B.Com.(Prog.

) Semester-V Commerce

Skill Enhancement Course (SEC)

ENTREPRENEURSHIP DEVELOPMENT
Unit : I-V

SCHOOL OF OPEN LEARNING

University of Delhi

Department of Commerce
 CON
NTENT
TS

UNIT 1
Lesson 1 Concept and Meeaning of Enntrepreneurr
Lesson 2 Entreepreneurshipp and Economic Devellopment

UNIT 2
Lesson 3 Entreepreneurial Competenc
C cies
Lesson 4 Entreepreneurshipp and Envirronment

UNIT 3
Lesson 5 The Business
B Plaan

UNIT 4
Lesson 6 Entreepreneurial Eco-System
E m

UNIT 5
Lesson 7 Functtional Planss (Financiall Plans)
Lesson 8 Manaagement Off Human Reesource
Lesson 9 Mark
keting

Editor : Content Revised byy :

K.B.Gupta Ms Rutiika Saini

SCHO
OOL OF OPEN LEARNIN
L NG
Univeersity of Delhi
5 Cavalry Lane,
5, L Delhii-110007
 Unit 1

LESSON 1
CONCEPT AND MEANING OF ENTREPRENEUR
Dr. Navneet Gera
The word "entrepreneur" is derived from the French Verb "entrepredre". In the 16th century, a
first reference to the word "entrepreneur" was made in military expeditions. The French who
organised the military expeditions were known as entrepreneurs. Therefore, "to organise" or "to
undertake" is the then established meaning of entrepreneurship. Then the construction people,
architects and builders were referred as entrepreneurs. Economists and business management
consultants used the term "entrepreneur" as a factor of production which was distinctly
differentiated from all other labour categories. Thus, "entrepreneur" represented an "owner and
organiser" of the business. In recent literature on economics and management, the term
"entrepreneur" represents an owner of the small-scale business.

Various studies and researches described the entrepreneur as a person with organisational
capacity, distinct values, attitude, aptitude, skills, belief and qualities. He is a creative,
imaginative and innovative person. He bears calculated risk. He is a decision-maker and a goal-
setter. He is committed and a hard-working person. He is a best time manager with excellent
team building and problem solving abilities. He is an achiever with a clear perception who can
identify opportunities. Thus, many descriptions and expressions are associated with
entrepreneurial personality. Another important attribute is the profit orientation of the
entrepreneurial activity.
On the basis of all the definitions given by various economists and management experts as well
as with the help of the descriptions of the term "entrepreneur", let us prepare the working
definition of an entrepreneur. It will facilitate us to know the functions of an entrepreneur. It will
give us guidelines for entrepreneurial development.
DEFINITIONS OF ENTREPRENEUR
“An entrepreneur is one who creates a new business in the face of risk and uncertainty for
achieving profit and growth opportunities and assembles the necessary resources to capitalize on
those opportunities”.
"An entrepreneur is a person who combines various factors of production, processes the raw

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material, converts the raw material into a finished product and creates utility in the product and
sells the product in the market in order to earn profit".
Entrepreneur as a Risk – Bearer
Richard Cantillon, an Irish man living in France, was the first who introduced the term
'entrepreneur' and his unique risk-bearing function in economics in the early 18th century. He
defined entrepreneur as an agent who buys factors of production at certain prices in order to
combine them into a product with a view to selling it at uncertain prices in future. He illustrated
a farmer who pays out contractual incomes which are certain to the landlords and labourers and
sells at prices that are 'uncertain'. He further states that so do merchants also who make certain
payments in expectation of uncertain receipts. Thus, they too are 'risk-bearing' agents of
production.Entrepreneur is described to be a specialised group of persons who bear uncertainty.
Uncertainty is defined as a risk which cannot be insured against and is incalculable. The
entrepreneur, is the economic functionary who undertakes such responsibility of uncertainty
which by its very nature cannot be insured, nor capitalised nor salaried too.
Entrepreneur as an Organiser
Jean-Baptiste Say, an aristocratic industrialist with his unpleasant practical experiences
developed the concept of entrepreneur a little further which survived for almost two centuries.
'His definition associates entrepreneur with the functions of coordination, organisation and
supervision. According to him, an entrepreneur is one who combines the land of one, the labour
of another and the capital of yet another, and, thus, produces a product. By selling the product in
the market, he pays interest on capital, rent on land and wages to labourers and what remains is
his/her profit. Thus, Say has made a clear distinction between the role of the capitalist as a
financer and the entrepreneur as an organizer. He further elaborates that in the course of
undertaking a number of complex operations like obstacles to be surmounted, anxieties to be
suppressed, misfortunes to be repaired and expedients to be devised, three more implicit factors
are deemed to be essential. These are:
1. Moral qualities for work judgement, perseverance and a knowledge about the
business world.
2. Command over sufficient capital, and
3. Uncertainty of profits.
Entrepreneur as an Innovator
Joseph A. Schumpeter, for the first time in 1934, assigned a crucial role of 'innovation' to the
entrepreneur in his magnum opus 'Theory of Economic Development'. Schumpeter considered
economic development as a discrete dynamic change brought by entrepreneur by instituting new
combinations of production, i.e., innovations. The introduction of new combination of factors of
production, according to him, may occur in anyone of the following five forms:
1. The introduction of a new product in the market.
2. The instituting of a new production technology which is not yet tested by experience in the
branch of manufacture concerned.
3. The opening of a new market into which the specific product has not previously entered.

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4. The discovery of a new source of supply of raw material.
5. The carrying out of the new form of organisation of any industry by creating of a monopoly
position or the breaking up of it.
Schumpeter also made a distinction between an inventor and an innovator.
An inventor is one who discovers new methods and new materials. And, an
innovator utilizes inventions and discoveries in order to make new
combinations.
In sum, the concept of the entrepreneur is intimately associated with the three elements-risk-
bearing, organising and innovating. Thus, an entrepreneur can be defined as a person who tries to
create something new, organises production and undertakes risks and handles economic
uncertainty involved in enterprise.
DEFINITIONS OF ENTREPRENEURSHIP
Entrepreneurship was defined in earlier days with respect to profit theories. Some important
definitions are discussed below
1. F.A.Walker defines "Profit" as a "rent for ability of entrepreneurs. Like land factor of
production, entrepreneurs differ in their abilities. Accordingly, there are marginal and
supra-marginal entrepreneurs with respect to their efficiency. Marginal entrepreneurs earn
only normal profits, which is a reward for their marginal ability. More efficient
entrepreneurs are considered as supra-marginal. They earn super-normal profit as a reward
for their organisational talent and business efficiency".
2. Prof. Taussing considers profit as a wage of the entrepreneur for his mental and directing
abilities.
3. StingIer, Champion and Edgework advocated that profit is the reward determined by the
marginal productivity of the entrepreneur.
4. J.8. Mill, Marshall and Hawley define "profit' as a compensation payable to the
entrepreneur for his risk bearing function.
5. Knight defines 'profit' as a reward for the uncertainty bearing capacity of the Entrepreneur.
Risk bearing function is acknowledged by Knight. According to this definition, risk and
uncertainty are classified as insurable and non-insurable risks.
Every entrepreneur has to bear certain risks in the business. Some risks like fire, theft and
accidents and natural calamities like flood, earthquake, etc. are predictable and can be
anticipated. The entrepreneur can frame policy to meet the challenges of such types of
risks. These are insurable risks. Profit does not arise out of insurable risks. But there are
some non-insurable risks like changes in the demand, government policy, technological
changes, trade cycle, competition, etc. These risks are unpredictable and cannot be
anticipated. Entrepreneurial skill lies in bearing and handling these risks. Profit is a reward
for bearing non-insurable risks.
6. Joseph Schumpeter defined "profit" as a reward for introducing innovations. An
entrepreneur is an innovative and creative person who introduces innovations in the
business. Innovation means commercial application of the inventions and scientific

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 discoveries. Innovations are of two types:
a. Innovations related to production
b. Innovations related to marketing
The production function represents the relationship between the input and the output. If an
entrepreneur introduces innovations related to inputs like new sources, types and
substitutes for raw materials, new packaging styles, new machinery, technological changes,
fuel, management techniques, enriched labour qualities, etc-. it is an innovation related to
the production function. It may be a cost-effective change but ultimately all innovations
result in developing a competitive edge.
The market function is represented by the interaction between the demand and the supply
forces. Market function innovations are the result of the changes in assumptions of the
demand and / or supply forces. Changes in the customer needs, preferences, fashions,
demand pattern, government policy, foreign trade, taxation policy, number of substitutes,
prices of the substitutes, advertisement and marketing policy are some of the innovations
related to the market function. An innovative entrepreneur becomes a market leader and in
order to sustain his position as a market leader, he has to introduce innovations
continuously. Profit is a reward for innovative entrepreneurs. When a given innovation is
copied or adopted by other entrepreneurs, profit disappears. To regain his position, the
entrepreneur has to introduce another innovation. This expands the scope for product
improvement and research and development strategy.
7. Peter Drucker has supported the views expressed by Schumpeter. According to Drucker,
innovation is an important tool of an entrepreneur. He can perceive new opportunities, can
convert the opportunities in attractive projects and become the market leader.
All these definitions describe various qualities of an entrepreneur and profit as the aim of the
entrepreneurial efforts.
FEATURES
1. Entrepreneur plays a distinct role in entrepreneurial activity. He invests his valuable, scarce
financial resources and organizes the production function.
2. He takes the decisions about:
a. What to produce: product selection.
b. How to produce: technology.
c. Where to produce: location.
d. When to produce: Duration, time planning.
e. For whom to produce: target consumers/market.
f. At what price to sale: price determination.
g. How much profit to earn: profit margin.
h. What to do with the profit: profit sharing/reinvestment.
i. No other factor of production participates in the decision-making process. It is the
domain of the entrepreneur.

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3. Entrepreneurship is a need-based function.

4. As a logical outcome, the product or service offered by an entrepreneur possesses utility.

It is the want satisfying capacity of the product.
5. Production is not for self - consumption but is offered for sale in the market.
6. Entrepreneurship is a profit-oriented activity and is a commercial proposition. An
entrepreneur aims at profit.
7. An entrepreneur possesses distinct qualities like risk-bearing, goal-setting,decision making,
information seeking, problem solving, time planning andmaintaining good interpersonal
relations in addition to the other set of specialcharacteristics like innovative ness, creativity,
communication skills, high levelof confidence, perception, team building, trustworthiness,
hard work,consistency and analytical strengths. These qualities, skills, aptitude, visionand
capabilities differentiate the entrepreneur from the owners of other factors of production as
well as the managers.
8. The entrepreneur is the owner of the venture. He has employment generation capacity.
9. He is a creator of wealth.
CHARACTERISTICS OF AN ENTREPRENEUR
If we go through the business history of India, we come across the names of persons who have
emerged as successful entrepreneurs. For example, Tata, Birla, Ambani, Modi, Dalmia, Kirlosker
and others are well-known names of successful entrepreneurs in the country who started their
business enterprises with small size and made good fortunes. Success or otherwise of a small
enterprise is, to a great extent, attributed to the success or otherwise of the entrepreneur
himself/herself. Then, the question is: What makes the entrepreneurs successful? Whether they
had anything common in their personal characteristics? The scanning of their personal
characteristics shows that there are certain characteristics of entrepreneurs which are found
usually prominent in them.
1. Hard Work:
Willingness to work hard distinguishes a successful entrepreneur from unsuccessful one. The
entrepreneur with his tedious, sweat-filled hours and perseverance revive their business even
from on verge of failure. In nutshell, most of the successful entrepreneurs work hard endlessly,
especially in the beginning and the same becomes their whole life. .
2. Desire for High Achievement
The entrepreneurs have a strong desire to achieve high goals in business. This high achievement
motive strengthened them to surmount the obstacles, suppress anxieties, repair misfortunes and
devise expedients and only set up and run a successful business.
3. Highly Optimistic:
The successful entrepreneurs are not disturbed by the present problems faced- by them. They are
optimistic for future that the situations will become favourable to business in future. Thus, they
can run their enterprises successfully in future.

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4. Independence:
One of the common characteristics of the successful entrepreneurs has been that they do not like
to be guided by others and to follow their routine. They resist to be pigeonholded. They liked to
be independent in the matters of their business.
5. Foresight:
The entrepreneurs have a good foresight to know about future business environment. In other
words, they well visualise the likely changes to take place in market, consumer attitude,
technological developments, etc. and take timely actions
6. Good Organiser:
Different resources required for production are divorced from each other. It is the ability of the
entrepreneurs that brings together all resources required for starting up an enterprise and then to
produce goods.
7. Innovative
Production is meant to meet the customers' requirement the changing taste of customers from
time to time, the entrepreneurs initiate innovative activities to produce goods to satisfy the
customers' changing the products. The research institutes/ centres established by Tata, Birla,
Kirloskar are examples of the innovative activities taken by the successful entrepreneurs in our
country.
NEED FOR ENTREPRENEURSHIP
To capitalize on new opportunities, to create wealth and new jobs. The economics of many
developing countries are in sate of transition as they strive to shift from a subsistence oriented
and heavily regulated environment to an outward looking, market driven economy. This
transition can be greatly assisted by the emergence of a large number of small - scale and rural
enterprises in all spheres of economic activity, which, in turn, requires the development of
entrepreneurial skills. Despite the importance of entrepreneurship for economic and social
development there is as yet scant research into or systematic observation of the processes
through which entrepreneurship emerges and sustains itself
FUNCTIONS OF AN ENTREPRENEUR
Some of the major functions of an entrepreneur are:
i) Identifying entrepreneurial opportunity – There are many opportunities in the world of
business. These are based on human needs like food, fashion, education, etc., which are
constantly changing. These opportunities are not realised by common man, but an
entrepreneur senses the opportunities faster than others do. An entrepreneur therefore, has
to keep his eyes and ears open and require imagination, creativity and innovativeness.
ii) Turning ideas into action – An entrepreneur should be capable of turning his ideas into
reality. He collects information regarding the ideas, products, practices to suit the demand
in the market. Further steps are taken to achieve the goals in the light of the information
collected.
iii) Feasibility study – The entrepreneur conducts studies to assess the market feasibility of the
proposed product or services. He anticipates problems and assesses quantity, quality, cost

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 and sources of inputs required to run the enterprise. Such a blue print of all the activities is
termed as a ‘business plan’ or a ‘project report’.
iv) Resourcing – The entrepreneur needs various resources in terms of money, machine,
material, and men to running the enterprise successfully. An essential function of an
entrepreneur is to ensure the availability of all these resources.
v) Setting up of the Enterprise – For setting up an enterprise the entrepreneur may need to
fulfil some legal formalities. He also tries to find out a suitable location, design the
premises, install machinery and do many other things.
vi) Managing the enterprise – One of the important function of an entrepreneur is to run the
enterprise. He has to manage men, material, finance and orgainse production of goods and
services. He has to market each product and service, after ensuring appropriate returns
(profits) of the investment. Only a properly managed organisation yields desired results.
vii) Growth and Development – Once the enterprise achieves its desired results, the
entrepreneur has to explore another higher goal for its proper growth and development. The
entrepreneur is not satisfied only with achieving a set goal but constantly strives for
achieving excellence
QUALITIES OF AN ENTREPRENEUR
Entrepreneurial personality is distinct from the personality of a common man. An entrepreneur
possesses special qualities, values, skills, attitudes, aptitudes, capacities, capabilities and
motivation. By learning these skills and inculcating the qualities, it is possible to transform the
common man's personality into an entrepreneurial personality. Systematic motivation and
training accelerates the process of transformation. A trainer-motivator plays an important role in
equipping people to learn these qualities and skills..-
1 Confidence
An entrepreneur is a confident person. Confidence develops an edge over the competitors.
Confidence is always impressive and wins others. Entrepreneurial personality demands a high
level of confidence.
Confident personality projects:
 Confident Appearance
 Confident Body Language
 Confident Communication
 Confident Work Style
 Confident Relationships
2 Clear Perception
Perception plays a very important role in our life. Perception has 'a make or a break' capacity.
The making is associated with "Positive Perception". The breaking is associated with "Negative
Perception."An entrepreneur cannot achieve a desired goal with a set perception. He has to
develop his perceptions about people (consumers), events, objects, relationships, etc.There are a
number of products and services which are the outcome of tile strong developed perceptions of

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the entrepreneurs. For example, mobile phones, transistor radios, audio-visual cassettes and CDs,
computers, etc. are the perceptions of the changing technology. In such cases, the needs of the
different customer groups are perceived by the entrepreneurs and products are designed with the
new techniques and technologies. Perceptions have helped the entrepreneurs to offer
convenience to the buyers. Perception helps the entrepreneur in decision - making, goal-setting,
team-building and conflict management. Perception leads to creativity, imagination and
innovativeness and gives a competitive edge to the entrepreneur.
3 Risk Bearing Ability
In a business, no other factor of production, except the entrepreneur, bears risk. When the
behavioural pattern of a large number of people is studied, some people are identified as zero
risk takers. They do not take any risk and are afraid of taking challenges. They select easily
attainable goals. Some people are hundred per cent risk-takers. They are excited by the
challenges and risks involved. They are neither bothered about the methods nor about the
attainment of the goals. They are charged only by the risk. But an entrepreneur is not a zero risk-
taker. He is not interested in an activity or work which anybody can do easily. He is not hundred
per cent risk-taker also. He cannot afford the luxury of not reaching the goals because his
investment is at stake.
An entrepreneur is careful and cautious while selecting his goals. He will examine his strengths
and weaknesses. He will assess the available resources, and will decide the strategy. He will
consider alternative courses of action and will identify people and institutions for support.
An entrepreneur takes not only a risk but shoulders the responsibility of the outcome of his
decisions. He takes the credit for his success and also is prepared to face the failures. If
successful, he strengthens himself to achieve a higher degree of success. If he fails, he examines
the causes of his failure and tries hard to overcome the problem. He does not leave anything to
chance, fate or any situation beyond his control. Therefore, he takes a moderate and calculated
risk.
4 Team-building Capacity
Team -building capacity is a key for entrepreneurial success. An entrepreneur requires a variety
of services and help from a large number of people and institutions including suppliers of raw
materials, machinery, workers, utilities like electricity, fuel, water supply, transportation,
financial organisations, government personnel, marketing people, advertisers and finally the
consumers. All these people and institutions participating directly or indirectly in different
capacities in the entrepreneurial venture facilitate the entrepreneur to achieve his ultimate goal,
"Success in Business". Therefore, an entrepreneur has to exhibit an excellent team-building
ability. Developing the team spirit and team-building ability is a difficult but not an impossible
task. A systematic use of certain techniques will equip you with a team-building ability
5 Time Consciousness and Time Planning
Time planning is achievement planning; An entrepreneur is a time conscious person. Time is a
valuable resource. How do you experience time and how do you use it depends upon what do
you expect from it. It is important to remember that time cannot be created nor destroyed but
time has to be managed effectively.Time is an important resource in a competitive environment.
Time planning is achievement planning. For an entrepreneur goals or targets are always with
reference to time. Time scheduling, time monitoring and time management is an important

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entrepreneurial skill."On-time Performance" is a key word for success.
6 Interpersonal Relations
An entrepreneur has to make special efforts for developing harmonious and cordial relationships
with others. The success of an entrepreneurial venture depends upon effective team -building
which needs developing interpersonal relations competencies.While developing harmonious
relationships with others, one must develop an approach to know his/her personality type, your
expectations from him/her, his/her expectations from you and the ultimate goal you want to
achieve with that relationship.
7 Communication Skills
Communication is a distinctive skill of an entrepreneur. Effective communication is necessary
for achieving positive relationship. Verbal communication is the communication through words.
Non-Verbal communication is the communication with gestures, expressions or body language.
The following are the important aspects of communication:
1. Speech-language, words, voice, tone, accent, speed
2. Facial expressions and gestures
3. Body language
4. Positive strokes
5. Confidence
6. Attentiveness
7. Praise for others
Communication is expressing ideas, giving instructions, sharing thoughts, imparting knowledge
and exchanging information. The goal of communication is to create and enhance understanding.
While communicating, the first step is to know which language is comfortably followed by the
other person. In the Indian environment, usually you should be able to speak at least your
regional language. Voice and tone are effective instruments of communication. It is observed
that successful professionals and entrepreneurs make special efforts to groom their voice. Tone
is the texture of the voice. Tone communicates your affiliation with the other person. It
communicates your feelings. It is essential to cultivate a proper tone culture. Accent make one's
speech attractive. Without accent your speech becomes monotonous. Accent is the ups and
downs of the words or the stress on words. It indicates the importance of the words and the
meanings you communicate. One should be able to understand the grasping power of the other
person and accordingly adjust the speed of speech. Facial expressions, gestures and body
language constitute the non-verbal communication. Often you communicate more in a non-
verbal manner than a verbal one. Facial expressions, gestures and body language have occupied a
significant place in non-verbal communication. Movements, postures, use of hands, legs, fingers,
eyebrows, sitting position, eye movements, hand shake, position of neck, way of standing and
walking represent body language. It is always said that "Words may lie but body seldom does".
Communicating with body language is an art.
8 Positive Attitude
Attitude is one's way of thinking and feeling, how you see people and events and how you

9
interpret them. It is your mental make-up.An entrepreneur comes across turbulent situations.
How he responds in such situations makes him a winner or a loser. Positive attitude makes him
win.
Positive Attitude implies
Positive Believing

Positive Thinking

Positive Action

Positive Results

Development of Positive Attitude:

1. Concentrate on your strengths
2. Sharpen your skills, talents, resources
3. Collect and rehearse happy experiences in your life
4. Identify the strengths of others
5. Know their happy experiences
6. Value and enjoy your work
7. Dream a little, plan a lot, work hard
8. Develop the habit of giving positive strokes to others with words, gestures and
actions;
9. Have positive interactions with others
10. Remember, any failure is not the end of the world. You can start again.
9 Leadership
An entrepreneur is the leader of his group of workers, managers, suppliers, financiers,
advertisers, marketing personnel, vendors, government personnel, consultants and consumers. He
is the true representative of his entrepreneurial venture.As a leader entrepreneur possesses the
qualities like vision, dynamism, straight forwardness, transparency, inspiration, achievement
motivation, discipline, trustworthiness, futuristic perspectives, convincing power, communicative
abilities, sense of responsibility, perseverance, persistence and hard work. He is a role model in
himself.The overall function of leadership is to lead effectively and efficiently in different ways
with different kinds of groups under a variety of situations.
10 Innovativeness, Creativity, and Imagination
Innovativeness, creativity and imagination are considered as the basic ingredients of an
entrepreneurial personality.Innovation is the introduction of a new concept, a new way of doing
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things or a new approach. With reference to enterprise, innovation can be in terms of new
technology, new technique of production, new sources and types of raw material, novel
machinery, new labour saving devices, new packaging techniques and packaging materials, new
way of advertising, product development, new application of the existing product and even
developing a new market. The history of entrepreneurial development itself is a reflection of the
innovativeness of the entrepreneurs, As a management principle, it is always said that, "Do
something with the help of which you can surpass and surprise the competitor but do not get
surpassed and surprised by the competitor," Innovation and innovativeness surpasses and
surprises the competitor. An innovative entrepreneur becomes a market leader. His market share
and profitability increases till the competitors catch that innovation and imitate it by bringing out
"me-too" products in the market. Until then, the entrepreneur enjoys a "surplus profit". Once the
innovation becomes common, surplus profit and market leadership disappears. The innovative
entrepreneur has to hit the market with another innovation to retain his market leadership and
high profit margin.Creativity is another significant attribute of an entrepreneurial personality. It
is a quality which need not be acquired because everyone possesses it.
11 Goal-Setting
A goal is a base building block of entrepreneurial career. It is described in many ways. "Goal is a
dream with a deadline" "Goal is how you see yourself." "Goal is what you want to be and how
you want to get there". "Goal is an end towards which you direct some specific efforts".Often,
the goal is confused with an objective or a mission. Objectives are the tactics planned and steps
to be taken to achieve goals. Goals are specific, measurable, accomplishments to be achieved in a
given time frame. Missions are the statements of general intent.
DEFINITION of 'Intrapreneurship'
Acting like an entrepreneur within a larger organization. The term is derived from a combination
of "intra" or internal, and "entrepreneurship." Intraprenuers are usually highly self-motivated,
proactive and action-oriented people who are comfortable with taking the initiative, even within
the boundaries of an organization, in pursuit of an innovative product or service.
Entrepreneurship and Intrapreneurship
The concept of entrepreneurship is seen as the process of uncovering and developing an
opportunity to create value through innovation and seizing that opportunity without regard to
either resources (human and capital) or the location of the entrepreneur – in a new or existing
company (Churchill, 1992).Intrapreneurship represent the initiation and implementation of
innovative systems and practices within an organization, by some of its staff under the
supervision of a manager who takes the role of an intrapreneur, in order to improve the
economical performance of the organization, by using a part of its resources, namely those that
previously have not been used in an appropriate manner. Intrapreneurship improves the
economical and financial performance of the company, by applying a more efficient use of the
resources and by using a suitable motivational system for its employees (Istocescu, 2003).
Similarities and differences between entrepreneurship and intrapreneurship
Unlike the entrepreneur, the intrapreneur acts within an existing organization. The intrapreneur is
the revolutionary inside the organization, who fights for change and renewal from within the
system. This may give rise to conflicts within the organization, so respect is the necessary key in
order to channel these conflicts and transform them into positive aspects for the organization.

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Even though intrapreneurs benefit from using the resources of the organization for the
implementation of the emerging opportunities, there are several motives why innovation is more
difficult to implement in an existing organization, such as (Malek &Ilbach, 2004):
In order to give an answer to this question an analysis of the advantages and disadvantages of
both concepts is required. The table below helps someone decide what type of business best
suits him after confronting him with the advantages and disadvantages that await him.
Table : Entrepreneurship and intrapreneurship: advantages and disadvantages
ENTREPRENEURSHIP
Advantages Disadvantages
• You are your own boss - independency • Money pressure – giving up on the
security of a regular paycheck
• The income increases
• Less benefits as the business is new
• You have the chance to be original
Long working hours
• You have part of excitement and adventure
Mistakes are magnified
• There are a lot of possibilities
• All decisions must be made alone
• Salary potential – you decide upon your own salary
INTRAPRENEURSHIP
Advantages Disadvantages
• Ability to stay in a friendly, well known environment • Reward may not be up to expectation
• Innovation may not be appreciated accordingly
• Practicing your skills within an organization – lower
risk • You can be innovative but to a certain limit – you are
not your own boss
• Using companies resources, good name, knowledge
• Access to customers, infrastructure

After seeing the pros and the cons of each concept we think that it is useful to see also the
similarities and differences between these two concepts.
Table 2: Entrepreneurship and intrapreneurship: similarities and differences

S.NO Similarities Differences

1 Both involve opportunity recognition
and definition.
2 Both require a unique business concept
that takes the form of a product,
process or service.
3 Both are driven by an individual
champion who works with a team to
bring the concept to fruition.
In start-up entrepreneurship, the entrepreneur
takes the risk whereas in intrapreneurship the
company takes the risk other than Career
related risk.
In a start-up the entrepreneur is subject or
more susceptible to outside influences; in
intrapreneurship the organization is more
insulated from outside forces or influence.
The business is owned by an individual in
entreprenueuship whereas in intrapreneurship
it is owned by company having control over
intellectual property etc.

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4 Both require that the entrepreneur be The rewards are unlimited in case of
able to balance vision with managerial entrepreneurship whereas it is limited under
skill, passion with pragmatism, and intrapreneurship.
proactiveness with patience.
5 Both involve concepts that are most The entrepreneur may or may not success
vulnerable in the formative stage, and whereas under intrapreneur the organisationhas
that require adaptation over time. more flexibility for management errors.
6 Both require harvesting Strategies.

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 LESSON 2
ENTREPRENEURSHIP AND ECONOMIC DEVELOPMENT
Dr. Navneet Gera
ROLE OF ENTREPRENEURSHIP IN ECONOMIC DEVELOPMENT
Entrepreneurs play an important role in economic development in multiple ways. The important
contributions towards economic development could be through providing employment,
contributing towards GDP, contributing towards foreign exchange, infrastructure development,
getting innovation, technology development and creating new avenues of business.
Entrepreneurs create new businesses, generating jobs for themselves and those they employ. In
many cases, entrepreneurial activity increases competition and, with technological or operational
changes, it can increase productivity as well. The small businesses in India are often ones created
by self-employed entrepreneurs. “Entrepreneurs give security to other people; they are the
generators of social welfare,” Carl J. Schramm, president and chief executive officer of Ewing
Marion Kauffman Foundation, said in February 2007. Entrepreneurs innovate and innovation is a
central ingredient in economic growth. As Peter Drucker said, “The entrepreneur always
searches for change, responds to it, and exploits it as an opportunity.” Entrepreneurs are
responsible for the commercial introduction of many new products and services, and for opening
new markets. Moreover, it is evident from research that entrepreneurs were essential to many of
the most significant innovations, ones that revolutionized how people live and work. From the
automobile to the airplane to personal computers – individuals with dreams and determination
developed these commercial advances. The crucial role played by the entrepreneurs in the
development of the emerging countries has made the people much conscious of the significance
of entrepreneurship for economic development. Now, people have begun to realize that for
achieving the goal of economic development, it is necessary to increase entrepreneurship both
qualitatively and quantitatively in the country. It is only active and enthusiastic entrepreneurs
who fully explore the potentialities of the country’s available resources labour, technology and
capital.
An entrepreneur has to take into consideration the fact that any business direction is not standing
still. It constantly develops and changes in order to survive under the conditions of business
competition. It should be mentioned that small business life cycle can be rather short – several
years or even months. It all depends on the way an entrepreneur runs and brands his business.
According to the key concepts of business theory, every business system has the following stages
of its development: beginnings of business (when you start a business and it enters the market);
business development (business growth and promotion); business maturity stage (the most
successful period of your company’s activity) and failure (either complete or partial bankruptcy).
Most beginning entrepreneurs believe that they achieve success when they start a business. In
fact, they are successful entrepreneurs if they manage to fight for place in the market and outstrip
competitors. Every entrepreneur may not succeed in passing business development stage. But
those who manage to reach the top of the market can make really big profits.
Entrepreneurs are among the prime movers of innovations. Entrepreneurship is a necessary
dynamic force. It is also opined that development does not occur spontaneously as a natural
consequence when economic conditions are in some sense ‘right’: a catalyst or agent is needed,
and this requires an entrepreneurial ability. Essentially, the entrepreneur searches for change,
sees need and then brings together the manpower, material and capital required to respond the

14
opportunity what he sees. Role of entrepreneurship in economic development varies from
economy to economy depending upon its material resources, industrial climate and the
responsiveness of the political system to the entrepreneurial function. The entrepreneurs
contribute more in favourable opportunity conditions than the economies with relatively less
favourable opportunity conditions. Small scale industries provide immediate large scale
employment, ensure a more equitable distribution of national income and also facilitate an
effective resource mobilization of capital and skill which might otherwise remain unutilized.
Lastly, the establishment of Entrepreneurship Development Institutes and alike by the Indian
Government during the last decades is a good testimony to her strong realization about the
premium mobile role of entrepreneurship played in economic development.
Key role of entrepreneurship towards economic development are as follows:
1. Entrepreneurship promotes capital formation by mobilizing the idle saving, of the public.
2. It provides immediate large scale employment. Thus, it helps reduce the unemployment
problem in the country, i.e., the root of all socio economic problems.
3. It promotes balanced regional development.
4. It helps reduce the concentration of economic power.
5. It stimulates the equitable redistribution of wealth, income and even political power in the
interest of the country.
6. It encourages effective resource mobilization of capital and skill which might otherwise
remain unutilized and idle.
7. It also induces backward and forward linkages which stimulate the process of economic
development in the country.
8. Last but no means the least, it also promotes country’s export trade i.e., an important
ingredient to economic development.
Role of entrepreneurs in economic development
The entrepreneur who is a business leader looks for ideas and puts them into effect in fostering
economic growth and development. Entrepreneurship is one of the most important input in the
economic development of a country. The entrepreneur acts as a trigger head to give spark to
economic activities by his entrepreneurial decisions. He plays a pivotal role not only in the
development of industrial sector of a country but also in the development of farm and service
sector. The major roles played by an entrepreneur in the economic development of an economy
is discussed in a systematic and orderly manner as follows.
(1) Promotes Capital Formation:
Entrepreneurs promote capital formation by mobilising the idle savings of public. They employ
their own as well as borrowed resources for setting up their enterprises. Such type of
entrepreneurial activities lead to value addition and creation of wealth, which is very essential for
the industrial and economic development of the country.
(2) Creates Large-Scale Employment Opportunities:
Entrepreneurs provide immediate large-scale employment to the unemployed which is a chronic
problem of underdeveloped nations. With the setting upof more and more units by entrepreneurs,

15
both on small and large-scale numerous job opportunities are created for others. As time passes,
these enterprises grow, providing direct and indirect employment opportunities to many more. In
this way, entrepreneurs play an effective role in reducing the problem of unemployment in the
country which in turn clears the path towards economic development of the nation.
(3) Promotes Balanced Regional Development:
Entrepreneurs help to remove regional disparities through setting up of industries in less
developed and backward areas. The growth of industries and business in these areas lead to a
large number of public benefits like road transport, health, education, entertainment, etc. Setting
up of more industries lead to more development of backward regions and thereby promotes
balanced regional development.
(4) Reduces Concentration of Economic Power:
Economic power is the natural outcome of industrial and business activity. Industrial
development normally lead to concentration of economic power in the hands of a few individuals
which results in the growth of monopolies. In order to redress this problem a large number of
entrepreneurs need to be developed, which will help reduce the concentration of economic power
amongst the population.
(5) Wealth Creation and Distribution:
It stimulates equitable redistribution of wealth and income in the interest of the country to more
people and geographic areas, thus giving benefit to larger sections of the society. Entrepreneurial
activities also generate more activities and give a multiplier effect in the economy.
(6) Increasing Gross National Product and Per Capita Income:
Entrepreneurs are always exploring for new opportunities. They explore and exploit
opportunities, encourage effective resource mobilisation of capital and skill, bring in new
products and services and develops markets for growth of the economy. In this way, they help
increasing gross national product as well as per capita income of the people in a country.
Increase in gross national product and per capita income of the people in a country, is a sign of
economic growth.
(6) Improvement in the Standard of Living:
Increase in the standard of living of the people is a characteristic feature of economic
development of the country. Entrepreneurs play a key role in increasing the standard of living of
the people by adopting latest innovations in the production of wide variety of goods and services
in large scale that too at a lower cost. This enables the people to avail better quality goods at
lower prices which results in the improvement of their standard of living.
(7) Promotes Country's Export Trade:
Entrepreneurs help in promoting a country's export-trade, which is an important ingredient of
economic development. They produce goods and services in large scale for the purpose earning
huge amount of foreign exchange from export in order to combat the import dues requirement.
Hence import substitution and export promotion ensure economic independence and
development.

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(8) Induces Backward and Forward Linkages:
Entrepreneurs like to work in an environment of change and try to maximise profits by
innovation. When an enterprise is established in accordance with the changing technology, it
induces backward and forward linkages which stimulate the process of economic development in
the country.
(9) Facilitates Overall Development:
Entrepreneurs act as catalytic agent for change which results in chain reaction. Once an
enterprise is established, the process of industrialisation is set in motion. This unit will generate
demand for various types of units required by it and there will be so many other units which
require the output of this unit. This leads to overall development of an area due to increase in
demand and setting up of more and more units. In this way, the entrepreneurs multiply their
entrepreneurial activities, thus creating an environment of enthusiasm and conveying an impetus
for overall development of the area.
Historical Background
Entrepreneurship in Pre-British India
During the pre-British period, India was constituted mainly by villages. There were cities, which
were the capitals of the princely states. Villages were self-sufficient. The village population used
to satisfy their daily requirements and needs within the village. The village economy was
constituted by farmers, artisans, craftsmen, balutedars and members of the gram panchayat. The
artisans, craftsmen and balutedars used to produce various products and provide necessary
services. They represented the entrepreneurial culture and possessed the characteristics of an
entrepreneur. There was the barter economy, in which commodities were exchanged for
commodities. Certain products like spices, needles, and salt were brought from outside by the
village traders. Farmers produced the foodgrains. Members of the gram panchayat established
law, peace and order. Thus, the village people were completely dependent upon each other. They
represented well knit, harmonious relationships.
Indian handicrafts, marble carvings, wooden articles, woollens garments, Jewellery and textiles
attracted the world market. Particularly, the Indian 'Mulmul', a type of Muslim cloth was world
famous. Village craftsmen and artisans received special patronage from the Indian kings and
princes. Indian spices, jute, jute goods, minerals, raw cotton and handicrafts were exported all
over the world. There was prosperity. Indian culture was an entrepreneurial culture. There was
"value for Labour." India was described as the "land of gold". But Indian economy received a
tremendous setback during the British rule.
Decline of Entrepreneurship During the British Period
During the British rule, Indian village economy received a big jolt from the competition by the
British industries. Mechanisation in the British industries initiated the industrialisation process in
Britain. On one hand, British industries, particularly, the textile industry required raw material
which was supplied by the Indian agriculture On the other hand, British industries were in need
of a ready market for their machine-made goods. Raw materials were exported from India and
the imported machine made British goods flooded Indian markets. As these goods were cheap,
compared to the handmade goods, they received a huge response from the common man. The

17
Indian market was flooded with the British goods. This caused a complete destruction of Indian
handicrafts and village industries. Princely states were merged in the British empire. This
adversely affected the Indian artisans and craftsmen as they lost the valuable patronage of the
Indian Kings and the Princes.
The British introduced a new system of education. The value of labour was completely lost.
People took pride in serving in the administrative services of the British Offices. Blue-collar jobs
were substituted by the white-collar jobs. Unfortunately, entrepreneurial culture" was
submerged. The British period witnessed the emergence of the employment-oriented mentality
among the Indian artisans and craftsmen. They became 'servants'. Risk-bearing ability and
confidence were substituted by complete obedience to the British administration. Creativity and
innovativeness were substituted by submissiveness and a blind imitation of the British. Once a
'land of gold', Indian economy was completely paralysed. At the time of Independence, India was
described as an underdeveloped country.
Entrepreneurship Development in Independent India
When India got Independence, Indian economy had all the characteristics of an underdeveloped
country. Agriculture was the main economic activity. Ninety percent of the population was
employed in agricultural activities. Agricultural production was undertaken mainly for self-
consumption. But the techniques of cultivation were primitive. The share of the agricultural
produce on the Gross National Product (GNP) was negligible. Industrial sectors were completely
underdeveloped. There was an acute shortage of capital, skilled workers, infrastructure facilities
and industrious attitude was totally absent. Technique of production was labour-intensive and
foreign trade suffered from a serious balance of payments. Exports were constituted of
agriculture products, particularly raw cotton, spices, jute, indigo etc. Imports were composed of
scare raw materials, machinery and equipment, food grains etc. Foreign exchange earning was
meagre as compared to the foreign exchange expenditure. Infrastructure facilities like electricity,
irrigation, transportation, postal services, telecommunications, godown facilities, research
institution and laboratories were not available. The educational system was faulty and was not
designed as per the requirements of the economy. The rate of growth and volume of population
was very high. The problem of unemployment was severe. Particularly, in the agricultural sector,
there was disguised unemployment. The productivity in the agricultural and industrial sectors
was at a very low level. Markets were underdeveloped and entrepreneurial culture was absent.
Considering the dismal picture of the economy, the government of the newly Independent India
had a gigantic task before it-the task of rehabilitation and reconstruction of the economy of the
country.
In the Indian context, strict hierarchy within organizations must give way to an open and
transparent work environment where new, radical ideas are welcome – and, most importantly,
where failure is not punished. The fear of failure and retribution are major impediments to
innovative thinking and risk-taking. Top management must show its commitment to
entrepreneurial behaviour within the organization. A good way to exhibit this is by making a
failed project not an end in itself but something that holds valuable lessons for the future; or by
recognizing individuals for the calculated risks they took and not just for the successes they
achieved.
When entrepreneurship education started in the 1980s, it was focused on self-employment.
Today, it must live up to the national agenda of employment generation rather than individual

18
wealth creation. The top business schools are preparing students for entrepreneurship, and a new
breed of young entrepreneurs are setting up their own ventures. Some are offering students
“deferred placements” so that they can come back to the institute after a couple of years if their
venture fails. We now need to replicate these successful entrepreneurship education models
across the rest of the country.
Equally crucially, perceptions about entrepreneurship need to change. Indian society must
overcome its deep-rooted tendency to value the status quo over risk-taking behaviour and see
entrepreneurship as merely the pursuit of materialism. Many of these perceptions have changed
since the 1990s, when entrepreneurs in the field of information technology emerged as role
models for the middle class. This set of entrepreneurs came from middle-income families who
used their knowledge and skills (rather than family wealth and political connections) to turn a
company around. Today, several young people in India are starting their own ventures after
university or leaving their comfortable, well-paying jobs to follow their dreams.
Make in India – Roadmap to Entrepreneurship Development
Four Pillars of Make in India
New Processes: ‘Make in India’ recognizes ‘ease of doing business’ as the single most important
factor to promote entrepreneurship. A number of initiatives have already been undertaken to ease
business environment. The aim is to de-license and de-regulate the industry during the entire life
cycle of a business.
New Infrastructure: Availability of modern and facilitating infrastructure is a very important
requirement for the growth of industry. Government intends to develop industrial corridors and
smart cities to provide infrastructure based on state-of-the-art technology with modern high-
speed communication and integrated logistic arrangements. Existing infrastructure to be
strengthened through upgradation of infrastructure in industrial clusters.
New Sectors: ‘Make in India’ has identified 25 sectors in manufacturing, infrastructure and
service activities and detailed information is being shared through interactive web-portal and
professionally developed brochures.
New Mindset: Industry is accustomed to see Government as a regulator. ‘Make in India’ intends
to change this by bringing a paradigm shift in how Government interacts with industry. The
Government will partner with industry in the economic development of the country. Our
approach will be that of a facilitator and not that of a regulator.
Progressive plans and entrepreneurship
Besides the measures outlined above which will directly act as a boost to the entrepreneurship
ecosystem, various other plans and policies which the government have worked on are sure to
incentivize entrepreneurship too, albeit indirectly. Take for example the ‘Make in India’
campaign which has been garnering widespread publicity ever since its launch. Launched amidst
much fanfare, this campaign which aims to change the notion that it’s difficult to business in
India, will in two ways also act as a boon to entrepreneurs. Firstly, the success of the campaign
lies on the premise that bureaucratic processes and red-tape will be cut down and it will be easier
for international firms to do business in India. This means that dealing with authorities and
regulations will become easier for home-grown entrepreneurs too, implying they’ll be more
likely to join in to make in India. The second way in which this campaign holds bright prospects
for entrepreneurship is that it will lead to a rise in the number of start-ups which have
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products/services built around the manufacturing industry (which the campaign primarily
targets).For instance, a HR start-up which comes up with a service to handle labour for
manufacturing firms, or a logistics start-up which helps in distribution of finished goods.
Another ambitious campaign started by the Modi government is ‘Digital India’. One of the core
components of this campaign is to maximize digital literacy by 2019. This dedicated thrust
provided to digital literacy means that startups in the digital space stand to benefit massively.
May they be online-education start-ups or e-commerce firms or mobile apps, all of them will
pick a chunk of the multi-billion dollar digital consumer market which will eventually evolve.
Other core aims of the campaign include setting up a nation-wide digital infrastructure and
delivering services digitally. These aims will give an opportunity to the tech talent that our
country boasts of to unleash their latent entrepreneurial skill-set and provide solutions to connect
rural areas under high-speed internet networks and provide support services to the government’s
vision of delivering services electronically. Clear Tax, which helps citizens file tax returns
online, is one such start-up providing an ancillary service that has become the first India-focused
startup to make it to Y Combinator, arguably the world’s most prestigious accelerator.
The switchover to the goods and services tax (GST), scheduled for 1st April. 2016, seeks to
streamline and modernise a thoroughly fragmented indirect tax system riddled with multiplicity
of rates levied by states. This will be done by the government levying a unified tax that will
subsume a large number of central and state taxes on the supply of goods and services. This is
indeed a giant step in the direction of making it easier to run businesses in India. With less
complexities of the tax structure to worry about, this move decreases the entry barrier for start-
ups. Also, such a move means less legal/financial hassles as well as lesser risks of
corruption/bribery – leading to a more entrepreneurship conducive environment for those
starting-up their own companies. Scaling up a company to expand to multiple cities & states will
also consequently become easier.
Under the Modi-government, well-defined progressive steps have been taken and the global
sentiment of the Indian economy is at an all-time high. If this support continues, and the above
plans & policies are implemented successfully, there will be no stopping for the country’s
economic growth. And with India poised as one of the world’s leading consumer country, it is
only natural that new-age enterprises will have to spring up to meet the rising demand.
Make in India initiatives for entrepreneurship development
 Foster innovation- It aims to support new ideas.
 Protect intellectual property- It aims to safeguard the creations of mind.
 Best in class manufacturing infrastructure- It also aims to create state of the art facilities for
manufacturing goods.
 Process of applying for Industrial License & Industrial Entrepreneur Memorandum made
online on 24×7 basis through eBiz portal.
 Validity of Industrial license extended to three years.
 Plan for integrating the Services of all Central Govt. Departments & Ministries with the
eBiz – a single window IT platform.
 Process of obtaining environmental clearances made online.

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 All returns should be filed on-line through a unified form.
 India’s manufacturing infrastructure and capacity for innovation is poised for phenomenal
growth: new smart cities and industrial clusters, being developed in identified industrial
corridors having connectivity, new youth-focused programs and institutions dedicated to
developing specialized skills.
 A new ‘National Industrial Corridor Development Authority’ is being created to coordinate,
integrate, monitor and supervise development of all Industrial Corridors.
 Work on 5 smart cities in progress as a part of the Delhi-Mumbai Industrial Corridor:
Dholera, Shendra-Bidkin, Greater Noida , Ujjain and Gurgaon.
 Approval accorded to 17 National Investment and Manufacturing zones.
India seems to be doing better than it was a couple of years ago. The Modi Govt has been
launching one initiative after another, supporting the country's business and economy. While
some initiatives struggle to make much of an impact, most are working wonders for India.The
'Make in India' program, for example, promotes India as a manufacturing hub for the world. The
Modi Government is marketing this campaign globally and the impact is evident.
Entrepreneurship and New Challenges of Globalization
Mobility of Jobs: One of the greatest challenges posed by the global trade system is how to shift
the jobs from one place to another. How the jobs can move from the developed nations to the
developing and under-developed nations. In the developed nations, where low-skilled workers
lose their jobs have to face difficulty while searching for the new job. Job-losses in the
developed nations result in double strain on them as the nation has to support the work-force
along with a cut on the tax revenues.
Dominance of Developed Nations: There is a dominance of developed western nations over
other emerging markets when it comes to international orders. These nations hold a huge impact
on the capita flow and how it travels from one nation to another. For example, the apex bodies
like International Monetary Fund and World Bank make it easier for the developed nations to
acquire money from theses organizations. The western culture is not a universal culture but still
it has a major influence over other developing and under-developed nations. Sometimes western
countries exert their power which in turn alleviates the poverty in under-developed countries.
Threat to the Cultural Diversity: As a result of globalization, the western culture was able to
penetrate the world but it has posed a great threat to the cultural diversity all over the world. The
dominance of some cultures has overtaken some of the cultures, as a result the global cultural
diversity is emulating.
Advantages of Globalization on Entrepreneurship
Global Advantage: Globalization has allowed small businesses to compete worldwide as they
are able to sell their products and services on the global platform. Small and medium sized
enterprises are always supported by the shipping companies as they offer package shipping all
around the globe. Additionally, these small business owners often purchase the products from
cross nation markets with the purpose of reselling. This practice helps small businesses to gain a
price advantage which was earlier available to the giant conglomerates only. They even gain
from the foreign exchange rates if buying from a country where the worth of dollar is more that
that of the local currency.

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Local Advantage: Globalization enabled international chains to set up shops in the neighboring
markets with low prices. It can be accomplished by taking the advantage of the cheap
labouravailable and then selling it at a low level of margin. As an entrepreneur, one can always
fight back and provide the goods and services which are not available at chain stores. For
example, it is often observed that local restaurants offer the local food that is not available in the
popular restaurant chains.
Piracy: The global economy has not been able to come up with global standards. The rules and
regulation regarding the piracy are different for different nations. Some of the nations have really
liberal policies which threatens entrepreneurs with cheap imitations. However, an increased level
of competition has emerged as a shield for the patents and encourages the innovation and risk
taking.
Speed of Adaptability: The business potential is no longer dependent upon the size of the firm
as firm of any size can achieve success in the global environment. The only thing critical to
success is the speed. It is believed that small businesses are able to adapt to the global and local
changes easily as they do not follow a large bureaucracy.
Disadvantages of Globalization on Entrepreneurship
1. The emergence of international trade worsening the inequalities of income in the
industrialized and less- industrialized nations.
2. The global trade is mainly dominated by the huge transnational companies who only
work for the profit motive without paying any consideration to the individual needs of
developing and under-developed nations.
3. The policies formulated in the industrialized countries favor the countries of its kind and
restrain some producers to have access to the exports.
4. In the countries where the conditions of financial institutions is weak, there is always an
element of risk in capital flows.
5. Developing nations engage in a race to attract the foreign investments which can often
lead to the lower environmental standards.

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 Unit 2
LESSON 3
ENTREPRENEURIAL COMPETENCIES

Dr. Vipin Kumar

Entrepreneurial behavior requires certain knowledge, skill or personality profile. Generally, it is
called entrepreneurial competence or traits.
A competence may be defined as an underlying characteristics of a person which results in
effective and/or superior performance in a job. A job competence is an underlying characteristics
of a person in that it may be motive, traits, skills, aspect of one’s self-image or a body of
knowledge which one uses.
Thus, success of an entrepreneur is governed by entrepreneurial competencies. If he has all these
competencies, he can be expected to achieve his entrepreneurial goals. Elements of
entrepreneurial competencies as follows:
(a) Body of Knowledge
(ii) Set of Skills
(iii) Cluster of Appropriate Motives/Traits.
(i) Body of Knowledge: Innovation is possible only through knowledge. The inventor or
originator of the idea that led to the knowledge or vision, of some thing new; the artist of
creative endeavour. Inventors include those who identify new technological processes,
new forms of plant life and new designs. Thus, inventions deal with new processes, or
new technical knowledge. In a simple way, knowledge means collections of information
and retention of facts that an individual stores in some parts of his brain.
Creative process provides imaginative people, geminate ideas, nurture them and develop
them successfully. This type of idea has a value. However, it must be proven useful or be
marketable and to achieve either status or achievement, must be developed. But
innovation is the development process which translates an idea into an application. It
requires persistence in analytically working out the details of product design or service, to
develop marketing, obtain finances and plan operations.
(ii) Set of Skills: Skill is the ability to demonstrate a system and sequence of behavior that
are functionally related to attaining a performance or goal. An entrepreneur is required to
have certain skills and these skills also constitute his leadership qualities. These skills are
as follows.
(a) Anticipatory Skills––foresight into a constantly changing environment;
(b) Visioning Skills––the use of persuation and example to induce a group to act in
accordance with the leader’s purposes or the shared purposes of a larger group;
(c) Value Congruence Skills––the need to be in touch with employee’s economic,
safety, psychological, spiritual, sexual, aesthetic and physical needs in order to
engage people on the basis of shared motives, values and goals;

23
 (d) Empowerment Skills––the willingness to share power and to do so effectively;
and
(e) Self understanding Skills––introspective or self underskills as well as
framework within which leaders understand both their own needs and goals and
those of their employees.
In practice, an entrepreneur who pursues the idea, planning its application, acquiring
resources and establishing its market through persistence, planning, organizing and
leadership needs above skills. With the help of these skills, entrepreneur is expected to
perform well in his entrepreneurial behavior.
(iii) Cluster of Motives and Traits: Motives deal with recurrent concern for a goal,
state or condition appearing in fantasy, which drives, directs and selects behavior
of the individual. Actually motive represents thought related to a particular goal,
state. McClellend opined that “need achievement” is social motive to excel that
tends to characterize successful entrepreneurs especially when reinforced by
cultural factors. According to Paul Wilken “entrepreneurship becomes the link
between need achievement and economic growth. Thus, need for achievement is
guiding force behind entrepreneurial activities. It is the desire to do well and it
motivates the people to undertake innovative activities.
The trait may be defined as a dispositional or characteristic way in which the
person responds to an equivalent set of stimuli. These responses represent
intelligence, charisma decisiveness, enthusiasm, strength, bravery, integrity and
self-confidence. Thus, traits are an individual’s personal characteristics. Traits are
contents of leadership qualities. So an effective leader is one who possesses
intelligence, alertness to the needs of others, understanding of the task, good
communication skills, initiative and persistence in dealing with the problems. It is
important to note that personal elements that govern the leadership ability are
intelligence, self-confidence, the drive to accept responsibility, good
communication skills and education.
In this way, entrepreneur is required to have certain traits. These traits are
necessary for leadership qualities expected from an entrepreneur. An entrepreneur
should be (i) adaptable to situations, (ii) alert to social environment, (iii)
ambitious and achievement oriented, (iv) assertive, (v) cooperative. (vi) decisive,
(vii) dependable, (viii) dominant (desire to influence others), (ix) energetic (high
activity level); persistent, (x) self-confident, (xi) tolerant of stress and (xii) willing
to assume responsibility.
Thus, for achieving success in his entrepreneurial behavior, entrepreneur is
required to have entrepreneurial competencies and these are consist of a set of
knowledge, skills, motives and traits.
Entrepreneurial Competencies Identified By The Edi
Entrepreneurship Development Institute of India (EDI) conducted a study under the guidance of
David C. McClelland, a reputed behavioural scientist, in three countries, namely, India Malawi
and Equador. It was found out that possession of certain competencies or abilities results in
superior performance. An entrepreneur may possess certain competencies and at the same time it

24
is possible to develop these through training, experience and guidance. Various competencies
required for superior performance by the entrepreneurs (identified during the study) are:
(a) Initiative: It is an inner urge in an individual to do or initiate something. These is a
popular saying, ‘Well begun is half done’. It is the entrepreneur who takes the first move
towards setting up of an enterprise. Most of the innovators have got this urge to do
something different. Entrepreneur basically is an innovator who carries out new
combinations to initiate and accelerate the process of economic development.
(b) Looking for Opportunity: An entrepreneur is always on the look out or searching for
opportunity and is ready to exploit it in the best interests of his enterprise.
(c) Persistence: An entrepreneur is never disheartened by failures. He follows Try-Try
Again for overcoming the obstacles that come in the way of achieving goals.
(d) Information Seeker: A successful entrepreneur always keeps his eyes and ears open and
is receptive to new ideas which can help in realizing his goals. He is ready to consult
expert for getting their expert advice.
(e) Concern for High Quality: Successful entrepreneurs do not believe in moderate or
average performance. They set high quality standards for themselves and then put in their
best for achieving these standards. They believe in excellence, which is reflected in
everything they do.
(f) Commitment: Top performers are prepared to make all sacrifices for honouring the
commitments they have made. Whatever they commit, they take it as a moral binding for
honouring their commitments, irrespective of the costs involved.
(g) Concern for Efficiency: Top performers are always keen to devise new methods aimed
at promoting efficiency. They are keen to evolve and try new methods aimed at making
working easier, simpler, better, and economical.
(h) Systematic Planning: Successful entrepreneurs evolve future course of action keeping in
mind the goals to be realized. They believe in developing relevant and realistic plans and
ensure proper execution of the same in their pursuit of attaining their goals.
(i) Problem Solving: A successful entrepreneur takes each problem as a challenge and put
in best for finding out the most appropriate solution for the same. He will first of all
understand the problem and then evolve appropriate strategy dealing with the same.
(j) Self-confidence: Entrepreneurs are not cowed down by difficulties as they believe in
their own abilities and strengths. They have full faith on their knowledge, skill and
competence and are not worried about future uncertainties.
(k) Assertiveness: An assertive person knows what to say, when to say, how to say and
whom to say. He believe in his abilities and ensures that others fall in line with his
thinking, aimed at promoting the interests of the organisation.
(l) Persuativeness: A successful entrepreneur through his sound arguments and logical
reasoning is in position to convince others to do the work the way he wants them to do. It
is not the physical, but intellectual force he will use for convincing others.

25
(m) Effective Strategist: A successful entrepreneur possesses the ability to evolve relevant
strategy, aimed at safeguarding or promoting organisation’s interests. Strategy may be
with respect to facing future uncertainities or challenges posed by competitors.
(n) Effective Monitoring: Entrepreneurs ensure that every thing is carried out in their
organizations as per their wishes. They ensure regular monitoring of the working so that
the goals of the oganisation are achieved in best possible manner.
(o) Concern for Employees Welfare: Future of the organisation depends on its employees.
If the employees are dedicated, committed and loyal, the organisation is bound to
perform well. A successful entrepreneur tries to promote organisation’s interest through
promotion of interests of the workers. He takes personal interest in solving problems
confronting works and generates the feeling that there is interpendence of the interest of
workers and the management.
Developing Entrepreneurial Competencies
Following steps are involved in developing entrepreneurial competencies:
(a) Recognising Process: Entrepreneurial behaviour starts with understanding and
recognition of the fact that in which area potential behavior is going to be noteworthy.
Specific competencies are meant for innovative behavior and that is why recognition
process should give specific competencies.
(b) Process of Self-Assessment: It deals with identifying the specific competencies among
the potential candidates for entrepreneurship. It is just like identifying a fact––does one
possess a given competence and if so how frequently one exhibit the same in one’s day-
to-day operational behaviour.
(c) Process of Practice: It covers the desired framework to what extent a potential candidate
for entrepreneurship lacks certain competencies. But being interested to undertake
entrepreneurial beahviour he would like to acquire these competencies and strengthen
others. Entrepreneurial development programmes provide help in strengthening this
process.
(d) Feed Back Process: It relates with appraisal or seeking information about the newly
acquired behaviour. It also deals with introspection process to what extent new behaviour
or act of exhibiting a competence has been beneficial.
Thus, there are different types of competencies required for developing entrepreneurship. To
become a successful entrepreneur, it is must for his to have that competencies or leadership
qualities like innovative, initiative, risk assuming personality, sensitivity to environment, sense
of work, commitment and decisiveness.
ENTREPRENEURIAL MOTIVATION, PERFORMANCE AND REWARDS
Motivation
Every individual acts in a distinct manner. Since people act differently, the basic question is
‘why they do what they do’? The answer to this question lies considerably in the explanation of
motivation. The term, ‘motivation’ comes from the Latin word ‘movere’ which means ‘to move’.
Motivation, as the base-building block of human action has been studied extensively. Studies on
motivation broadly refer to two areas (a) motivating self, and (b) motivating others. Available

26
literature suggests that it is imperative to understand the underlying concept of motivation in
order to formulate a theoretical base for both the aspects. Motivational theories are based on the
fact that behavior is essentially purposeful and directed towards the attainment of a goal. Thus,
the concept “motive” refers to the purpose underlying all goal directed actions. All motives,
however, may not be equally important to the context of the goal. Some action arise from a
biological or physiological need, over which people do not have much control. Such motives are
common to the entire animal kingdom. But there are certain crucial and other higher order needs
which are common to human beings. The distinctly human motives are largely unrelated to
biological and survival needs. These are related to feelings of self-esteem, competency, social
acceptance, etc.
Psychologists have described the term motivation as:
 The immediate influence on the direction, vigour and persistence of action;
 The process of arousing action, sustaining the activity in progress and regulating the pattern
of activity.
 An inner state that energises activities and directs or channels bahaviour towards goal;
 How behavior gets started, is energized, is sustained, is directed, is stopped and what kinds of
subjective reactions are present in the organism while all this is going on;
 Steering one’s action towards certain goals and to commit a certain part of one’s energies
reacting to them.
These descriptions help in answering any or all the following questions:
(i) What energises human behaviour?
(ii) What directs such behavior?
(iii) How is this behaviour maintained and sustained?
Significance Of Motivation
Motivation is an effective instrument in the hands of manager for inspiring the workforce and
creating a confidence in it. By motivating the workforce, management creates ‘will to work’
which is necessary for the achievement of organizational goals. Motivation involves getting the
members of the group to pull weight effectively, to give their loyalty to the group, to carry out
properly the purpose of the organisation. The following results may be expected if the employees
are properly motivated:
(i) The workforce will be better satisfied if management provides them with opportunities to
fulfil their physiological and psychological needs. The workers will cooperate voluntarily
with the management and will contribute their maximum towards the goals of the
enterprise.
(ii) Workers will tend to be an efficient as possible by improving upon their skills and
knowledge so that they are able to contribute to the progress of the organisation. This will
also result in increased productivity.
(iii) The rates of labour turnover and absenteeism among the workers will be low.

27
(iv) There will bee good hum
T man relationss in the orgaanisation as friction am
mong the woorkers
thhemselves an
nd between the
t workers and the mannagement wiill decrease.
(v) The number of complainnts and grievvances will come downn. Accident rate will alsso be
T
loow.
(vi) There will bee increase in the quantityy and qualityy of productts. Wastage and
T a scrap will
w be
leess. Better qu
uality of prooducts will allso increase the public im
mage of the business.
Maslow’’s Need Hierrarchy Mod
de
A.H. Maaslow develo oped a conceeptual framew work for undderstanding human motiivation which has
been widdely acclaim med. He defifined a persoon’s effectivveness as a function off matching man’s
m
opportunnity with thee appropriatee position of
o hierarchy of needs. Process
P of motivation
m begins
with an assumption n that behavviour, atleasst in part, is directed towards
t the achievemennt of
satisfactiion of needss. Maslow prroposed thatt human neeeds can be arranged
a in a particular order
from the lower to thee higher as shhown in beloow. The need hierarchy is as followss:

F Maslow
Fig. w’s Need Hiierarchy
(a) Basic Physio
B ological Neeeds: the needds that are taaken as the starting poinnt for motivvation
thheory are thhe so-calledd physiological needs. These
T needss relate to the survivall and
m
maintenance of human liife. They incclude such thhings a foodd, clothing, shelter,
s air, water
w
annd other neccessities of liife.
(b) Safety and Security
S Neeeds: After satisfying thhe physiologgical needs, people wannt the
asssurance of maintain a given econoomic level. They T want job
j security, personal bodily
b
seecurity, secu
urity of sourcce of incomee, provision for old age, insurance aggainst risks, etc.
(c) Social Needss: Man is soccial being, He
H is, therefoore, interesteed in converssation, sociab
ability
exxchange of feelings
f and grievances, companionsship, recogniition, belonggingess, etc.
(d) Esteem and
E d Status Neeeds: Thesee needs em mbrace suchh things as self-confiddence,
inndependencee, achievemeent, competeence, knowledge, and suuccess. Theyy are also knnown
ann egoistic neeeds. They are
a concernedd with prestiige and statuus of the indiividual.
(e) Self-fulfilment Needs: The
T final stepp under the need prioritty model is the
t need forr self-
fuulfilment orr the need to
t fulfil whaat a person considers tot be his mission
m in life. It

28
 involves realizing one’s potentialities for continued self-development and for being
creative in the broadest sense of the word. After his other needs are fulfilled, a man has
the desire for personal achievement. He wants to do something which is challenging and
since this challenge gives him enough dash and initiative to work, it is beneficial to him
in particular and to the society in general. These sense of achievement gives him
psychological satisfaction.
Maslow proposed that the needshave a definite sequence of domination. Second need does not
dominate until first need is reasonably satisfied and third need does not dominate until first two
needs have been reasonably satisfied and so on. The other side of the need hierarchy is that man
is wanting animal, he continues to want something or the other. He is never fully satisfied. If one
need is satisfied, the other need arises. As said above (according to Maslow), needs arise in a
certain order of preference and not randomly. Thus, if one’s lower level needs (physiological and
security needs) are unsatisfied, he can be motivated only by satisfying his higher level needs.
Another point to note is that once a need or a certain order of needs is satisfied, it ceases to be a
motivating force. Man lives for bread alone as long as it is not available. In the absence of air one
cannot live, it is plenty of air which ceases to be motivating.
Factors For Entrepreneurial Motivation
A number of factors have been found to be responsible for the growth of entrepreneurship. These
factors can be grouped in three categories namely Entrepreneurial Ambitions, Competency
Reasons and Facilitating Factors.
(a) Entrepreneurial Ambition
(i) To make money
(ii) To gain social prestige
(iii) To secure self-employment or independent living
(b) Compelling Reasons
(i) Unemployment or dissatisfaction with existing job or occupation
(ii) To use technical or professional knowledge and skills
(iii) To put the idle funds of the entrepreneur to use
(c) Facilitating Factors
(i) Previous knowledge, experience or association with same or similar of activity
(ii) Influence and encouragement by family member, friends and relatives
(iii) Imitation of successful entrepreneurs.
Internal And External Factors
R.A. Sharma has studied the factors that prompted new entrepreneurs to enter industry and has
classified them in two major categories: the factors that are internal to the entrepreneur and those
external to the entrepreneur. The internal factors make the personality of an entrepreneur and
induce the person to adopt entrepreneurship. Without the presence of internal factors
entrepreneurial activity in a person cannot start. However once the entrepreneurial tendencies

29
germinate in a person, the external factors start playing an important role in the person becoming
an entrepreneur and starting his own business venture.
Internal Factors
 Desire to work independently
 Occupational experience
 Technical/Trade/Qualification and knowledge
External Factors
 Supportive government policies
 Availability of financial assistance
 Ancillary support
 Availability of infrastructural facilities like industrial plot, electricity, technical facilities etc.
People become industrial entrepreneurs because of three main reasons:
1. Desire to do something independently in life.
2. Availability of technical/manufacturing or trade knowledge and skill with prospective
entrepreneur.
3. Support from government and other agencies.
MANAGERIAL ROLE AND MANAGEMENT PROCESS IN SMALL BUSINESS
Introduction
Small business has its own distinctive features. The owner himself often acts as the chief
executive and looks after more than one functional area. Therefore, managerial strategies and
practices used successfully in large firms cannot be blindly applied to small scale units. Basic
managerial functions in the two types of business––large and small are the same. But the manner
in which these functions should be carried out can be different.
Managerial Responsibilities Of An Entrepreneur
The managerial responsibilities of an entrepreneur include the following:
(a) Management of self (entrepreneurial qualities and motivation)
(b) Management of enterprise.

30
 Fig.: Maanagerial Responsibilit
R ties of an En
ntrepreneurr
(a) Management of Self: Thhe term ‘entrrepreneur’ haas been definned in variouus ways––a risk-
M
taaker, a reso
ources assemmbler, an orrganisation builder, an innovator, and so on. Truly T
sppeaking, an entrepreneuur is all commbined into one.
o He introoduces new ideas, carriees on
new activitiess, coordinatees the factors of producttion and deciides how thee business shhould
be run. He haas vision, oriiginality of thought andd ability to take
t calculaated risks.
Entrepreneursship refers to identifyiing and innnovating ideas and servvices, mobillizing
E
reesources, organizing prooduction/serrvices and finally
fi markeeting them withw an effoort to
coover the risk
k and constaantly strive for
f growth annd excellencce. The persoon who perfforms
alll these funcctions is callled an entreepreneur. Thhe term ‘enttrepreneur’ may be useed for
inndividuals who
w incubatee new ideas,, start enterpprises basedd on those iddeas and proovide
addded value tot society based
b on theeir independdent initiativve. The entreepreneurs haave a
vision, comm mitment to constructive
c change, persistence to gather neceessary resouurces,
annd energy too achieve ammazing resultts.
To perform the
T t entreprenneurial role effectively, an entrepreeneur has too be creativee and
innnovative. Innovation
I m
may pertainn to new products
p or services, new
n methodds of
prroduction, adopting
a neww sources off supply of raw
r materiaal, adding neew attributess to a
prroduct and introducing
i new, multipple and optim
mum utilizaation of resouurces. It reqquires
thhe use of imaagination annd intuition for
f sensing opportunities
o s.

Itt should also

o be noted thhat self-conttrol self-detterminationn and self-coonfidence arre the
im
mportant attrributes of suuccessful enntrepreneurs. They shouuld feel that they can do the
w
work rather than
t being made
m to feeel the same through outtside forces. They should be
caapable of mooulding theirr destiny andd destiny of their enterprrise.
(b) Enterprise Managemen
E M nt: There iss a differencce between operating an
a enterprisee and
m
managing an
nd enterprisse which must
m be clearly undersstood by thhe entreprenneurs.
O
Operating annd enterprisee often invollves buying or making goods and services,
s priicing,
seelling, and services.
s Although diffeerent produccts/services require diffferent operattions,
yet, these op perational functions
f arre governedd by comm mon manageement princiiples.

31
 However, management is not the same as operation. Operating is physical while
managing is mental. For managing an enterprise effectively, the first generation managers
must learn to perform the basic management functions of planning, organizing, staffing,
directing and controlling.
An entrepreneurs must acquire management skills to manage his enterprise successfully.
Significance of Management:
(i) Determination of objectives or goals.
(ii) Efficient utilization of resources.
(iii) Sound organisation.
(iv) Integration of efforts and providing order to endeavours.
(v) Meeting challenges.
(vi) Nation’s growth and prosperity.
Planning Process
Planning is the process of deciding the objectives of business and choosing the most appropriate
course of action to achieve the objective. Planning is a rational process because logical reasoning
is used in setting objectives and in choosing course of action. Planning involves thinking and
judgment and is, therefore, called an intellectual process. Planning is a continuous process as
changes in plans have to be made from time to time to take care of changing environment.
Planning is forward looking because plans are prepared for a future period o time. Planning is a
basic function as it lays the foundation for other management functions.
Quite often a haphazard approach is adopted to planning in small firms. There is a misconception
that small firms are simple and do not require planning. The small scale entrepreneur does not
want to involve his staff in the planning process due to the desire to keep the secretes with
himself. Personal responsibility for results, lack of planning skills and absence of specialized
staff are other major hurdles to planning in small firms. Generally small scale units tend to take a
short range view or problems and seldom develop long range strategic plans.
Planning is very important for small business. It helps to focus attention on objectives, provides
direction to decision making, assists in facing uncertainty and change, improves efficiency of
operations and facilitates coordination and control.
Systematic planning in any business consists of the following steps:
(a) Mission Statement: First of all the basic mission or overall philosophy of the enterprise
is clearly defined. Mission statement should reflect the interest of the owners, customers,
employees and the society as a whole.
(b) Analysis of External Environment: Such analysis should cover economic conditions,
government policies and regulations, technological changes, political conditions and
social situation. It will reveal opportunities and threats which the firm is likely to face.
Special attention needs to be paid to market conditions and competitive situation.
(c) Analysis of Internal Environment: Situation audit is undertaken to judge the current
position of the firm in terms of market share, capacity utilization, sales turnover, profit
margin, etc. Appraisal of the firm’s resources (resource analysis) should be carried out to
32
 identify its strengths and weaknesses. Physical facilities financial position, managerial
capabilities, marketing competence, etc. are covered in resource analysis. Financial and
non-financial ratios are often used to judge the resource position.
Analysis external and internal environment together is called SWOT (strengths,
weaknesses, opportunities and threats) analysis.
(d) Formulation of Objectives: On the basis of information collected through SWOT
analysis, the goals which the firm wants to achieve in future are decided. Goals should be
challenging but attainable. Goals should also reflect the mission of the firm. Goals are
laid down both for short period (next year) as well as long term (e.g. next five years).
(e) Development of Action Plans: Action plans refer to the future course of action to be
adopted to attain the objective. Action plans include the following:
(i) Priorities of different goals
(ii) Alternatives selected to exploit opportunities and to face threats in the
environment
(iii) Timing of different courses of action
(iv) Action programmes for different functional areas of business.
Plans should be formalized in the form of working documents. Such formalization is
necessary for effective communication and implementation of plans.
(f) Execution and Review of Plans: Plans and action programmes are implemented. The
plans are reviewed on a continuous basis. Whenever necessary revision in the adopted
plans and programmes should be carried out. Such updating is essential to take care of
changes in the environment and capabilities of the enterprise.
Organising Process
Organising is an important function of management by which management brings together
human and material resources. This function must be performed when an activity involves two or
more persons. Organising involves determining the activities to be done, grouping the activities,
assigning the grouped activities to individuals, and creating a structure of authority and
responsibility among the people to achieve the objectives of the enterprise.
Urwick defined organizing as determining what activities are necessary to achieve and purpose
and arranging them in groups which may be necessary to assign to the individuals. The process
of organisation involves the determination of authority and responsibility relations in the
organisation. An important function of every manager is to determine the nature of the activities
required to attain the group goals, the grouping of these activities and the assignment of the
activities to the individuals with necessary delegation of authority.
The process of organisation involves the following steps:
(a) Determination of objectives;
(b) Identification and grouping of activities;
(c) Assignment of duties to individuals; and
(d) Development of relationships.

33
Types off Organisatiion Structurre
There aree four main types
t of form
mal orgnaisaation which are
a as follow
ws:
(a) Line Organisation: In thhis form of organisation,
L o , a straight liine commannd exists fromm the
highest to thee lowest posiition. The auuthority and responsibilitty of every position
p is cllearly
defined. Eacch subordinnate is accoountable to only one superior. But B there is i no
n. Line organnization is coonsidered to be most suiitable for sm
sppecialization mall scale uniits.
C
Chief Execu
utive

Fig.:: Line Orgaanisation

(b) Line and Sta

L aff Organisaation: As ann enterprise grows manaagement requuires the serrvices
of staff expeerts. These experts
e adviise line mannagers but thhe final authhority for taaking
decisions and d issues ordders remainss with true executives. Line and staffs organissation
prrovides the benefits off specializatiion and unitty of comm mand. But thhere is dangger of
coonflicts betw
ween line offficers and staaff experts.

Chieef Executivee

Fig.: Lin
ne & Staff Organisation
O n

34
(c) Project Orga
P anisation: Inn this type of
o organisatiion, a separaate team is created
c for every
e
m
major projectt. The team provides
p exppert and focuused efforts for timely completion
c o the
of
prroject.

Fig.: Project
P Orgganisation

(d) Matrix Org

M ganisation: This structture is a combination
c of functioonal and prroject
reesponsibilitiees. In additiion to the permanent
p fu
functional deepartments, project teamm are
crreated tempo orarily. The staff for proojects is larggely deputedd from functiional departm
ment.
O the comp
On pletion of a project
p the staff
s returns back to theeir respectivee departmennts. A
smmall scale firm
f may adopt
a projecct structure when several projects are carriedd out
siimultaneously and eachh project requires high degree of coordinationn among seeveral
teechnical experts.

Fig.: Matrix
M Orgganisation
Principlees of Sound
d Organisatiion:
(a) Division of Work:
D W The work to be performed shoulds be divided into meaningful
m tasks
annd one emplloyee shouldd as far as poossible conceentrate on onne type of woork only.
(b) Unity of Co
U ommand: EachE employyee should report
r and be
b accountaable to onlyy one
suuperior. Ord
ders and instrruction shouuld come from
m a single boss.
(c) Parity Betweeen Authoriity and Resp
P ponsibility: The authoriity of every employee shhould
be commensurate with his responssibility. Thee authority and responssibility of everye
position shou
uld be clearrly specifiedd in the form
m of job descriptions and organissation
chharts.
(d) Scalar Chain n: The chainn of commannd from the top positionn to the lowest position must
be direct and clear.

35
(e) Departmentalisation: Similar tasks should be grouped into the same department on an
appropriate basis.
(f) Balance Between Centralisation and Decentralisation: Proper delegation of authority
should be made to ensure that there is the right degree of decentralisation.
(g) Appropriate Span: Span of control means the number of subordinates reporting directly
to one superior. The span should be appropriate in view of the nature of work, ability of
the superior, competence of subordinates, degree of coordination required, etc. Generally,
small enterprises prefer a wide span as they cannot afford the cost of additional layers in
the organisation.
(h) Human Use of Human Resources: The requirements of work should integrated with the
capabilities and aspirations of employees.
(i) Flexibility: The organisation structure should be able to adapt to changes in the internal
and external environment.
Staffing
After organizing the various activities to be performed, management is in a position to know the
manpower requirements of the enterprise at different levels in the organisation structure. After
determining the number and types of personnel to be selected to fill different jobs, management
proceeds with recruiting, selecting and training the people to fulfil the requirements of the
enterprise. In a running enterprise, staffing is a continuous process because new jobs are created
in the enterprise and existing employees leave the enterprise.
Staffing comprises of those activities which are essential to keep manned the positions created by
the organisation structure. It includes the task of determining positions created by the
organisation structure. In includes the tasks of determining the requirements with regard to
number and types of people for the jobs to be done, laying down qualifications for various jobs
and recruiting, selecting and training people to perform those jobs efficiently.
Staffing is concerned with both manages and non-managers. It is a function performed by
managers at all levels. Earlier, staffing was considered a part of organising. But with the
recognition of the importance of the human factor in industry and business, it began to be
considered as a separate function. Staffi9ng usually includes the following activities:
(i) Human resource planning.
(ii) Deciding sources of recruitment.
(iii) Receiving applications.
(iv) Testing and interviewing.
(v) Final selection and appointment letter.
(vi) Orientation and placement.
(vii) Training and development.
Directing
Direction is the process of guiding, supervising, leading and motivating the subordinates to work
in a way that is beneficial to the enterprise. The manager not only shows the right path but also

36
leads the subordinates to achieve the objectives of the enterprise. He creates a sense of
belongingness, faith and loyalty among the subordinates.
The direction function involves the following four elements:
(a) Leadership: Leadership is the process by which a manager guides and influences the
work of others in choosing and attaining specified goals. According to Chester Barnard,
leadership is the quality of the behaviour of the individuals whereby they guide people
towards the accomplishment of some common goal.
(b) Communication: A manager has to tell the workers what they are required to do, how to
do and when to do it. It has to create an understanding in the minds of the subordinates of
work to be done. This is done by the process of communication.
(c) Motivation: It is the function of a manager to motivate the people working under him to
perform the work assigned. A successful manager has to make proper use of motivation
to enthuse the people to work harmoniously for the attainment of desired objectives.
(d) Supervision: Supervision is the process by which conformity between planned and
actual results is maintained. Effective supervision ensures greater output of high quality.
It teaches the subordinates the way their tasks are to be performed.
Controlling
According to Fayol, “In an undertaking, control consists of verifying whether everything occurs
in conformity with the plan adopted, the instructions issued and the principles established.”
Controlling is that management activity whereby the managers compare actual performance
against the planned one, find out the deviations, take corrective action to remove the deviations,
incorporate positive deviations in the plans and help ensure the realization of the specific goals.
In a running concern, planning and control go together because planning seeks to set consistent,
integrated and articulated goals or programmes, while control seeks to compel events conform to
plans. The most notable feature of the process of control is that it is forward-looking. A manager
cannot control the past but can avoid the problems in future by taking actions in the light of past
experiences. The control process consists of the following steps:
(i) Setting up of standards
(ii) Measuring performance.
(iii) Comparing performance with standards.
(iv) Taking corrective action.
Decision-Making
Decision-making is a process of selection from a set of alternative courses of action which is
thought to fulfil the objectives of the decision problem more satisfactorily than other. A
decision a course of action which is consciously chosen for achieving a desired result. It is
something that takes place prior to the actual performance of a course of action that has been
chosen. To state this in terms of managerial decision-making, it is an act of choice wherein a
manager selects a particular course of action from the available alternatives in a given situation.
Managerial decision-making involves the entire process of establishing goals, defining tasks,

37
searching for alternatives and developing plans in order to find the best answer to the decision
problem.
Characteristics of Decision-Making
The basic characteristics of decision-making are enumerated below:
(a) It is a process of choosing a course of action from among the alternative courses of
action.
(b) It is a human process involving to a great extent the application of intellectual abilities.
(c) It is the end process preceded by deliberation and reasoning.
(d) It is always related to the environment. A manager may take one decision in a particular
set of circumstances and another in a different set of circumstances.
(e) It involves a time dimension and a time lag.
(f) It always has a purpose. Keeping this in view, there may just be a decision not to decide.
(g) It involves all actions like defining the problem and probing and analyzing the various
alternatives which take place before a final choice is made.
Significance of Decision-making
No business can survive without effective decision-making. Decision-making is an essential part
of every function of management. In the words of Peter F. Drucker, “Whatever a manager does,
he does through decision-making.” Decision-making lies deeply embedded in the process of
management. Decision-making spreads over all the managerial functions and covers all the areas
of the enterprise. Management and decision-making are bound up and go side by side. Whether
knowingly or unknowingly, every manager makes decisions constantly.
Decision-making and planning are deeply interlinked. The determination of objectives, policies,
programmes, strategies, etc. involves decision-making. The managers also take decisions on the
organizational design, staffing, directing and leading the employees in work situations and on
regulating performance in tune with pre-determined standards. In other words, all managerial
functions are preceded by certain managerial decisions.
The most outstanding quality of a successful entrepreneur is his ability to make sound decisions.
A manager has to make up his mind quickly on certain matters. It is not correct to say that he has
to make spur of the moment decisions all the time. While taking many decisions, he gets enough
time for careful fact finding, analysis of alternatives and choice of the best alternative. Decision-
making is a human process. When a manager decides, he chooses a course which he thinks is the
best.
Steps in Decision-making
(i) Defining the problem.
(ii) Analysing the problem.
(iii) Collection of data.
(iv) Developing alternatives.
(v) Review of key factors.

38
(vi) Selecting the best alternative.
(vii) Implementing the decision.
(viii) Follow up.

Fig.: Decision-making

Management of Time
Time is a very valuable resource especially for a small scale entrepreneur who is often burdened
with multiple roles in his business. The entrepreneur can achieve considerable improvements in
his firm’s performance through more efficient us of time. Management of time involves the
following steps:
(a) Time Use Analysis: First of all a systematic analysis is made to find out the proportion
of total time spent by the employer and his staff on different activities.
(b) Setting Priorities: Critical or vital activities should receive greater time. Activities
taking more than the justified time need to be identified. Irrelevant or time wasting
activities should be eliminated.
(c) Time Allocation: A work-cum-time schedule should be prepared. Proper time should be
allocated to each activity. The tasks one wants to do but for which he does not have time
should be noted.
(d) Adhere to Time Schedule: The most difficult part of time management is to complete
each activity within the prescribed time period. For this purposes, it is necessary to
delegate tasks to subordinates, to organize every workday and to continuously evaluate
the time management system.
Individual Risk behaviour and propensity for Entrepreneurship
The Propensity of Risk Taking is referred to an entrepreneurship’s orientation of taking risk.
Risk taking is an essential part of an entrepreneurship’s personality. Risk taking is an essential
condition to get entered into the entrepreneurship career. Risk taking is considered to be almost
synonymous to the entrepreneurship. Most of the entrepreneurs are bound to take risk and it
eventually becomes the part of their personality. On a personal level, many entrepreneurs take
big risks to leave stable jobs to throw their efforts (and sometimes their own money) into
launching a business.

39
There is no guarantee of monthly income in the case of entrepreneurship. It does not guarantee
the success and even it becomes difficult for the entrepreneurs to spend time with the family and
friends. Below are some of the major risks taken by the Entrepreneurs.
1. Strategic Risk: An inspiring occupational idea will appeal to investors. Though, we
live in a everchanging and fast-paced world where strategies can become obsolete
swiftly. Changes in the market or the business situation can mean that a selected
strategy is the wrong one, and a company might struggle to reach its yardsticks
and key performance indicators (KPIs).
2. Financial Risk: An entrepreneur will have to have money to launch a business either
in the form of loans from investors, out of the savings, or funds from personal sources
(family and friends). The initiator will have to put their own "skin in the game." Any
new business should have a monetarist plan within the overall business plan showing
income forecasts, how much money will be vital to break even, and the likely return
for investors in the first five-year period. Failure to predict plan aptly could mean that
the entrepreneur risks insolvency, and stakeholders would not get nothing.
3. Technology Risk: Novel technologies are continually evolving, mainly in the era of
the Fourth Industrial Revolution. Some of these changes are categorized as "paradigm
shifts" or "disruptive" technologies. To be viable, a new company may have to devote
heavily in new schemes and procedures, which could severely affect the bottom line.
4. Market Risk: Numerous aspects can affect the marketplace for a product or service.
The ups and downs of the economy and new market trends pose a risk to new
industries, and a certain product might be popular one year but not the next. For
example, if the economy crashes, people are less motivated to buy luxury products or
extras. If a competitor launches a similar product at a lower price, the competitor
might steal market share. Entrepreneurs should accomplish a market analysis that
evaluates market factors, the demand for a product or service, and customer behavior.
5. Competitive Risk: An entrepreneur must constantly be mindful of players in the
industry. If there are no players at all, this could indicate that there is no claim for a
creation. If there are a few larger competitors, the market might be saturated, or, the
firm might brawl to compete. Additionally, industrialists with new ideas and
inventions should protect intellectual property by looking for patents to guard
themselves from competitors.
6. Reputational Risk: A business's status is everything, and this can be particularly so
when a new corporate is launched and customers have inflexible expectations. If a
new business displeases customers in the initial stages, it may never gain purchase in
future. Social media plays a enormous part in business status and word-of-mouth
marketing. One tweet or undesirable post from a dissatisfied customer can lead to vast
fatalities in returns. Reputational risk can be accomplished with a strategy that
communicates product details and shapes relationships with customers and other
stakeholders.
7. Environmental, Political, and Economic Risk: Some things cannot be measured by a
good business plan or the right insurance. Earthquakes, cyclones, storms, battles, and
depressions are all dangers that corporations and new entrepreneurs may face. There
may be a robust marketplace for a product in an under-developed country, but these
countries can be unbalanced and insecure, or logistics, tax rates, or tariffs might make
trade difficult depending on the political climate at any point in time.

40
 LESSON 4
ENTREPRENEURSHIP AND ENVIRONMENT

Dr. Pawan Kumar Jain

Business environment refers to the factors external to a business enterprise which influence its
operations and determine its effectiveness. Business environment may be healthy or unhealthy.
Healthy business environment means the conditions are favourable to the growth of business
whereas unhealthy environment implies conditions hostile or unfavourable to business
operations. Business and its environment interact with each other. Economic system and other
conditions in the environment determine the success of business enterprises. The firm and its
management have to adjust to the conditions prevalent around it. However, business enterprises
try to influence and shape the environment. Successful working of business concerns improves
the economic and social conditions in the country.
No business concern can ignore the environment around it except at its own peril. “The penalty
of environ mental disregard is heavy. It not only reduces profit margins and makes opportunities
for expansion slip, but it also arouses social hostility and makes social environment growingly
inhospitable to business operations.”
A study of business environment offers the following benefits:
1. It provides information about environment which is essential for successful operation of
business firms.
2. Itopens up fresh avenues for the expansion of new entrepreneurial operations. The
entrepreneurs may come forward with new ideas and with new ventures when they find
environment suitable to their enterprises.
3. Knowledge about changing environment enables businessmen to adopt a dynamic
approach and maintain harmony of business operations with the environment.
4. By studying the environment entrepreneurs can make it hospitable to the growth of
business and thereby earn popular support.
Thus, the entrepreneur should continuously study the nature of environment and its influence on
business. However, mere study is not enough. Attempts must be made to influence the
environment in order to make it congenial and favourable to entrepreneurial activities. The most
successful entrepreneur is one who not only adjusts to the environment but also modifies the
environment to suit his requirements through the direct and indirect influences he can exercise
over the system.
PHASES OF BUSINESS ENVIRONMENT
Business environment may be classified into four broad categories; namely (i) economic, (ii)
legal, (iii) political; and (iv) socio-cultural.
Economic Environment
Economic environment is of multidimensional nature. It consists of the structure of the economy,
the industrial, agricultural, trade and transport policies of the country, the growth and pattern of
national income and its distribution, the conditions prevailing in industrial, agricultural and other

41
sectors, the position relating to balance of trade and balance of payments, and other
miscellaneous conditions of the economy.
There is a close relationship between a business firm and the economic environment around it.
The success of a business enterprise depends considerably upon the State and growth of the
economy. Commenting on the Indian economic environment and its impact on Indian business
houses, Dr. Surinder P.S. Pruthi wrote: "The face of the Indianbusiness has altered considerably
during the last few years as a series of legislative enactments and other environmental features.
The abolition of the managing agency system, the birth of the concept of joint sector, the
promulgation of the Monopolies and Restrictive Trade Practices Act, the growing role of
financial institutions in the management of private sector undertakings, the emergence of a
professionally trained class of managers, growing internationalisation of business, etc., have all
combined to change the face of Indian business in recent years."
An economy comprises public and private sector and the relative role of the two sectors in the
economy makes a lot of difference to business. In a privately owned and controlled economy
(free economy),the primary goal of a business firm is to earn profit and profitability is the main
criterion of judging the efficiency of business. On the other hand, in a society owned and
controlled economy (closed economy), the primary goal of business is social benefit and social
responsibility is the main criterion of judging its efficiency.
In a mixed economy like India, business enterprises work for both profitability and social
interest. In this age of planning, business enterprises work within the framework of a planned
business environment. Private sector has to function within the conditions largely created by
the State. The private and public sectors must function as parts of a single organism rather than
as two separate entities.
The Industrial Policy of 1956 stressed the need for proper direction and regulation of the private
sector as well as the increasingrole of the State to achieve rapid growth in national wealth. In
the words of the planners, "It (private sector) has to visualise for itself a new role and accept in
the larger interest of the country a new code of discipline. Private enterprises, like any other
institution, will endure and justify itself only to the extent to which it proves to be an agent for
promoting the public good."
Some changes were made in the Industrial Policy in 1970 and 1973. Restrictions on large
industrial houses, preferential treatment to small scale sector, boost to joint sector, etc., are
some of these changes. In recent years there has been a trend towards liberalisation,
simplification and rationalisation of industrial policy.
Legal Environment
Business must function within the framework of legal structure. Therefore, an adequate
knowledge of laws and rules is necessary for efficient managerial performance. When new laws
are made and controls exercised through legal enactments, the first reaction of the business
community is to oppose them and disobey them. Management should try to understand what
should be the right laws and strictly obey them when so made. In addition, it can influence the
government to change and improve the law and make it useful to the business community.

42
There are several business laws in our country. These relate to development of corn panics,
foreign collaboration, foreign exchange, labour management, industrial disputes, social security
benefits, and other such allied problems. A working knowledge of these laws is very helpful for
the entrepreneur and the business executive. Such knowledge will keep them away from innocent
breaches and resultant penalties. Some laws differ from Slate to State and amendments arc made
from time to time. Therefore, the entrepreneur must always keep in touch with those who know
the latest position in law. In addition, an entrepreneur should:
(a) read the books that enlightenon the legal side of business
(b) consult government agencies concerned with the implementation of business laws.
(c) retain labour law consultants.
Political Environment
In a democratic country like India, politics cannot be ignored. Managers and entrepreneurs
should understand the working of the political system. Such understanding and concern for
national problems will help them in the long run in discharging their responsibilities to the
satisfaction of the public.
Public opinion is very important and today's public opinion becomes tomorrow's legislation.
Businessmen should, therefore, learn to take public opinion into account in the decision-making
process. If business does not learn how to deal adequately with public opinion, it will face a
disaster. This does not mean that business should surrender itself to public opinion. Rather, it
implies intelligent response in order to change wherever necessary and a constructive approach
to problems.
There exists an interacting relationship between business and politics. Business cannot develop
without the understanding and support of the politicians. Similarly, business strategy and
business activities influence politics and the Government. It is, therefore, in the interest of
businessman toensure that the Government is stable and helpful to business. Government should
also take the business community intoconfidence while preparing and implementing plans for
the country's development.
It is commonly observed that business community and the Government are hostile to each other
and there is lack of trust among the two. Businessmen should establish a cordial relationship and
proper communication with the people in power and win their confidence. They should try to
study and understand the political processes and the working of the Government departments
and agencies.
As regards relationship of businessmen with politicians there are two opposite approaches. The
traditional approach is that businessmen should not align themselves with any political party and
should keep themselves away from the political bosses. The modern view is that businessmen
should take keen interest in the political affairs of the local, State and Central Governments.
They should have their representatives on various Government bodies at all levels of policy
formulation and planning.
Socio-Cultural Environment
Traditional culture should be protected in so far as it is not a hindrance to innovation,
motivation, and development. In under developed countries a great deal of superstition exists
and people believe that success or failure depends upon the God's mercy. Much time is wasted

43
when activities like laying down the foundation of a building or a project are postponed for
auspicious days recommended by Pandits. As a result lime and cost overruns occur frequently.
Certain occupations are not considered fit for particular castes or communities. Social position
or status is linked with ownership of land and house rather than with ownership of an enterprise.
All this results in considerable immobility and inflexibility and thus wasted labour.
Work is done in a customary way and experimentation is resented. Incentive to hard work and
more earnings is reduced because one has to share his income with the members of the joint
family. Savings and investment are left to the household who is usually an old person devoted to
traditions and static customs. In such an economic culture carrot and stick approach is used to
motivate people. On the other hand, the modern view is that employees should be treated as
human beings. Unless a healthy work environment and modern attitudes towards work are
developed, entrepreneurship cannot flourish. Depressing social conditions and conservative
attitudes hamper innovations. It is not easy to maintain and create the required quantity and
quality of entrepreneurship.
SOCIO-ECONOMIC ORIGINS OF ENTREPRENEURSHIP
The entrepreneurial activity at any time is dependent upon a complex and varying combination
of socio-economic, psychological and other factors. The various environmental factors exercise
a strong influence on the personality or personal backgrounds of the entrepreneurs. Therefore,
any attempt to understand the entrepreneurial spirit among people should include an examination
of the socio-economic origins of the entrepreneurs. The process of interaction and adaptation
between the individual and his environment goes on continuously.
A few empirical studies have been conducted to examine the socio-economic origins of
entrepreneurs. In one such study of 40 enterprises in two districts of Andhra Pradesh, the
following socio-economic factors were analysed.
1. Caste origins: To begin with some social groups produce a larger and more capable body
of entrepreneurs than other groups. This is due to the influence of prevailing social
factors. It has often been suggested to at certain religions and castes encourage the
growth of entrepreneurial talent. The caste system has been found to be exercising its
own influence on the occupational mobility. Some religious communities like the
Parsees, Marwaris and Sindhees seem to have an affinity for industrial activity. It is true
that certain castes have imbibed in themselves a particular culture that fosters
entrepreneurship. It was mainly the people hailing from Kamma, Kapu, Vysya, Brahmin
and Kshatriya communities who dominated the entrepreneurship in the two industrial
estates. The study of Hadimani also revealed that entrepreneurs from the trading castes
(Marwaris) succeeded better in the initial stages. Caste system in India led to rigid
traditions and customs and economic activity was rigidly stratified by the caste system.
Therefore, a few ethnical communities engaged in trade and industry for centuries in
India. Marwaris, Parsees, Jains, Baniyas, Sindhis, Vaishyas, and Khatris have been the
dominant sources oi' entrepreneurs hip. Dominance of certain ethnical groups in
entrepreneurship is a global phenomenon. The protestant ethics in the west, the
Summurai in Japan, the trading classes in U.S.A. and the family business concerns of
France have distinguished themselves as entrepreneurs.

44
 Hadimani found that caste attachment was high in both weavers and non-weavers. In
case of the former such attachment hindered entrepreneurship while in the latter it
promoted entrepreneurship. A holistic approach to the problems of caste dualism
revealed that Marwaris succeeded better because they had entrepreneurial traits.
Enduringqualities of business men such as hardwork, devotion to work, honesty and
quality control were more pronounced among Marwaris. However, entrepreneurship is
no more confined to the traditionally known communities.
2. Entry into entrepreneurship: The time and age at which the entry is made into
entrepreneurship are important factors. The Kamma community entered the field of
entrepreneurship earliest of all other communities. It reveals the resourcefulness and
enterprising quality of Kamma entrepreneurs. In comparison with Kamma and Kshatriya
entrepreneurs, Kapu and Brahmin entrepreneurs entered into entrepreneurship at a
younger age and Vysya entrepreneurs at an older age.
3. Family background: This factor includes size of family, type of family
and economic status of family. Hadimani's study revealed that Zamindar family
helped to gain access to political power and exhibited higher level of entrepreneurship. To
some extent, joint family provided family property to invest and
expand the family firm. Background of afamily in manufacturing provided a
source of industrial entrepreneurship. Occupational and social status of the family
influenced mobility.
The average annual income of the entrepreneurs from different sources a: the time of
commencement was found to be around Rs. 19,000. This does not suggest that economic
status greatly influences the emergence and performance of entrepreneurship. About 57.8
per cent entrepreneurs had an urban background and others had a rural background.
Obviously, rural background is not a handicap for the exercise of entrepreneurship though
urban background may prove to be an added advantage.
4. Religious background: Religion exercises a strong influence on attitudes towards
material gains relatively to efforts. Max Weber propounded the theory that the 'protestant
ethic' among Christians fosters the right attitude for entrepreneurship. On the other hand,
Islam and Hindu religions do not foster such an attitude. However, subsequent researchers
have questioned Weber's theory. Several empirical studies reveal that religions in India do
not inhibit entrepreneurial spirit. Hadimani suggests that mo re than the form of religion
practised the type of interpretation given to different religious values determine entrepre-
neurial success. For example, Marwaris dharma (Moral duty), artha (wealth) and
kama(desire) were inner worldly while Moksha (salvation) was outer worldly and that too
at the end. On the other hand, weaving caste entrepreneurs considered moksha as the
ultimate goal of life.
5. Education and technical know how: Education, entrepreneurship and development are
interrelated. Education is the best means of developing man's resourcefulness which
encompasses different dimensions of entrepreneurship. Ashok Kumar found in his study
that majority of the entrepreneurs were graduates and post-graduates particularly in
engineering and other technical disciplines. Kamma and Brahmin entrepreneurs were
relatively more educated than others. It may be expected that the high level of education

45
 may enable the entrepreneursto exercise their entrepreneurial talent more efficiently and
effectively.
6. Occupational Background: Employed people were more attracted towards
entrepreneurship than those engaged in agriculture or business. A sizeable number of
entrepreneurs were the unemployed youth prior to starting the industrial units.
Entrepreneurship is thus not confined to any particular occupation. What is required is the
presence of entrepreneurial spirit and zeal. Most of the entrepreneurs came from families
where the pa rental occupation was agriculture or employment.
7. Migratory character: As much as four - fifths of the entrepreneurs were immigrants
having come from different places within the State or from outside.
8. Type of Industry started: Nearly two-thirds of the entrepreneurs started industrial units
in engineering works. A little more than one–tenth preferred to start units innon- metallic
products while 7.5 percent started units belonging to plastic works industry. A few other
entrepreneurs started units belonging to food products, aluminium products and other
miscellaneous products.
9. Type of ownership preferred: More than one-half of the units were partnership firms,
nearly one-third were sole trading concerns and about one-tenth were private limited
companies. Most of the entrepreneurs preferred partnership to avoid legal formalities
involved in starting a company.
Another study of 334 entrepreneurs in the Anakapalle and Gudivada districts of Andhra
Pradesh revealed that more than 90 percent of entrepreneurs at both the towns were
Hindus. Gavaras and Kammas were the two dominant castes and they belonged to
landowning and land tilling class. This shows that the bold of the caste structure on
occupations in India is getting loosened. Entrepreneurial opportunities are now open to
people who are willing to take risks irrespective of their caste origins.
About two-thirds of the entrepreneurs entered into entrepreneurs hip before the age of 25 years.
People from the mercantile communities entered comparatively at a younger age due to their
early orientation and guidance by their parents. Non-traditional merchants entered into the
merchant activities on a large scale only after 1960s. However, the degree of occupational
mobility of these farming castes was greater than traditional merchant castes. Occupational
mobility was found to be tow but growth rate was high.
Formal education helps to develop entrepreneurial skills like resourcefulness, initiative and
entrepreneurs. However, the lack of higher education is not a limiting factor. The study revealed
that majority of the entrepreneurs lacked higher education, most of the young persons with
higher education prefer white collar jobs in the Government. However, technicians, engineers
and other professionals are now coming forward as entrepreneurs. This is an encouraging trend.
The entrepreneurs were well informed, widely travelled and experienced. Most of them entered
business neither casually nor accidentally but after preparation.
Structure and economic status of the family are important because these determine the support
which an entrepreneur gets from his family. Such support influences the success of an
entrepreneur. "Membership of a resourceful family or community facilitates entrepreneurship.
Joint family system is supposed to inhibit individual is in and accumulation of control. But once
a beginning is made the family become the breeding ground for more entrepreneurs. The same

46
family members who are a drag on resources prove to be strength in adversity. About half of the
entrepreneurs were living independently and the other half in joint families.
The average annual earnings increased from grandfather to father and from father to the
entrepreneur himself. This improvement in economic status must have had a positive impact on
entrepreneurs' activities. The financial soundness of the past generation creates a sense of
security and thereby encourages the spread of entrepreneurship. The magnitude of
entrepreneurial activity also depends upon the economic status or financial origins of the
entrepreneur. Most of them show initiative in consolidating and building up on the base provided
by the father and the grandfather. Few of them start from a scratch and thus become self made
entrepreneurs.
About 44 percent of the entrepreneurs were proprietary concerns. About 55 percent were
partnerships and the rest were companies. Greater number of entrepreneurs originating from
nuclear families organised themselves into family partnerships. This shows that family bond has
been strengthened by business bond.
A look into the place of activity and nature of market revealed that about 84 percent of the
entrepreneurs operated from the local area and 90 percent of the entrepreneurs had local or
regional markets. However, the markets for trading, manufacturing and other services were
widely spread than those for fanning and professional services.
N. Gangadhar Rao conducted a study of 87 entrepreneurs operating in 13 industrial estates of
Andhra Pradesh. He found
1. Enterprises of Vaisyas constitute the single largest group but Kammas account for more than
l/4th of the total units.
2. Most of the entrepreneurs entered enterprises at the age of 30-40 years.
3. Quite contrary to the popular belief that entrepreneurs are drawn mostly from merchant
classes, white collar workmen emerged as the single largest group.
4. Half of the entrepreneurs were either graduates or post-graduates but the other half were non-
graduates.
5. Average annual earnings of all the entrepreneurs and their fathers at the time of starting the
enterprise were found to be Rs 27,000.
6. Migration was very low and the pull of the place where they lived initially was very high.
More than two-thirds of them were sons of the soil.
7. Partnership is the most popular form of organisation.
8. Entrepreneurs' family members played a useful role in shaping the entrepreneurial ambitions.
9. All but two entrepreneurs expected financial assistance from the nationalised banks and other
State agencies. Ancillary relations with large firms, dependable partners, allotment of
plot/shed, assistance from Government in importing machinery or materials were other
expectations.
10. Availability of technical knowhow, ease of setting up, lack of competition and previous
employment in industry were the main reasons for choice of industry.

47
Sharma investigated the economic, social and geographic origins of the entrepreneurs who
promoted 220 public limited non-government manufacturing companies during April, 1961 to
March 31,1963.
1. Occupational origins: An overwhelming majority (134 out of 198) of the individual
entrepreneurs came from the mercantile background. However, a shift in favour of newer
occupations, e.g., technicians, real estate owners, etc., was noticed. The entrepreneurs are
now drawn from diverse backgrounds which suggests that the base of entrepreneurship is
getting widened.
2. Educational backgrounds: About 30 per cent of the entrepreneurs were graduates, 10
percent postgraduates, 10 percent undergraduates. About 28 percent had professional
qualifications in engineering and technology and about 11 percent in law. Rest had
professional education in medicine, accounting and management.
3. Social and geographic origins: The traditionally trading castes of Banias-- Hindu and
Jain, Chettiars, etc. constituted 47% of all enterprising families and 49% of all
promotions. However, the share of these castes was going down as more people from
other communities (Brahmins, Patels, Loharas, Khatris, Sikhs, Aroras, etc.) joined the
ranks of industrialists.
4. Nature of enterprise: Well-established business houses and professionally qualified
entrepreneurs have by and large preferred the modern sector (engineering, metals,
chemicals and electricals). On the other band, newer entrepreneurs have floated
enterprises in the traditional sector (textiles). In general individuals having technical
knowledge entered related industries in the modern sector. But a slightly lower
proportion of new entrepreneurs than the old ones possessing education unrelated to
specific nature of industry went into the traditional sector. The traditionally trading
communities relied more on the modem sector while the South Indian entrepreneurs
preferred their floatations in the traditional sector.
The socio-economic background exerts significant influenceon the level of entrepreneurial
motivation, access to resources, risk-bearing capacity, etc. which in turn influence significantly
the growth of entrepreneurs. In his study, H. Sadoak evaluated the socio-economic origins of
'First Generation Entrepreneurs' who were defined as those who have first time taken
entrepreneurship after independence. He used 'Survey Interview Method'.
The main findings of his study are as follows:
1. Out of 100 units, 61 were located in backward districts.
2. 55 units were proprietorships, 27 partnerships and 18 private limited companies.
3. 60 units were having project costs up to Rs 5 lakhs and 40 units employed up to 10 persons.
4. 72 entrepreneurs were below 41 years of age.
5. About 70 percent of the entrepreneurs were graduates or postgraduates.
6. About 32 percent had experience in the same line, 40 percent in other lines and 28 percent
had no past experience. More persons without and with experience in the same line started
industries in notified backwardareas.

48
7. In backward regions. 70 to 90 percent of project costs came from Government agencies.
Most of the first-generation entrepreneurs could not start their own projects without financial
support from the financial institutions.
8. Average investment per unit and average employment were lower in backward areas than in
non-backward areas. There is a tendency among the entrepreneurs to promote capital-
intensive industries in backward areas clue to the availability of central subsidy based on
capital investment. In order to create more employment opportunities in backward areas
employment subsidy rather than capital subsidy should be used. However, the policy of
incentives and institutional efforts have helped to create income and employment
opportunities through the promotion of new industries.
ENVIRONMENTAL FACTORS AFFECTING ENTREPRENEURSHIP
A complex and varying combination of financial, institutional, cultural and personality factors
determines the nature and degree of entrepreneurial activity at any time. The personal
backgrounds of the entrepreneurs are determined mainly by the environment in which they are
born and brought up and work. A multitude of environmental factors determine the
entrepreneurial spirit among people. The entrepreneurs in turn create on impact on the
environment. The interaction between the entrepreneur and his environment is an ongoing
process. At any given point of time, the entrepreneurs derive meanings from the environment
prevailing at that time and try to adapt and/or change the environment to suit their needs.
The environment, particularly the external environment is dynamic. It keeps on environment on
the organisation depends largely on the degree to which the organisation depends (immediate or
remote) on the environment and organizational response to environmental changes. All the
factors outside and inside (Individual, groups, machinery, equipment, procedures, rules, policies,
etc.) an organisation interact and affect the performance of the organisation. Some of the
environmental factors which hinder entrepreneurial growth are given below:
1. Sudden changes in Government policy.
2. Sudden political upsurge.
3. Outbreak of war or regional conflicts, e.g. ‘sons of the soil’ call.
4. Political instability or hostile Government attitude towards industry.
5. Excessive red-tapism and corruption among Government agencies.
6. Ideological and social conflicts.
7. Unreliable supply of power, materials, finance, labour and other inputs.
8. Rise in the cost of inputs.
9. Unfavourable market fluctuations.
10. Non-co operative attitude of banks and financial institutions.
Entrepreneurship is environmentally determined. The most important essential for
entrepreneurial growth is the presence of a favourable business environment. A healthy business
environment requires active social and cultural behaviour of the people, efficient economic
conditions, helpful motivating Government policies, etc. When environment mitigates
entrepreneurship it must be modified.

49
STATE AND THE ENTREPRENEUR
State plays now a vital role in the sphere of entrepreneurship. This role may be classified into
three categories:
1. Supporting role
2. Regulating role
3. Participative role
Support: The Government of India has launched several schemes for the growth of
entrepreneurship so as to ensure the rapid economic development of the country. It has created a
vast network of institutions and agencies which provide several types of assistance to new and
established entrepreneurs. Public financial institutions or development banks are one part of this
institutional framework. These banks at the national and State level provide financial, managerial
and promotional assistance.
At the national level Industrial Finance Corporation of India (IFCI), Industrial Credit and
Investment Corporation of India (ICICI), Industrial Development Bank of India (IDBI), Small
Industries Development Bank of India (SIDBI) are the major institutions. Every State has its
own-State financial corporation and/ or State industrial development corporation. These
agencies provide industrial finance through term loans, underwriting and direct subscription to
industrial securities. They also render assistance in the identification and promotion of industrial
projects. They have set up several institutes for undertaking training and research in different
fields of management. They have sponsored technical consultancy organisations (TCOs) for
providing necessary facilities and guidance to new enterprises. 'Seed capital' is provided to new
entrepreneurs on soft terms. In addition a directory of industrial, technical and management
consultants has been prepared so that entrepreneurs can take their help in the formulation and
implementation of projects. Special schemes are available for backward areas, women
entrepreneurs, sick units and technical graduates, industrial Reconstruction Bank of India
(IRCBI), and Bureau of Industrial and Financial Reconstruction (BIFR) have been set up to
prevent and correct sickness in industry. National Small Industries Corporation (NSIC) and
other bodies are operating to promote small scale entrepreneurs.
In addition to institutional framework, the Government has developed industrial infrastructure in
the form of transportation, communications, power, etc. It provides incentives and subsidies of
various types to deserving entrepreneurs. But for the assistance and facilities provided by the
Government, entrepreneurial base in India would have remained narrow.
Regulation: In order to achieve the objective of socialist pattern of society, Government of
India has enacted innumerable regulations and controls. These regulations are designed to set
priorities of industrial development, to regulate the pattern of production and distribution, to
check the growth of monopolies and concentration of economic power, etc. Some of the more
important ways in which Government regulates business activities are given below:
(i) Industrial Policy Resolutions
(ii) Industrial licensing under the Industries Development and Regulation Act, 1951
(iii) Capital Issues Control
(iv) The Companies Act, 1956
(v) Control over Monopolies and Restrictive Trade Practices

50
(vi) Fiscal and monetary controls
(vii) Controls over exports and imports
(viii) Foreign exchange regulations
(ix) Commodity controls
Private industrialists in India often complain that there are too many controls and these controls
have failed to achieve the intended objectives. In recent years there has been a trend towards
liberalisation of economic activities. The control and regulatory mechanism is a dynamic
process and has to be viewed against the environmental situation existing at a point of time.
Different degrees of control may be necessary at different stages of economic growth.
Participation: In India, Government has emerged as the single largest entrepreneur through the
public sector. The top ten companies in India in terms of size are all in the public sector. Key and
basic industries like iron and steel, coal mining, aeronautics, power, railways, communications,
cement, etc. are mostly owned and controlled by the Government. All major commercial banks
and insurance companies have been nationalised.
Government began to participate in industry and trade because it felt that private sector alone
will not be able to industrialise the country at the desired pace and scale. Government enterprises
seek to achieve economic (planned growth, rapid industrialisation, generation of surplus), social
(employment generation, balanced regional development, egalitarian society), and political (self-
reliance, national defence, etc.) objectives.
ENVIRONMENT IN UNDERDEVELOPED COUNTRIES
Development of a healthy business environment is an essential condition for growth of
entrepreneurs. New enterprises can flourish and grow only under favourable economic, social
and political conditions. Unfortunately, economic and social conditions in underdeveloped
countries are unfavourable and even prohibitive. There is lack of adequate infrastructure and
capital. Social institutions are hopelessly traditional and social attitudes inhibit entrepreneurial
behaviour. People in general are conservative and do not initiate and appreciate changes.
Obviously entrepreneurship cannot flourish under such conditions. Therefore, it is very difficult
lo create and maintain the required quantity and quality of entrepreneurship in underdeveloped
countries.
Business environment in underdeveloped countries is such that entrepreneurship can be
organised on a small scale. Shortage of capital and imperfect market restricts large scale
enterprises. Most of the entrepreneurs can imitate but few can innovate. That is why these
countries place emphasis on the small scale sector as an instrument of economic planning and
development. Political ideology also requires the development of a decentralised industrial
structure where ownership and economic power are mostly distributed. The State in these
countries provides preferential treatment to small scale enterprises lo generate employment, to
mobilise local capital and skills and to ensure a more equitable distribution of income and
wealth.
In order to supplement the efforts of private entrepreneurs the Government in underdeveloped
countries has become an important entrepreneur. Active participation of the Slate in business
helps to spread innovating and imitating entrepreneurship throughout the country. In addition the
Government takes various physical and financial measures to stimulate the growth of
entrepreneurship.

51
Family Business
B in India-
I Role and Contriibution towards growth
h of Entrepreneurship
India is believed
b to have
h third highest
h numbber of familyy owned or family-controlled businnesses
which coonsists of approximatel
a ly 90% of all businesses that aree incorporatted in the India.
I
Howeverr, around 85% of the fam mily-owned businesses of India do not have a robust
r succeession
plan. 75%% of top 20 business
b houuses of Indiaa are family-owned.
Definitioon: “ A fam mily businesss is a comm mercial orgganization inn which deecision-makinng is
influenceed by multipple generatioons of a fam
mily, related by blood orr marriage or o adoption, who
has both the ability to
o influence the
t vision off the businesss and the willlingness to use this abillity to
pursue diistinctive go
oals”
Key Takeeaways
 Entirely owneed and manaaged by mem
E mbers of a sinngle family
 O
Owned, contrrolled and opperated by members
m of one
o or severaal families.
 Innterest and significant coommitment towards
t busiiness.
CHARACTERISTIC
CS OF FAMILY BUSIN
NESS
1. Fammily memberrs are loyal to t the principples of the founder.
fo
2. Thee entity has to
t ensure thee uniformity in its operattions.
3. Succcession plannning in an ongoing
o proccess.
4. Inddulgence of family
f membbers in businness operatioons.
5. Enssures the effe
fective utilizaation of in house talent ini family.
6. Reqquires Singlee minded dedication of family
f membbers
7. Enssures survivaal of family business thrrough tougheest times.
8. Succcess depend ds on undersstanding perssisting withinn the familyy
9. Fammily businesss can consisst of one or more
m then onne family in business
b opeerations.
10. Fammily memberrs who are notn contributting or not innvolved in buusiness are part
p of businness.
11. Fammily businesss values are reflection of values possessed and followed
f by family memmbers.
12. Meembers of fam mily have legal control over
o businesss.
Three Circle Modell of Family Business
B

Source: Taguri
T and Davis,
D 1982

52
The three circle model has the three overlapping circles consisting three different groups namely
Family, Ownership and Business. A particular person carries one of the seven sections that are
formed by the overlapping groups. The owner has the position in the top circle. The left circle is
occupied by family members and right circle is taken by the employees. If a member lies in the
two circle then he would be falling in the overlapping area. For example if one member of the
family is working in the business but does not own a stake that means he lies in the bottom
center section. If a member of the family owns a stake in the business but he is not the employee
of the business then it lies on the left center section.
The three circle model depicts seven different groups having varied level of involvement in the
family business. All seven sections are given below:
1. Family members not involved in the business, but who are descendants or spouses/partners of
owners.
2. Family owners not employed in the business.
3. Non-family owners who do not work in the business.
4. Non-family owners who work in the business.
5. Non-family employees.
6. Family members who work in the business but are not owners.
7. Family owners who work in the business.
Each of the seven interest groups identified by the model has its own viewpoints, goals, concerns
and dynamics. The model reminds us that each sector has legitimate views that deserve to be
respected, but these views also must be integrated to set future direction for the family business
system. The long-term success of a family business system depends on the functioning and
mutual support of each of these groups.
Approaches to Avoid Conflicts in Family Business
1. Coping approach : which involves adopting to negotiation among family members try
and resolve conflict and agree on common terms.
2. Arbitrary approach: in this approach the elder person of the family will be allotted with
the power to frame rules and control business activity. But this approach has not proven
to be successful as most of the time elder person in family may not prove to be effective
manager for business.
3. Managed approach: this approach states that person who has ability to maintain better
relationship with key individuals of business and have ability to understand business and
manage the same should be appointed as lead person for the business.
Measures to overcome family business challenges and problems
1. Family Constitution or Governance
2. Developing a Succession Plan
3. Family Gathering and Get Together
4. Appointing an outside Board of Advisors
5. Training and orientation 6. Know Your Purpose
7. “Treat each other with grace and respect,”
8. Keep the Lines of Communication Open

53
 Unit 3
LESSON 5
THE BUSINESS PLAN
Dr. Navneet Gera
New Product development:
Product development is the process of designing, creating and marketing new productsor
services to benefit customers. Improving and updating products is an ongoing task as consumer
needs and wants continuously change. Product development involves either improving an
existing product or its presentation, or developing a new product to target a particular market
segment or segments. Consistent product development is a necessity for companies striving to
keep up with changes and trends in the marketplace to ensure their future profitability and
success. A competitive product development strategy should include a company-wide
commitment to creating items that fulfill particular consumer needs or characteristics. These
characteristics might include consumers' desire for the following: products that are high-quality
or low-cost; products that provide the consumer with speed or flexibility; or products that offer
some other form of differentiation that posits them a desirable purchase.A number of
organizations are dedicated to supporting product development professionals, such as the Product
Development and Management Association (PDMA) and the Product Development Institute
(PDI). A failure to develop products could result in a reduction in sales if consumers decide to
buy competitor products.
REASONS FOR NEW PRODUCT FAILURES
– Overestimation of market size
– Design problems
– Incorrectly positioned, priced, or advertised
– Pushed despite poor marketing research findings
– Development costs
– Competition
Major Stages in New-Product Development

1. Idea generation
2. Idea screening
3. Concept development and testing
4. Marketing strategy development
5. Business analysis
6. Product development
7. Test marketing
8. Commercialization

54
1. IDEA GENERATION
New product development starts with Idea generation-The systematic search for new product
ideas. A company typically has to generate many ideas in order to find a few good ones. For
example, one brainstorming session for Prudential insurance company came up with 1500 ideas
and only 12 were considered even usable. Establishing yourself as a successful entrepreneur
depends, in part, upon choosing a good idea. The idea must not only be good for the market, but
good for the project and good for the entrepreneurs. It should also be manageable without much
dependence on others. As an entrepreneur, when one is searching for an idea worthy of
commitment, don’t pursue one idea at a time. Develop five or ten in parallel so that one emerges
appropriately. If you are pursuing a single idea by feigning commitment before you feel it, you
may put yourself in a tight corner. Choosing an idea is quite difficult and the entrepreneur has to
weigh objectively his intrinsic capabilities in finalizing an idea. In the idea stage, suggestions for
new products are obtained from all possible sources, customers, competitors, R & D, distributors
and company employees. Ideas may be contributed by Scientists, professional designers, rivals,
customers, sales force, top management, dealers etc Major sources for new ideas include,
internal sources and external sources such as customers, competitors, distributors, and suppliers,
and others.
INTERNAL IDEA SOURCES
Internal sources include company employees at all levels. Companies can pick the brains of its
executives, scientists, engineers, manufacturing staff, and sales people.
EXTERNAL IDEA SOURCES
– Customers
New product ideas also come from watching and listening to customers. Company engineers or
sales people can meet with and work alongside to get suggestions and ideas.
– Competitors
Companies watch competitor’s adds to get clues about their new products. They buy competing
new products, take them apart to see how they work, analyze their sales, and decide whether they
should bring out a new product of their own.
– Distributors & Suppliers
Distributors and suppliers can also contribute many good and new product ideas. Resellers are
those close to the market and can pass along information about customer problems and new
product possibilities. Suppliers can tell company about new concepts, techniques, and materials
that can be used to develop new products.
– Outsourcing
Many companies are now outsourcing some of their new product innovation to outside
developers. Companies such as Dell, Motorola sometimes buy new designs from Asian
developers and then market under their own brand names.

55
Other idea sources include Trade magazines, shows, seminars, government agencies, new
product consultants, advertising agencies, marketing research firms, university and commercial
laboratories, and inventors.
2. IDEA SCREENING:
Process used to spot good ideas and drop poor ones.
The purpose of idea generation is to create a large number of ideas. The purpose of the
succeeding stages is to reduce that number. The first idea reducing stage is the Idea screening.
– Executives provide a description of the product along with estimates of market
size, product price, development time and costs, manufacturing costs, and rate
of return.
– Evaluated against a set of company criteria for new products.
Some of the observations of the new product committee can be to ask questions such as “Is the
product truly useful to the consumers and society?”, “Do we have the people, skills, resources, to
make it proceed?” etc.
3. CONCEPT DEVELOPMENT AND TESTING
An attractive idea must be developed into a product concept. It is important to distinguish
between product idea, product concept, and a product image.
 Product Idea:
– Ideafor a possible product that the company can see itself offering.
 Product Concept:
– detailed version of the idea stated in meaningful consumer terms.
 Product Image:
– the way consumers perceive an actual or potential product.
For example, after more than 10 years of development, Daimler Chrysler has commercialized its
experimental cell powered electric car into the market. This car’s non polluting fuel system runs
directly on Hydrogen. Daimler Chrysler has tested more than 100 F cell cars under varying
weather conditions, traffic situations, and driving styles in world wide.Daimler’s task is to
develop this into alternative product concept, find out each how attractive each concept to its
customers, and choose the best one.
Concept one: A moderately priced sub compact designed as a second family car to be used
around town.
Concept two: A medium cost sporty compact appealing to the young people.
Concept three: An inexpensive subcompact green car appealing to environmentally conscious
people.
CONCEPT TESTING:
The entire product marketing programme is tried out for the first time in a small number of well
selected test markets. Test market is necessary to find out the viability of a full marketing
programme for national distribution. Customer reactions can be tested under normal conditions.

56
Testing the new product concepts with a group of target consumers to find out if the concepts
have strong consumer appeal is called concept testing. Many firms routinely test new-product
concepts with consumers before attempting to turn them into actual new products.
4. MARKETING STRATEGY DEVELOPMENT
The next step is marketing strategy development which is designing an initial marketing strategy
for a new product based on the product concept.
The marketing strategy statement consists of :
– Describe the target market, planned product positions, sales, market share, and
profit goals.
– Outlines the product’s planned price, distribution, and marketing budget.
– Describes the long-run sales and profit goals, marketing mix strategy.
5. BUSINESS ANALYSIS
The best product that is picked up will be subjected to rigorous scrutiny to evaluate its market
potential, capital investment, rate of return on capital etc. Business analysis is a combination
of market research, cost benefit analysis and profitability analysis. To estimate sales, the
company might look at the sales history of similar products and conduct surveys of market
opinion. It can then estimate minimum and maximum sales to assess the range of risk. After
preparing the sales forecast, management can estimate the expected costs and profits for the
product, including marketing, R&D, operations, accounting, and finance costs. The company
then uses the sales and costs figures to analyze the new product's financial attractiveness.
 Involves a review of the sales, costs, and profit projections to assess fit with company
objectives.
 If results are positive, project moves to the product development phase.
6. PRODUCT DEVELOPMENT
Product development involves developing the product concept into physical product in order to
ensure that the product idea can be turned into a workable product.
 Calls for large jump in investment.
 Prototypes are made.
 Prototype must have correct physical features and convey psychological characteristics
Eg: Gillette uses employee volunteers to test new shaving products. Every working day at
Gillette, 200 volunteers from various departments come to work unshaven. The volunteers are
given razors, shaving cream or after shave to use. The volunteers evaluate razors for sharpness of
blade, smoothness of glide, ease of handling.
7. TEST MARKETING
If the product passes functional and a consumer test, the next step is Test marketing, the stages of
product development in which the product and marketing program are tested in more realistic
market settings.

57
  Product and program introduced in more realistic market setting.
 Not needed for all products.
 Can be expensive and time consuming, but better than making major marketing mistake.
8. COMMERCIALIZATION
Test marketing gives the management the information needed to make final decision about
whether to launch a new product. Commercialization means introducing the new product into the
market. The company may have to build or rent a manufacturing facility. It may have to spend,
in the case of a new consumer-packaged good, moderate to heavy amount for advertising, sales
promotion, and other marketing efforts in the first year. Once the test market gives the green
signal for the product with or without expected modifications, the company can proceed to
finalize all features of the product. Now the marketing department can launch a fully fledged
advertising and promotion campaign for mass distribution. In particular, small companies may
enter attractive cities or regions one at a time. Larger companies, however, may quickly
introduce new models into several regions or into the full national market.
 Must decide on timing (i.e., when to introduce the product).
 Must decide on where to introduce the product (e.g., single location, state, region,
nationally, internationally).
 Must develop a market rollout plan.
SOURCES OF NEW IDEAS
Some of the more frequently used sources of ideas for new entrepreneurs include consumers,
existing companies, distribution channels, the government, and research and development.
Consumers
Potential entrepreneurs should pay close attention to the final focal point of the idea for a new
product or service-the potential consumer. This attention can take the form of informally
monitoring potential ideas and needs or formally arranging for consumers to have an opportunity
to express their opinions. Care needs to be taken to ensure that the idea or need represents a large
enough market to support a new venture.
Existing Companies
Potential entrepreneurs and intrapreneurs should also establish a formal method for monitoring
and evaluating Competitive products and services on the market. Frequently, this analysis
uncovers ways to improve on these offerings that may result in a new product that has more
market appeal.
Distribution Channels
Members of the distribution channels are also excellent sources for new ideas because of their
familiarity with the needs of the market. Not only do channel members frequently have
suggestions for completely new products, but they can also help in marketing the entrepreneur's
newly developed products.

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Government
The government can be a source of new product ideas in two ways. First, the files of the Patent
Office contain numerous new product possibilities. Although the patents themselves may not be
feasible new product introductions, they can frequently suggest other more marketable product
ideas. Several government agencies and publications are helpful in monitoring patent
applications. The government’s information summarizes each patent granted and lists all patents
available for license or sale. Also, the Government Patents Board publishes lists of abstracts of
thousands of government-owned patents; a good resource of such information is the
Government-Owned Inventories Available for license. Other government agencies assist
entrepreneurs in obtaining specific product information.
Research and Development
The largest source of new ideas is the entrepreneur's own "research and development," efforts
that may be a formal endeavor connected with one's current employment or an informal lab. A
more formal research and development department is often better equipped and enables the
entrepreneur to conceptualize and develop successful new product ideas.
METHODS OF GENERATING IDEAS
Even with a wide variety of sources available, coming up with an idea to serve as the basis for a
new venture can still be a difficult problem. The entrepreneur can use several methods to help
generate and test new ideas, including focus groups, brainstorming, and problem inventory
analysis.
Focus Groups
Focus groups have been used for multiple reasons wherein the moderator leads a group of people
through an open, in-depth discussion rather than simply asking questions to get participant
response. For a new product area, the moderator focuses the discussion of the group in either a
directive or a nondirective manner. The group of 8 to 14 participants is stimulated by comments
from other group members in creatively conceptualizing and developing a new product idea to
fulfill a market need. In addition to generating new ideas, the focus group is an excellent method
for initially screening ideas and concepts. Using one of several procedures available, the results
can be analyzed more quantitatively, making the focus group a useful method for generating new
product ideas.
Brainstorming
The brainstorming method for generating new product ideas is based on the fact that people can
be stimulated to greater creativity by meeting with others and participating in organized group
experiences. Although most of the ideas generated from the group have no basis for further
development, often a good idea emerges. This has a greater frequency of occurrence when the
brainstorming effort focuses on a specific product or market area. When using this method, the
following four rules should be followed:
1. No criticism is allowed by anyone in the group -no negative comments.
2. Freewheeling is encouraged - the wilder the idea the better.
3. Quantity of ideas is desired - the greater the number of ideas, the greater the likelihood of the
emergence of useful ideas.

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4. Combinations and improvements of ideas are encouraged; ideas of others canbe used to
produce still another new idea.
The brainstorming session should be fun, with no one dominating or inhibiting the discussion.
Problem Inventory Analysis
Problem inventory analysisuses individuals in a manner that is analogous to focus groups to
generate new product ideas. However, instead of generating new ideas themselves, consumers
are provided with a list of problems in a general product category. They are then asked to
identify and discuss products in this category that have the particular problem. This method is
often effective since it is easier to relate known products to suggested problems and arrive at a
new product idea than to generate an entirely new product idea by itself Problem inventory
analysis can also be used to test a new product idea. Results from product inventory' analysis
must be carefully evaluated as they may not actually reflect a new business opportunity. To
ensure the best results problem inventory analysis should be used primarily to identify product
ideas for further evaluation.
Concept Stage
After a new product idea has been identified in the idea stage as viable, it should be further
developed and refined through interaction, with consumers. In the concept stage, the refined
product idea is tested to determine consumer acceptance without necessarily incurring the costs
of manufacturing the physical product. Initial reactions to the concept are obtained from potential
customers.
One method of measuring consumer acceptance is the conversational interview in which selected
respondents are exposed to statements that reflect the physical characteristics and attributes of
the product idea. Where competing products exist, these statements can also compare the
primary features of existing products. Favorable as well as unfavorable product features can be
discovered by analyzing consumers' responses, with favorable features then being incorporated
into the product.
Features, price, and promotion should be evaluated for both the concept being studied and any
major competing products. By identifying any major problems in the product concept, research
and development can be directed to develop a more marketable product, or the concept can be
dropped and not receive further attention.
Idea Generation Techniques
Idea generation techniques are a method that encourages creative actions concentrating
on techniques for divergent thinking, ways of re-framing problems and so on.
Some methods require groups of two or more people. There are nearly two hundred types of idea
generation techniques available to promote creativity.
The idea generation techniques identified are briefly introduced as follows:
1. Role Playing: Role playing involves designers acting out scenarios. These scenarios are
often ones that the designers observed during the research phase of the design process
when they participated in user research. This technique is a tool for both team-based
ideation and communication to users and/or clients.
2. Active Search: Active search refers to designers hunting for a particular solution. This hunt
could range from a web search for images of current vacuum cleaners to searching through
books, magazines, newspapers, etc. to find the demographics of a particular population.

60
3. Attribute List: Attribute listing refers to taking an existing product or system, breaking it
into parts and then recombining these to identify new forms of the product or system.
4. Brainstorm: Brainstorming involves generating a large number of solutions to a problem
(idea) with a focus on the quantity of ideas. During this process, no ideas are evaluated; in
fact unusual ideas are welcomed. Ideas are often combined to form a single good idea as
suggested by the slogan. Brainstorming can be used by groups as well as individuals Since
brainstorming was the first idea generation technique created it is often referred to as, “the
mother of all idea generation techniques”.
5. Collaborate: Collaboration refers to two or more people working together towards a
common goal. Designers often work in groups and co-create during the entire creative
process.
6. Concrete Stimuli: Concrete stimuli are used when designers want to gain new perspectives
on a problem by manipulating physical materials. This could be looking at paint chips,
feeling different material textures or physically maneuvering objects.
7. Critique: Critique refers to receiving input on current design ideas. This could be
collaborative such as receiving a design critique from a colleague or individuals critiquing
their own ideas (either systematically or intrinsically). This technique often spurs new
thought by finding solutions to design flaws within current concepts.
8. Documenting: Documenting refers to designers writing down ideas (physically or
electronically). This includes journaling, writing stories, and taking notes.
9. Expert Opinion: Designers often elicit opinions from experts to identify potential problems
with products or services before more comprehensive evaluations. This occurs when they
are looking for an answer to a problem that is outside their domain knowledge or when
they want to test a new idea.
10. Empathy/User Research: User research requires the designer to observe people in
everyday situations in order to develop empathy for them. The methods used to conduct
this type of research is founded in ethnographic research methods such as observations,
field studies and rapid ethnography.
11. Encompass: Encompassing is an inspirational technique which involves designers
immersing themselves in information relevant to the current project.
12. Forced Analogy: Forced analogy involves comparing the current problem with something
else that has little or nothing in common in order to gain new insights and results. This
technique often generates ideas for new areas of research.
13. Incubate: Incubation refers to stepping back from the problem to let the subconscious mind
work.
14. Passive Searching: Passive searching refers to designers looking through material (web,
magazines, books) for inspiration without searching for a particular solution to a problem.
They are simply looking for inspiration.
15. Prototyping: Prototyping, in this study, refers to a low fidelity model of an idea. These
models can be created with any type of material (paper, clay, etc.) as they are only used to
conceptualize a thought.
16. Reflect: Reflection occurs when designers review their previous work (sketches,
documents, prototypes, etc.)
17. Sketching: Sketching refers to a rough drawing of an idea.
18. Socializing: Socializing refers to talking with others about topics unrelated to the current
project.

61
19. Storyboards: Storyboards are a way for designers to represent information gained in the
research phase of the design process. Quotes from the user, pictures, and other relative
information are placed on cork board, or a similar surface, to represent a scenario and to
help understand the relationships between design ideas. Designers often post information
about users using as little detail as possible to allow for interpretation of information
SELECTION OF PRODUCT
The entrepreneur is concerned with identifying a particular product that he hopes to market
successfully at a reasonable profit. Therefore, the selection of a right product is very essential for
being successful in the business venture. The right product means that which can be marketed at
a reasonable profit which will go towards business growth. Various factors influence the
entrepreneur in selecting the right product. These decisive factors are..
i) Whether import restriction or the items selected are banned items would considerably
weigh favorably or otherwise in the selection of the product.
ii) If the entrepreneur himself or his partners have gathered, substantial amount of experience
in the manufacture and marketing of certain products, then the selection of such a product
would be to their advantage.
iii) The selection of the product will also be based on the degree of profitability that generally
rules in the market. Such information can be obtained from the banks or the financial
institutions or the market itself.
iv) Many concessions are available from the Government for producing a product which
serves an import substitute or even essential item, hence it may enjoy substantial amount
of incentives, subsidies, concessions etc
v) Many products belong to the priority sector industries or small scale sector, hence certain
products are listed by the government for purchase from the small scale sector only, hence
this selection would be advantageous to the entrepreneur
vi) The market for the product also plays a significant role in the selection of the product. If
the product also has an export market, it widens the scope of marketing.
vii) Certain products are permitted for production only if the licence is obtained from the
appropriate authority while others belong to the de-licensed category.
viii) Many products enjoy specific advantages in regard to the scale of manufacture or carry
locational advantages i.e. if a product is produced in a free trade zone or in backward areas
with special incentives and concessions which are made available for manufacturing such
a product.
ix) If a product belongs to an ancillary unit and serves aa major component for the parent
industry, it provides a ready demand, hence selection of this type of product entails easy
marketability
THE PRODUCT LIFE CYCLE (PLC)
After launching the new product, management wants the product to enjoy a long life and
compete the existing products. Although the company doesn’t expect its product to sell forever,
the company wants to earn a normal profit to cover all the effort and risk that went into
launching it.Product Life Cycle (PLC) is the course of a products sales and profits over its

62
lifetime. It involves five distinct stages: product development, introduction, growth, maturity and
decline.
Figure given below shows a typical product life cycle (PLC) although its exact length and shape
is not known in advance

Practical Problems of PLC

 Difficult to identify which stage of the PLC the product is in.
 Difficult to pinpoint when the product moves to the next stage.
 Difficult to identify factors that affect product’s movement through stages.
 It’s not easy to forecast sales level, length of each stage, and shape of PLC.
 Strategy is both a cause and result of the PLC.
Introduction Stage of PLC
The introduction stage starts when the new product is first launched. Introduction takes time, and
sales growth is slow in the initial phase. Products such as Instant coffee, frozen foods etc
lingered for many years before they entered a stage of rapid growth.In this stage, as compared to
the others, profits are negative or low because of the low sales and high distribution and
promotion expenses. Much money is needed to attract distributors and build their own
inventories. Promotion spending is relatively high to inform consumers of the new product and
get them to try it.
Growth Stage of PLC
If the new product satisfies the market, it will enter a new growth stage in which sales will start
climbing quickly. The early adopters will continue to buy and later buyers will start following
their lead, especially if they hear favorable word of mouth. Attracted by the opportunities for
profit, new competitors will enter the market. They will introduce new product features, and the
market will expand. The increase in competitors will lead to increase in the number of

63
distribution outlets, sales jump just to build reseller inventories. Prices remain same or fall only
slightly. Companies keep their promotion spending at the same or a slightly higher level. Profits
increase during the growth stage, as promotion expenses are spread over a large volume and as
unit manufacturing costs fall. The firm uses several strategies to sustain rapid market growth rate
as long as possible.
Maturity Stage of PLC
At this stage of PLC, product sales growth will slow down. The maturity stage normally lasts
longer than the previous stages and poses strong challenges to marketing management. In any
market, most products are in the maturity stages of the life cycle. Therefore, most of the
marketing management deals with mature product. Competitors begin marking down prices,
increasing their advertising and sales promotion and allocate their R&D budgets to find better
versions of the product. These steps lead to a drop in profit. Some of the weaker competitors start
dropping out, and the industry eventually contains only well established competitors.
Decline Stage of PLC
The sales of most product forms and brands eventually dip. The decline may be slow or rapid
depends on the products. Sales may plunge to zero or they may drop to a level where they
continue for many years. This stage is the decline stage. As sales and profits decline, some firms
withdraw from the market. Carrying a weak product can be very costly to the firm, and not just
in profit terms. A weak product often requires frequent price and inventory adjustments. A
products falling reputation can cause customers concern about the company and its products.
For these reasons, companies need to pay more attention to their aging products. The firm’s first
task is to identify those products in the decline stage by regularly reviewing sales, market shares,
costs and profit trends.
Entrepreneur V/S Investors
1. An entrepreneur focuses on a new business idea, while an investor may focus on existing
business ideas.
2. The entrepreneur usually approaches an investor to finance the equity of his business, while
an investor approaches an entrepreneur, whom is potentially profitable, to invest money
and earn income from his or her investment.
3. An entrepreneur contributes idea and passion (but may also invest money), while an
investor primarily invests money on the business.
4. An entrepreneur is passionate and dedicated to his idea and would stick to it despite
suffering some losses or period of breakeven, while an investor is practical and reasonable
to an idea and may leave it when losses occur.
5. An entrepreneur is usually optimistic to his business, while an investor is more pessimistic
and more focused on the things that might go wrong in the business.
6. Entrepreneurs view more on the qualitative side of business, while investors view more on
the quantitative or financial side of the business.
7. An entrepreneur, when starting a business, expect many things (both quantitative and
qualitative), while an investor, when investing his or her money on a business, expects
more on the ROI (return on investment).

64
8. Entrepreneurs don’t necessarily focus on calculating the most approximate figure of return
on a business, while investors usually calculate the return of business and arrive at an
approximated or estimated figure.
9. Entrepreneurs could start entrepreneurship even without money, while money is a necessity
for investors to start investing.
10. Although they can be both owners of a business, an entrepreneur manages the business and
knows it more from its sales and operation to the feelings and behaviours of its employees
and customers, while an investor may only know the business based on the financial and
quantitative reports of the business.
Remember that although entrepreneurs and investors differ from each other, they need each other
and they can be a great team to build a successful business. Furthermore, an entrepreneur can
also be a financial investor of his or her own business, while an investor can also be more
involved in the business he or she has invested. Finally, every nation or community needs great
entrepreneurs and investors to develop its economy.

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 Unit 4
LESSON 6
ENTREPRENEURIAL ECO-SYSTEM
Dr. Navneet Gera
Self Help Groups (SHG)
Self Help Groups (SHG) consist poor people who suffer from the similar problems. They usually
for a group so that they can solve their problem by helping each member of the group. These
groups also encourage the group members to make small savings which are kept with the banks.
The common fund is deposited with the bank in the same of SHG. The SHG also provide
financial assistance to the group members in the form of small loans.
Characteristics of a SHG
1. Size: A SHG usually consists of 10-20 members (Legally it should not be more than 20
members)
2. Membership: Each family can have one family member as the member of the group
only. The groups usually comprise of only men or only women. The members should
carry the same social and financial status to ensure the equal participation of every
member without the exertion of any power.
3. Meetings: The group has the requirement of regular meetings. Ideally there should be a
meeting every week or atleast once in a month. The membership records and the minutes
of the meeting are to be maintained in the registers.
4. Book Keeping by SHG: The group has to maintain a simple and clear record of data. If
the members of the group are not capable of keeping the records, they can outsource this
service to any other person. Following is the list of books need to be maintained by
SHGs:
a. Minutes Book
b. Savings and Loan Register
c. Weekly/Monthly Register
d. Members Passbook
Major Functions performed by the SHGs
1. Promoting Savings: The SHG encourages its members to save a small amount in
order to make it their habit. Every SHG should promote the idea of “Savings first and
credit later”
2. Lending to members: The group can use the saved amount to give loans to the other
needy members. The purpose of the loan, the maximum amount and the rate of
interest is to be decided by the group only.
3. Solving problems: The SHG must try to solve the problem of the group members.
The members of the groups are usually financially weak and semi-skilled, therefore
the other members can help them on financial and non-financial matters. In some
situations, the SHG can take the loan from the bank and then give the money to its
members as the loan.

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Business Incubators:
A business incubator is a well established network of varied facilities providing funding services
to startups to bear risk and authenticate the business proposition. The services provided by such
incubators consist early stage support, cash availability, working space, networking and
mentoring services. The government has launched varied incubators in order to support the
startups for example, National Science and Technology Entrepreneurship Development, Indian
Science and Technology Entrepreneurs Parks and Business Association, Centre for innovation
incubation and entrepreneurship, Agri business incubator etc.
Objectives of Business Incubators:
 Decrease in the cost of launching a enterprise
 Increase the confidence among new entrepreneurs
 Increase the risk taking ability
 Facilitate infrastructure and networks
 Help in venture funding and legal formalities
 Foster innovation and creativity
Stages of Incubation
 Pre-incubation: The funds are made available for the research and development
activities, training and business planning.
 Early stage: In this stage the funds are made available for the marketing activities, legal
services and accounting procedures.
 Classic incubation: Funds are given for providing the support in order to enhance the
networking process.
 Graduation: This is the last stage of incubation, where the funds are invested in
marketing of products and services and helps the startup to reach its end users.
Advantages of Business Incubators
1. They improve the survival rate of the business
2. They support the business monetarily.
3. They help the business to reach the best investors.
4. They provide the accountant, lawyer, coaching and mentoring services.
5. They provide better infrastructure and space facilities.
Disadvantages of Business Incubators
1. The incubators help the business to initialize the process but later on they can interfere
and distract the entrepreneurs.
2. It can pose a threat to the integrity of business innovation.
Angel Investors
They are the investors having a high level of net worth and interesting in providing funds
to the new entrepreneurs. They are majorly categorized as Corporate Angels,
Entrepreneurial Angels, Enthusiast Angels, Micro management Angels and professional
Angels.

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Types of Angel Investors
There are varied types of angels depending upon their nature and ability to support the startups.
 Corporate Angels: They are senior professionals in the business. They support the
companies and other big enterprises.
 Entrepreneurial Angels: They are the entrepreneurs who have their own business
and the manage their business on their own. The primary motive behind the
investment here is to seek the synergy out of similar business.
 Enthusiast Angels: These investors are self-sufficient and well established
businesses. They invest in other businesses in order to enhance the quality of business
operations and bring a radical change in the market in the times to come.
 Micromanagement Angels :These are the angels who have reached to this position
with the help of their hard work and they are serious about their job.
 Professional Angels: They carry specialized skills and expertise in a particular field.
They usually tie knots with the businesses who can add to their overall worth and
expertise. These relationships result into growth and development of both the
companies.
STARTUPS IN INDIA
India is observing an evolution of startups, achieving the milestones not just in the domestically
but also in all over the world. There is an ample of inspiring success stories of people who have
their own roads of innovation and dreams.
1. Make my Trip: This startup was a creation of Mr. Deep Kalra, who was an alumnus of
IIM Ahmedabad. Make My Trip has transformed the travel industry over the last decade.
The application was initially launched to the United States in the year 2000 to cater to the
needs of NRIs for their Indo-American trips. It launched its actions in India in 2005,
opening with flight tickets. After a few years, Make My Trip got listed in NASDAQ and
next year the company grew with 3 acquisitions. It has got worldwide recognition and
innumerable rewards.
2. Flipkart: There is no Indian who is not aware of the Flipkart. Flipkart achieved massive
success which is the result of its first mover advantage in the online market in India. The
startup was launched by Mr. Sachin and Mr. Binny Bansal, both were IIT-Delhi alumni.
They had already worked with the Amazon prior to working here and therefore they
introduced the same concept to the Indian market as well. Just like Amazon, they also
started offering books in 2007 and now transact in every type of product, from a small
bottle of shampoo to diamond jewelry , from CDs to stationery. In the year 2014 the
Flipkart acquired Myntra for around INR 2000 crore. Flipkart is one of the top five startups
with a worth of $11 Billion.
3. Zomato: This application was launched in the year 2008, it gained the polularity overnight
since its launch. It started it journey as foodiepay.com and in a couple of years it reached to
the heights and become one of the most promising online application in India. It also
achieved its global recognition in next couple of years. The Co-founders of Zomato i.e Mr.
Deepinder Goyal and Mr. Pankaj Chaddah took the assignment to newer heights with their
full dedication and a low level of funding in the initial days.

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VENTURE CAPITAL
Venture capital is a form of financing especially designed for funding high technology, high risk
and perceived high reward projects. While a conventional financier seeks to fund projects with
proven technologies and already established markets, a venture capitalist provides funds to the
entrepreneurs pursuing new and hitherto unexplored avenues and ideas.
Thus, venture capital helps the entrepreneurs translate their new ideas into commercial
production. It especially helps in financing of high technology projects and helps translate
research and development into production.
International Finance Corporation, Washington (IFCW) defines venture capital as equity or
equity featured capital seeking investment in new ideas, new companies, new products, new
processes or new services that offer the potential of high returns on investment. It may also
include investment in turnaround situations.
The origin of the concept of venture capital is traced back to 1946 with the establishment of the
American Research and Development Corporation of General Dohiot. In fact, there is no looking
back since then. Now, it has become a worldwide concept in the field of funding technology-
based products. However, the concept of venture capital is of recent origin in India.
In India, the venture capital industry had its formal introduction in the Budget Speech of the
Finance Minister in 1988. Though extremely focused in its technology development objective,
the introduction recognized the need for a source of patient capital with the ability to participate
in high risk projects in return for high rewards.12 coincidentally, around the same time, the
Industrial Credit and Investment Corporation of India Limited (IClCI) came forth with initiatives
for addressing technology incentive projects. One such initiative, the venture Capital Division,
was spun off into Technology Development and Information Company of India Limited (IDICI)
which has since emerged as a significant player and a pioneer in the field of venture capital
industry in the country.
Immediately after the Budget Speech announcement, a cess of 5 per cent was levied on all
payments for import of technology / knowhow resulting in the creation of a sizable pool of
funds. The venture fund that was created out of this cess was to be administered by the Industrial
Development Bank of India (IDBI) for providing financial assistance to industrial enterprises
attempting commercial application of indigenous technology on adapting imported technology to
wider domestic applications. Besides, many of the development banks and development finance
institutions have .also entered venture capital business in the recent years. Going purely by the
number of venture capital firms in India today, one could possibly argue that there exists a
venture capital industry in the country. It augurs well for future industrial development of the
country.
The Government of India issued some guidelines on November 18, 1988 mainly to promote a
broad framework for the operations of the venture capital companies in the country. The main
features of these guidelines are given hereunder:
1. All India Financial Institutions, the SBI and other scheduled banks are eligible to float such
a fund.
2. Minimum size of the fund should be Rs. 10 crores.
3. In the event of public issue, the promoters' share is to be more than 40% of the issued
capital.

69
4. Foreign holding will be allowed upto 25% provided it comes from multilateral international
financial organisations, developmental institutions or mutual funds.
5. The NRIs investment is allowed -upto 74% in the capital on a non-repatriable basis and
upto25-40% on a repatriable basis.
6. Debt-equity ratio should be limited to 1:1.5.
7. Venture capital funds are not allowed to operate in money market operations, bill Re-
discounting, portfolio investments and financial consultancy services.
8. The venture capitalist will pay tax at the rate of 20% on its dividend income and long-term
capital gains. But, an investor is entitled to tax exemption on dividends subject to a
maximum of Rs. 10,000 and will have to pay tax at 20% on capital gains.
Case Study: MAKE IN INDIA: A NEW INITIATIVE OR FLOUNDER
The make in India initiative was launched by prime minister on 25th September 2014 as a part of
a wider set of nation building initiative. Indian economy is set to compete with the established
manufacturing hub and other developed countries through the NaMo Government vision of
‘Make in India’ Campaign. The economy is slowly and gradually moving ahead and the rating
agencies are revising the projected growth rate every six months on a positive side. The
structural changes within the country are witnessing a lot of changes through policy making. A
major national initiative, designed to facilitate investment, foster innovation, Enhance skill
development, protect intellectual property and build best-in-class manufacturing infrastructure,
there has never been a better time to make in India. Make in India was a timely response to a
critical situation the much-hyped emerging markets, bubble had burst, and India’s growth rate
had fallen to its lowest level in a decade.
The macro-economic variables of India are communicating a strong and clear message to the
society and global economy. The foremost variable which is most often talked about is GDP and
which is an important factor to understand an economy. The economy is certainly growing at
about 7.5% per annum as per the various agencies such as IMF. This indicator is giving an
indication to the global economies about many other key factors responsible for such an
impressive growth. The high GDP is giving an indication that the economic environment which
comprises of economic policies including monetary and fiscal policy are also favourable and
under control. Moreover, the inflationary pressures are under control and the NaMo Government
is taking steps to keep inflation (CPI) between 4-6%. The good monsoon within the country is
also indicating towards better growth. Indian economy is said to have demographic dividend due
to more young people in the economy that is below 35 years. The economy is continuously
reforming its economic, financial and other sector. NaMo Government has introduced GST
(Goods and Service tax) which has been implemented by 2017. Moreover, the other schemes of
‘swachbharat’ (Clean India), ‘MUDRA’ –a financial assistance for small entrepreneur is about to
bring a change in the economy. Make in India has further boosted the economy through bank
accounts using ‘pradhan mantra jandhan yojana’ and also linking Aadhar card for subsidy under
gas connection. The Modi government has said it wants to radically de-bureaucratise, deregulate,
change officers’ mindsets, cut paperwork and remove the notorious legal and infrastructure
hurdles to starting and doing business in India. The goal the NaMo government has set is to
make India break into the top 50 in the World Bank’s ease of business index ranking from the

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current 130th position in 2016. The manufacturing sector is drawing roadmaps of technological
developments as well as constant innovations to compete globally.
Fig-1 India’s GDP and Manufacturing growth

The advantages which INDIA avails are as:

For automobile sector:-
 Sixth largest producer in the world with an average annual production of 24 million
vehicles in 2016.
 India has the fifth largest passenger vehicle and commercial vehicle market
 Presence of four large auto manufacturing hubs across the country: Delhi-Gurgaon-
Faridabad in the north, Mumbai-Pune-Nashik-Aurangabad in the west, Chennai-
Bengaluru-Hosur in the south and Jamshedpur-Kolkata in the east.
 Contributes to 7.1 % of India's Gross Domestic Product (GDP) by volume.
For Electrical Machinery sector:-
 Market growth in past 10 years - 11.6%
 Domestic Power Equipment industry growth in past 10 years - 11.9%
 Export growth in past 10 years - 18.6%
 Major Electrical Equipment industry growth in past 10 years - 8.3% & in past 5 years -
4%
For Biotechnology sector:-
 India is among the top 12 biotech destinations in the world and ranks third in the Asia
Pacific.
 India has the second highest number of United States Food & Drug Administration
(USFDA) approved plants.

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  No.1 producer of Hepatitis B vaccine recombinant.
Progress of Make in India initiative:
 Mercedes Benz has brought into the “Make in India” program in two different areas.
Firstly, in the luxury car segments, it has decided to manufacture more of its components
in India – thus increasing the localization of its new model C220 CDI to 60%. Secondly,
Mercedes Benz has also decided to manufacture its luxury buses in India, to be exported
to Africa and South East Asian markets. The trials have already begun and full-fledged
exports will start from early 2016.
 Hyundai Heavy Industries (HHI) of South Korea will work with Hindustan Shipyard
Limited, Vizag to build warships in India. Currently, the time duration from the point of
order to delivery takes around 6 years. With this collaboration, this gap is expected to fall
to 2.5 years.
 Hyundai Heavy Industries (HHI) of South Korea will work with Hindustan Shipyard
Limited, Vizag to build warships in India. Currently, the time duration from the point of
order to delivery takes around 6 years. With this collaboration, this gap is expected to fall
to 2.5 years.
 Modi government has announced setting up of 42 new mega food parks in the next 4
years. These food parks will provide incentives for small businesses to set up their
facilities under various schemes.
Table- 1 India’s Key Indicators
Manufacturing GDP CAGR (2010-13) 1.4%
Manufacturing GDP percentage of total GDP 12.9%
(2015)
Labor costs (US$/hour) 1.7$
Manufacturing exports percentage of total exports 54.9%
(2011)
Highest corporate tax rate (2015) 34.6%
Researchers per million population 157
Per capita personal disposable income (US$) (2015) 1,154$
Per capita personal disposable income (2011) 9.2%
CAGR (2005–2015)
Source: (Deloite Gllobal competitiveness Report 2016)
Today, India’s credibility is stronger than ever. There is visible momentum, energy and
optimism. Make in India is opening investment doors. Multiple enterprises are adopting its
mantra. The world’s largest democracy is well on its way to becoming the world’s most powerful
economy. Though this initiative is good for the economy but it has some negative factors too. As
it could lead to Negligence of Agriculture, Depletion of Natural Resources, and Loss for Small
Entrepreneurs, Disruption of Land, Interest in International Brands, Pollution.
The ‘Make in India’ campaign has resulted into favourable response from few organisations,
Havells is one of several Indian companies to have shifted production or sourcing from China,

72
due to cost of labour. The cost of labour is less in India in comparison to china. Consumer
appliances company Godrej, mobile-phone maker Micromax, auto-parts maker Bosch and
stationery manufacturer ITC have all started expanding or exploring manufacturing operations in
India. Chinese companies, too, are forming joint ventures with Indian partners to set
up production bases in the country. As per the report of Business today some of the organisations
have already shifted part of their production from China to India and a few more were
considering a similar move to take advantage of lower Indian labour costs and favourable
currency movements. The reforms shall be an ongoing process which is being witnessed by
NaMo Government and it can be said that “Achche Din Aa Gaye Hain”.
Indian leaders and the Government has been promoting manufacturing in India through the
campaign ‘Make in India’ by different policies and developing conducive environment for ease
of doing business in India.. The slowdown in China, however, could make a big difference this
time. China became an export powerhouse because of its vast pool of low-wage workers, but it’s
no longer so cheap to manufacture there. Moreover, India’s cost of labour as well as the available
talent, legal and regulatory environment shall contribute meaningfully to the manufacturing
sector of the emerging economy.
Based on the case study answer the following questions:
1. According to you MAKE IN INDIA is a new initiative or a flounder.
2. How far infrastructure development done under make in India initiative can increase
tread in the country?
3. How far the Make in India incentive can increase Indian economy GDP?
4. Can import and export policy under make in India contribute in developing the economy?

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 Unit 5
Lesson 7
FUNCTIONAL PLANS (FINANCIAL PLANS)
Dr. Navneet Gera

FINANCING OF ENTERPRISE
Finance is one of the important prerequisite to start an enterprise. In fact, it is the availability of
finance that facilitates an entrepreneur to bring together land, labour, machinery and raw material
to combine them to produce goods. The significance of finance in production is elucidated like a
lubricant to the process of production. There are others also who hold even the metaphorical
views that finance is the life blood of enterprise.
Financing an enterprise whether large or small is a critical element for success in business.
Instances are galore to cite that many enterprises, though potentially successful, failed because
they were undercapitalized. Therefore, what follows is that every enterprise should clearly chalk
out its future financial requirements in its very beginning itself.
The decisions taken by the entrepreneur well in advance regarding the future financial aspects of
his/her enterprise is called “financial planning”. In other words, financial planning deals with
futurity of present decision in terms of financial aspects of an enterprise. In short, financial
planning is a financial forecast made for the enterprise in the beginning itself.
Imagine that you were to start your own business. Irrespective of the nature of the business, you
should answer the following keys financial questions:
 Asset investments, i.e. what sort of assets will you require?
 How should the chosen investments be financed?
 Will you borrow the money or supply whole of the required capital yourself?
 How will you manage your routine / daily financial activities like managing inventory or
collecting from your customers or paying your suppliers?
 How should the investment be rewarded? How much of the profits will you distribute and
how much will you retain?
 These financial decision form the very essence of Financial Management
In a financial plan/financial forecast, the entrepreneur should clearly answer the following three
questions:
1. How much money is needed?
2. Where will money come from? and
3. When does the money need to be available?
As regards the money needed, it can be estimated by developing a statement of various assets
required by the enterprise.
While estimating the money needed, the entrepreneur should take the following three things into
consideration:

74
1. There should be adequate money to pay the purchase considerations.
2. There should be sufficient capital at his/her disposal to support the business operations up to
the three initial months of the enterprise.
3. Lastly, enough provision should be made to meet unexpected/unplanned business expenses.
Thus, the total of these three amounts will constitute the total money needed to start the
enterprise. Integral to total amount needed is to decide about its arrangement or sources.
In every business/enterprise, capital is arranged from two sources i.e.jnternal and external.
Internal sources refer to the owner's own money known as 'equity.' Particularly in the case of
small enterprises, the owner's money called equity is very thin. Therefore, an overwhelming
portion of money needed is arranged from the external sources like the financial institutions and
commercial banks, etc.
There are two ways of classifying the financial needs of an enterprise:
1. on the basis of extent of permanence, the financial needs are classified into two types:
a) fixed Capital, and
b) Working Capital.
2. on the basis of period of use, we can classify the financial needs into the following tow
types:
a) Long term Capital/Finance, and
b) Short term Capital/Finance.
Fixed Capital
The money invested in some fixed assets or durable assets like land, building, machinery,
equipment, furniture, etc., is known as fixed capital. These assets are required for permanent use,
that is, for a long period of time.
Working Capital
The money invested in current assets like raw material, finished goods, debtors, etc., is known as
working capital. In other words, money required for day-to-day operations of business/enterprise
is called 'working capital'.
Long-term Capital
This is such money whose repayment is arranged for more than five years in future. The sources
of long-term finance could be owner's equity, term-loans from financial institutions, credit
facilities from the commercial banks, hire-purchase facilities from specific organisations, etc.
Short-term Capital
This is a borrowed capital/money that is to be repaid within one year.
The sources of short-term finance include bank borrowings for working capital, deposits or
borrowings from friends and relatives, etc.
The theory of financial management suggests that, in order to ensure sound financial health of an
enterprise, short-term finance/ funds should be utilized for acquiring current assets. Current

75
assets, foor example, include thee items like raw materiaal, finished goods, sem mi-finished goods,
debtors, etc. Basicallly, these aree the items which
w keep changing
c theeir shape. Thhey can norm mally
be conveerted into cassh within a period
p of onne year. On the
t other hannd, long-termm finance shhould
be used for acquirinng assets whhich are of long nature. These are commonly termed as 'fixed '
assets'. The
T examples of fixed asssets could be, b land and building, plaant and macchinery, furnniture,
etc.
SOURCE
ES OF FIN
NANCE
There aree various sou
urces of finaance from whhich an enterrprise an raisse required funds
f are
1 Internal Source
S
2 External Source
S

Sourrce of
finaance

Intternal Extern
nal

1. Internal Sourcees
Under this source, funds are raised
r from within the enterprise ittself. The innternal sourcces of
financingg could be owner's
o capittal known ass equity, depposits and looans given by b the owner, the
partners, the directoors, as the case
c may be, to the ennterprise. OneO source for f raising funds
f
internallyy may be personal
p loanns taken byy the entreprreneurs on his/ h her perrsonal assetss like
Providennt Fund, Lifee Insurance Policy,
P builddings, investm
ments, etc. Inn addition too these, in caase of
a runningg enterprise,, funds couldd also be raiised throughh the retentioon of profits or conversion of
some asssets into fun nds. The carrdinal princiipal of finanncial managgement also suggests thhat an
entreprenneur should religiously plough
p backk a good porrtion of his/hher profits innto the enterrprise
itself. Hoowever, the scope for raising
r fundds from inteernal sourcess particularlly in the caase of
small-scaale enterprisees remains highly
h limiteed.
2. Exteernal Sourcees
In short, funds raised from otheer than internnal sources are from exxternal sourcces. The extternal
sources usually
u inclu
ude the follow
wing:
1. Depposits or borrrowings from relatives and
a friends and
a others.
2. Borrrowings fro
om the bankss for workingg capital purrposes.
3. Creedit facilitiess from the coommercial banks.
4. Terrm-loans from
m financial institutions.
5. Hirre-purchase or leasing facility
fa from the Nationaal Small Inddustries Corpporation (NSTC)
andd State Smalll Industries Corporation
C s (SSICs).
6. Seeed/Margin money,
m subsiddies from thee Governmeent and the fiinancial instiitutions.

76
If we now lump both the sources together, these can broadly be classified as follows:
1. Personal funds or Equity Capital.
2. Loans from relatives and friends.
3. Mortgage Loans.
4. Term-Loans.
5. Subsidiaries.
The sources used for raising funds determine what is called 'capital structure'.
CAPITAL STRUCTURE
An enterprise/business raises funds from the internal and external sources. These take the forms
of ownership capital and borrowed capital respectively. The former is also known as equity and
the latter as debt. The composition of equity and debt in overall capital of an enterprise is called'
capital structure? In simple words, capital structure is the ratio between debt and equity capital.
Hence, it is also expressed as the debt-equity ratio.
Here, it must be noted that the term capital structure differs from financial structure. Capital
structure means the permanent financing of the enterprise represented primarily by long-term
sources of funds, i.e., debt and equity. Thus, it excludes funds raised from short-term sources.
But, financial structure refers to how the firm's assets are financed by raising funds from both
long-term and short-term sources.
A business enterprise needs to maintain a proper ratio between these two in order to function
smoothly and efficiently. In fact, it depends upon the business conditions of the enterprise
concern. As a general principle, for a successful business in favourable conditions, debt capital
may be twice or even more than equity capital. But, for a business reeling under unfavourable
conditions, say incurring losses, the proportion of debt capital should be as low as possible. This
is because on account of fluctuation in earnings and inadequacy of cash, the enterprise may not
pay interest and the amount of loan. In consequence, the creditors and suppliers will look upon
the financial position of the enterprise as unreliable and, hence, may stop extending credit. Such
position will culminate to make the enterprise insolvent.
In simple words, an optimum capital structure can be defined as a financing mix incurring the
least cost but yielding the maximum returns. It is obtained when the market value per equity
share is the maximum.
Definition of capital structure:
"Optimum leverage can be defined as that mix of debt and equity which will maximise the
market value of a company, i.e., the aggregate value of the claims and ownership interests
represented on the credit side of the Balance Sheet. Further, the advantage of having an optimum
financial structure, if such an optimum does exist, is two-fold. It minimises the company's cost of
capital which in turn its ability to increase and find new wealth by creating investment
opportunities. Also, by increasing the firm's opportunity to engage in future wealth-creating
investment, it increases the economy's rate of investment and growth."
An optimum capital structure bears the following features:
1. The capital structure should involve the minimum cost and the maximum yields.

77
2. The adopted capital structure should be flexible enough to fulfil the future requirements
of the capital as and when needed.
3 The use of the debts should be within the repaying capacity of the enterprise. In fact,
failure to recognize this important aspect/ fact is the common cause of financial strain
among the small scale enterprises?
4. The capital structure should ensure the proper control over the affairs of the enterprise. In
any case, it should not be a control diluting one.
While one can add certain other features to these for some particular enterprises, the
said features appear to be common and major ones.
Factors Determining Capital Structure
Maintaining the capital structure in any enterprise depends on a variety of factors.
1. Nature of Business:
The nature of the business itself is one of the factors determining capital structure to be
maintained. The businesses subject to wide fluctuations in sales need to maintain smaller
proportion of borrowed funds, i.e., debt capital. Companies manufacturing televisions,
refrigerators, machine tools and like are examples 'of businesses subject to fluctuations in
their sales. On the contrary, the business firms dealing in items/ goods having inelastic
demand like essential consumer goods, may have larger proportion of borrowed capital.
The reason is that these firms generally have stable earnings.
The capital structure of companies is also determined by the competitiveness found among
them. For example, in case of ready-made garments industry, competition is mainly based
on styles and fashions which are subject to frequent and unpredictable changes. As such,
these firms have to depend less on borrowed capital and more on equity or owner's capital.
2. Size of the Enterprise:
Small enterprises have to rely less on borrowed capital and depend more on owner's
capital. This is because investors consider lending to small firms more risky. On the other
hand, large enterprises are considered less risky. Therefore, investors believe that their
money is safe and, hence, prefer to lend money to large enterprises. This enables the large
enterprises to raise funds from different sources.
3. Trading on Equity:
In case the rate of return on capital employed is more than the rate of interest on debentures
or rate of dividend on preference shares, it is called trading on equity or leverage effect. In
such case, there is greater dependence on borrowed capital in the capital structure.
4. Cash Flows:
The ability of a business to discharge its fixed obligations depends upon the availability of
cash, i.e. cash flows. As such more the cash inflows, more will be the proportion of
borrowed capital in the capital structure. Reverse will happen in a converse situation.
5. Purpose of Financing:
The purpose of financing also affects the capital structure of the enterprises. In case funds
are required for some directly productive purposes, for example, purchase of new
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 machinery, the enterprise may rely on external sources for raising the required funds. This
is because the enterprise will be in a position to pay the fixed charges, or say, interest out of
the profits so earned. In contrast, in case the enterprise is required to raise funds for
unproductive purposes like spending on the employees' welfare facilities, it will have to
depend on owner's capital. In other words, it will raise funds by issue of equity shares.
6. Provision for Future:
The scope of changing the capital structure in future happens to be a basic consideration for
determining the capital structure of an enterprise. As a general principle, it will always be
safe to keep the best security to be issued in the last instead of issuing all types of securities
in one stroke only.
TERM LOANS
Simply stated, loans taken for a definite period of time are called' term loans'. Based on period,
loans are broadly classified into two types:

Term
Loans

Short Term Long Term

Loan Loan
1. Short-term Loans, and
2. Long-term Loans.
Long-Term Loans
These are the loans taken for a fairly long duration of time ranging from 5 years to 10 or 15
years. Long-term loans are raised to meet the financial requirements of enterprise/ company for
acquiring the fixed assets which include the following:
1. Land and site development
2. Building and civil works
3. Plant and machinery
4. Installation expenses
5. Miscellaneous fixed assets comprising vehicles, furniture and fixtures, office equipment
and so on.
In case of units to be located in backward areas, another element of miscellaneous fixed cost
includes expenditure to be incurred in infrastructure facilities like roads, railway sidings, water
supply, power connection, etc.
Term loans or say long-term loans are also required for expansion of productive capacity by
replacing or adding to the existing equipment.

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Sources of Term Loans
The following are the sources of raising term loans:
1. Issue of shares
2. Issue of Debentures
3. Loans from Financial Institutions
4. Loans from Commercial Banks
5. Public Deposits
6. Retention of Profits
Shares
Share is unit into which the total capital of a company is divided. As per Section 85 of the
Companies Act, 1956, a public limited company can issue the following two kinds of shares:
(a) Preference Shares, and
(b) Equity Shares.
Preference Shares
These are the shares which carry a preferential right over equity shares with reference to
dividend. They also carry a preferential right over equity shares with reference to the payment of
capital at the time of winding up or repayment of capital.
The preference shares may be of various types such as cumulative and non-cumulative,
redeemable and irredeemable, participating and non-participating and convertible and non-
convertible.
Equity Shares
What is not preference share is equity share. In other words, equity shares are entitled to
dividend and capital after the payment of dividend and capital on preference shares. Based on the
types of shares, there are two types of captials..
(i) Preference Share Capital, and
(ii) Equity Share Capital.
Procedure for Issue of Shares
The procedure followed for the issue of the shares is as follows:
1. Issue of Prospectus
First of all, in order to give the prospective investors necessary and relevant information,
the company issues statement called prospectus. It also contains information on the
manner in which the amount of shares will be collected.
2. Receipt of Applications
The company receives applications in response to its prospectus through a scheduled
bank.

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3. Allotment of Shares
After the subscription is over and 'minimum subscription' is received, the shares are allotted
to the applicants within 120 days of the issue of prospectus. In case, the 'minimum
subscription' is not received, the company cannot proceed with the allotment of shares, but
application money must be refunded to the application within 130 days of the issue of the
prospectus.
Debentures
Issue of debentures is another method of raising term loans from the public. A debenture is an
instrument acknowledging a debt by a company to a person or persons. Section 2 (12) of the
Indian Companies Act, 1956 defines a debenture as follows:
"Debenture includes debenture stock, bonds and any other securities of the company whether
constituting a charge on the company's assets or not."
A company can issue various types of debentures, viz. redeemable and irredeemable, registered
and bearer, secured and unsecured and convertible and non-convertible debentures.
The procedure for the issue of debentures are, more or less, the same as those for the issue of
shares.
Difference between Shares and Debentures
The major points of distinction between shares and debentures are as follows:
1. Representation
A share represents a portion of capital whereas a debenture represents a portion of debt of
a company.
2. Status
A shareholder is a member of the company, but a debenture holder is a creditor of the
company.
3. Return
A shareholder is paid dividend while a debenture holder is paid interest.
4. Right of Control
The shareholders have a right of control over the working of the company whereas the
debentures holders don't have such right.
5. Repayment
Debentures are normally issued for a specified period after which they are repaid. But,
such repayment is not possible is case of shares.
6. Purchase
A company cannot purchase its own shares from the market, but it can purchase its own
debentures and cancel them.
7. Order of Repayment
In liquidation, debenture holders get priority in payment, but shareholders are the last to

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 get payment after all claims have been fully satisfied.
SOURCES OF SHORT-TERM FINANCE
Short-term finance is obtained for a period upto one year. These are required to meet the day-
to-day business requirements. In other words, short-term finance is obtained to meet the working
capital requirements of the enterprise.
The sources of short-term finance could be
1. Loans from Commercial Banks
2. Public Deposits
3. Trade Credit
4. Factoring
5. Discounting Bills of Exchange
6. Bank Overdraft and Cash Credit
7. Advances horn Customers
8. Accrual Accounts.
VENTURE CAPITAL
Venture capital is a form of financing especially designed for funding high technology, high risk
and perceived high reward projects. While a conventional financier seeks to fund projects with
proven technologies and already established markets, a venture capitalist provides funds to the
entrepreneurs pursuing new and hitherto unexplored avenues and ideas.
Thus, venture capital helps the entrepreneurs translate their new ideas into commercial
production. It especially helps in financing of high technology projects and helps translate
research and development into production.
International Finance Corporation, Washington (IFCW) defines venture capital as equity or
equity featured capital seeking investment in new ideas, new companies, new products, new
processes or new services that offer the potential of high returns on investment. It may also
include investment in turnaround situations.
The origin of the concept of venture capital is traced back to 1946 with the establishment of the
American Research and Development Corporation of General Dohiot. In fact, there is no looking
back since then. Now, it has become a worldwide concept in the field of funding technology-
based products. However, the concept of venture capital is of recent origin in India.
In India, the venture capital industry had its formal introduction in the Budget Speech of the
Finance Minister in 1988. Though extremely focused in its technology development objective,
the introduction recognized the need for a source of patient capital with the ability to participate
in high risk projects in return for high rewards.12 coincidentally, around the same time, the
Industrial Credit and Investment Corporation of India Limited (IClCI) came forth with initiatives
for addressing technology incentive projects. One such initiative, the venture Capital Division,
was spun off into Technology Development and Information Company of India Limited (IDICI)
which has since emerged as a significant player and a pioneer in the field of venture capital
industry in the country.

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Immediately after the Budget Speech announcement, a cess of 5 per cent was levied on all
payments for import of technology / knowhow resulting in the creation of a sizable pool of
funds. The venture fund that was created out of this cess was to be administered by the Industrial
Development Bank of India (IDBI) for providing financial assistance to industrial enterprises
attempting commercial application of indigenous technology on adapting imported technology to
wider domestic applications. Besides, many of the development banks and development finance
institutions have .also entered venture capital business in the recent years. Going purely by the
number of venture capital firms in India today, one could possibly argue that there exists a
venture capital industry in the country. It augurs well for future industrial development of the
country.
The Government of India issued some guidelines on November 18, 1988 mainly to promote a
broad framework for the operations of the venture capital companies in the country. The main
features of these guidelines are given hereunder:
1. All India Financial Institutions, the SBI and other scheduled banks are eligible to float such
a fund.
2. Minimum size of the fund should be Rs. 10 crores.
3. In the event of public issue, the promoters' share is to be more than 40% of the issued
capital.
4. Foreign holding will be allowed upto 25% provided it comes from multilateral international
financial organisations, developmental institutions or mutual funds.
5. The NRIs investment is allowed -upto 74% in the capital on a non-repatriable basis and
upto 25-40% on a repatriable basis.
6. Debt-equity ratio should be limited to 1:1.5.
7. Venture capital funds are not allowed to operate in money market operations, bill Re-
discounting, portfolio investments and financial consultancy services.
8. The venture capitalist will pay tax at the rate of 20% on its dividend income and long-term
capital gains. But, an investor is entitled to tax exemption on dividends subject to a
maximum of Rs. 10,000 and will have to pay tax at 20% on capital gains.
Financial Literacy for an Entrepreneur
An Entrepreneur should have a sound knowledge of accounting principles, financial statements
and ratio analysis to take the day to day decisions of business.Elearnmarkets.com (ELM) is an
online financial education portal, which has steadfastly embarked on a mission for spreading
financial literacy in India. There are many organizations such as NIESBUD, Nan who are
contributing meaningfully by providing financial literacy to the youth.
Ratio Analysis
An Entrepreneur need to know some of the most important ratios used to measure company’s
performance and the value of your business.
1. Current ratio
The current ratio measures liquidity and gauges how capable a business is in paying current
liabilities by using current assets only.

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 Current Ratio = Total Current Assets / Total Current Liabilities
A general rule of thumb for the current ratio is 2 to 1 (or 2:1). That means you own twice what
you owe. For service based businesses where salary and rent are their largest outgoings, this is a
good ratio. If it starts looking like 3:1, you may have an oversupply of cash or you’re carrying
large accounts receivable.
A 1:1 ratio is a place an Entrepreneur doesn’t want to be. Business Organisations are not liquid
enough and likely to encounter a cash squeeze while waiting for accounts receivable to convert
to cash. If you sense your firm approaching a 1:1 position, take corrective action:
 Convert non-current assets to current assets;
 Increase current assets with new equity contributions;
 Put profits back into the business;
 Increase your current assets using short term loans or other borrowings.
2. Gross profit ratio
Before calculating gross profit margin, first derive the gross profit.
Gross profit = sales – cost of goods sold
For most service-based businesses, cost of goods is very small, so gross profit reveals little.
Gross profit margin is more telling, measuring a business’s pricing and production efficiency. A
company with a strong brand can command a high price. A company with talented project
managers will achieve high efficiency.
Gross profit ratio = gross profit / net sales
Gross profit margins are largely dictated by how well managers negotiate and lead people.
Examine individual projects using gross profit margin, and discover the company’s most
valuable staff. These managers are valuable. They can price correctly and control costs.
Investors tend to pay more for businesses with above-industry efficiency ratings, as they expect
these businesses to make profits as long as overhead costs are controlled (overhead refers to rent,
utilities, etc.).
Businesses with healthy gross profit margins can sustain bigger hits, compared to businesses
with thin margins, which are more vulnerable. Outsourcing has been one way service-based
businesses have improved gross profit margins over the last decade.
3. Net profit margin
Net profit margin shows how much net profit is derived from every rupee of total sales. It
indicates how well the business has managed its operating expenses. It also can indicate whether
the business is generating enough sales volume to cover minimum fixed costs and still leave an
acceptable profit.
Net profit margin ratio = net profit (before tax) / net sales

84
A business that achieves high gross profit margins, may score a poor net profit margin. Variable
costs rise undetected because they are not tied to a project. In such situations business owners
ask themselves “What’s going on – we are working hard and not making any money?”
Service-based businesses increasing their head count often encounter this problem. Variable
costs like personal, printer cartridge, paper and pantry expense can rise sharply. What was a
small cost can become a large figure when multiplied across many staff.
4. Accounts receivable turnover
This ratio shows the number of times accounts receivable are paid and re-established during the
accounting period. The higher the turnover, the faster the business is collecting its receivables,
and the more cash on hand.
Accounts receivable turnover = total net sales / accounts receivable
A company healthy services business scores 3:1 or 4:1. A company that cannot demonstrate to an
investor they can collect debts may be devalued, even though it has high net profit margins.
Either not enough money is being spent on collection, or the clientele are poor payers.
If you are planning to sell a business, tighten your collection process. Introduce better terms for
early payers, collect more deposits, automate your invoicing system and prefer TT payments
over check.
5. Profit per square foot
This is one you won’t find in a text book. Rent is one of the largest fixed operating expenses a
services business faces, so it’s not unreasonable to calculate the return on rent to the business.
After all, office space is much like a plant – it’s where the work gets done.
Profit per square foot = net profit (before tax) / square feet of office space
For example, the cost of keeping one permanent employee in the company annually may be
$3,000 per year. You want to make sure the person occupying this space is a producer,
contributing to the bottom line. This is one reason why outsourcing finance functions to a third
party may make sense – you free up limited space to make room for sales / operations functions.
6. Profit per head
Calculating the cost of permanent head count tells you a lot about how efficiently your people
make revenue. Unlike fixed costs such as rent, which is difficult to influence once a rental
agreement is signed, profit on head count is one fixed cost that business people can improve.
Profit per head = net profit (before tax) / number of full time staff
Which service and/or people are an asset or liability? Changing either is not easy, so it pays to
get this right early on.
Questions
Questions and Answers
Q1. Explain financial plans of an Enterprise.
The decisions taken by the entrepreneur well in advance regarding the future financial aspects of
his/her enterprise is called “financial planning”. In other words, financial planning deals with
futurity of present decision in terms of financial aspects of an enterprise. In short, financial

85
planning is a financial forecast made for the enterprise in the beginning itself.Finance is one of
the important prerequisite to start an enterprise. In fact, it is the availability of finance that
facilitates an entrepreneur to bring together land, labour, machinery and raw material to combine
them to produce goods. The significance of finance in production is elucidated like a lubricant to
the process of production. There are others also who hold even the metaphorical views that
finance is the life blood of enterprise. Financing an enterprise whether large or small is a critical
element for success in business. Instances are galore to cite that many enterprises, though
potentially successful, failed because they were undercapitalized. Therefore, what follows is that
every enterprise should clearly chalk out its future financial requirements in its very beginning
itself.
Q2. What are sources of finance?
There are two ways of classifying the financial needs of an enterprise based on extent of
permanence, the financial needs are classified into two types 1. fixed Capital and Working
Capital. Based on period of use, we can classify the financial needs into the following towtypes:
Long term Capital/Finance, and Short-term Capital/Finance.
There are various sources of finance from which an enterprise an raise required funds areInternal
Source, External Source. Internal Source funds are raised from within the enterprise itself. The
internal sources of financing could be owner's capital known as equity, deposits and loans given
by the owner, the partners, the directors to the enterprise. One source for raising funds internally
may be personal loans taken by the entrepreneurs on his/ her personal assets like Provident Fund,
Life Insurance Policy, buildings, investments, etc. In addition to these, in case of a running
enterprise, funds could also be raised through the retention of profits or conversion of some
assets into funds. The cardinal principal of financial management also suggests that an
entrepreneur should religiously plough back a good portion of his/her profits into the enterprise
itself. However, the scope for raising funds from internal sources particularly in the case of
small-scale enterprises remains highly limited. External Sources funds raised from other than
internal sources are from external sources. The external sources usually are Deposits or
borrowings from relatives and friends and others, Borrowings from the banks for working capital
purposes, Credit facilities from the commercial banks, Term-loans from financial institutions,
hire-purchase or leasing facility from the National Small Industries Corporation, State Small
Industries Corporations and Seed/Margin money, subsidies from the Government and the
financial institutions. Personal funds or Equity Capital, Loans from relatives and friends,
Mortgage Loans, Term-Loans and Subsidiaries. The sources used for raising funds determine
what is called 'capital structure'. banks, etc.
Q3. Define Term Loan? Explain Long Term Loan and Short Term Loan?
TERM LOANS :Term Loan can be defined as loans taken for a definite period of time are
called' term loans'. Based on period, loans are broadly classified into two types Short-term
Loans, Long-term Loans.
Long-Term Loans :These loans taken for a fairly long duration of time ranging from 5 years to
10 or 15 years. Long-term loans are raised to meet the financial requirements of enterprise/
company for acquiring the fixed assets like Land and site development, Building and civil works,
Plant and machinery, Installation expenses, Miscellaneous fixed assets, comprising vehicles,
furniture and fixtures, office equipment and so on.In case of units to be located in backward
areas, another element of miscellaneous fixed cost includes expenditure to be incurred in

86
infrastructure facilities like roads, railway sidings, water supply, power connection, etc. Term
loans or say long-term loans are also required for expansion of productive capacity by replacing
or adding to the existing equipment. Sources of Term Loans are Issue of shares, Issue of
Debentures, Loans from Financial Institutions, Loans from Commercial Banks, Public Deposits,
Retention of Profits, Shares. Share is unit into which the total capital of a company is divided. As
per Section 85 of the Companies Act, 1956, a public limited company can issue the following
two kinds of shares: Preference Shares, and Equity Shares. These are the shares which carry a
preferential right over equity shares with reference to dividend. They also carry a preferential
right over equity shares with reference to the payment of capital at the time of winding up or
repayment of capital. The preference shares may be of various types such as cumulative and non-
cumulative, redeemable and irredeemable, participating and non-participating and convertible
and non-convertible. What is not preference share is equity share. In other words, equity shares
are entitled to dividend and capital after the payment of dividend and capital on preference
shares. Based on the types of shares, there are two types of capitals. Preference Share Capital,
and Equity Share Capital.
Short-term finance: Short-term finance is obtained for a period up to one year. These are required
to meet the day-to-day business requirements. In other words, short-term finance is obtained to
meet the working capital requirements of the enterprise. The sources of short-term finance could
be Loans from Commercial Banks, Public Deposits, Trade Credit, Factoring, discounting Bills of
Exchange, Bank Overdraft and Cash Credit, Advances horn Customers, Accrual Accounts.
Venture capital is a form of financing especially designed for funding high technology, high risk
and perceived high reward projects. While a conventional financier seeks to fund projects with
proven technologies and already established markets, a venture capitalist provides funds to the
entrepreneurs pursuing new and hitherto unexplored avenues and ideas. Venture capital helps the
entrepreneurs translate their new ideas into commercial production. It especially helps in
financing of high technology projects and helps translate research and development into
production. International Finance Corporation, Washington defines venture capital as equity or
equity featured capital seeking investment in new ideas, new companies, new products, new
processes or new services that offer the potential of high returns on investment. It may also
include investment in turnaround situations.

87
 LESSON 8
MANAGEMENT OF HUMAN RESOURCE
Dr. Navneet Gera
HUMAN RESOURCE PLANNING
Indian corporate sector is facing the challenge to get right skilled employees .Many
surveys have claimed majority of Indian engineering and management students cannot be
employed as they lack the expected skills set needed to be employed which may be set
back for India’s aspirations of “ Make in India “ campaign . Indian GDP is 2 trillion US $
currently and India is expecting it to reach at 3trillion US $ by 2020.
Human Resource Planning is very important in human resource management and development.
It sees that the organisation has the right people at the right time and place with the right skills. It
believes that each employee is a resource to an organization and contributes to its productivity.
The main objectives of Human Resource Planning are as follows:
1. Identify and assess future human resource needs
2. Analyse and improve upon utilisation of existing resources
3. Integrate and coordinate human resource policies so that the present and future human
resource needs are met easily
Human resource planning is a continuous process. HRP is a futuristic planning. Considering the
growth areas of the organisation in the next five years, the HRP department analyses and
identifies the requirements of human resource of each department and each functional area of the
organisation.
CATEGORIES OF HUMAN RESOURCE
The human resource is classified mainly into four categories:
1. Skilled,
2. Semi-skilled,
3. Unskilled and
4. Administrative staff.
NEED OF HUMAN RESOURCES
A thorough assessment is made about the posts vacant, job requirements, future demand for and
supply of various categories of people in both management and non-management cadres.
Depending upon the product or the service, scale of operation and technique of production,
different organisations will have different requirements of human resource. Accordingly year
wise requirement of various categories of employees is assessed. Further details about the
desired qualifications and experienced expertise are also scrutinised and a master plan of human
resource requirement is prepared.
Human resources is an asset of an organisation. It is responsible for either the success or the
failure of the organisation. It has been seen that many organisations have survived in adverse
situations only because of their dedicated, committed human resource in spite of a conducive
88
environment. Some are wiped off from the industrial scene only because of unproductive,
uncommitted, indisciplined human resource. Thus, human resource employed in the organisation
plays a vital role in the "making or breaking" of the organisation.
From the organisational point of view, human resource has an economic contribution.
Organisations compare the contribution to the productivity by a worker and the cost incurred on
that worker. Human resource constitutes a major cost component as in most of the organisations,
nearly 50 per cent of the total cost is spent on the wage bills and other benefits to the human
resource. Therefore, while planning the human resource, it becomes obligatory for the
organisations to assess the productivity of the employees and to plan for the optimum utilisation
of human resource. The following specific issues are considered for the efficient and effective
utilisation of human resource.
 Whether right people are appointed for right jobs?
 Are they doing the job in the right manner?
 Do they need further training?
 Is there a surplus workforce?
 Is there a deficiency in workforce?
 How to resolve the surplus/deficient workforce situation?
A solution to the above issues cannot be given in isolation. Its impact on production, finance and
general administration has to be considered in minute details. Therefore, HRP is a part of the
strategic, integrated planning process.
PROCESS OF HUMAN RESOURCES
Once the master plan of human resource requirements is prepared, the Department of Human
Resource Management and Development takes a review of the existing employers. To facilitate
the optimum utilisation of human resources, decisions are taken with respect to the following:.
 New recruitment
 Promotion
 Job rotation
 Training
 Transfers
 Dismissals
RECRUITMENT
Recruiting people is mainly the responsibility of the Human Resource Management and
Development Department. The process begins with job analysis. It consists of title of the job,
department, division, location, reporting authority, subordinates, function of the job, risks if any,
professional, technical, commercial knowledge required, skills, resources to be controlled and
any other special features involved in the job. Job analysis leads to job description. It describes
particularly the duties and the responsibilities of a given job. It decides the job requirements and
consists of the qualifications, experience, special training, age and personal qualifications.

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SELECTION
Once the number of people to be appointed at the required posts/positions is decided, the next
step is to advertise the vacancies and invite applications. Existing employees are also allowed to
apply. They are described as the internal candidates because they are already in association with
the organisation. If they are selected and promoted for the posts, it improves the moral
commitment of the existing employees. It also saves time and money of the organisation in
training new candidates. If suitable internal candidates are not available, search for external
candidates begins. Applications of the external candidates are scrutinised. Candidates satisfying
all the conditions are scrutinised. Candidates satisfying all the conditions and requirements are
invite4 for the interviews. An interview panel consisting of management representatives and
technical experts including the head of the department is appointed. Sometimes, candidates have
to appear for the aptitude tests, ability tests, general knowledge test and technical ability tests.
On the basis of the biodata of the candidate, performance in the interview and assessment report
of the various tests, suitable candidates are selected for appointment.
INDUCTION
Once the candidates are appointed, their induction process begins. Induction is a process of
introducing the recruits to the organisation and explaining their role within the organisation.
Induction helps to develop proper perceptions about the organisation. Induction makes the
recruits feel comfortable with the other employees. They know the procedures, places, people,
operations, management styles-and other necessary information. Induction in a proper way
results in making the recruit feel committed to the organisation. It also promotes good
interpersonal relations.
PROMOTION
Human Resource Management and Development Department has to frame a Promotion Policy. It
is a strategic policy. Evaluation of the performance with predesigned parameters and periodical
appraisals of the employees helps the organisation to select the employees for promotion.
EXIT
Exit of the employees from the organisation is also a part of the function of the Human Resource
Management and Development Department. Exit of the employees is caused due to the
completion of the service period due to the attainment ofthe age of retirement. It is the routine,
usual and natural process of exit of the employee. In such a case, an employee receives all the -
retirement benefits. But sometimes, exit is caused due to extraordinary situations. Some
unavoidable reasons for the exit are prolonged illness, career development, moving to another
area, marriage in the case of women, increasing family problems etc. Avoidable reasons are
mainly personality clashes, job dissatisfaction, lack of chances for promotion, inadequate salary,
poor work environment etc. A procedure is framed for the exit of the employee from the
organisation.
PERFORMANCE APPRAISAL
Performance appraisal is a important area in Human Resource Management. Periodical
performance appraisal is a common practice in most of the large-scale industries. Entrepreneurs
in the small-scale sector also recognise it as a tool for the up gradation of performance of the
employees.

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Performance appraisals are applicable for all categories of employees-management and non
management. Sometimes, self-appraisal schemes are introduced for top management employees.
But, most of the employees are appraised by those to whom they report. Regular appraisal forms
are filled up and appraisal interviews are taken. The outcome of the appraisal is discussed with
the employees. The objective of the appraisal is not to blame but to bring an improvement among
the employees. From this point of view, the actual performance of the employees is appraised. It
gives a qualitative judgement as to indicate how well or how bad the employee is doing the job,
whether the employee is able to complete the task assigned to him and to what extent the
achievement is possible, whether the performance is affected due to some circumstances beyond
the control of the employee and whether the employee has utilised his strengths in performing
the task.
"Performance appraisals play a useful role in understanding and identifying the potential of the
employees. It focuses on the aspects like whether the strengths and capabilities of the employee
can be developed to match the specific requirements of the jobs at higher levels. It also helps to
understand which other jobs can be assigned to him. Thus, the appraisal is the SWOT analysis of
the employee. It suggests how to strengthen the strengths and overcome the weaknesses so that
he can become a better asset for the organisation.
Performance appraisal is an important tool applied at the time of giving salary increase to the
employees. Often, the performance of an employee is so extraordinary that the organisation plans
to reward the employee with a special increase in salary over and above the routine increase.
Extra bonus, incentives and salary increase rewards are given to an employee as recognition of
his services. Considering the valuable contribution of the employee, the organisation does not
want to lose him. He is given extra benefits so that he will not leave the organisation. Thus,
performance appraisal is an integral part of the human resource development efforts. See the fig
6.1 below
Effective Performance Appraisal

Behaviour of the Employee

Information and Knowledge

Precision, Accuracy, Promptness

Commitment and Integrity

Support to the Organisation

Skills, Qualities and Motivation

Fig 6.1 shows steps for performance appraisal

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TRAINING
As per the survey conducted by some of the leading players, the facts are as follow:
Aspiring Minds — a Gurgaon-based employability solutions company conducted a survey
testing Indians’ employability quotient after a management degree revealed the employability of
management students to be lower than 10% for any functional role in human resources,
marketing and finance. (Graduating management students' employability quotient at less than
10%: Survey, 2013). The Survey covered more than 32,000 MBA students across 220 colleges.
Web portal MBAuniverse.com and assessment company Merit-Trac, conducted a survey and
revealed a majority of MBA graduates in India are not employable. Covered 2264 MBA students
from 29 cities, showed that out of the top 25 business schools, the remaining provided only 21
per cent of their graduates with a job.
Due to globalisation and privatisations, the industries face a fierce competition from
multinationals. The competitive edge of the multinationals is sharpened with the work culture of
their employees, training and continuous updation of skills and values. Training improves the
competency and the adaptability to changing organisational needs.
Basically, training performs two roles.
The reactive role of training provides the employees the necessary expertise, skills, knowledge
up gradation in response to the demands made by senior managers.
The proactive role in training identifies the needs and requirements of training to fulfil the future
developmental demands of the organisation. Fig 6.2 shows below the training approach
The Assessment Phase

The Training Development Phase

The Training Evaluation Phase

Fig 6.2 Training Approach
The exercise of training activity begins with the assessment of the training needs.
Sometimes, top level managers suggest some specific training to the employees for skill
improvement and job betterment. Sometimes, organisational growth necessitates training to cope
up with the challenges. Sometimes, employees themselves suggest some training modules.
Once, the training needs are identified, the organisationhas to develop various training
programmes. The types of training programmes popularly given to the employees are as follows:
1. Induction Training
2. On-the-job Training
3. Functional Training
4. Behavioral Training
5. Technical Skill Improvement Training

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 6. Managerial Skill Improvement Training
7. Quality Circles, Total Quality Management
After the completion of training, it is essential to evaluate the effectiveness of training. Every
training programme has a set of objectives. Whether these objectives are attained and to what
extent they are attained is ascertained by evaluation. The shortcomings identified by evaluation
can be overcome by further training. The success of any training programme largely depends
upon the sincere participation of the employees.
WAGE AND REMUNERATIONS
Wage is a reward given to the "labour" factor for its productivity. There are various theories of
wages. It is believed that wages are fixed up according to the demand for and supply of labour.
In recent years, wages are termed as a reward for labour. It is classified as monetary and non-
monetary reward. While deciding the monetary rewards, factors like educational qualifications,
special training, skills, experience, duties and responsibilities, risk involved, performance, efforts
required, seniority, mobility, job difficulty, hazardous conditions etc. are given top consideration.
The main aim of the wages and salary system is to attract, retain, and motivate human resource
which the organisation requires. Specific aims are as follows:
1. To attract the qualitative human resource in required number
2. To encourage suitable, qualified and experienced employees to remain in the organisation
3. To plan for rewards for outstanding performance
4. To provide internally equitable and externally competitive wages
5. To create appropriate differentials between various jobs with their relative values
6. To maintain industrial peace, by giving just share to employees
7. To become cost-effective
INDUSTRIAL RELATIONS
The term "industrial relations" represent the relationship between the employer and the
employees with respect to working hours, terms and conditions of work, conditions at the place
of work, wage settlement; other monetary benefits like bonus, incentives, promotions, safety at
the place of work, profit sharing, etc. Under normal circumstances, this relationship is based
upon mutual trust, cooperation and the sense of belongingness. When there is a proper
communication, both the parties can solve any problem and can arrive at agreements.
But, due to external pressures of trade unions or internal vested interest groups, the cordial,
healthy and peaceful atmosphere is disturbed. Tensions mount as the industrial relations are-,..-
spoiled. Distrust, disbelief and suspicion create the feelings of enemity. To resolve the conflict,
the external help of lawyers and judiciary becomes essential. To avoid this, certain guidelines
should be followed by employers.
1. Transparency in the decision-making process
2. Participative management
3. Free communication

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4. Impress the employees that union activity and spoiled industrial relations may not
help them to gain anything
5. Joint consultation committees
6. Establishment of staff associations
7. Giving negotiation rights to staff associations
8. Strong work values
9. If and when absolutely essential, recognition to the trade union activity.
India’s Employability Mission
 India requires competent force to fulfill its manpower needs.
 Education system should be improved.(linked to industry requirements) Skill India
campaign is an initiative in this regard.
 Skills required to enhance employability are communication skills, management and
leadership , analytical skills , interpersonal skills , technical skills ,etc.
Questions and Answers
Q1. Explain the concept of Human Resource Planning
Human Resource Planning is very important in human resource management and development.
Human resource has an economic contribution. Organisations compare the contribution to the
productivity by a worker and the cost incurred on that worker. Human resource constitutes a
major cost component as in most of the organisations, nearly 50 per cent of the total cost is spent
on the wage bills and other benefits to the human resource. Therefore, while planning the human
resource, it becomes obligatory for the organisations to assess the productivity of the employees
and to plan for the optimum utilisation of human resource. The following specific issues are
considered for the efficient and effective utilisation of human resource.Indian corporate sector
is facing the challenge to get right skilled employees .Many surveys have claimed
majority of Indian engineering and management students cannot be employed as they lack
the expected skills set needed to be employed which may be set back for India’s
aspirations of “ Make in India “ campaign . Indian GDP is 2 trillion US $ currently and
India is expecting it to reach at 3trillion US $ by 2020.It sees that the organisation has the
right people at the right time and place with the right skills. It believes that each employee is a
resource to an organization and contributes to its productivity.The main objectives of Human
Resource Planning identify and assess future human resource needs, Analyse and improve upon
utilisation of existing resources, Integrate and coordinate human resource policies so that the
present and future human resource needs are met easily. Human resource planning is a
continuous process. HRP is a futuristic planning. Considering the growth areas of the
organisation in the next five years, the HRP department analyses and identifies the requirements
of human resource of each department and each functional area of the organisation.
Q2. Explain the need and process of Human Resource?
Human Resource Planning is a part of the strategic, integrated planning process. The Department
of Human Resource Management and Development takes a review of the existing employers. To
facilitate the optimum utilisation of human resources, decisions are taken with respect to the

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New recruitment, Promotion, Job rotation, Training, Transfers, Dismissals. Although the process
begins with job analysis, recruitment, selection, induction, promotion etc.
Q3. What is the main aim of the wages and salary?
The main aim of the wages and salary system is to attract, retain, and motivate human resource
which the organisation requires to attract the qualitative human resource in required number, to
encourage suitable, qualified and experienced employees to remain in the organisation, to plan
for rewards for outstanding performance, to provide internally equitable and externally
competitive wages, to create appropriate differentials between various jobs with their relative
values, to maintain industrial peace, by giving just share to employees, to become cost-effective.
Q4. Explain Industrial Relations?
Industrial relations represent the relationship between the employer and the employees with
respect to working hours, terms and conditions of work, conditions at the place of work, wage
settlement; other monetary benefits like bonus, incentives, promotions, safety at the place of
work, profit sharing, etc. Under normal circumstances, this relationship is based upon mutual
trust, cooperation and the sense of belongingness. When there is a proper communication, both
the parties can solve any problem and can arrive at agreements. Due to external pressures of
trade unions or internal vested interest groups, the cordial, healthy and peaceful atmosphere is
disturbed. Tensions mount as the industrial relations are spoiled. Distrust, disbelief and suspicion
create the feelings of enmity. To resolve the conflict, the external help of lawyers and judiciary
becomes essential. To avoid this, certain guidelines should be followed by employers.
Transparency in the decision-making process, participative management, free communication,
impress the employees that union activity and spoiled industrial relations may not help them to
gain anything, joint consultation committees, establishment of staff associations, giving
negotiation rights to staff associations, strong work values, when absolutely essential,
recognition to the trade union activity.

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 LESSON 9
MARKETING
Dr. Hem Chand Jain
Marketing may be narrowly defined as a process by which goods and services are exchanged and
the value determined in terms of money prices. That means marketing includes all those
activities carried on to transfer to goods from the manufacturers of producers the consumers.
We shall be learning later in the lesson that marketing is more than mere physical process of
distributing goods and services. It is the process of discovering and translating consumer wants
into products and services. It begins with the customer (by finding their needs) and ends with the
customer (by satisfying their needs).
The scope of marketing can be understood in terms of functions that an entrepreneur has to
perform. These include the following:
(a) Functions of exchange: which include buying and assembling and selling?
(b) Functions of physical supply: include transportation, storage and warehousing.
(c) Functions of facilitation: product planning and development, marketing research,
standardization, grading, packaging, branding, sales promotion, financing.
The Marketing Concept
The marketing concept holds that the key to achieving organizational goals consists in
determining the needs and wants of target markets and delivering the desired satisfactions more
effectively and efficiently than competitors. Under marketing concept, the emphasis is on selling
satisfaction and not merely on the selling a product. The objective of marketing is not the
maximization of profitable sales volume, but profits through the satisfaction of customers. The
consumer is the pivot point and all marketing activities operate around this central point. It is,
therefore, essential that the entrepreneurs identify the customers, establish a rapport with them,
identify their needs and deliver the goods and services that would meet their requirements.
The components of marketing concept are as under:
(a) Satisfaction of customers: In the modern era, the customer is the focus of the
organization. The organization should aim at producing those goods and services, which
will lead to satisfaction of customers.
(b) Integrated marketing: The functions of production, finance and marketing should be
integrated to satisfy the needs and expectations of customers.
(c) Profitable sales volume: Marketing is successful only when it is capable of maximizing
profitable sales and achieves long-run customer satisfaction.
Marketing versus Selling
The basic difference between marketing and selling lies in the attitude towards business. The
selling concept takes an inside-out perspective. It starts with the factory, focuses on the
company’s existing products, and calls for heavy selling and promoting to produce profitable
sales. The marketing concept takes an outside-in perspective. It starts with a well-defined market,

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focuses on customer needs, coordinates all the activities that will affect customers, and produces
profits through creating customer satisfaction.
Starting point Focus Means Ends
Selling Concept
Factory Products Selling and Profits through
Promoting sales volume

Marketing Concept
Market Customer Coordinated Profits through
Needs marketing customer satisfaction
Importance of Marketing in Small Business
Since marketing is consumer oriented, it has a positive impact on the business firms. It enables
the entrepreneurs to improve the quality of their goods and services. Marketing helps in
improving the standards of living of the people by offering a wide variety of goods and services
with freedom of choice, and by treating the customer as the most important person.
Marketing generates employment both in production and in distribution areas. Since a business
firm generates revenue and earns profits by carrying out marketing functions, its will engage in
exploiting more and more economic resources of the country to earn more profits.
A large scale business can have its own formal marketing network, media campaigns, and sales
force, but a small unit may have to depend totally on personal efforts and resources, making it
informal and flexible. Marketing makes or breaks a small enterprise. An enterprise grows,
stagnates, or perishes with the success or failure, as the case may be, of marketing. “Nirma” is an
appropriate example of the success of small scale enterprise.
Marketing of Services
The services sector is more than twice the size of the manufacturing sector. The growing
competitive market for services means that a marketing orientation has become essential for the
survival for service industries too.
India’s high capabilities in Information Technology are well known. In addition, there is the
most popular segment of its services sector, the entertainment industry, particularly films and TV
happens to be one of the fastest growing in the world. Indian films are popular across West Asia,
Afghanistan, Central Asia, Russia, South Africa and South East Asia. They are now penetrating
the western world.
Market Segmentation
A market consists of large number of individual customers who differ in terms of their needs,
preferences and buying capacity. Therefore, it becomes necessary to divide the total market into
different segments or homogeneous customers groups. Such division is called market
segmentation. They may have uniformity in employment patterns, educational qualifications,
economic status, preferences, etc.

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Market segmentation enables the entrepreneur to match his marketing efforts to the requirements
of the target market. Instead of wasting his efforts in trying to sell to all types of customers, a
small scale unit can focus its efforts on the segment most appropriate to its market.
A market can be segmented on the basis of the following variables:
1. Geographic Segmentation: The characteristics of customers often differ across nations,
states regions cities or neighbourhoods. The entrepreneur can decide to operate in one or
a few or all the geographic areas, but pay attention to differences in geographic needs and
preferences.
2. Demographic Segmentation: Variables such as age, sex, family size, income,
occupation, education, religion, race and nationality are widely used for market
segmentation.
3. Psychological Variables: Personality, life style, social class, etc. can also be used for
market segmentation. For example, some products like pens, watches, cosmetics and
briefcases are designed differently for common men and status seekers.
4. Behavioural Segmentation: Buyers are divided into groups on the basis of their
knowledge, attitude, use or response to a product.
Marketing Mix
In order to cater to the requirements of identified market segment, an entrepreneur has to develop
an appropriate marketing mix. Marketing mix is a systematic and balanced combination of the
four inputs which constitute the core of a company’s marketing system – the product, the price
structure, the promotional activities and the place or distribution system. These are popularly
known as “Four P’s” of marketing.
An appropriate combination of these four variables will help to influence demand. The problem
facing small firms is that they sometimes do not feel themselves capable of controlling each o the
four variables in order to influence the demand.
Product Mix Price Mix Place Mix Promotion Mix
 Features  List Price  Location  Advertising
 Design  Discounts  Transport  Personal selling
 Variety  Allowances  Channels  Sales
promotion
 Quality  Payment Period  Coverage
 Publicity
 Brand name  Credit Terms  Delivery
 Packaging  Availability
 Sizes  Inventory
 Services
 Warranties

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A brief description of the four elements of markets mix is as follows:
1. Product: The first element of marketing mix is product. A product is anything that can
be offered to a market for attention, acquisition, use, or consumption that might satisfy a
want or need. Products include physical objects, services, events, persons, places, ideas or
maxis of these. This element involves decisions concerning product line, quality, design,
brand name, label, after sales services, warranties, product range, etc. An appropriate
combination of features and benefits by the small firm will provide the product with USP
(unique selling proposition). This will enhance the customer loyalty in favour of its
products.
Products and services are broadly classified into consumer products and industrial
products. Consumer products are bought for final consumption; whereas industrial
products are bought by individuals and organisations for further processing or for use in
conducting business.
Other ways of classifying products are as follows:
(a) Convenience products: These are consumer products that the customer buys
very frequently, without much deliberation. They are low priced of low value and
are widely available at many outlets. They may be further subdivided as:
 Staple Products: Items like milk, bread, butter etc. which the family
consumes regularly. Once in the beginning the decision is programmed and it
is usually carried on without change.
 Impulse Products: Purchase of these is unplanned and impulsive. Usually
when the consumer is buying other products, he buys these spontaneously for
e.g. Magazines, toffees and chocolates. Usually these products are located
where they can be easily noticed.
 Emergency Products: Purchase of these products is done in an emergency as
a result of urgent and compelling needs. Often a consumer pays more for
these. For example, while travelling if someone has forgotten his toothbrush
or shaving it; he will buy it at the available price.
(b) Shopping products: These are less frequently purchased and the customer
carefully checks suitability, quality, price and style. He spends much more time
and effort in gathering information and making comparisons. E.g. furniture,
clothing and sued cars.
(c) Specialty products: These are consumer goods with unique characteristics /
brand identification for which a significant group of buyers is willing to make a
special purchase effort. For example, Mitsubishi Lancer, Ray ban glasses.
(d) Unsought product: These are products that potential buyers do not know exist or
do not yet want. For example Life Insurance, a Lawyers services in contesting a
Will.
The above product decisions are very important to ensure the sale of products. A product has
both tangible and intangible components. While buying a product, the customer does not merely
look for the physical product, but a bundle of satisfaction. Thus, the impact that any product has

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upon a buyer goes well beyond its obvious characteristics. There is a psychological dimension to
all customer purchases; what a customer thinks about a product is influenced by far more than
the product itself. For example, the buyer of an air conditioner is not purchasing cooling machine
only. He looks for attractive colour and design, durability, low noise, quick cooling, etc. these
influencing factors must be considered by the small firms to meet the requirements of different
kinds of customers.
2. Price: The second element is the price, which affects the volume of sales. It is one of the
most difficult tasks of the marketing manager to fix the right price. The variables that
significantly influence the price of a product are: demand of the product, cost competition
and government regulation. The product mix includes: determination of unit price of the
product, pricing policies and strategies, discounts and level of margins, credit policy,
terms of delivery, payment, etc. Pricing decisions have direct influence on the sales
volume and profits of the firm. Price, therefore, is an important element of the marketing
mix. Right price can be determined through pricing research and by adopting test-
marketing techniques.
Small firms should think of pricing as a method whereby prices are set with regard to
costs, profit targets, competition and the perceived value of products. Because of their
simplicity, cost-plus-pricing are attractive to small businesses, though this is not the only
mode of pricing utilized by small firms. For example, the profit margin in the cost-plus
approach may well be fixed after examining both the nature of the market and the
competitor activity within it. It is a mistake for small firms to rely wholly on cost-plus,
but very small firms do that to the detriment of profits and market share.
The pricing policies mainly followed by the small firms are:
(a) Competitive pricing: This method is used when market is highly competitive and
the product is not differentiated significantly from the competitor’s products.
(b) Skimming-the-cream pricing: Under this pricing policy, higher prices are
charged during the initial stages of the introduction of a new product. The aim is
to recover the initial investment quickly. This policy is quite effective when the
demand for a product is likely to be more inelastic with respect to price in its early
stages; to segment the market into segments that differ in price elasticity of
demand and to restrict the demand to a level, which a firm can easily meet.
(c) Penetration pricing: Under this policy, prices are fixed below the competitive
level to obtain a larger share of the market. Penetration pricing is likely to be
more successful when the product has a highly elastic demand; the production is
carried out on a large scale to achieve low cost of production per unit; and there is
strong competition in the market.
3. Promotion: Promotion refers to the various activities undertaken by the enterprise to
communicate and promote its products to the target market. The different methods of
promoting a product are through advertisement, personal selling, sales promotion and
publicity.
1. Place or Physical Distribution: This is another key marketing mix tool, which stands for
the various activities the company undertakes to make the product available to target
customers. Place mix or delivery mix is the physical distribution of products at the right

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 time and at the right place. It refers to finding out the best means of selling, sources of
selling (wholesaler, retailers, and agents), inventory control, storage facility, location,
warehousing, transportation, etc. This includes decisions about the channels of
distribution, which make the product available to target customers at the right time, at the
right place and at the right price. By selecting wrong distribution channels or by using the
ones it has traditionally used, a small firm could be depriving it of new market
opportunities.
In a situation where a small firm has only one primary product, the general rise and fall of sales
will lead to a rise and fall of the firm, unless the firm learns to consistently adjust its marketing
mix to match consumer demand.
Marketing mix of a firm selling automatic washing machines
Target market Urban household with high income and status
consciousness.
Product Latest technology, automatic washing machines.
Price High, but should not be beyond the low range high-
income groups.
Promotion Heavy advertising through high image magazines and
television stressing the high quality of the machines.
Place (distribution) Though high image retailers.

A marketing mix must be consistent for any product. Pricing, for example, must be consistent
with packaging and perceived product quality. If one of these is not in line with others, then sales
might suffer as a consequence. A manager selecting a marketing mix is like a cook or chef
preparing meal. Each knows through experience that there is no ‘one best way’ to mix the
ingredients. Different combinations may be used depending upon one’s needs and objectives. In
the marketing as in cooking, there is no standard formula for a successful combination or
ingredients. Marketing mixes vary from company to company and from situation to situation.
The right marketing mix is important for any product to have a long life cycle.
Tender Marketing
The Corporation participates in bulk global tender enquiries and local tenders of Central and
State government and Public Sector Enterprises on behalf of small-scale units. It is aimed to
assist small units with ability to manufacture quality products but which lack brand equity and
credibility or have limited financial capabilities. Under this scheme, the Corporation has
identified large number of items for which it actively participate sin tenders of these Departments
and Enterprises. On receipt of the orders, Corporation farms out these orders to the units on
whose behalf it has quoted. This assistance has enabled large number of small units to compete
for the orders, which are normally out of reach of the individual units because of the bulk
requirement.

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The main benefits of the scheme are:
 Small scale units are provided with all requisite financial support depending upon the units’
individual requirements the purchase of raw material and financing of sale bill.
 Enhanced business volume helps small units achieve maximum capacity utilization.
 They are exempted from depositing earnest money.
 Small units are helped to participate in large and global tenders up to its capacity and
capability.
 They are also assisted technically for quality upgradation and new product development in
addition to testing facility.
 Ensures fair margin to small units for their production.
 Publicity to small 8industries products.
 Production of quality products from the small scale sector.
Consortia Marketing
A small unit in its individual capacity faces problem very often to procure and execute large
orders, which inhibits and restricts the growth of small scale units. National Small Industries
Corporation Limited (NSIC) accordingly adopted Consortia Approach and built groups /
consortia of units manufacturing same products, thereby easing out marketing problem of SSI
units. The Corporation explores market and secures orders for bulk quantities. These orders are
then farmed out to small units in tune with their production capacity. Testing facilities are also
provided to enable units to improve and maintain the quality of their products conforming to the
standard specifications.
The main benefits of the scheme are:
 Participation and Procurement of Orders for bulk quantities.
 SSIs capacity of participating in large tenders enhanced.
 Support testing facility provided by NSIC.
 Financial assistance for Raw Material, Bill discounting etc. provided by NSIC.
 Wherever required, equipment is also financed to the SSI on priority.
 Help in developing / designing of new products and quality enhancement of SSI products.
Marketing Problems of Small Scale Units
All types of business enterprises face marketing problems, but these problems are more severe in
case of small scale units because of lack of knowledge, adequate funds and lack of experience.
Some of the marketing problems commonly faced by the small scale entrepreneurs in India are:
(a) Competition from large scale sector: Because of scarcity of resources, small
entrepreneur usually use inferior technology. As a result their products are not
standardized. The obsolete technology used by them gets translated into inferior quality
of products.

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(b) Lack of marketing knowledge: Most of the small scale entrepreneurs are not highly
educated or professionally qualified to have knowledge of marketing concept and
strategy. Their lack of expertise further inhibits their understanding of the prevailing
trends in the market.
(c) Lack of sales promotion: Small units lack the resources and knowledge for effective
sales promotion. Large scale units mostly have well-known branded names. They also
have huge amount of resources to spend on advertisement and other sales promotion
tools. Small scale units, on the other hand, have to pay a heavy commission to dealers for
their selling efforts, which reduce profits margins.
(d) Weak bargaining power: At the time of purchase of inputs, large scale entrepreneur
manage to get huge discounts and credit. Such facilities are not available to small units.
(e) Product quality: It is costly and difficult for a small unit to have quality testing and
evaluating equipment.
(f) Credit sales: The small scale enterprise is invariably called upon to sell on credit.
However, when it comes to purchasing inputs, they are denied liberal credit facilities. As
a result, they have to borrow excessive working capital than actually needed. This
increases the general cost of production and prices, making it non-competitive.
POLICY SUPPORT TO SMALL SCALE INDUSTRIES
Introduction
After attaining independence in 1947 India adopted mixed economic planning as a method to
achieve economic development. Along with the Large Scale sector the thrust was on the Small
Scale sector because of its decentralized, its small size, use of mainly indigenous, employment
intensity and its suitability for rural areas with limited techno-economic structure.
Industrial policies over the years have focused to promote SSIs through various incentives
related to financial, fiscal and infrastructure measures; along with a heavy industry base.
Objectives
After going through this less you should be able to:
 Explain the various provisions under Industrial Policy Resolution formulated by the
Government in assisting the small scale industry (SSI).
 Discuss the various fiscal incentives for SSIs.
Industrial Policy Resolutions and SSIs
Government’s attitude and intention towards industries in general and SSIs in particular are
reflected in Industrial Policy Resolutions. This sub-sections 20.2.1 to 20.2.11 deal with such
resolutions.
Industrial Policy Resolution 1948
The government stressed the role of SSIs for balanced industrial growth. It was stated that SSIs
are particularly suited for the utilization of local resources and creation of employment
opportunities. The primary responsibility for developing small industries by creating

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infrastructure has been provided to state governments. Central government frames the broad
policies and coordinates the efforts of State Government for the development of SSIs.
Industrial Policy Resolution 1956
It stated that besides continuing the policy support to cottage, village and small industries by
differential taxation or direct-subsidies, the aim of state policy would be that the development of
this sector is integrated with that of large scale industry. The focus was to improve the
competitive strength of SSIs. To achieve this 128 items were exclusively reserved for production
in SSIs, and 166 items were reserved for exclusive purchase by government from this sector.
It emphasize that whatever can be produced by SSIs must only be so produced. The main thrust
of policy was effective promotion of cottage, village and small industries widely dispersed in
rural areas and small towns. This thinking specified the following things:
(a) 504 items were reserved for exclusive production in the small-scale industries.
(b) The concept of District Industries Centres (DICs) was introduced so that in each district
single agency could meet all the requirements of SSIs under one roof.
(c) Technological upgradation was emphasigned in traditional sector.
(d) Special marketing arrangement through the provision of services, such as, product
standardization, quality control, market survey, were laid down.
Industrial Policy Resolution 1980
The policy focused on the need of promoting SSIs through integrated industrial development
between large and small sectors. Industrially backward districts were indentified for faster
growth of existing network of SSIs. Following measures were specified in the policy:
(a) Investment limit was raised for tiny, small, and ancillary units to Rs. 2 lacs, Rs. 20 lacs,
and Rs. 25 lacs respectively.
(b) “Nucleus plants” in each industrially backward district replaced the “district industries
centres.” These were to concentrate on assembling the products of SSIs and to produce
inputs needed by large number of small units.
(c) Reservation of items and marketing support for small industries was to continue.
(d) Availability of credit to rowing SS units was continued.
(e) Buffer stocks of critical inputs were to continue.
(f) Agricultural base was to strengthen by providing preferential treatment to agro-based
industries.
(g) An early warning system was to establish to avoid sickness and take appropriate remedial
measures.
Industrial Policy Resolution 1990
Main features of this Resolution are as follows:
(a) It raised the investment ceiling in plant and machinery for SSIs.
(b) It created central investment subsidy for this sector in rural and backward areas. Also,
assistance was granted to women entrepreneurs for widening the entrepreneurial base.

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(c) Reservation of items to be produced by SSIs was increased to 836.
(d) Small Industries Development Bank of India was established to ensure adequate flow of
credit to SSIs.
(e) Stress was reiterated to upgrade technology in improve competitiveness.
(f) Special emphasis was laid on training of women and youth under Entrepreneurial
Development Programme.
(g) Activities of Kadhi and Village Industries Commission and Khadi and Village Industries
Board were to expand.
Industrial Policy Resolution 1991
The basic thrust of this resolution was to simplify regulations and procedures by delicensing,
deregulating, and decontrolling. Its salient features are:
(a) SSIs were exempted from licensing for all articles of manufacture.
(b) The investment limit for tiny enterprises was raised to Rs. 5 lacs irrespective of location.
(c) Equity participation by other industrial undertakings was permitted up to a limit of 24
percent of shareholding in SSIs.
(d) Factoring services were to launch to solve the problem of delayed payments to SSIs.
(e) Priority was accorded to small and tiny units in allocation of indigenous and raw
materials.
(f) Market promotion of products was emphasized through co-operatives, public institutions
and other marketing agencies and corporations.
Comprehensive Policy Package for SSIs and Tiny Sector 2000
Main focus of this policy is as follows:
(a) The exemption for excise duty limit raised from 50 lakhs to Rs. One crore to improve the
competitiveness.
(b) Credit linked capital subsidy of 12% against loans for technology up gradation was
provided in specified industries.
(c) The third census of small scale industries by the ministry of SSI was conducted, which
also covered sickness and its causes in SSI’s.
(d) The limit of investment was increased in industry related service and business enterprises
from Rs. 5 lacks to Rs. 10 lakhs.
(e) The scheme of granting Rs. 75000 to each small scale enterprise for obtaining ISO 9000
certification was continued till the end of 10th plan.
(f) SSI associations were motivated to develop and operate testing laboratories. One time
capital grant of 50% was given on reimbursement basis to each association.
(g) The limit of composite loan was increased from Rs. 10 lakhs to Rs. 25 lakhs.
(h) A group was constituted for streamlining of inspection and repeal of redundant laws and
regulations.

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(i) The coverage of ongoing Integrated Infrastructure Development (IID) was enhanced to
cover all areas in the country with 50% reservation for rural areas and 50% earmarking of
plots for tiny sector.
(j) The family income eligibility limit of Rs. 24000 was enhanced to Rs. 40000 per annum
under the Prime Minister Rozgar Yozna (PMRY).
Industrial Policy Package for SSI 2001-02
This policy emphasizes the following:
(a) The investment limit was enhanced from Rs. 1 crore to Rs. 5 crore for units in hosiery
and hand tool sub sectors.
(b) The corpus fund set up under the Credit Guarantee Fund Scheme was increased from 125
crore to 200 crore.
(c) Credit Guarantee cover was provided against an aggregate credit of Rs. 23 crore till
December 2001.
(d) 14 items were de-reserved in June 2001 related to leather goods, shoes and toys.
(e) Market Development Assistant Scheme was launched exclusively for SSI sector.
(f) Four UNIDO assisted project were commissioned during the year under the Cluster
development Programme.
Industrial Policy on SSIs 2003-04
The following are the highlight of this endeavor:
(a) 73 items reserved for exclusive manufacture in the SSI sector were de-reserved in June
2003. These consist of chemical and their products, leather and leather products,
laboratory reagents etc.
(b) Selective enhancement of investment in plant and machinery from Rs. One crore to Rs. 5
crore. It was for 13 items in stationary sector and 10 items of drugs and pharmaceuticals
sector from June 2003.
(c) Banks were directed to provide credit to SSI sector within an interest rate band of 2
percent above and below their Prime Lending Rate (PLR).
(d) The composite loan limit for SSI was raised from Rs. 25 lakhs to Rs. 50 lakhs.
(e) The limit of dispensation of collateral requirement was raised from Rs. 15 lakhs to Rs. 25
lakhs on the basis of good track record and financial position of the unit.
(f) The lower limit of Rs. 5 lakhs on loans covered under the Credit Guarantee Scheme was
removed. All loans up to Rs. 25 lakhs were made eligible for guarantee cover under the
Credit guarantee Scheme.
(g) 417 specialised bank branches were made operational for SSIs.
(h) Third all India census for SSI was conducted throughout the country and its final results
were released on January 17, 2004.
(i) 60 clusters were identified in July 2003 for focused development.

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(j) Small and medium Enterprise (SME) fund of Rs. 10000 crore was set up under SIDBI to
solve the problem of inadequate finance for SSIs.
(k) LaghuUdyami Credit Card Scheme was liberalized. Under this scheme, the credit limit
was increased to Rs. 10 lakhs from Rs. 2 lakhs. But, it was only for borrowers with
satisfactory track record.
Policy Initiatives on SSI 2004-05
Policy initiatives for this year are as follows:
(a) The national commission on Enterprises in the Un-organised/Informal Sector was set up
in September 2004. It suggested measures considered necessary for improvement in the
productivity of these enterprises, generation of large scale employment opportunities,
linkage of the sector to institutional framework in areas like credit, raw material supply,
infrastructure, technology up gradation, marketing facilities and skill development by
training.
(b) 85 items were de-reserved in October 2004.
(c) The investment limit in plant and machinery was raised from Rs. One crore to Rs. 5 crore
in October 2004, in respect of seven items of sports goods to help to upgrade the
technology and enhance competitiveness.
(d) The Small and Medium Enterprise (SME) fund of Rs. 10000 crore was started by SIDBI
since April 2004, with 80% of the lending for SSI units. The interest rate was 2% below
the prevailing Prime Lending Rate (PLR) of the SIDBI.
(e) The Reserve Bank of India raised the composite loan limit from Rs. 50 lakhs to Rs. One
crore.
(f) Promotional Package for small enterprises was initiated.
Policy Package for SME 2005-06
This policy package contains the following points:
(a) The Ministry of Small Scale Industries has identified 180 items for dereservation.
(b) Small and Medium Enterprises were recognized in the services sector, and were treated
on par with SSIs in the manufacturing sector.
(c) The corpus of the Credit Guarantee Fund was raised from Rs. 1132 crore in March 2006
to Rs. 2500 crore in five years.
(d) Credit Guarantee Trust for Small Industries (CGTSI) was advised to reduce the one time
guarantee fee from 2.5 per cent to 1.5 percent for all loans.
(e) Insurance cover was extended to approximately 30,000 borrowers, identified as chief
promoters, under the CGTSI. The sum assured would be Rs. 200000 per beneficiary and
the premium will be paid b y CGTSI.
(f) The emphasis was laid on Cluster Development model not only to promote
manufacturing but also to renew industrial towns and build new industrial townships. The
model is now being implemented, in nine sectors including khadi and village industries,
handlooms, handicrafts, textiles, agricultural products and medicinal plants.

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Fiscal Incentives
Fiscal incentives are provided through tax concession granted in the form of exemptions of direct
or indirect taxes leviable on production or profits, besides special tax concessions. These
incentives have been provided to promote the SSIs.
Tax Holiday
With effect from financial year 2005-06, deduction in respect of profits and gains for small scale
industrial undertakings is available under Section 80IB.
Small scale industrial undertaking can claim deduction at the following rates:
(a) If SSI unit is owned by a company, the deduction available in 30% for first 10 years,
(b) If SSI unit is owned by a co-operative society, the deduction to be availed is 25% for first
10 years, and
(c) If any other person owns SSI unit, the deduction to be claimed is 25% for first 10 years.
The small scale units can avail this tax exemption facility only after fulfilling the following
conditions.
(a) No small scale or ancillary undertaking shall be subsidiary of, or owned or controlled by
other industrial undertaking.
(b) SSI unit can manufacture any nature type of goods article to avail deduction.
(c) The SSI unit should commence business between 1st April 1991 and 31st March 2002.
(d) They should employ at least 10 workers in a manufacturing process carried out with the
aid of power or at least 20 workers in a manufacturing process carried out without the aid
of power.
(e) This tax exemption from total income is allowed from the assessment year in which unit
begin to manufacture or produce goods or articles.
Excise Concessions
Government of India has provided a major relief by granting full exemption from the payment of
central excise duty on a specified output and thereafter slab-wise concessions. The following
concessions are available to them in this regard:
(a) SSI units producing goods up to Rs. 100 lakhs are exempted from payment of excise
duties.
(b) SSI units having turnover less than Rs. 60 lakhs per annum need not have a separate
storeroom for storing the finished products.
(c) SSIs are also not required to maintain any statutory records such as daily stock account of
production and clearances, raw material account, personal ledger account etc. Their own
records are adequate for excise purposes.
(d) There is no distinction between registered and unregistered units for SSI concessions.
Further, the eligibility for excise concessions for SSIs has been based on annual turnover

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 rather than SSI registration. Duty liability is to be discharged by 15th of the following
month.
(e) The SSI exemption is available for home consumption as well as in respect of goods
exported to Nepal&Bhutan.
(f) Normally, excise officers are not expected to visit SSI units paying less than Rs. 11 lakhs
duty annually.
(g) With effect from 1-4-1994, Gate-Pass System was replaced by manufacturer invoice to
cover clearances of goods as the duty-paying document.
Presently there are two streams of concessions to SSIs. These are as follows:
(a) SSI Scheme (Without CENVAT): This scheme is effective from 1st April 2000. The
Table shows the rate of duty applicable to such manufactures whose turnover does not
exceed Rs. 3 crores in the previous financial year in respect clearances of excisable goods
for home consumption (including exports to Nepal or Bhutan) from one or more factories
of the same manufacturer or from factory by one or more manufacturers:
Table: Rate of Duty in Respect of Clearances of Excisable Goods
S.No. Value of Clearance Rate of Duty
(Rs.)
1 Up to Rs. 100 Lakhs NIL
2 100 – 300 Lakhs Normal Rate of Duty

It may be noted that beyond clearances of Rs. 100 lakhs, the manufacturer is liable to pay
normal rate of duty. The manufacturer may opt for not availing exemption and instead
pay the normal rate of duty on the clearances. But once the option is exercised, it shall
continue till the remaining part of the financial year.
Value for purpose of calculating the limit of 100 and 300 lakhs is the ‘Assessable value’
i.e., wholesale price at factory gate, exclusive of taxes, where price is the sole criteria.
(b) SSI Scheme (with CENVAT): This scheme is effective from 1st April 2003. It provides
the concessional rate of duty in respect of clearances of specified goods for home
consumption (including exports to Nepal or Bhutan), and also states that all clearances of
the specified goods which are used for captive consumption in production of the specified
goods shall be subjected to ‘nil’ rate of duty. The Table shows the Rate of Duty.
Table: Rate of Duty in Respect of Clearances of Specified Goods
S.No. Value of Clearance Rate of Duty
(Rs.)
1 Up to Rs. 100 Lakhs 60% of normal rate
2 100 – 300 Lakhs Normal Rate of Duty

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 A manufacturer can opt for this option any time determining his eligibility for concession
and the concessional rate of duty.
The exemption shall apply only subject to the following conditions:
i. A manufacturer who intends to avail the exemption shall exercise his option in writing to
the jurisdiction Deputy Commissioner or Assistant.
ii. The clearances of specified goods already made during the financial year, prior to the
exercise of such option, shall be taken into account for computing the aggregate value of
clearances. Value of all clearances of all factories should be clubbed.
iii. The aggregate value of clearances of all excisable goods should not exceed Rs. 300 lakhs
in the preceding year.
The exemption contained shall not apply to the specified goods bearing a brand name / trade
name (whether registered or not) of another person, except in some specified cases.
Measures for Promotion and Development of SSIs
Central and State governments have formulated several schemes to make the SSIs vital and
competitive. Some of these schemes are enumerated in sub-section 20.4.1 to 20.4.7.
Reservation Policy
Reservation of items for exclusive manufacture in SSI sector has been one of the important
policy measures for promoting and protecting this sector against competition from medium /
large / multinational companies.
The policy received statutory backing in 1984 under Industries (Development & Regulation)
Act, 1951. However with the opening up of Indian trade in 1991, most of reserved items were
importable with the removal of quantitative restrictions. This paved the way to phase out
reservation in due course, and every year some items were dropped from the reserved list. Out of
836 items reserved in 1989, 39 items were dereserved in four phases viz., 15 items in 1997, 9
items on 1999, 1 item on 2001 and 14 items on 2001. Subsequently, 51 items were dereserved in
2002, 75 items in 2003 and 85 items in 2004, 108 in March 2005, and 180 in May 2006. Now
298 items stand reserved for this sector.
It is believed that dereservations will enable medium / large / multinational companies to move
out of capital intensive manufacturing to enter labour-intensive production. This shift over will
certainly create new employment opportunities at rapid rate.
Government’s Purchase Preference Policy for SSI Products
Realizing that small scale units face the problem of marketing their products at remunerative
prices, Government stores purchase programme was initiated to assist small-scale industries in
obtaining a fair share of the total purchases made by the Government and its departments. Bulk
and departmental buyers such as the Railways, Defence and Communication ministries and
companies are invited in participate in buyer-seller meets to enrich SSI unit’s knowledge
regarding terms and conditions, quality standard, etc. required by the buyer. Under the Stores
Purchase Policy of the Government 409 items of stores were reserved for exclusive purchase
from KVIC / Women’s Development Corporation / Small Scale units in 1989.

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This list was reviewed. In February 2004, the Committee (set up to consider the question of
inclusion of additional items) received list and 358 items were approved, after deleting items
having common nomenclature and addition of some new ones. This list also includes 8
handicraft items reserved for purchase from the Handicraft Sector.
Governments Price Preference Policy for marketing SSI Products
Assistance under Government Stores Purchase Programme in the form of reservation of products
for exclusive purchase from small scale sector and price preference in one of the major
instruments for providing marketing supports to the small scale industries. These facilities
include the following:
(a) Price preference up to 15% in case of selected items.
(b) No registration fee.
(c) A consortium to channelize and identify markets for the products of SSIs both in India
and abroad.
Apart from this, the Single Point Registration Scheme of National Small Industries Corporation
(NSIC) the following benefits are given to SSI units, which get them registered with the NSIC:
(a) Availability of Tender Sets free of cost.
(b) Exemption from payment of Earnest Money Deposit.
(c) Exemption from payment of Security Deposit up to the monetary limit for which the unit
ire registered.
(d) Price preference up to 15% over the lowest quotation of the large scale units (on merits).
The units registered with NSIC under this scheme are given a registration certificate indicating
items, for which registered and monetary limit up to which registered. The Policy of the Price
Preference of 15% is a critical benefit available to the SSI sector. The benefit is available to
compensate them on account of non-availability of economies of scale, poor resource base, poor
access to raw-material etc. as compared to the large scale sector.
Technical Assistance
Technology is the key to enhance an organisation’s competitive advantage in today’s dynamic
information age. SSIs need to develop and implement a technology strategy in addition to
financial, marketing and operational strategies, and adopt the one that helps integrate their
operations with their environment, customer and suppliers.
National Small Industries Corporation Ltd. (NSIC) offers SSI units the following support and
services through is Technical Services Centre, Extension Centres, Software Technology Parks
and Technology Transfer Centre:
(a) Technology audits and benchmarking.
(b) Technology needs assessment.
(c) Technology sourcing.
(d) Application of new techniques.
(e) Technology acquisition.

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(f) Material testing facilities through accredited laboratories.
(g) Product design including computer Aided Designs.
(h) Common facility support in machining.
(i) Energy and environment services at selected centres.
(j) Classroom and practical training for skill upgradation.
Software Technology Parks (STPs) facilitate small industries in setting up 100% export-oriented
units for software export. They also act as major point to activate software exports directly
through NSIC. These STPs extend support in terms of the requisite infrastructure to the SSI units
to start business operations with a minimum lead-time. Following facilities are available at NSIC
Software Technology Park:
(a) Built-up Space: this enables the software industries to commence their operations with
minimum gestation period.
(b) Instant Power Connection: Instant power connections and generator facility is also
available on site, which will allow software units to work without any interruptions.
(c) High Speed Data Link: High-speed data communication facility through satellite
connection is available. The member units can avail 64 kbps to 2 mbps dedicated leased
channels.
(d) Business Centre: A business centre comprising of Conference Hall, Photocopier, Fax,
Training aids, etc. is available inside the STP complex for the member units.
(e) Telephones: Each member units will be provided with one telephone line for business
promotion on occupation.
Raw material Assistance
NSIC aims to help SSI units by financing purchase of raw material (both indigenous and
imported), thus allowing them to focus on manufacturing quality product. State Directorate of
Industries distributes scarce raw materials to small units. State Small Industries Development
Corporations have set up depots for distribution of raw materials to SSIs. The Central
Government has introduced a buffer stock scheme to ensure availability of scarce raw materials
to this sector.
Financial Assistance
Central and State Governments have introduced several schemes to ensure adequate and timely
availability of credit to SSIs through various institutions.
The main features of the financial services offered by institutions are as follow:
(a) Financial assistance for the equipment and marketing activities under one roof with speed
and efficiency.
(b) Prompt clearance of the proposals with minimum processing time and without
cumbersome paper work.
(c) Assistance in preparing the proposals and completion of document formalities.

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(d) Market oriented interest rates and service charges with liberal terms of margin, level of
assistance and repayment schedules.
(e) Arrangement with commercial banks for sanction of loan proposals received from small
enterprises.
New Initiatives
The following new initiatives have been taken by the government:
(a) Advisory and Mentoring Services: Inadequate management skills are often the cause of
non-performance of small enterprises. NSIC’s advisory and mentoring services are aimed
at effectively addressing this impediment to growth. It offers mentor-pupil relationship
services in which the Mentor, a person with wide experience in running his own business,
will volunteer his services to individual or a group of units – the pupil. An advisor, a
senior professional, generally retired and a specialist in a specific area will assist in the
process. Mentors and advisor will provide the necessary professional and moral support
in the early lifecycle of an enterprise or to existing units facing critical operational
problems.
(b) Technology Business Incubators: Innovative entrepreneurial ideas have to be fostered
and developed in a supportive environment before they become attractive for Venture
Capital Institutions. Incubation centre enable technical entrepreneurs to conduct their
Research and Development programmes in a professional, friendly and supportive
environment, without making any further investment.
Technology Business incubators are an important tool for entrepreneurial development.
Recognizing this need, NSIC has setup the following Technology Business Incubators.
(1) Information Technology
(2) Product Design
(3) Energy and Environment
(4) Bio-Technology
(5) Electronics and Communication.
(c) Suppliers Rating Accreditation Services: Accreditation, a necessity for buyer comfort,
speaks of the enterprise’s ability to supply reliably and effectively a product, in
accordance with the customer’s changing needs. NSIC provide accreditation to SSI units
by developing an effective accreditation system process through collaboration with
Indian and International Accreditation agencies. Accreditation is provided at two levels –
for all Government purchases and for private national international buyers.
Summary
Small Scale Industry sector has emerged as India’s engine of growth in the New Millennium.
The SSI sector accounts for nearly 40 percent of value added in the manufacturing sector and 34
percent of total exports from the country. Through 95 percent of industrial units in the country,
the sector provides employment to about 20 million persons.

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The government has recognized its importance for the economy and its intention towards
promotion of SSIs is reflected in various Industrial Policy Resolutions right from the year 1948.
The primary objective of the Small Scale Industrial Policy during the nineties was to impart
more vitality and growth-impetus to the sector to enable it to contribute its mite fully to the
economy, particularly in terms of growth of output, employment and exports. The sector has
been substantially delicensed. Further efforts would be made to deregulate and debureaucratise
the sector with a view to remove all fetters on its growth potential, reposing greater faith in small
and young entrepreneurs. All statutes, regulations and procedures were reviewed and modified,
wherever necessary, to ensure that their operations did not militate against the interests of the
small and village enterprises.
Government is aware of the challenges faced by SSIs and has been trying to improve their
competitiveness through various measures. These consist of the following:
(a) Tax concessions have been provided to SSIs to promote investment in this sector and also
to grant relief to small entrepreneurs.
(b) Technological facilities have been increased.
(c) In order to facilitate adequate flow of credit efforts have been done.
(d) Measures have also been taken to improve infrastructure facilities and promote marketing
of products.

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