ME6071 : : ENTREPRENEURSHIP DEVELOPMENT

UNIT - 1
ENTREPRENEURSHIP DEVELOPMENT
If we could have an entrepreneur in every family, india’s economy would sky rocket. – Rahul Balaji,
Chairman & MD, Bajaj Auto
Origin:
Entreprendre (French Word) – “Between Taker” and “go between” i.e To undertake
(Risk Bearer)
Concept:
An individual or group of individuals who create something new, who organizes production and
undertake risk involved in the establishment or operation of a business enterprise.
Entrepreneur as Risk-Bearer
Richard Cantillon, an Irishman living in France, was the first who introduced the term ‘entrepreneur’ in
earlier 18th century.
- 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. - Richard Cantillon (Irish-French
economist)
In 1965, Knight also described entrepreneur to be specialized group of persons who bear Uncertainty.
UNCERTAINTY – defined as a risk which cannot be insured against and is incalculable.
RISK – can be reduced through the insurance principle, where the distribution of the outcome in a
group of instances is known.
According to Knight, entrepreneur is the economic functionary who undertakes such responsibility of
uncertainty which by its very nature cannot be insured, or capitalized or salaried.
Entrepreneur as Organizer or Co-ordinator
 Jean-Baptise Say, the French political economist, associates entrepreneur with the functions of
coordination, organization and supervision. According to Say, an entrepreneur is one who
combines the land of one, the labour of another and capital of yet another, and thus produces a
product.
 Thus Say has made a clear distinction between the role of the capitalist as a financier and the
entrepreneur as an organizer. So to play such a role, entrepreneur must possess the art of
superintendence and administration.

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

Entrepreneur as Innovator
Joseph A.Schumpeter for the first time in 1934, assigned a crucial role of ‘innovation’ to the
entrepreneur.
The innovation i.e introduction of new combination of factors of production, according to him, may
occur in any one of the following five forms:
1. Introduction of a new product
2. Introduction of a new method of production
3. Opening of a new market
4. Discovery of a new source of supply of raw materials
5. Carrying out of the new form of organization of any industry.
He also made distinction between innovator and inventor.
Inventor – one who discovers new methods and new materials, Produces idea (Dicovery)
Innovator – one who utilizes inventions and discoveries in order to make new combinations, idea
converted in to reality (Exploitation)
Synthesis of the Concept
Entrepreneur performs various functional roles as risk taker, decision maker, organizer or
coordinator, innovator, employer of factors of production, etc.
To sum up, an entrepreneur can be defined as a person who tries to create something new.
Organizes production and undertakes risk and handles economic uncertainty involved in
enterprise.
Characteristics of successful entrepreneurs
1. Hardwork (10% inspiration & 90% perspiration)
2. Desire for High Achievement (Sunil Mittal of Bharti Telecom)
3. Highly optimistic (Thomas A.Adison – Phonograph)
4. Independence
5. Foresight (N.R.Narayana Moorthy – Infosys)
6. Good organizer
7. Innovative (Late Dhirubhai Ambani)
8. Perseverance (Miss Fenny Hust, a creative writer)
9. Team spirit (Hare & Tortoise)
 Slow & Steady wins the race
 Fast & Steady wins the race
 Core Competance wins the race
Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College
  Innovation & Team spirt wins the race
Azim Premji’s 10 Golden Rules for a Successful Entrepreneur
1. Dare to Dream
2. Set Clear Goals
3. Never Loose Zest and Curiosity for Learning
4. Strive for Excellence
5. Build Self-Confidence
6. Learn to Work in Teams
7. Take Care of Yourself
8. Persevere
9. Have a Broader Social Vision
10. Never Let Success go to Your Head.

Kiran Mazundar-Shaw – Essential Qualities of a Successful Entrepreneur

 Spirit of challenge
 Sense of conviction
 Resourcefulness
 Ethos of persistence
 Ability to manage failure
 Problem solving approach
 Ability to spot and leverage opportunity
 Building core competence and excellence
 Uncompromising work ethic
 Building a strong organizational DNA through differentiation

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

Bases of Difference Entrepreneur Manager

To render his / her service in an

Motive To start a venture.
enterprise.

Status Owner of the Enterprise. Employee in the Enterprise.

Assumes all risk and

Risk Bearing Does not bear any risk.
uncertainty.

Rewards Profit – Highly Uncertain. Salary – Fixed and Certain.

Translates Entrepreneur ideas into

Innovation Innovator – Change Agent.
practice.

High Achievement Motive, Sound knowledge in Management

Originality in Thinking, Theory and Practices.
Qualifications
Foresight, Risk – Bearing
Ability, and so on.

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

Intrapreneur
Concept:
 A manager within a company who promotes innovative product development and marketing.
 An intrapreneur is an inside entrepreneur, or an entrepreneur within a large firm, who uses
entrepreneurial skills without incurring the risks associated with those activities.
Definition:
Intrapreneur is an entrepreneur within an already established organization.
- Gifford Pinchot
(American forester and politician

Bases of Difference Entrepreneur Intrapreneur

An Entrepreneur is independent in An Intrapreneur is dependent on the

Dependency
his operations. Entrepreneur. i.e., the Owner

An Entrepreneur himself raises Funds are not raised by the

Raising of Funds
funds required for the enterprise. Intrapreneur.

An Entrepreneur bears the rick An Intrapreneur does not fully bear

Risk
involved in the business. the risk involved in the enterprise.

An Entrepreneur operates from An Intrapreneur operates from within

Operation
out-side the Organization. the Organization itself.

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

Entrepreneurship
Concept:
The capacity and willingness to develop, organize and manage a business venture along with any of its
risks in order to make a profit. The most obvious example of entrepreneurship is the starting of new
businesses.
Definition:
Entrepreneurship is based on purposeful and systematic innovation. It includes not only the
independent businessmen but also company directors and managers who actually carryout innovative
functions.
- Joseph A. Schumpeter
(Austrian-born American economist and political scientist)

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

Growth of Entrepreneurship in India
1. Entrepreneurship during pre-independence:
a. Handicrafts Entrepreneurship
b. Manufacturing Entrepreneurship
c. Managing Agency System
2. Entrepreneurship during post-independence:
a. Industrial Policy
b. Small Scale Industries
c. Government established;
i. Directorate of Industries
ii. Financial Corporations
iii. Small Scale Industries Corporation
iv. Small Industries Service Institute
Pull factors of Entrepreneurship Career
 High need for independence
 High financial rewards
 Long lasting mark
 Dealing with all aspects of a business
Positive aspects of Entrepreneurship Career
 Enjoys unlimited powers
 Numerous opportunity for self development
 Immense satisfaction when getting rewards
 Monetary rewards can be more than matching with his / her capacity and capability
 Respect for his / her immediate family and friends
 Independent, generates employment for others
 Develops the economy of a country
 Can be a great achiever realizing his goals
Negative aspects of Entrepreneurship Career
 Faces constrains from financier, laborers, suppliers, customers, etcetera
 May lead to frustration since the scope of operation is limited by resources
 Have to work long and hard hours
 Stress because of risk of failure
 Frustration and disappoinment nay be present because everything will not go as per plan

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

UNIT - 2
ENTREPRENEURIAL MOTIVATION
 Entrepreneurial behavior is the result of entrepreneurial motivation.
 Motivation has been derived from the word ‘motive’ which implies the inner state of mind that
activates, provokes and directs our behavior towards the goal.
 Motivation is a process that motivates a person into action and induces him to follow the course
of action till the goals are finally achieved.
Introduction & Definition of Motivation
• To motivate means to provide motive, to impel people to action, and to create incentives to
work.
• “Motivation is the work a manager performs to inspired, encourage, and impel people to take
required action” – Lewis Allen
• “The act of stimulating someone or oneself to get a desired course of action”- Michael J
• “Motivation means stimulating people to action to accomplish desired goals.”- William Scott
• Based on above definitions, Motivation may be defined as one’s willingness to exert high level
of efforts towards the accomplishment of goal or fulfillment of need.
 Nature of Motivation.
 Internal feeling of an individual. (Internal to man)
 A single motive can cause different behaviours.
 Different motives may result in single behaviour.
 Motives come and go.
 Motives interact with the environment.
Motivational cycle or process
Motivation is a process or cycle aimed at accomplishing some goal. The Basic elements included in the
motivational process are motives, goals and behaviour.
1. Motives
Motives provide an activating thrust towards reaching a goal.
2. Goals
Motives are directed towards goals.
3. Behaviour
Behaviour is directed to achieve a goal.
Human behaviour is characterized by three features
• Behaviour is caused, i.e. needs.
• Behaviour is motivated, i.e. drive.
• Behaviour is directed, i.e. goal.

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

  Types of Motivation.
 Positive Motivation:
 Results in willing co-operation of workers by tempting them towards rewards or incentives.
 Negative Motivation:
 Creates fear amongst workers by threatening them with demotions, pay cuts, lay offs, etc.

 Importance of Motivation:
 Improves morale of employees.
 Lower labour turnover.
 Improves goodwill of organisation.
 Creates cordial industrial relations.
 Changes are more easily accepted by employees.
 Theories of Motivation.
( A ) Maslow Need Hierarchy Theory:
 Based on human needs.
 Strong needs of an individual dominates the other needs.
 The second need does not arise till the first need is satisfied i.e. needs have a definite sequence
of domination.

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

( B ) McClelland’s Three Need Model:
McClelland’s need theory is closely associated with learning theory, because he believed that
needs are learned or acquired by the kinds of events people experience in their environment and
culture. He found that people who acquire a particular need behave differently from those who
do not have.
His theory focused on Murray’s three needs: achievement, power, and affiliations. In the
literature, these three needs are abbreviated as “n Ach”, “n Pow”, and “n Aff” respectively.
Need for Achievement (“n Ach”):
 Drive to excel, advance and grow.
 Desire to achieve something with own efforts.
Through his research, McClelland identified the following six characteristics of high need
achievers:
1. High-need achievers have a strong desire to assume personal responsibilities for performing a
task or finding a solution to a problem.
2. High need achievers tend to set moderately difficult goals and take calculated risks?
3. High need achievers have a strong desire for performance feedback?
4. They have need for achievement for attaining personal accomplishment.
5. They look for challenging tasks.
6. The high need-achievement individuals are not buck-passers.
2. Need for Power:
 Drive to influence others and situations.
 Desire to influence and dominate others through use of authority.
The need for power is concerned with making an impact on others, the desire to influence others,
the urge to change people, and the desire to make a difference in life. People with a high need for
power are people who like to be in control of people and events. These result in ultimate satisfaction
to man.
People who have a high need for power are characterized by:
1. A desire to influence and direct somebody else.
2. A desire to exercise control over others.
3. A concern for maintaining leaders-follower relations.

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

3. Need for Affiliation:
 Drive for friendly and close interpersonal relationships.
 Desire to establish and maintain friendly relationship with others.
The need for affiliation is defined as a desire to establish and maintain friendly and warm relations
with other people. The need for affiliation, in many ways, is similar to Maslow’s social needs.
The people with high need for affiliation have the following characteristics:
1. They have a strong desire for acceptance and approval from others.
2. They tend to conform to the wishes of those people whose friendship and companionship they
value.
3. They value the feelings of others.
As regards the above three needs, McClelland holds the view that all three needs may
simultaneously be acting on an individual. But, in case of an entrepreneur, the high need for
achievement is found dominating one.
 Motivating Factors:
( A ) Internal Factors: ( B ) External Factors:
 Educational Background.  Assistance from Government.
 Occupational Experience.  Assistance from financial institutions.
 Desire to do work independently.  Availability of technology.
 Desire to branch out to manufacturing.  Availability of raw material.
 Family Background.  Demand of the particular product.

 Developing Entrepreneurial Competences.

 Gaining first hand knowledge about competencies.
 Competency Recognition.
 Self Assessment.
 Comparing of Competencies.
 Developing of Competencies and feedback.

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

Achievement Motivation: Kakinada Experiment
 Achievement depends on how badly one wants to achieve. The need for achievement, therefore,
plays an important role in making an entrepreneur as successful. It is an inner spirit that
activates an entrepreneur to strive for success. In simple terms, need for achievement is the
desire to do well. The empirical evidences support the hypotheses that need for achievement
contributes to entrepreneurial success. Hence, there is the need for developing achievement
motivation for developing entrepreneurship in an economy.
 Then, the question is how to develop achievement motivation? David C. McClelland, a well-
known Behavioural scientist of USA holds the view that achievement motivation can be
developed through training and experience. For this, McClelland conducted his experiments
with groups of businessmen in three countries, i.e. Malawi, India, and Ecuador.
 He carried out a separate full-fledged training programme in India to instill achievement
motivation in the minds of entrepreneurs. His successful experiment is popularly known as
“Kakinada Experiment” Following is a brief description of this experiment.
 Kakinada Experiment:
 Kakinada is an industrial town in Andhra Pradesh. The experiment started in January 1964. The
main objective of the experiment was to break the barrier of limited aspirations by inducing
achievement motivation. A total of fifty two persons were selected from business and industrial
community of the town. They were given an orientation programme at Small Industry Extension
Training Institute (SIET), now NIESIET, and Hyderabad.
 The participants were grouped into three batches. They were put under training for 3 months.
The training programme was designed in such a way that it could help the trainees improve
imagination and enable them to have introspection of their motivation.
 Accordingly, the programme included the following items in its syllabi:
 1. The individuals strived to attain concrete and regular feedback.
 2. The participants sought models of achievement to emulate.
 3. The participants thought of success and accordingly set plans and goals.
 4. The participants were encouraged to think and talk to themselves in a positive manner.
 The impact of this training programme on the participants’ behaviour was observed after a
period of two years. The observations were quite encouraging. It was found that those attended
the programme performed better than those did not.

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

  The participants’ need for achievement was assessed by using Thematic Apperception Test
(TAT). In this TAT, ambition related pictures were displayed to the trainees and then they were
asked to interpret the pictures and what is happening in the picture.
 Thereafter, all the themes related to achievement were counted and, thus, the final score
represented one’s need for achievement. McClelland reached to this conclusion that the training
programme positively influenced the entrepreneurial behaviour of the participants. As regards
caste, the traditional beliefs and imitation of western culture, they did not determine one’s
behaviour as an entrepreneur.
 That the need for achievement motivation can be developed more especially in younger minds is
well supported by the cross-country experiments. For example, Junior Achievement
Programme’ is started in the United States of America with a view to instill achievement
motivation in the minds of younger generation. Similarly, in United Kingdom, “Young
Enterprise” programme has been started in the same objective of inducing achievement
motivation in younger minds.
 The above said experiments/programmes have made us realize that entrepreneurship is to be
developed from a very young age. Accordingly, efforts have been made to develop a school
curriculum that would result in a high need for achievement among the students.
 For this purpose, the success stories drawn from history and legends of the indigenous culture
are introduced in course curriculum to induce in young minds the ‘need for achievement’ and
strong desire to do something good/ great they grow up. This is because the younger minds are
more susceptible to change.
Developing Achievement Motivation among Entrepreneurs
Developing Achievement Motivation among Entrepreneurs!
Behavioural experiments like “Kakinada Experiment” of David C. McClelland has proved beyond
doubt that achievement motivation can be developed. It is with this realization; Assam started the noble
experiment named “Entrepreneurial Motivation Training Centers (EMTCs)” way back in 1973 to
develop achievement motivation among the prospective entrepreneurs.
The concept of “Entrepreneurial Motivation Training (EMT)” now rechristened as “Entrepreneurship
Development Programmes (EDPs)” is based on this belief that achievement motivation can be
developed by imparting required training and education to the prospective entrepreneurs.
The modus operandi of developing achievement motivation involves a process having the
following three major stages:
1. Know yourself stage,

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

2. Knowing the destination stage,
3. Empowering stage.
1. Know yourself Stage:
In this stage, the trainer presents and describes the ideal attributes or qualities of a person with
achievement motivation. These are exemplified by suitable examples. Then, trainees are asked to probe
into their personality to identify the attributes they possess. Self-assessment in supplemented by
comments and observation by other trainees.
Thus, the trainee comes to know the real self. A comparison of ideal with real self creates discrepancy
or disequilibrium. Such knowledge of discrepancy induces trainee to reduce or eliminate the same for
its better self. Thus, the process of change motivation sets in.
2. Knowing the Destination Stage:
In this stage, the facilitator helps the trainee initiate actions to fill in the gap of remove the discrepancy
between the ideal and the actual personality traits. Various measures like change in attitudes and beliefs
and undertaking some experiential exercises can be initiated to close the gap between the ideal and the
present personality traits. Efforts are made to practice the changed attitude and modification in
behaviour in real life situations. The feedback, whatsoever, is continuously gathered and religiously
analyzed.
3. Empowering Stage:
With an objective to give confidence to the trainees, they are, in this stage, left their own to think and
practice the ways and means to experiment the new qualities and traits they have so far acquired.
In summary, the EMT process can be diagrammatically presented as follows:

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

The various exercises and games that can be used for developing achievement motivation among
the trainees are summarized as follows:
Exercise and Games for EMT:

Nos. Exercises / Games Objectives

1. Micro-lab To help trainees familiarize themselves with each other.
To build up and break and trainees expectations about the
programme.
2. Thematic To determine the existence and level of achievement motivation
Appreciation Testamong the trainees.
(TAT) To help them internalize the associate network of achievement
motivation.
To emphasize the formation and use of achievement language in day-
to-day thinking and action.
3. Who am I? To help the trainees know themselves their goals, strengths and
weaknesses.
4. Achievement To help trainees internalize thought process related to high need for
Planning (APO) achievement.
Exercise or Boat
Making Exercise
5. Tower Building To help know goal setting ability, understanding of help behaviour,
positive strokes and decision making.
6. Convince andTo know the process of influencing others, leadership, fast grasping
Crown (Groupand communicating skills.
discussion a subject
and convincing
others)
7. Creativity Games To remove the barriers of creative thinking
Let us illustrate achievement motivation with an anecdote. This anecdote is about an entrepreneurship
development programme especially on ‘achievement motivation.’ The trainer started his session with
an exercise, wherein each participant was given a set of 10 plastic rings, which he was asked to throw
around a stationary pole placed at one end of the hall. The objective for each participant was to

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

maximize the number of rings he could throw on to the pole, and the condition was that he could
choose his distance from the pole.
The theory says that an entrepreneurial person who is characterized by high levels of achievement
motivation would choose a moderated distance from the pole, because going too far would make the
task unattainable, and going too near ‘would deprive the person of the sense of accomplishing a
challenging task.
All the trainees, except one, threw the rings from ‘appropriate’ distances, and collected their scores,
some high and some low. The one exception was a person who went near the pole, and placed all the
10 rings around the pole. Naturally, he was judged to be low on the achievement motive.
Though his behaviour was rather unusual, his explanation seemed to be quite logical. If the objective
was to maximize the number of rings around the pole, and there was no external constraint on the
choice of the distance, why should he take unnecessary risk by moving away from the pole? The
subsequent activities and achievements of the trainees confirmed that this person was probably more
entrepreneurial than the rest.
Of the 17 trainees (16 who were assessed to be high on achievement motivation and one who was low),
only three have started their own ventures in later years, and only one survived and that was the man
who was judged to have been low on achievement motivation! As in the training session, so in life too,
he chose to be an odd man out!
Entrepreneurship Development Programmes: Meaning, Need and Objectives of EDP
Meaning:
 As the term itself denotes, EDP is a programme meant to develop entrepreneurial abilities
among the people.
 In other words, it refers to inculcation, development, and polishing of entrepreneurial skills into
a person needed to establish and successfully run his / her enterprise.
 Thus, the concept of entrepreneurship development programme involves equipping a person
with the required skills and knowledge needed for starting and running the enterprise.
Need for EDPs:
That, entrepreneurs possess certain competencies or traits. These competencies or traits are the
underlying characteristics of the entrepreneurs which result in superior performance and which
distinguish successful entrepreneurs from the unsuccessful ones.
Then, the important question arises is: where do these traits come from? Or, whether these traits are in
born in the entrepreneurs or can be induced and developed? In other words, whether the entrepreneurs
are born or made? Behavioural scientists have tried to seek answers to these questions.

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

A well-known behavioural scientist David C. McClelland (1961) at Harvard University made an
interesting investigation-cum-experiment into why certain societies displayed great creative powers at
particular periods of their history? What was the cause of these creative bursts of energy? He found that
‘the need for achievement (n’ ach factor)’ was the answer to this question. It was the need for
achievement that motivates people to work hard. According to him, money- making was incidental. It
was only a measure of achievement, not its motivation.
In order to answer the next question whether this need for achievement could be induced, he conducted
a five-year experimental study in Kakinada, i.e. one of the prosperous districts of Andhra Pradesh in
India in collaboration with Small Industries Extension and Training Institute (SIET), Hyderabad.
Objectives of EDP:
The major objectives of the Entrepreneurship Development Programmes (EDPs) are to:
a. Develop and strengthen the entrepreneurial quality, i.e. motivation or need for achievement.
b. Analyse environmental set up relating to small industry and small business.
c. Select the product.
d. Formulate proposal for the product.
e. Understand the process and procedure involved in setting up a small enterprise.
f. Know the sources of help and support available for starting a small scale industry.
g. Acquire the necessary managerial skills required to run a small-scale industry.
h. Know the pros and cons in becoming an entrepreneur.
i. Appreciate the needed entrepreneurial discipline.
j. Besides, some of the other important objectives of the EDPs are to:
k. Let the entrepreneur himself / herself set or reset objectives for his / her enterprise and strive for their
realization.
l. Prepare him / her to accept the uncertainty in running a business.
m. Enable him / her to take decisions.
n. Enable to communicate clearly and effectively.
o. Develop a broad vision about the business.
p. Make him subscribe to the industrial democracy.
q. Develop passion for integrity and honesty.
r. Make him learn compliance with law.

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

Phases of Entrepreneurship Development Programmes In India
EDP is primarily designed to induce motivation and competence among young prospective
entrepreneurs. There are three different phases of EDP like:
1. Pre-training phase:
Pre-training phase consists of all activities and preparation to launch training programme. Pre-
training phase of EDP consists of the following activities :
 Selection of entrepreneurs for the training programme.
 Arrangements of infrastructure are for the programme like selection of place of training.
 Deciding guest faculty for the programme from education industry and banks.
 Taking necessary steps for inauguration of programme.
 Formation of selection committee to select trainees from the programme.
 Making provision with regard to publicity and campaigning for the programme.
2. Training Phase:
 The primary objective of training programme is to develop motivation and skill or competency
amongst the potential entrepreneurs. Care should be taken to impart both theoretical and
practical knowledge to various trainees. The training phase of EDP will be so designed that it
will answer the following questions:
(a) Whether the attitude of the entrepreneur has been tuned towards the proposed project or no.
(b) Whether the trainee has been motivated to accept entrepreneurship as a career.
(c) How the trainee behaves like an entrepreneur.
(d) Whether the trainee has sufficient knowledge on resources and technology or not.
(e) What kind of entrepreneurial traits he lacks and what steps should be taken to set it.
3. Follow-up Phase:
Follow up phase of EDP has been termed as post-training phase. The ultimate objective is to develop
competent entrepreneurs.
So that they can start their project. Post-training phase is a review phase of training programme. It
consists of reviewing of work in the following manner:
 Review of pre-training work
 Review of actual training programme
 Review of post training programme so that cost effectiveness of the present programme can be
evaluated.

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

UNIT – 3
SMALL ENTERPRISES: MEANING & DEFINITION
Meaning of Small Business Enterprises:
Small business may be defined in various ways e.g. in terms of investment, number of persons
employed, volume of output and sales, technique of production etc.
However, in India, small business is defined by Government, as consisting of the following four
types of businesses:
(i) Small Scale Industries:
The investment in plant and machinery is up to Rs. 1 crore.
TYPES: MANUFACTURING, FEEDER, SERVING, ANCILLARY TO LARGE, MINING or
QUARRYING.
(ii) Ancillary Industrial Undertakings:
The investment in plant and machinery not to exceed Rs.1crore; and the undertaking must sell not less
than 50% of the its output to other industrial undertakings.
(iii) Export-Oriented Units:
The investment in plant and machinery is up to Rs. 5 crores; and the unit must export at least 30% of its
output by the end of three years from the commencement of production.
(iv) Tiny Units:
The investment in plant and machinery is up-to Rs.25 lakhs.

Small and medium-sized enterprises (SMEs, also small and medium enterprises) or small and
medium-sized businesses (SMBs) are businesses whose personnel numbers fall below certain limits.
The abbreviation "SME" is used in the European Union and by international organizations such as the
World Bank, the United Nations and the World Trade Organization (WTO). Small enterprises
outnumber large companies by a wide margin and also employ many more people. SMEs are also said
to be responsible for driving innovation and competition in many economic sectors.

Definitions of Micro, Small & Medium Enterprises In accordance with the provision of Micro,
Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium
Enterprises (MSME) are classified in two Classes:
1. Manufacturing Enterprises-he enterprises engaged in the manufacture or production of goods
pertaining to any industry specified in the first schedule to the industries (Development and
regulation) Act, 1951) or employing plant and machinery in the process of value addition to the

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

 final product having a distinct name or character or use. The Manufacturing Enterprise are
defined in terms of investment in Plant & Machinery.
2. Service Enterprises:-The enterprises engaged in providing or rendering of services and are
defined in terms of investment in equipment..
The limit for investment in plant and machinery / equipment for manufacturing / service
enterprises, as notified,vide S.O. 1642(E) dtd.29-09-2006 are as under
Manufacturing Sector
Enterprises Investment in plant & machinery
Micro Enterprises Does not exceed twenty five lakh rupees
Small Enterprises More than twenty five lakh rupees but does not exceed five crore rupees
Medium Enterprises More than five crore rupees but does not exceed ten crore rupees
Service Sector
Enterprises Investment in equipments
Micro Enterprises Does not exceed ten lakh rupees:
Small Enterprises More than ten lakh rupees but does not exceed two crore rupees
Medium Enterprises More than two crore rupees but does not exceed five core rupees

Characteristics of Small Business Enterprises:

Some of the salient characteristics of small business enterprises are stated below:
(i) Limited Investment:
In a small business enterprise, capital is supplied by an individual or a small group of individuals. As
per a census of small scale units in India, mostly small business enterprises are run as sole-
proprietorship and partnership.
(ii) Personal Character/Owner-Management:
A small business is identified with its owners; who themselves act as managers. Managers as such have
maximum motivation to work; as they themselves happen to be the owners also, at the same time.
(iii) Labour-Intensive:
Small business enterprises are mostly labour-intensive. The machinery and equipment used are not very
sophisticated and are operated manually.
(iv) Unorganised Labour:
Small business enterprises employ less number of workers as compared with big business enterprises.
Workers of these units do not form labour unions and remain unprotected.

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(v) Local Area of Operations:
The area of operations of small units is generally local as they have less capital and less marketing
facilities at their disposal. There is a local touch between employer and employees; and between
employer and customers though products of some small scale enterprises are exported to many
countries of the world.
Problems Faced by Small Business Enterprises:
Small business enterprises in India face many problems, which come in the way of their growth and
prosperity.
These problems could be put into two categories:
(I) Financial Problem – The Central Problem:
Small scale industries usually do not have sufficient funds to meet their fixed capital and working
capital requirements.
Institutional lenders are generally reluctant to advance money to small industries since:
1. They are not in a position to offer the guarantee required by financial institutions and
2. Their capacity to repay the loan is little.
In fact, inadequate finances are the central problem faced by small-scale enterprises. It is the mother of
all other problems of the small scale business sector. For example, problems like outdated technology,
lack of professional management, problem of advertising etc. all arise for small scale enterprises;
because they do not command requisite funds for meeting these purposes.
Many small scale enterprises, as a matter of fact, in the past have closed down due to financial crisis.
(II) Other Problems:
Other problems, of course, of a serious nature faced by small business enterprises are as follows:
(i) Faulty Planning:
Faulty planning is a major problem of the small business. No proper viability studies-technical or
economic-are carried out by the small firms; before they are sponsored. Small firms cannot afford the
preparation of a project report for which a large unit can pay fat fee to a consultant.
(ii) Shortage of Raw-Material and Other Infrastructural Facilities:
Small business industries suffer from accurate shortage of basic raw materials. In most of the cases,
when raw materials are in short supply, large scale business enterprises grab the entire supply, because
of their stronger bargaining position. Small scale enterprises also face lack of other infrastructural
facilities like water and power connections. Shortage of power leads to under utilisation of plant
capacity.

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

(iii) Lack of Latest Technology:
Most of the small firms use old or outdated techniques of production. They cannot afford new
machines and equipment based on latest technology; mainly because of financial crunch. As such, the
cost of production of small firms is higher and the quality of production is rather inferior.
(iv) Marketing Problems:
Small firms face severe problems in the sphere of marketing of their products.
Some major marketing problems of the small business are:
1. Lack of funds and facilities for advertising
2. Competition from the big business counterparts on grounds of higher cost and inferior quality
(characteristic of small business).
3. Unwillingness of distribution channels to deal in products of small manufacturing units.
4. Lack of providing after sales services, on the part of the small firms.
5. Problem of recoveries or collection, in case goods is sold on credit etc.
(v) Lack of Professional Management and Trained Personnel:
Small business enterprises have owner based management i.e. owners themselves act as managers.
They cannot afford the services of professionalized expert managers; because they cannot pay the
required handsome remuneration to them. Alongside professional managers, small business cannot
employ qualified and trained manpower, again due to financial crunch.
In fact, professional managers and other trained personnel get attracted towards multinational
corporations and other big industrial and commercial companies; which can afford to provide high
salaries and attractive perks to these people.
TYPES OF OWNERSHIP
There are basically three types or forms of business ownership structures for new small businesses:
Sole Proprietorship: A business owned and operated by a single individual
Partnership: A business that is owned and operated by two or more people
Private Corporation: A business that is a legal entity created by the state whose assets and liabilities
are separate from its owners. While there are also public corporations — who stock (and ownership)
are traded on a public stock exchange — most small businesses are (or at least start as) private
corporations.
A private corporation is owned by a small group of people who are typically involved in managing the
business. Forming a corporation requires developing a legal document called the “Articles of
Incorporation” and submitting them to the state in which the corporation wishes to reside.

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Advantages of a corporation include limited liability — an owner (stockholder) can only lose up to the
amount s/he invested; unlimited lifespan — a corporation is charted to last forever unless its articles of
incorporation state otherwise; great sources of funding; and ease of transfer of ownership.
Disadvantages include double taxation — the corporation, as a legal entity, must pay taxes, and then
shareholders also pay taxes on any dividends received.
Ownership Pattern of MSMEs in Thousand
Ownership Pattern Number
Proprietary 1402.8 (90.35%)
Partnership firms 59.8 (3.85%)
Private Company 41.7 (2.69%)
Public Limited Company 8.2 (0.3%)
Cooperatives 4.6 (0.3%)
Others 35.3 (2.27%)
Source : Government of india, Ministry of Micro, small & medium Enterprises, Annual Report 2009-
10
Stages involved in the Formulation of a Good Business Plan
Normally, micro and small-scale enterprises do not include sophisticated techniques which are used for
preparing project reports of large-scale enterprises. Within the small-scale enterprises too, all the
information may not be homogeneous for all units.
These stages are:
1. General Information.
The information of general nature given in the project report includes the following:
Bio-data of Promoter:
Industry Profile:
Industry Profile:
Product Details:
2. Project Description.
A brief description of the project covering the following aspects is given in the project report.
Site:
Physical Infrastructure:
Availability of the following items of infrastructure should be mentioned in the project report:
(i) Raw Material:
(ii) Skilled Labour:

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

Utilities:
These include: (i) Power: (ii) Fuel: (iii) Water:
Pollution Control:
Communication System:
Transport Facilities:
Other Common Facilities:
Production Process:
Machinery and Equipment:
Capacity of the Plant:
Technology Selected:
Research and Development:

3. Market Potential.
While preparing a project report, the following aspects relating to market potential of the product
should be stated in the report:
(i) Demand and Supply Position:
(ii) Expected Price:
(iii) Marketing Strategy:
(iv) After-Sales Service:
(v) Transportation:
4. Capital Costs and Sources of Finance.
An estimate of the various components of capital items like land and buildings, plant and machinery,
installation costs, preliminary expenses, margin for working capital should be given in the project
report.
5. Assessment of Working Capital Requirements.
The requirement for working capital and its sources of supply should be carefully and clearly
mentioned in the business plan or project report.
6. Other Financial Aspects.
In order to adjudge the profitability of the project to be set up, a projected Profit and Loss Account
indicating likely sales revenue, cost of production, allied cost and profit should be prepared. A
projected Balance Sheet and Cash Flow Statement should also be prepared to indicate the financial
position and requirements at various stages of the project.Break-even point (BEP) is calculated as
follows:

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

BEP = F/S-V x 100
where, F = Fixed Cost
S = Sales Projected
V = Variable Costs
7. Economic and Social Variables.
In view of the social responsibility of business, the abatement costs, i.e., the costs for controlling the
environmental damage should be stated in the project. Arrangements made for treating the effluents
and emissions should also be mentioned in the report.
Following are the examples of socioeconomic benefits:
(i) Employment Generation.
(ii) Import Substitution.
(iii) Ancillarisation.
(iv) Exports.
(v) Local Resource Utilization.
(vi) Development of the Area.

8. Project Implementation.
Setting up of a Small Business Enterprise
Who do establish small business enterprises? Broadly, there are two types of people who establish
small enterprises. One people who want to take the advantages of opportunities available. Two, people
who have no option for making a livelihood.
These two types of entrepreneurs are also termed as ‘entrepreneurs by choice’ and ‘entrepreneurs by
compulsions’ respectively. Starting an enterprise is not so simple and cannot be set up just. In fact,
there are several steps involved in setting up a small business enterprise.
Following are the major ones:
(i) Information Collection
(ii) Information Organization
(iii) Acquiring Required/Vocational Skills
(iv) Financial Requirements
(v) Market Assessment
(vi) Provision for Crisis

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

Identification of Business Opportunity: Idea Generation and Opportunity
In general sense, the term opportunity implies a good chance or a favourable situation to do something
offered by circumstances. In the same vein, business opportunity means a good or favourable change
available to run a specific business in a given environment at a given point of time.
To mention the important ones, the entrepreneurs selected their products or projects based on:
a. Their own or partners’ past experience in that business line;
b. The Government’s promotional schemes and facilities offered to run some specific business
enterprises;
c. The high profitability of products;
d. Which indicate increasing demand for them in the market?
e. The availability of inputs like raw materials, labour, etc. at cheaper rates;
f. The expansion or diversification plans of their own or any other ongoing business known to them;
g. The products reserved for small-scale units or certain locations.
Now, having gained some idea on how the existing entrepreneurs selected products/projects, the
intending entrepreneur can find a way out of the tangle of which opportunity/product/project to select
to finally pursue as one’s business enterprise.
Idea Generation:
Sources of Ideas:
In a sense, opportunity identification and selection are akin to, what is termed in marketing
terminology, ‘new product development.’ Thus, product or opportunity identification and selection
process starts with the generation of ideas, or say, ideas about some opportunities or products are
generated in the first instance.
(i) Knowledge of potential customer needs,
(ii) Watching emerging trends in demands for certain products,
(iii) Scope for producing substitute product,
(iv) Going through certain professional magazines catering to specific interests like electronics,
computers, etc.,
(v) Success stories of known entrepreneurs or friends or relatives,
(vi) Making visits to trade fairs and exhibitions displaying new products and services,
(vii) Meeting with the Government agencies,
(viii) Ideas given by the knowledgeable persons,
(ix) Knowledge about the Government policy, concessions and incentives, list of items reserved for
exclusive manufacture in small-scale sector,

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

(x) A new product introduced by the competitor, and
(xi) One’s market insights through observation.
Methods of Project Appraisal
1. Economic Analysis:
2. Financial Analysis:
3. Market Analysis:
1. Opinion Polling Method:
(a) Complete Enumeration Survey:
(b) Sample Survey:
(c) Sales Experience Method:
(d) Vicarious Method:
2. Life Cycle Segmentation Analysis:

4. Technical Feasibility:
5. Management Competence:
Guidelines of Planning Commission’s for Formulating Project Report
1. General Information:
2. Preliminary Analysis of Alternatives:
3. Project Description:
4. Marketing Plan:
5. Capital Requirements and Costs:
6. Operating Requirements and Costs:
7. Financial Analysis:
8. Economic Analysis:
9. Miscellaneous Aspects:

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

UNIT IV FINANCING & ACCOUNTING
NEED FOR FINANCIAL PLANNING
Finance is one of the important prerequisites 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
together to combine them to produce goods.
Financing an enterprise-whether large or small is a critical element for success in business.
The decisions taken by the entrepreneur well in advance regarding the future financial aspects of
his/her enterprise is called “financial planning”.
In financial forecast, the entrepreneur should clearly answer the following three questions:
1. How much money is needed?
2. Where will money come from?
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:
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. 10-
15% of purchase consideration to cover such expenses.

Classification of financial needs of an enterprise:

1. On the basis of extent of performance
(i) Fixed Capital, (ii) Working Capital
2. On the basis of period of use
(i) Long term Capital/Finance (ii) short term Capital/Finance

SOURCES OF FINANCE
(i) Internal Sources
(ii) External Sources

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TERM LOANS
SOURCES
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
CAPITAL STRUCTURE
Ownership capital – equity
Borrowed capital – debt.
Equity – Debt ratio (Capital Structure)
Capital Structure – Permanent financing of enterprise represented primarily by Long term sources of
funds.
Financial Structure - Permanent financing of enterprise represented primarily by Short term & Long
term sources of funds.
FACTORS DETERMINING CAPITAL STRUCTURE
1. Nature of business
2. Size of the enterprise
3. Trading on equity
4. Cash flows
5. Purpose of financing
6. Provision for future
FINANCIAL INSTITUTIONS
CLASSIFICATION
 Commercial Banks
 Other Financial Institutions
1. Industrial Bank of India (IDBI)
2. Industrial Finance Corporation of India Ltd. (IFCI)
3. Industrial Credit and Investment Corporations of India Ltd. (ICICI)
4. Industrial Reconstruction Bank of India (IRBI)
5. State Finance Corporations (SFCs)
6. State Industrial Development Corporations (SIDCs)

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 7. Small Industries Development Bank of India (SIDBI)
8. Export – Import Bank of India (EXIM Bank)

TAXATION
TAX BENEFITS TO SMALL SCALE ENTREPRENEURS
TAX HOLIDAY
 Under Section 80J of the income Tax act 1961 – New industries – Exempted from payment of
income tax on their profits subject to maximum of 6% per annum of their capital employed.
 This exemption – five years from commencement of production on satisfying the following two
conditions
 The unit should not have been formed by the splitting or reconstruction of an existing unit.
 The unit should employ 10 or more workers in a manufacturing process with the power or at
least 20 workers without power
DEPRECIATION
Under Section 32 of the Income Tax act, 1961, a small scale industry is entitled to a deduction on
depreciation on block of assets at prescribed rate.
 Small enterprise is allowed subject to a maximum of Rs.20 Lakh deduction for depreciation on
plant & machinery on following conditions
 The assets must be owned by the assesse.
 The assets must actually be used for the purpose of the assess’s business or profession.
 Depreciations allowance or deduction is allowed only on fixed assets i.e building machinery,
plant & furniture.
REHABILITATION ALLOWANCE
Garanted under section 33-B of the Income Tax act, 1961 – whose business is discontinued on account
of the following reasons:
 Flood, typhoon, hurricane, cyclone, earthquake or other natural upheavals
 Riot or civil disturbance
 Accidental fire or explosion

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

INVESTMENT ALLOWANCE
The investment allowance under section 31 A OF THE INCOME Tax act, 1961 is allowed at the rate
of 25% of the cost of acquisition of the new plant or machinery installed.
EXPENDITURE ON SCIENTIFIC RESEARCH
Under section 35 of the Income Tax act, 1961 the following deductions in respect of expenditure on
scientific research is allowed.
 Any revenue expenditure incurred on scientific research related to the business of the assess in
the previous year.
 Any sum paid to a scientific research association or a university, college, institution or to a
public company which has its object, the undertaking of a scientific research.
 Any capital expenditure incurred on scientific research.
AMORTIZATION OF CERTAIN PRELIMINARY EXPENSES
TAX CONCESSION TO SSI IN RURAL AREAS – 20%
TAX CONCESSION TO SSI IN BACKWARD AREAS – 20%
EXPENDITURE ON ACQUISITION OF PATENTS & COPYRIGHTS

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

UNIT – 5
SICKNESS IN SMALL BUSINESS
SICKNESS IS EASY TO UNDERSTAND BUT DIFFICULU TO DEFINE
A sick industry is one which is not healthy.
A healthy unit is one which earns a reasonable profit i.e., return on capital employed and which builds
up reserves after providing reasonable depreciation.
RBI – A sick unit is one which which incurs cash losses for one year & in the judgement of the bank, it
is likely to continue to incur cash losses for the current year as well as for the following year.
PROCESS OF INDUSTRIAL SICKNESS
It becomes clear from the definitions of industrial sickness that industrial sickness does not occur all of
a sudden in the life of an industrial unit. In fact, it is a gradual process with distinct stages taking from
5 to 7 years to corrode the health of a unit beyond cure and making the unit sick. For example, Bidani
and Mitra put this process of industrial sickness in the following manner:

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

Srivastava and Yadav have chalked out the above process of industrial sickness in their own manner as
delineated in the following Figure

Signals of industrial Sickness:

industries do not fall sick overnight rather the process of failure can take number of years. This implies
that the signs of sickness may be discernable quite early in the life of an industry. These warning signs
in several functional areas are termed as ‘signals’.
The various signals of industrial sickness as continuous irregularity in cash credit accounts ; low
capacity utilization; profit fluctuations, downward sales and fall in profits followed by contraction in
the share market; failure to pay statutory liabilities; larger and longer outstanding in the bills accounts;
non-submission of periodical financial data/stock statement etc. in time; financing capital expenditure
out of funds provided for working capital purposes; rapid turnover of key personnel; existence of large
number of law suits against a company; rapid expansion and too much diversification within a short
time; and any major change in the share holdings.
The important signals of industrial sickness are:
(i) Decline in capacity utilization;
(ii) Shortages of liquid funds to meet short-term financial obligations;
(iii) Inventories in excessive quantities;
(iv) Non-submission of data to banks and financial institutions;

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College

(v) Irregularity in maintaining bank accounts;
(vi) Frequent breakdowns in plants and equipment’s;
(viii) Decline in the quality of product manufactured or service rendered;
(viii) Delay or default in the payment of statutory dues such as provident fund, sales tax, excise duty,
employees’ state insurance, etc.;
(ix) Decline in technical deficiency; and
(x) Frequent turnover of personnel in the industry.
Symptoms of Industrial Sickness:
 The persistence of various signals over a long period of time becomes symptoms of sickness.
 The various symptoms ultimately reflect on plant performance, capacity utilization, financial
ratios, share market price and practices in the diverse areas of finance, production, marketing
and labour relations in the industry.
Some of the important symptoms which characterize industrial sickness are listed as follows:
(i) Persisting shortage of cash;
(ii) Deteriorating financial ratios;
(iii) Widespread use of creative accounting;
(iv) Continuous tumble in the prices of the shares;
(v) Frequent request to banks and financial institutions for loans;
(vi) Delay and default in the payment of statutory dues;
(vii) Delay in the audit of annual accounts; and
(viii) Morale degradation of employees and desperation among the top and middle management level.

Compiled By : Rathinasabapathi.G, Assistant Professor Grade 1, DoME, Panimalar Engineering College