factor often hampers small-scale industries as they cannot compete if there’s an entry of a large player in the market and they can blow the small-scale industry out of business with their spending.

2. Highly Niche Business

Small-scale businesses are generally highly niche fields as they cater to a limited customer base, often local areas, and have a few products in their line-up. Compared to a bigger brand that can offer multiple products to the customer, the small-scale industry needs to impress the customers to be able to sustain itself in the market. If such an aspect fails or the customer isn’t enticed, the growth and future of the business will look bleak.

3. Lack of growth and expansion

Small-scale businesses and industries have a hard time expanding their venture as it will require a significant amount of resources. They will require large capital, manpower, newer manufacturing or production areas, and an overall increase in the overheads. This at times is not possible for small-scale businesses as they can’t mitigate the required means for expanding further and will be limited to being a small-scale player in the overall economy.

4. Geographical limitation

Small-scale industries are often geographically limited to catering to a small base of users. The entire distribution and supply network of small-scale industries is confined to localities and smaller areas. This restricts them to catering to a wide audience present in other cities, states, and on a global scale. This often results in them being limited to just catering to the geographical boundaries of reach and watching other bigger industries take over the other customer base.

5. Demand and Supply Prejudice

Small-scale industries operate on a limited scale with fixed manufacturing or production capacity. They cannot just escalate the production if needed within a short period. For say a small-scale industry got a large batch order to be supplied at short notice. This won’t be manageable for them that easily and may result in business loss due to customers shifting to other medium or large-scale manufacturers.

Final Words

Small-scale industries are the entry-level industry that helps strengthen and empower the grassroots level of the economy by serving the local customer base whilst providing employment opportunity to the local population. The role of small-scale industries is large in the nation’s economic empowerment and starting a small-scale industry presents a lot of benefits and advantages. Similarly, there are a few disadvantages and downsides of it too which we should know about. We hope this article helped clarify both aspects of it.

LEAVE A RESPONSE

Sumit Kumar Yadav has experience analyzing business and finance of big to small companies. Loan, Insurance, Investment data analysis are his key areas.