SYLLABUS

UNIT I ENTREPRENEURAL COMPETENCE - Entrepreneurship concept

Entrepreneurship as a Career - Entrepreneurial Personality Characteristics of Successful
Entrepreneurs - Knowledge and Skills of an Entrepreneur.

UNIT II ENTREPRENEURAL ENVIRONMENT - Business Environment Role of

Family and Society– Entrepreneurship Development Training and Other Support
Organisational Services - Central and State Government Industrial Policies and
Regulations.

UNIT III BUSINESS PLAN PREPARATION - Sources of Product for Business -

Prefeasibility Study - Criteria for Selection of Product – Ownership - Capital Budgeting -
Project Profile Preparation – Matching Entrepreneur with the Project - Feasibility
Report Preparation and Evaluation Criteria.

UNIT IV LAUNCHING OF SMALL BUSINESS - Finance an Human Resource

Mobilisation – Operation Planning Market and Channel Selection – Growth Strategies

– Product Launching – Incubation, Venture capital, Start - ups.

UNIT V MANAGEMENTOF SMALL BUSINESS - Monitoring and Evaluation of

Business – Business Sickness – Prevention and Rehabilitation of Business Units –
Effective Management of small Business – Case Studies.
CONTENTS

LEARNING OBJECTIVES........................................................................................................ 2

1.1 BASIC CONCEPTS OF ENTREPRENEURSHIP .................................................................. 2

1.2 APPROACHES TO ENTREPRENEURSHIP ...................................................................... 11

1.3 EVOLUTION OF ENTREPRENEURSHIP ......................................................................... 18

1.4 ROLE OF ENTREPRENEURSHIP IN ECONOMIC DEVELOPMENT .................................. 25

1.5 ENTREPRENEURSHIP PERSONALITY .......................................................................... 33

1.6 ENTREPRENEURSHIP AND RISK TAKING .................................................................... 41

1.7 KNOWLEDGE AND SKILL OF ENTREPRENEURS .......................................................... 48

1.8 STEPS FOR SETTING UP BUSINESS ENTERPRISE ........................................................ 57

LEARNING OUTCOMES ....................................................................................................... 67

SHORT ANSWER QUESTIONS............................................................................................. 67

LONG ANSWER QUESTIONS ............................................................................................... 68

LEARNING OBJECTIVES

 Identify the importance of entrepreneurship

 Describe the motivational factors for startups

 Classify the entrepreneurial opportunity in each decades

 Explain the role of entrepreneurship in economic development

 Discuss the level of risk taking by entrepreneurs

 Identify the most important knowledge and skill to run a business successfully

1.1 BASIC CONCEPTS OF ENTREPRENEURSHIP

Entrepreneur:

An entrepreneur is someone who exercises initiative by organizing a venture to take

benefit of an opportunity and, as the decision maker, decides what, how, and how much of
a good or service will be produced. An entrepreneur provides risk capital as a risk taker, and
monitors and controls the business activities.

Entrepreneurship:

Entrepreneurship is the ability and readiness to develop, organize and run a business
enterprise, in uncertain conditions in order to make a profit. Entrepreneurship is the
willingness to start a new business which plays an important role in the economic
development of a country.
This term evolved to be associated with free enterprise and capitalism in the twentieth
century. It may take the form of sole proprietorship, partnership or a company where the
entrepreneurs holds maximum shares.

Thus, it will be helpful for any business organization to understand the definition of
entrepreneurship, its sources and its types to be able to manage enterprises. There are many
definitions of entrepreneurship based on sources and types of entrepreneurship such as
entrepreneurial skills, innovations, and managements. Previous researches classified
entrepreneurship based on technology, and process of entrepreneurship.
Over years, the term covered whole of the enterprise, than refereeing to a single individual.

Entrepreneur is derived from the French word “Enterprendre” which means “to
undertake”. It is commonly used to describe an individual who organizes and operates a
business or businesses, taking on financial risk to do so.

Entrepreneurs possess character traits as leaders, similar to the Great Man Theory of
Leadership. Some of those have been listed below:

1. An entrepreneur is an innovator

2. An entrepreneur is an opportunity finder and information seeker

3. They believe in quality and efficiency and work systematically

4. They are optimistic and willing to learn

5. They are quick decision makers

6. They take risk, set goals and achieve them

7. They are visionaries with dynamism and networking skills.

8. They are catalysts of change and possess team building and managerial skills

9. They are intellectual having balanced person, EQ -Emotional Quotient, SQ –

Spiritual Quotient

10. They never give up.

Barot (2015) identified two types of entrepreneurship:

1. Opportunity-based entrepreneurship in which an entrepreneur perceives a

business opportunity and develops the business as his career choice.

2. Necessity based entrepreneurship in which the new entrepreneur has no

option to earn a living but for entrepreneurship. The situation is exist when
there is no other labor market option

Aulet, W., and Murray, F., (2013) divided entrepreneurship into two categories:

1. Entrepreneurship which is innovation-driven: This type of innovation-driven

entrepreneurship shares the idea of innovation in business with purpose to
take up opportunities.

2. Small business entrepreneurship or small medium enterprises: It has a limited

access to the global market, serve local markets with traditional way with low
competitive advantage.

These two types of entrepreneurship differ in terms of innovation required, business

model, process, technology and focus on revenue, cash flow and jobs created over time.

1. Small Business Entrepreneurship: It involves starting a business, usually local, that an

entrepreneur believes can benefit the city or town they operate in. It’s a common type of
entrepreneurship, as most businesses are small businesses. Small business entrepreneurs
usually own their business at times with family members. The initial intent usually isn’t to
achieve extremely high profit margins. However, the business may grow their business into
a larger enterprise after periods of success. These businesses typically employ residents of
their town and sometimes family members. Eg. Single location restaurant, one grocery shop.

2. Large business entrepreneurship denotes larger businesses with a series of lifecycles

from consistent innovation by creating new products and services to meet evolving
customer needs and demands. These businesses are already established and can grow from
smaller establishments. These entrepreneurs, are experienced business people with access
to capital and resources that make it possible to grow. These entrepreneurs may buy out
smaller businesses that can meet the needs of existing target markets. Eg. Apple, Microsoft.

3. Scalable Startup Entrepreneurship Scalable startup stems from existing businesses,

and their founders believe the company has the potential for infinite growth after identifying
a market opportunity. Scalable business entrepreneurs also have access to funds or obtain
funding from venture capitalists and angel investors. These endeavors also focus on rapid
growth and big profits. Tech companies are examples of scalable startup entrepreneurship.

4. Social entrepreneurship : A social entrepreneur wants to address social problems with

their products or services that improve people’s livelihoods. These problems can be
environmental, cultural, social, and economic issues. The resulting businesses can be for-
profit, non-profit, or a hybrid, but acquired funds typically support operations, and extra
capital is redistributed into the community. They can be small businesses and large, scalable
companies that grow and operate in different parts of the world. Unlike other ventures, end
products of social enterprises don’t always follow the traditional business structure.

Educational programs for under privileged.

While social, scalable, and large and small business entrepreneurship are the main
types of entrepreneurial ventures, there are additional models as presented below:

i) Innovative Entrepreneurship: Innovative entrepreneurs are continually coming up with

new ideas, products, and services that they believe will benefit a target market. They can be
small business owners, CEOs of scalable startups and large businesses, or community
organizers who aim to address evolving social needs in their communities.

ii) Imitator Entrepreneurship: Imitator entrepreneurship uses existing business ideas as

inspiration with the intent to improve upon them and provide additional value to customers.
Imitator entrepreneurship is less risky, as there is already an established path to follow.

iii) Researcher Entrepreneurship: Researcher entrepreneurs establish business ventures

after a long-term research process that relies on facts and data. They’re cautious and detailed
and create in-depth business plans to guide their processes.

iv) Buyer entrepreneurship: These entrepreneurs buy companies or absorb smaller

businesses because they think they can achieve long-term success or supplement existing
products and services.

The various functions of entrepreneurship are Innovation and creativity, Risk

taking and achievement and organization and management, Catalyst of Economic
Development, Overcoming Resistance to Change and Research.

I) Innovation and Creativity – Innovation is derived from the latin word ‘Inovare” which
means to renew. In business, it may refer to a product, service or process that improves or
replaces the existing one. It may be defined as a process by which a domain, a product or
service is renewed and brought up to date by applying new processes, introducing new
techniques or establishing new ideas to create value. Creativity is defined as “the tendency
to generate or recognize ideas, alternatives, or possibilities that may be useful in solving
problems, communicating with others. Entrepreneurs think outside of the box and explore
new areas for cost-effective business solutions.

(II) Risk taking and Achievement – A risk is defined as the possibility of loss, injury,
disadvantage or destruction. A business involves certain risks during establishment
and expansion. It results in introducing a new product or service to society. In general,
entrepreneurs accept four types of risks namely Financial Risk, Job Risk and Social & Family
Risk & Mental & Health Risk.

(III) Organization and Management – Entrepreneurship organistaions are structures that

promote receiving and development of ideas from all members of the firm. It provides
flexibility to pool the inputs of all concerned, to the decision makers. They have specific
innovation model, financial model, HR selection and utilization process. Entrepreneurial
management means the skills necessary to successfully develop and manage a business
enterprise. According to Mintzberg, these include the interpersonal roles, informational
roles and decision-making roles. The smaller the organization, the more concentrated
these roles are in the hands of the owner-manager.

(IV) Research – Detailed market research provides entrepeneurs with understanding of the
target market, consumer’s problems and competitor’s actions. It can be carried out at every
stage of business cycle to develop appropriate business strategies and deal with competition.
It may be primary research involving sales and competition or secondary research of
published company reports, surveys, Newspaper reports and Government data base. An
entrepreneur finalizes an idea only after considering a variety of options, analysing their
strengths and weaknesses by applying analytical techniques, testing their applicability,
supplementing them with empirical findings, and then choosing the best alternative.

(V) Overcoming Resistance to Change – New innovations are generally opposed by people
because it makes them change their existing behaviour patterns. An entrepreneur always
first tries new ideas at his/her level. It is only after the successful implementation of these
ideas that an entrepreneur makes these ideas available to others for their benefit.

(VI) Catalyst of Economic Development – An entrepreneur plays an important role in

accelerating the pace of economic development of a country, by starting new business,
creating jobs, contributing to improvement in GDP, exports, Standard of living, skill
development and community development. They are instrumental in creation of demand
and also production that is associated with fulfilling the demand.

The entrepreneurial process is cyclical and starts over and over again. They are:

(I) Search for a new Idea – An entrepreneurial process begins with the idea generation,
wherein the entrepreneur identifies and evaluates the business opportunities available.
When working on business ideas, the perspectives of the company, the customer, the
competitor and the collaborator needs to be considered. A SWOT analysis of the industry
needs may show the gap and opportunities for a new business.

(II) Assessment of Idea – The identification and the evaluation of opportunities is a difficult
task, therefore, an entrepreneur seeks inputs from all the persons including employees,
consumers, channel partners, technical people, etc. to reach to an optimum business
opportunity. Evaluation of opportunities brings into light, the respective advantages and
disadvantages of each opportunity, thereby helping the entrepreneur to decide on the idea,
to be developed upon.

(III) Detailed analysis of possible Ideas – An entrepreneur can evaluate the efficiency of
an opportunity by continuously asking certain questions such as, whether the opportunity is
worthy of investing, its attractiveness, proposed solutions feasibility, chances of competitive
advantage & various risks associated with it etc. Above all, an entrepreneur must analyse
his/her personal skills & capabilities to ensure realization of entrepreneurial goals.

(IV) Selection of promising Idea – Once the analysis is done at both macro & micro level,
then the entrepreneur selects the best possible option amongst the chosen few, on the basis
of the key factors identified by him/her before idea generation.

(V) Assembling the required Resource – The next step in the process is resourcing,
wherein, the entrepreneur identifies the sources from where the right amount of finance and
the right quality of human resource can be arranged. Thus, the entrepreneur finds investors
or financial sources for its new venture and the people required to carry out the business
activities.

(VI) Determining size of unit – On the basis of the ability to manage resources, the
entrepreneur determines the initial size of the business and the possibilities of expansion.
This is explained in the initial sections of this module.

(VII) Deciding location of Business & Planning Layout – Entrepreneur should ideally
decide the location where there are Tax holidays & cheap labour & material are available
adequately. This has a bearing on cost, lead time for manufacturing and delivery, quality of
labour and such.

(VIII) Financial Planning – Once the funds are raised and the employees are hired, business
location and layout have been finalised, a detailed budget is worked out and action plan is
devised based on the same.

(IX) Launching the Enterprise – Launching the enterprise involves compliance to

Government norms, legal procedures and continuous coordination of resources.

(X) Managing the enterprise –This is to initiate the business operations to achieve the set
goals. Entrepreneur must decide the management structure or the hierarchy, which is
required to solve the operational problems, as and when they arise.

(XI) Harvesting – The final step in the entrepreneurial process is harvesting, wherein, an
entrepreneur decides on the future prospects of the business, such as its growth and
development. The actual growth is compared against the planned growth and then the
decision regarding the stability or the expansion of business operations are taken.

Though, entrepreneurship looks lucrative, it demands untiring efforts of an

entrepreneurs to convert idea to action and monito its growth. However, all these efforts
payoff in a manner that enterprises support economic development and societal growth.
1.2 APPROACHES TO ENTREPRENEURSHIP

Cunningham and Lischeron (1994) posited six schools of entrepreneurship, which

helps understanding of the major approaches to entrepreneurship. Each school is
differentiated by how it describes entrepreneurship/entrepreneur - personal
characteristics, opportunities available, management styles or adapting an existing venture.

These schools are:

1. The great person’s school of entrepreneurship;

2. The psychological characteristics school of entrepreneurship;

3. The classical school of entrepreneurship;

4. The leadership school of entrepreneurship;

5. The management school of entrepreneurship; and,

6. The intrapreneurship school of entrepreneurship.

(i) The great person school stresses on the inborn traits of the person to recognize
an opportunity and make the appropriate decision. The assumption of this
approach is that, this intuitive faculty, provides an individual, the required
entrepreneurial makeup. The great person possesses confidence and is also
endowed with high levels of vigour, persistence, vision, single-mindedness and
self-respect.
(ii) The psychological school of entrepreneurship states that, entrepreneurs have
unique values, needs and attitude that distinguish them from non-entrepreneurs.
They will have a higher propensity to function in entrepreneurial domain. They
posses’ pacific personality namely: risk-taking propensity; personal values and
 the need for achievement (nAch). This school records that, a person develops
entrepreneur traits over time through socialization.
(iii) The classical school, is developed around venturing, which involves risk taking.
Innovation and creativity are considered the vital factors that influence
entrepreneur. The school states that, the role of management is to seek
opportunity that focuses on innovation.
(iv) The management school suggests that an entrepreneur is a person who organizes
or manages a business undertaking, assuming the risk for the sake of profit
(Webster, 1966). This school states that, entrepreneurship can be nourished
through conscious learning. Management strategies are often considered the
reason for failure in entrepreneurial activities .The school believes that, training
in management functions, will be helpful in reducing business failure.
(v) The leadership school of entrepreneurship proposes that a successful
entrepreneur must be a ‘people manager’, an effective leader and also a mentor
who directs and leads the team to accomplish set tasks. Kao (1989) postulates that
the entrepreneur must be a leader, able to define a vision of what is possible, and
attract people to rally around that vision and transform it into reality. Getting the
task accomplished and responding to the needs of those involved in task
accomplishment are considered important in this approach.
(vi) Intrapreneurship school focuses on innovativeness and competitiveness
within organizations. Intrapreneurs, though with limited power within
organizations, act as entrepreneurs and implement their ideas without
necessarily becoming owners. This stresses on initiative and a supportive culture
in an organization.
There are broadly four approaches to the study of entrepreneurship:

 Sociological Approach

 Psychological Approach

 Political Approach

 Composite Approach

I. SOCIOLOGICAL APPROACH: IT CAN BE SEEN FROM SUPPLY AND DEMAND SIDE

The Sociological Supply Side:

The sociological supply side, focuses on the influence of society on entrepreneurial

practices. The presence of congenial cultural attributes that facilitate entrepreneurial
practices and, social class or ethnic group are considered as explanatory variables in
sociological supply side perspective. The scholars like Weber, Shapero and Sokol
(1982), contend that, the presence of entrepreneurship-compatible culture, social class
or group is capable of engendering behaviours that facilitate and enhance
entrepreneurial activities.

 Weber (1904) stated that, the high rate of economic development recorded in
the Western societies relative to other cultures was a corollary of the presence
of values such as individualism, an ascetic self-denial, which discourages
extravagant lifestyles, positive attitude towards work, savings and investment.

The ethic encouraged abstinence from life’s pleasures, and rigorous self-
discipline. Frugality, savings and investment were encouraged. This behavior
accounted for the level of economic development witnessed in those societies.

 Shapero and Sokol’s (1982) explained how group membership and socio-
 cultural environment affect the choice of an entrepreneurial path. Parents were
the major credible examples of entrepreneurship in most cases, but, the influence
of relatives, colleagues, and classmates were also to be considered.

“If he could do it, I knew I could too!” attitude influenced entrepreneurship.

Some ethnic groups were found to contain a large number of examples to establish
the credibility of entrepreneurial event. Jews, Lebanese, Ibos in Nigeria, Jains and
Parisis in India, Gujeratis in East Africa were examples of this. The availability of the
following influences the propensity to engage in entrepreneurial event: perceptions of
desirability and feasibility, financial support, other support, demonstration effect,
models, mentors and partners.

The Sociological Demand Side:

This view holds that, entrepreneurship is not only a condition of traits and
behaviours but also of the environment in which entrepreneurship takes place (Lee and
Peterson, 2000). Wilken recorded the effect of government actions that are facilitating
of entrepreneurship. Gnyawali and Fogel (1994) define the entrepreneurial
environment as the overall economic, socio-cultural and political factors that influence
people’s willingness and ability to undertake entrepreneurial activities. However, the
ecological and institutional processes are considered here.

 Ecological model explains the rate of entrepreneurship in terms of the

availability and distribution of environmental resources. It focuses on rates
of entrepreneurship rather than traits of founders. The influences of firms,
influences of markets; public policies; regulations and physical
infrastructure are too stated.

 In institutional processes intra-population processes; inter-population

processes are identified as influencers.
 Intra-population processes refers to an environment’s carrying capacity (environmental
resources). Here, it is contended that an environment’s carrying capacity set a limit on
density. According to Aldrich (1990:9), “ecologists assume that growth is rapid at first,
proceeding exponentially, but then tapering off, as a population approaches its carrying
capacity”. Increasing dissolution rates and decreasing founding rates attributes to the
institution founding rates. The Inter-population processes occur between populations.
The argument under these processes has been that the dominant populations drive
others into positions of subordination.

II. PSYCHOLOGICAL APPROACH:

The role of entrepreneurship in dealing with competition has drawn researchers’

extensive interest. Although entrepreneurship is mostly associated with the fields of
administration, management and economy, it is indeed, an interdisciplinary subject. Mc
Clelland, Atkinson and Feather initiated researches in this area. According to them, the
motivation of individual and society is one of the most important factors that explain
entrepreneurship and individual’s becoming an entrepreneur depends on the highest
possibility of achievement.

When the possibility of achievement gets higher, entrepreneurial propensity rate

increases. These studies stated that, entrepreneurial ability of individual is connected with
societies’ perception of success and to what extent individuals are affected by this
perception. It was also observed that, individual differences have important effects on
entrepreneurship despite cultural commonality.

Studies that were focused over people’s relationships with enterprises and
organizations realized that not only enterprises affect individuals, but also individuals affect
enterprises. Data about entrepreneurship that psychology obtained were recognized and the
relationship between entrepreneurship and the characteristics like risk-taking, uncertainty
avoidance, power distance, need for achievement and risk-management have been studied.
The studies over entrepreneurship that psychology carried out classified individual traits
into two groups:

 The first looked for relationship between entrepreneurship and personal

characteristics that categorized entrepreneurs as self-controlled, self-
confident and competitive people. With imagination and risk taking ability.

 The second group of study explored motivation resources of entrepreneurs

like: motivation for achievement, power distance and willingness for taking
risks.

III. POLITICAL APPROACH:

The theory of the entrepreneur is a branch of the theory of income distribution.

Income theory may be divided into three broadcategories:

1. The Theories of Wages,

2. Interest on Capital and

3. Entrepreneurial Profit.

From Political approach perspective, entrepreneurs are those individuals who

perform the same or similarfunctions in the political sphere as entrepreneurs perform in
the free market economy. The function of political entrepreneurship consists in the
direction of coercively obtained resources by the state toward processes of production
which would not otherwise have taken place. This theory presents the following
characteristics of entrepreneurship namely: ownership, the direction of scarce resources
throughproduction for satisfaction of wants and uncertainty-bearing.

Ownership: These are individuals who exercise ultimate control, and are thus owners. Rents
accrue to the entrepreneur through his control over, and direction of, the factors of
production.
Investment & Production: This is the decision- making aspect of entrepreneurial behavior:
choosing between alternative production opportunities.

IV. COMPOSITE APPROACH:

The entrepreneurship is a complex phenomenon. No approach has discussed the

entrepreneurial dynamics fully. Due to their non-holistic nature, they have failed to offer the
precise laws of success of entrepreneurship. It is understood that, entrepreneurial behaviour
is an outcome of the interplay of multiple social, cultural, economic, political and
psychological factors. None of these factors are solely responsible for the emergence of
successful entrepreneurs. It is observed that, the emergence, performance and perception of
entrepreneurs can is a conglomeration that results in an integration of sociological,
psychological, economic and political factors contributing to the escalation in
entrepreneurial behaviour.

There are some variables that contribute to the development of a milieu conducive to
entrepreneurial supply and economic development namely:

 Business Knowledge,

 Need for Achievement,

 Value Orientation for Progress

 Adequate Capital,

 Adequate Technical Knowledge,

 Adequate Market and

 Favorable Political Conditions

The study of entrepreneurship has relevance today, not only because it helps
entrepreneurs better fulfill their personal needs but because of the economic contribution
of the new ventures. It results in increasing national income by creating new jobs.
Entrepreneurship serves as the bridge between innovation and market place. Although
government provides great support to entrepreneurship research, it has difficulties in
translating the technological innovations to products or services. Entrepreneurships
facilitates integration of those research and business skills. Thus the study of
entrepreneurship and education of potential entrepreneurs are essential in strengthening
the economic system of a country.

1.3 EVOLUTION OF ENTREPRENEURSHIP

A look into the history of entrepreneurship during the pre-independence era

shows that, entrepreneurial activity was controlled by a social system that encouraged
specific communities or castes to involve in a specific trade. The Parsis and Gujarathis
in the Northern side and Chettiyars and Mudaliyars in the Southern side had access
to production and sale of goods and services. The trade based on community was
restricted to a specific line. Even the access to capital and money lending was bound by
caste system. There were varying interest rates on the money that was lent. Under the
prevalent managing agency system, capital was raised within a particular business group
based on the credit standing of a small number of capable entrepreneurs, who controlled
their enterprises. Each business group developed itself into a trust based on family ties,
which aspect has greatly diminished in importance in recent times.

Urban areas had access to resources and market, and so enterprises thrived in
developed areas. They decided the pattern of consumption which was easily adapted by
the urban developers. The interest for adaption to British lifestyle stayed as a primary
factor that influenced production activities. This is attributable to demonstration effect as
the cities expanded, factory system of production was adopted, leading to a different mode
of commodity consumption, as distinct from the traditional way in the rural areas. While
the city-made goods would be available everywhere, the artisanries were consumed
mainly in the rural areas. The factory products and the rural traditional products in a way
performed different roles in the lives of Indian people (Morris, 1967). However, the
impact of urbanization and industrialization had a bearing on the rural consumption
habits too. But the strongly prevailed case system, kept a class of people in rural areas
below the poverty line. While the kinds of products supplied by handicrafts industry
varied according to castes, their distribution andconsumption were also on caste lines. In
Navsari, the parsi entrepreneurs effected the substitution of traditional products by new
products which were cheaper as a result of large scale production.

Rural areas thrived well in indigo trade. The absence of individual rationalism,
prevalence of personal tie and lack of competition in Indian society and the social inertia
resulted in inflexibility in the supply of factors of production [Rande, 1898]

India’s economic development strategy after Independence was based on the

Mahalanobis model, which gave preference to the investment goods industries sector. The
services and household goods sector was considered secondary (Nayyar, 2008).
Mahalanobis emphasized on mining andmanufacturing for the production of capital goods
and infrastructural development (including electricity generation and transportation).
The role of the factory goods sector was downplayed because it was more capital intensive
and it couldn’t address the problem of high unemployment in India immediately. Any
increase in planned investments in India required a higher level of savings than existed in
the country. Because of the low average incomes in India, the needed higher levels of
savings had to be generated mainly by restrictions on the growth of consumption
expenditures. Therefore, the Indian government implemented a progressive tax system.
It generated higher levels of savings. It also restricted increase in income and wealth
inequalities. This model involved use of resources into their most productive p u r p o s e s .
Investments were carried out both by the government and the private sector.The
government invested in strategic sectors like National defense and also those sectors in
which the size of investment required (such as infrastructure) was large. The private
sector had to contribute to India’s economic growth in ways defined by the government
planners. The government determined where businesses could invest, identified what
businesses could produce, what they could sell, and what prices they could charge.

There was direct participation of the government in economic activities such as

production and selling and regulation of private sector economic activities through a
rigorous control system. The Indian economy was protected from foreign competition
through the ‘infant industry argument’ and a binding foreign exchange constraint.

 Imports were limited to goods considered essential either to the development

of the economy (such as raw materials and machines) or to the maintenance of
minimal living standards (such as crude oil and food items).

 Exports played a limited role in economic development, thereby minimizing

the need to compete in the global market place.

This made India became a relatively closed economy, permitting only limited
economic transactions with other countries. India relied on government institutions to
maintain growth with equity. The government played an increasingly larger role in the
economy in areas of investment, production, retailing, and regulation of the private
sector. The following table shows the focus of Government in various periods:
 Period Focus Area

1950’s Electricity, Petroleum, Steel, Coal and Electric Goods.

1960’s Nationalized Banking and Insurance, Farm Machinery, Irrigation, High

Yield Seeds, Chemical Fertilizers.

1970’s Increase foreign exchange earnings, Export units, Duty draw back.

1980’s Liberalized imports which lead to raise of imports from five percent to
thirty percent.

This active and dominant participation by the government in economic activities

resulted in: The creation of a

 Protected,

 Highly-regulated,

 Public sector-dominated economic environment.

India faced problems in its overall approach to development, in the area of

industrialization and increase in corruption in its economy. The Indian economy faced a
number of serious sectoral imbalances, which resulted in withshortages in some sectors
and surpluses in others.

The dominant role that, the government played in economic growth and industrial
developments, certainly had its negative effects. Some of the perils of such control are
listed below:
 1. Price ceiling and control

2. Non-transparent transactions

3. Long waiting time for customers to receive products

4. Illegal payments and corruption

5. Control on ownership and private capital

6. High income tax rates

7. High customs and exercise duties

Such policies, coupled with high individual and corporate income tax rates and
high customs and excise duties, led to outcomes similar to those resulting from price
ceilings namely, increased corruption and higher transaction costs.

However, there were evidences that, individuals responded to incentives in their

pursuit of self-survival and accumulation of wealth which relied on economic climate. The
economic reforms of the early 1990s set the stage for substantial improvements in the
Indian economy. India’s economy grew at an average of 6.3 per cent from its 2.5%. The
rate of inflation and fiscal deficit decreased substantially. Improved exchange rate
management led to improved financing of the current account deficitand higher foreign
exchange reserves. Finally, India’s GDP and per capita income both increased from 1990
onwards.

The direct participation of the government in economic activities like production

and selling and regulation of private sectoreconomic activities presented certain controls.
There was a binding foreign exchange constraint. Imports were limited to goods
considered essential either tothe development of the economy or to the maintenance
of minimal living standards. E xports was considered to play a limited role in economic
development, to minimize the need to compete in the global market place. As a result,
India became a relativelyclosed economy, permitting only limited economic transactions
with other countries. Domestic producers were protected from foreign competition and
within India itself.

After independence the planners felt that, Entrepreneurs should focus their efforts
on nation building rather than selling products or competing with each other, because he
felt that it did not directly contribute to this cause.

They wanted industries to be located all over India, rather than be positioned at
select industrial clusters to ensure a balanced industrial growth. This required
entrepreneurs to obtain a location permit prior to the start of their company.In order to
avoid capitalistic monopolies, companies had to obtain licenses to expand their
production capacity. To prevent money laundering within companies, it was mandatory
for the excise and licensing officials to visit and audit every company each year in order to
ensure quality assurance. All of these strict regulations had their problems as well. This
made the procedures become cumbersome and led the entrepreneurs in paying bribes in
order to acquire the necessary licenses.

1. Impact of Regulations:

 Business owners had to obtain a governmentlicense to meet with foreign

business delegates.

 This business environment offered no incentive to invest time in technical

innovation to reduce manufacturing costs or even offer better quality
products and services. There was a pressure to classify a product under a
category that attracted a lower rate of duty.

In reaction to the above, Indian business practices began changing in 1991 after
extensive economic reforms, this resulted in rapid economic growth.
 2. Emergence of Technopreneurs:

Indian engineerswho migrated to the United States in the eighties have found the
U.S. to be a haven forentrepreneurial pursuits and have become highly successful in their
respective fields. They initially started high technology product companies in Silicon
Valley that primarily focused on solving critical market problems. Most of these Indian
entrepreneurs, benefited in their respective market segments, supported entrepreneurs
in India with start-upcompanies.

3. Indians Attitude Towards Entrepreneurship:

The liberalization, which was started in 1991, and the Information Technology
boom of the mid-late 90’s, has been significant factors, leading to a wave of
entrepreneurship sweeping through the country. The society and government are not
very encouraging towards entrepreneurship due to:

 Risk averseness.

 People seeking secure and long-term employment.

 Poor physical infrastructure needs

 Social Attitudes,

 Lack of capital, and

 Lack of government support are major factors of hindrance.

The liberalization of the economy in the 1990s has paved the way for a huge
number of people to become entrepreneurs. India competed with China, While China
focused on foreign direct investment, India concentrated moreon the development of the
institutions that support private enterprise by building a stronger infrastructure to
support it. Today, India’s corporate and legal systems operate with greater efficiency and
 transparency than in China. The Government is encouraging entrepreneurship by
providing training and also the facilities to succeed, particularly in the rural areas as
grassroots innovation: that includesinventions for a milieu that is essentially Indian is
stressed now.

1.4 ROLE OF ENTREPRENEURSHIP IN ECONOMIC DEVELOPMENT

According to economist Joseph Alois Schumpeter (1883-1950),

Economic development essentially means a process of upward change whereby the

real per capita income of a country increases over a period of time. The number and
competence of entrepreneurs affect the economic growth of the country. Economic
development is the effect for which entrepreneurship is an inevitable cause. The role of
entrepreneurs in the economic development of advanced countries has stood as examples
for developing and under developed countries. Entrepreneurs utilize the potentials of the
countries resources such as labour, capital and technology for its growth.

The role of entrepreneurs differs from country to country based on the resources,
industry climate and responsiveness of the political system of an economy. The contribution
of entrepreneurs may be higher in favorable opportunity conditions than in economies with
less favorable opportunity conditions like policies and regulations.

Adam Smith, in his work on “An Enquiry into the Nature and Causes of the Wealth
of Nations”, published in 1776, appreciated the rate of capital formation as an important
determinant of economic development. In conditions where the economic development was
dependent on the ability of the people to save more and invest more in any country, he stated
that, ability to save is governed by improvement in productivity by division of labour. Smith
believed that, each individual is led by an “Invisible Hand” in pursuing his/her interest. He
advocated the policy of laissez-faire in economy related affairs.

In his theory of economic development, David Ricardo identified three factors of

production, namely, machinery, capital and labour. The entire produce is distributed as rent,
profit and wages respectively. According to Ricardo, profit leads to saving of wealth which
ultimately went to capital formation.

Schumpeter (1934) saw the entrepreneur as the key figure in economic

development because of his role in bringing innovations. Parson and Smelser (1956)
described entrepreneurship as one of the two necessary conditions for economic
development, one is entrepreneurship and the other is increased output of capital.

Harbison (1965) considered entrepreneurs as the prime movers of innovations, and

Sayigh (1962) described entrepreneurship as 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 always needed, and this
requires an entrepreneurial ability”. The entrepreneur searches for change, sees need
and then brings together the manpower, material and capital required to respond the
opportunity that he sees.

McClelland’s (1961) gave the concept of personality aspect of entrepreneurship, in

which he said, some people with high achievement motivation come forward to behave in an
entrepreneurial way to change the stationary inertia, as they would not be satisfied with the
present status that they have in the society.

Under the conditions of shortage of funds and the problem of imperfect market in
underdeveloped regions, the entrepreneurs are bound to launch their enterprises on a small-
scale and imitative. The imitation of innovations introduced in developed regions on a
massive scale can foster the economic development in underdeveloped regions. However,
such imitation requires equal ability on the part of entrepreneurs to run their enterprises.

In this line, Berna stated that, “It involves often what has aptly been called
„subjective innovation‟, that is, the ability to do things which have not been done before by
the particular industrialists, even though unknown to him, the problem may have been
solved in the same way by the others.” Thus imitative entrepreneurs form the main
instrument of development of underdeveloped regions. Small-scale entrepreneurship in
industrial structure like India plays an important role to achieve balanced regional
development.

Small-scale industries provide:

 Immediate large- scale employment,

 Ensure a more equitable distribution of national income

 Facilitate an effective resource mobilization of capital and skill.

The establishment of Entrepreneurship Development Institutes and similar schemes

by the Indian Government show the role of entrepreneurship in economic development of
the country.

1. Helps Capital Formation:

Entrepreneurs promote capital formation by mobilizing the unused 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 Employment Opportunities:

Entrepreneurs provide immediate large-scale employment to the unemployed which

is a major problem of underdeveloped nations. In due course, these enterprises grow
thereby, providing direct and indirect employment opportunities to many more. Thus, it
paves way for economic development of the nation. Entrepreneurs generate employment
both directly and indirectly.

 Directly, self-employment as an entrepreneur and

 Indirectly by starting many industrial units they offer jobs to millions.

3. Fosters Balanced Regional Development:

Entrepreneurs help to remove regional differences through setting up of industries

in less developed and backward areas. The growth of industries and business in these areas
lead development of road transport, health, education, entertainment, etc. Setting up of
industries lead to development of backward regions and thereby helps the unemployed.

4. Dilutes 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 and creation of perfect market.

5. Creation and Distribution of Wealth:

It stimulates equitable redistribution of wealth and income in the interest of the

country to more citizens and regions, thus giving benefit to larger sections of the society.
Entrepreneurial activities also invokes more activities and give a multiplier effect in the
economy.
6. Raise in Gross National Product and Per Capita Income:

Entrepreneurs explore and use opportunities, encourage effective resource

mobilization of capital and skill, bring in new products and services and develop markets for
growth of the economy. Thus, they help increasing gross national product as well as per
capita income of the people in a country. This forms the sign of economic growth. Large
number of entrepreneurs are required to meet the increasing demand for goods and
services.

7. High Standard of Living:

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 in their standard of living.

8. Promotes Export Trade:

Entrepreneurs help in promoting a country's export-trade. They produce goods and

services in large scale for the purpose earning foreign exchange from export in order to
combat the import dues requirement. Thus, import substitution and export promotion
ensure economic independence and development.

9. Induces Backward and Forward Linkages:

Entrepreneurs appreciate change and try to maximize profits by innovation. When an

enterprise is established in alignment with the changing technology, it induces backward
and forward linkages which stimulate the process of economic development in the country.

10. Encourages Overall Development:

Entrepreneurs act as catalytic agent for change. Once an enterprise is established, the
process of industrialization is set in action. This generates 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 because of the 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.

11. Creating Innovation:

An entrepreneur, apart from combining the factors of production, also introduces

new ideas and new combination of factors. He introduces newer and newer techniques of
production of goods and services. An entrepreneur fosters economic development through
innovation.

12. Creation of New Businesses:

New offerings by entrepreneurs, in the form of new goods & services, result in new
employment, which can produce a cascading effect in the economy. The stimulation of
related businesses or sectors that support the new venture add to further economic
development. Education and training institutes, infrastructure development organizations,
real estate companies, logistic support, capital investment, and qualified workforce evolve
naturally.

13. Entrepreneurs for Social Change:

Entrepreneurs support freedom by reducing dependence on obsolete systems and

technologies. This help in improved quality of life, greater morale and economic freedom.
More time to devote to work means economic growth. Technological entrepreneurship
means, entrepreneurs in lesser-developed countries have access to the same tools as their
counterparts in richer countries. They also have the advantage of a lower cost of living.

14. Personal Growth:

 Entrepreneurs have higher confidence and greater independence. Entrepreneurs can
take on greater responsibility, work flexible schedules and use creative solutions to problem
solve. However, entrepreneurs work long hours and risk their personal assets in developing
their business as well.

15. Entrepreneurship puts new business ideas into practice:

With their innovative and disruptive ideas, entrepreneurs can tackle social problems.
Hence, entrepreneurship contributes to self-reliance. As the time moves on some sectors and
disruptive technologies create new industries and avenues such as mobile industry and
payments industry. Some industries become redundant or outdated. Some industries grow
horizontally and the intersection of industries become blur with the onset of technologies
and automation.

Entrepreneurship: comprises innovation management, business model development,

emerging technologies, proof of concept, business plan, accounting, managing intellectual
property such as patents, trademarks, copyrights; marketing, finance, lean methodology for
startups and valuation for startups. Entrepreneurship evaluates whether team is required,
tests product developed and test markets the product as well. Social entrepreneurship is also
part of economy.

16. Startup Development:

It starts with people joining together. It involves:

1. Making Things People Want: this process involves developing the

products and services people in the society need. This comes with the
market research and secondary research.

2. Making People Want the Things: this process is nothing but the digital
marketing process for the startup.
 Startup should have a unique business proposition. It should build sustainable
business model. Entrepreneur should build the sustainable, repeatable, and scalable
business.

17. Raising Funds:

Some investors such as angel investors, venture capitalists, private equity firms
invest in specific sectors according to their organizational/investment fund portfolio.
Entrepreneur when targeting specific venture capitalists (VC) should do prior research
about the VC firm, their portfolio, interests, type of startups they fund, amount of funding
they provide, and the tenure they remain invested in the company, etc. Some of the VC firms
provide rapid grants for the startups.

18. Technology Transfer:

This involves transfer of technologies from advanced countries to the less advanced
countries using licensing of patents. Technology transfer acts as a bridge between innovation
and business. Technologies can be categorized into 3 different categories. They are:

1. Innovative Technologies: are the new products, processes, ideas which

are to be commercialized; followed by product sales.

2. Emerging Technologies: are the new technologies in progress in an

incremental way.

3. Established Technologies: are proven technologies commercially being

used by consumers and industries.

Technology transfer should consider what the country requires. The factors such as
capital required, business environment (both local and global), legislature, government
policies, and how government boosts the technology impact the technology transfer.

19. Green Technologies:

 For the threat coming to climate with traditional equipment such as AC, fridge, and
TV, green technologies can help. Green technologies can help in handling the climate change
challenge. Product innovation is required to include green technologies. In intellectual
property matters and assets in green/climate change Japan, a pioneer in patent technologies.

20. Incubation Center:

This provides guidance, initial physical office facilities, helps the graduating
students/budding entrepreneurs, helps in conceptualization, ideation and validates the idea,
provides mentoring in technology and business, strategizes businesses, and helps the new
entrepreneur in building their business network. Department of Science and Technology has
incubation program. It provides access to knowledge, access to funding and access to
facilities. Usually a startup undergoes 2 to 3 years incubation period.

1.5 ENTREPRENEURSHIP PERSONALITY

Psychology plays a very important role in understanding the personality of any

person of any field. Psychological perspectives of entrepreneurship are there in many
extensive studies abroad but not in India. Psychological variables are very much significant
to entrepreneurship. There are writings from the 17th century that are focused on
entrepreneurial behavior and the book by Frank Knight which is written in 1921 on
“Risk, uncertainty, and profit” is still considered to be a source to learn the
entrepreneurial traits and behaviors.

The role of entrepreneurship has drawn interest among researchers in India.

Entrepreneurship is defined as the recognition and utilization of business opportunities
within the individual–opportunity connection (Shane & Venkataraman 2000). The most
essential drivers of entrepreneurship research came from economics, psychology, and
sociology. Recently, the importance of a psychological perspective had been acknowledged
globally because “entrepreneurship is primarily personal” (Baum et al. 2007). Thus,
Personality variables may have a significant function in the entrepreneurial development.

Initially, Psychology’s interest for entrepreneurship was associated with periodic

interest to identify the psychological dynamics of individual behaviors. With more research
studies it was understood that not only organizations affect individuals, but also individuals
affect organizations. Therefore, when the personality of individuals was studied, it was
pondered over entrepreneurial personality affected organizations more strongly. Thus, the
research on entrepreneurship psychology obtained recognition and the association between
entrepreneurship and individual characteristics has been given detailed attention.

Advanced studies in entrepreneurship included psychological variables like

cognition, feeling, perception and motivation related to entrepreneurial development.
Industrial and organizational (I/O) psychology evolved when entrepreneurship process
focused on skills such as:

 Innovative idea,

 Inventive creation,

 Risk in decision,

 Courageous,

 Confident and

 Strong prospect design.

Levine and Rubenstein, in 2017 stated that, the distinctive character of individuals
will differ to a great extent by form of entrepreneurial action. Thus, psychologists concepts
such as motivation for achievement and big five personality that entrepreneurship study
brought out, started gaining attention.
 The “Characteristicsthat make entrepreneurs successful” were Risk, Uncertainty
tolerance and Profit orientation. Comparison of employed managers and entrepreneurs,
minimized many of the vague factors to focus specifically on the role of personality. The Big
5 Personality model is currently is one of the most accepted model for classification for
personality traits.

The personality traits of an entrepreneur that accounts for the entry in the business
and stays with the entrepreneur and some traits that the entrepreneur develops after the
entry into the business and keep on developing over time such as risk tolerance which is a
very important personality trait in the high growth high-value business are notable.
However, all the researchers agree that, personality traits develop over the time of the
entrepreneurship but basic traits stay with the entrepreneur innately, so there is a basic co-
relation in the personality traits of an entrepreneur and to the degree of success of an
organization.

An entrepreneur who has high risk-taking trait may not appeal to the employee who
is seeking regular growth in the career. It might attract the employee who shares similar
vision as the entrepreneur. Sometimes entrepreneurial personality traits do collide with the
business ideas and market practices that cost them a lot but also these traits stand them out
from the regular ideas and provide a fresh idea in the market.

David Gartner emphasized focusing on how the organizations emerge, and what are
the facts that support the organizational growth. He emphasized that, there is no ideal
personality of an entrepreneur that guarantees a successful organization however some
personality traits do help in the positive growth of the business (Gartner, 1985)
 A lot of researchers also argue that the personality traits are not nature driven or exist
in the entrepreneur before the start of the business but some traits develop with the time of
business or manipulate from the surrounding environment such as risk-taking behaviour in
the entrepreneur gets stronger with the success of each decision. Entrepreneurs with the
most risk-taking behaviour usually have the team that possesses the same trait of
personality (Turker & Sonmez Selçuk, 2009).

There are three questions that every researcher in entrepreneurship personality is

curious about:

 Is there any defined personality traits that define the chances of a person
becoming an entrepreneur

 Are there specific personality traits that help the entrepreneurs gain
success in their ventures?

 Does the personality traits in an entrepreneur differ with their choice of

business or geographical area or do all the entrepreneurs share the same
personality traits?

The Myers-Briggs Type Indicator which is a personality assessment tool used in most
of the fortune 500 companies described the two more widely present personality traits of
the entrepreneurs namely:

 Perception

 Intuition

Four Areas of Personality

The psychological and sociological assessments to define the personality traits of

entrepreneurs were confined down to these four areas:
 1. Extrovert or Introvert

This identifies whether the entrepreneur's energy driver is the communication or

interaction with the outside world or exploring their inner world and having minimum
interaction with the outside world (Shamuganathan, 2016). Though most entrepreneurs
have a mixture of both sides in all of them one side is more dominant than the other side and
it also depends on the type of business or start-up.

2. Information Processing:

A profitable venture depends on how the entrepreneurs process the information

surrounding them:

 Whether they look at the numbers and utilize the five senses or

 They mostly look at the bigger picture besides the current facts and
figures, the entrepreneur with the correct composition of these two
traits can predict future opportunities

3. Analyzing Ability:

Entrepreneurs analyzing ability is an important personality trait. There are two

different schools of thought on this:

 The entrepreneur might logically analyze the present situation by

placing facts and figures and then act accordingly which common.

 Considering what will work best for the people around them, even if it
goes against the numbers and facts.

4. Communication Style
 The clarity of the message and the style of conveying the message to the outside world
is what matters most; entrepreneurs have two basic approaches to convey their message to
the outside world:

 Communication in a planned and orderly which deals with the numbers

and figures

 Communication is the planned spontaneous way and gives more

flexibility for expression and discussion.

Social entrepreneurs are more focused on closing the gap between the actual needs
of the people and what the government or authorities are providing them instead of creating
a new market or innovative product social entrepreneurs tend to close the gap with
innovative means and processes.

The traits of social entrepreneurs tend to be more tilted towards social achievement
rather than personal achievement and well-being of the society in general rather than
organization financial health however the general traits are almost similar with both social
and commercial entrepreneurs such as creativity, innovativeness, sense of destiny, sense of
freedom and independence, as far as the risk-taking trait seems to be lower in the social
entrepreneurs as compared to the commercial entrepreneurs (Crane & Crane, 2007).

1. Curiosity: An entrepreneur's ability to remain curious allows them to continuously seek

new opportunities. Instead of settling for what they think they know, entrepreneurs ask
challenging questions and explore different avenues. The drive they have to continuously
ask questions and challenge the status quo can lead them to valuable discoveries easily
overlooked by other business professionals.
2. Structured Experimentation: With each new opportunity, an entrepreneur must run
tests to determine if it’s worthwhile to pursue. To do so, the entrepreneurs needs to conduct
thorough market research and run meaningful tests to validate the idea and determine its
potential.

3. Adaptability: The nature of business is ever-changing. New challenges and opportunities

come up often. It’s not possible to be prepared for every situation, but successful
entrepreneurs are adaptable and keep moving forward, irrespective of the changes that are
occurring.

4. Decisiveness: An entrepreneur has to make difficult decisions and stand by them. They
are responsible for guiding their business, right from funding to strategy for resource
allocation. They make challenging decisions and face the consequences. If the outcome turns
out to be less than favourable, the decision to take corrective action is also vested upon them.

5. Team Building: Usually, it’s the entrepreneurial team, rather than an individual, that
drives a venture toward success. Entrepreneurs identifies teammates who have
complementary talents and contribute to business goals.

6. Risk Tolerance: Entrepreneurship is often associated with risk. Launching a venture

requires an entrepreneur to take risks. However, they also need to take steps to minimize it.
Entrepreneurs who actively manage the relationship between risk and reward position their
companies to “benefit from the upside.”

7. Comfortable with Failure: Entrepreneurship requires a certain level of comfort with

failure. The reasons for failure are numerous and include everything from a wrong business
model to a lack of focus or direction. While many of these risks can be avoided, some are
inevitable. Successful entrepreneurs must prepare themselves for, and be comfortable with,
failure. Instead of letting fear hold them back, they look for the possibility of success to move
forward.
8. Persistence: During the entrepreneurial process, many decisions turn out to be wrong,
and some ventures fail altogether. Part of what makes an entrepreneur successful, is their
willingness to learn from mistakes, continue to be inquisitive, and persist until they reach
their goal.

9. Innovation: Innovation goes hand-in-hand with entrepreneurship. Some of the most

successful start-ups have taken existing products or services and drastically improved them
to meet the changing needs of the market. It’s a type of strategic mindset that can be
cultivated. Ability to spot innovative opportunities and position the venture for success is
considered an important trait of an entrepreneur.

10. Long-Term Focus: It’s easy to start a business, but hard to grow a sustainable and
substantial one. Some of the greatest opportunities in history were discovered well after a
venture launched.” Entrepreneurship is a long-term endeavor, and entrepreneurs must
focus on the process from beginning to end to ensure long-term success.

While personality theory remains relevant with its own set of contentions,
researchers have moved to the Big-5 factor personality model. Several additional
traits have been fused into the Big-5 for entrepreneurial work, covered self-efficacy,
innovativeness, locus of control, and risk attitudes. Researchers often mix and match
these traits to describe a multidimensional “entrepreneurial orientation.”

The Big Five-Factor model is an important model for measuring various

attributes of personality through Neuroticism, Extraversion and Openness to
Experience, Agreeableness and Conscientiousness. Its multidimensional approach,
describes a broad domain of psychological functioning to influence career choice and
work performance.

 Neuroticism: It contrasts emotional stability and even-temperedness with

 negative emotions, such as feeling anxious, nervous, sad, andtense.

 Extraversion: It includes traits such as sociability, activity, assertiveness, and

positive emotionality.

 Openness to experience: It describes the breadth, depth, originality, and

complexity of an individual’s mental and experimental life.

 Agreeableness: It includes traits such as altruism, tender-mindedness, trust,and

modesty.

 Conscientiousness: It describes socially prescribed desire control that helps in task-

and goal-orientated behaviour.

1.6 ENTREPRENEURSHIP AND RISK TAKING

Entrepreneurs bear substantial risk, but there is no empirical evidence of a positive

premium. Self-financed entrepreneurs may find it optimal to invest into risky projects
offering no risk premium. The model has a positive correlation between survival, size, and
age of businesses often serve as stimulation for risk taking.

Recent estimates, recommend that to compensate for the extra risk entrepreneurial
returns should exceed public equity by at least 10 percent. The existence of an outside
opportunity and endogenous risk choice helps a self-financed entrepreneur to choose how
much to invest in a project. All available projects offer the same expected return but a
different variance.

After returns are realized, the entrepreneur decides whether:

 To exit or
  Take up employment or

 To stay in business.

The possibility of exit: For values of wealth below a certain threshold, the outside
opportunity gives higher utility; for higher wealth levels, entrepreneurial activity is
preferred. Risky projects provide fortune for future wealth particularly valuable to
entrepreneurs with wealth levels close to this threshold. As the level of wealth increases,
entrepreneurs invest in less risky projects.

The terms of risk and uncertainty are similar, but inspite of how well the risk is
managed, uncertainty cannot be removed because all possible situations and
interdependencies cannot be taken into account. Traditional financial theory differentiates
systematic risk and particular risk. Investors can reduce total risk with the two risk
management instruments:

1. Diversification and

2. Asset allocation

The risk is the result of the use of resources, through which the entrepreneur may
suffer probable losses or may have lower incomes than expected. The risk of investment is
the probability of going beyond what is desired. Success can only be achieved through a
proper risk-benefit assessment.

Risks that an economic entity has to manage give arise to two approaches or cultures
of risk: (Griffiths, 2005):

 The culture that rejects the risk is characterized by stability, experience,

centralized management and the needs of the clients being undermined.

It results in the lack of initiative of the employees, lack of strategies and the lack
of innovation.The culture that accepts the risk is open to innovation, the determinants
 being novelty, motivation, exploitation of specific opportunities, where decisions are
passed on to all employees, customers are at the forefront and the continuous change in
strategies reflects adaptation to changing circumstances. The culture that rejects risk is a
trait of modern risk management.

The term is derived from the French word “Risque” of the 17th which means
danger, an inconvenience to which people are exposed. It is "The possibility to reach a
danger ... or to bear a damage: a possible danger" (Coteanu, 1998, 929) in Romanian
Language. In Britain encyclopedia entrepreneur means "a person who organizes and
manages a job oreconomic association and receives its risks".

Frank Knight in 1921, in his work on Risk, Incertitude and Profit defined risk
as:

The given definition quantifies risk through objective probability and uncertainty
through subjective probability. Risk is classified as follows:

1. Based on nature, risks may be: pure risks that cannot be controlled, like
(natural calamities and wars or speculative risks where there is
probability of both loss and gain which are manageable through
management techniques.

2. Based on location, there are: macroeconomic risks; sectoral risks;

microeconomic risks.

3. Based on predictability the risks may be: predictable risks, or

 unpredictable risks from unanticipated factors.

4. Based on belonging it may be internal risks, which are the result of the
company's activity; external risks, which depend on the environment in
which the company operates;

5. Based on consequences, risks may be:

 Exploitation risks, that result in change in the result when

changing the conditions of the activity;

 Financial risks, that arise because of the financing policy and

bankruptcy risks that affects the company's solvency.

Usually low wealth entrepreneurs choose risk. If risky projects were not available, no
exit would occur. Three attributes are key to this:

 The existence of an outside opportunity,

 Financial constraints and

 The endogenous choice of risk.

Entrepreneurs intend to receive medium and rational risks. Most of people intend to
go to their own attitude extremes about risk and risk – taking. Entrepreneurs wouldn’t
consider every kind of risk, but they consider rational and certain risks. When a work is high
risk, it means its return is uncertain.

Entrepreneurs accept the following types of risks:

1. Financial Risk: Entrepreneurs mobile their investment through personal savings, money
borrowed by pledging assets that are movable and immovable. This is done only during
establishment of business, but also day to day running of the same. Any wrong decision will
result in failure if the enterprise, which will result in loss of assets and savings. Hence, they
take enormous risk.

2. Job Risk: If an entrepreneur opts to exit from the business, there should be alternate
employment available to him. As discusses earlier, he either takes rational risks or certain
risk that are in line with industry, he shall always join the workforce. The society that accepts
/ rejects failure is an important determinant in this regard.

3. Social and Family Risk: The beginning of entrepreneurial job needs a high energy and
time demanding. Because of these undertakings, he may face some social and family damages
like shortages and the problems resulting from the entrepreneur’s absence at home and its
effects on his / her family.

4. Mental Risk: The biggest risk that an entrepreneur takes it is the risk of mental health.
The risk of money, home, spouse, child, and friends could be adjusted but mental tensions,
stress, anxiety and the other mental factors have many destructive influences because of
entrepreneurial activity. Entrepreneurs continually confront the failure risk. The high return
requires high risk. And entrepreneurial risk – taking is the risks of the possible failures that
power the persons to do risky activities or high return. Risk greatly influences
entrepreneurship. After selecting the objective, entrepreneur tries realize it. Risk taking and
the objectives have a direct relationship as bigger the objective, the bigger is the risk.
Improving quality and services of entrepreneurs is also a challenge.

5. Technology Risk: Business keep up with the changing trends and take advantage of new
technologies available in the market. Technologies do not come cheap. In this Industrial
Revolution 4.0 era, changes referred to as “disruptive” or “paradigm shifts” technologies are
emerging. Because there are a lot of competitions, and every company is works to handle the
competition by upgrading to the latest technology. However, upgrading is also a risk because,
after a lot of money must have been pumped into it, it may or may not yield expected results.
6. Strategic Risk: A business plan is a clear layout of all the business strategies. In the
dynamic world, the strategy gets easily copied or keeps changing by the counter actions of
competition in the market. It becomes important to analyse the key performance area and
start developing benchmarks to scale up the performance. This in turn helps in evolving a
new strategy involving money, time, energy and risk all over again. Strategic mistakes cost a
lot and they may land an enterprise in an irreversible stage.

7. Reputational Risk: A business is as good as its reputation. This is more so when the
business is just starting, and potential customers and investors are still doubtful about it. If
the business fails to create a positive reputation, especially at the initial stage, it may find it
difficult to gain the trust of the lenders and investors. Social media news flies a gust speed. A
negative post made by a dissatisfied customer about a business can negatively affect its
reputation before new customers. An entrepreneur must be prepared for such events and
have a strategy on how to handle the situation.

8. Market Risk: Every business plan that is devised, suffers a setback when the market
conditions change. A past success does not ensure future success. When the market trend
changes, it throw a significant stress on existing enterprises. Those enterprises that have
scientific decision making and market analysis strength, tend to survive. In today’s data
driven world, knowledge and application of marketing data plays a vital role in the success
of any enterprise.

9. Political and Environmental Risk: Irrespective of the business plan, a change in political
climate affects the running of the business. The change of Government means, change of rules
and regulations, tax structure, subsidies and such. Similarly unforeseen environmental
issues and changing environmental norms are demanding sustainable business practices
that challenge the existing resources and operations.

10. Competitive Risk: The absence of competition might spell doom for entrepreneurs. Lack
of competition for a particular product or service might means, people are not interested in
such a business. On the other hand, the market might be saturated if the business has a lot of
competition because of the high demand. The risk posed here is that the business might
struggle to meet up, retain a market share or even combat the competition. Competition
helps, but also kills.

Entrepreneurs forecast and plan ahead as an entrepreneur, you cannot see all the impending
risks, but there is a need to:

 Forecast the possible risks.

 Plan everything down,

 Have a post-success plan

 Prepare for how to fund their business.

 Adequately track the receivables.

 Reduce outstanding balances,

 Pay off debt on time, and

 Identify bad credit to avoid it.

 Implement a standard for credit and payment to

 Know which credit scores and payments should be attended to.

 Seek professional help.

 Keep loans and other borrowings to the barest minimum.

 Weigh the risks involved.

  Come up with a backup if the business plan fails.

 Prepare for the worse.

 Employ the services of risk management professionals

 Map out a plan on how to tackle unforeseen risks.

 Insure the businesses.

 Protect the business against incapacities, liabilities, and other issues.

 Insure vehicle, property and employees.

 Remain optimistic even in the face of uncertainties

1.7 KNOWLEDGE AND SKILL OF ENTREPRENEURS

While some say that, entrepreneurs are born or made, there are also researchers who
state that entrepreneurship is a skill that can be learned. Drucker (1985) argued that
entrepreneurship is a practice and that “Most of what you hear about entrepreneurship
is all wrong. It’s not magic; it’s not mysterious; and it has nothing to do with genes. It’s
a discipline and, like any discipline, it can be learned.” In a traditional view,
entrepreneurship were believed to be developed through training. Presently,
entrepreneurship is being viewed as a way of thinking and behaving that is relevant to all
parts of society. Lichtenstein and Lyons (2001) stated that it entrepreneurs come to
entrepreneurship with different levels of skills and therefore each entrepreneur requires a
different ‘game plan’ for developing his or her skills. They, added that, skill development is a
qualitative, not quantitative change that requires some level of transformation on the part of
the entrepreneur.
 Kelley et al (2010) said that, it is important to support all people with
‘entrepreneurial mindsets’, not just the entrepreneurs, as they each have the potential to
inspire others to start a business. He stated that, any educational training should enable
people not just to develop skills to start a business but rather to be capable of behaving
entrepreneurially in whatever role they take in life. This approach captures the critical
philosophy of modern entrepreneurship education and training programmes required, if
countries are to generate an increasing pool of people who are willing to behave
entrepreneurially.
Some factors distinguish high-growth firms from non-high- growth firms. Barringer
et al (2005) found that,
 The Characteristics of the Founder,
 Firm Attributes,
 Business Practices and
 HRM Practices
are important in helping a firm achieve quick growth. According to a European Commission
report (2006), management capacity in essence relates to four main fields of expertise of the
owner/manager or of the staff:
 Strategic and management knowledge aspects like human resource
management, accounting, financing, marketing, strategy and
organizational issues, such as production and information and
technology aspects;
 Understanding the running of the business and of the potential
opportunities or threats (including visions for further development of
activities, current and prospective marketing aspects)
 Willingness to question and maybe review the established patterns
(innovation, organizational aspects); and
 Attitudes towards investing time in management development or other
needed competencies.
 Such competencies in management are determinants towards a company’s growth
potential but the report offers little indication as to how these competencies might be
delivered. Many researchers have studied entrepreneurial skills. Some common themes are:

 Personal characteristics.

 Interpersonal skills.

 Critical and creative-thinking skills.

 Practical skills and knowledge.

The following sections examine each skill area in more detail:

I. THE PERSONAL CHARACTERISTICS OF AN ENTREPRENEUR

1. Speaking Confidently:

In pitching to investors, communicating with clients, or making conversation at an

event, the way the entrepreneurs present the business and its potential, can influence
investors to fund venture, and help customers to decide to buy. Entrepreneur is the best
advocate of business.

2. Accepting and Acting on Feedback:

Instead of sticking on to the perfection component, the entrepreneur may opt to

receive feedback from:

 The customer on product performance, business models, assumptions

etc.

 The investors, fellow entrepreneurs, friends and family for constructive

feedback.
 If not all, the entrepreneur, should consider working on the feedback, to ensure
continuous improvement.

3. Recognizing Patterns:

Pattern recognition from data, market trends, and user behaviour relating to cash
flow statements, and such can enable the entrepreneur to make predictions about future
cash flows. This helps he entrepreneur to identify seasonality and other time-related trends
that inform the long-term goals. The observation of how:

 Users interact with your product,

 Pay attention to how they react to specific elements and

 What questions arise during use?

These kinds of trends in user behaviour helps in product improvement.

4. Business Management Skills:

Entrepreneurs with this skill set can foresee and manage operations of different
departments as they possess a good understanding of each function. Business management
skills include:

 Multitasking,

 Delegating responsibilities and

 Making critical business decisions.

5. Risk-taking Skills:

As discussed earlier, ability to take calculated and intelligent risks is one of the
essential entrepreneur skills. Entrepreneurs understand that, calculated risks result in
tremendous success. They know that risk is an opportunity to learn.
6. Networking Skills:

Networking involves building and managing relationship with other professionals to

grow and promote a business. This skills opens up opportunities and help brand building.
This helps the entrepreneur to stay up-to-date with industry trends. Through a solid
network, they can meet professionals to fund their ideas, access professional business
expertise and get feedback on their new venture or idea.

 Former and current co-workers

 Alumni from educational institutions

 Former professors and teachers

 Industry leaders and speakers

 Former and current clients

 Friends and family members

 Business professionals in the geographic area

 Others in the industry with similar interests, responsibilities and goals

9. Critical Thinking Skills:

Critical thinking refers to objectively analysing the information and drawing a

rational conclusion. It helps entrepreneurs assess a situation and come up with a logical
solution. Usually, a critical thinker is independent, competent and reflective. This skill helps
entrepreneurs to connect ideas, evaluate information, explore inconsistencies in work and
solve complex issues. They use the information to deduce meaningful insights.

10. Problem-Solving Skills:

 Entrepreneurs face challenging and unexpected situations. An entrepreneur must
possess excellent problem-solving skills to handle stressful situations and calmly identify
alternate solutions. Problem-solving skills help entrepreneurs to reach their business goals.

11. Creative thinking skills

Entrepreneurs with creative thinking skills are never hesitant to try solutions that
others may overlook because of fear of failure. Such people think out-of-the-box and always
seek input from professionals in a different field for understanding a new perspective.

12. Customer Service Skills:

Quality customer service promotes brand loyalty. From talking to clients to

discussing funding opportunities, customer service skills help entrepreneurs connect with
their potential customers.

13. Financial Skills:

The ability to handle resources, assess investments, calculate ROI using accounting
and budgeting software to keep track of all the financial processes are financial skills,
required for entrepreneurs.

14. Leadership Skills:

Being able to inspire colleagues, empower the workforce and lead from the front
requires excellent leadership skills. Entrepreneurs with leadership skills motivate their
employees, manage operations and delegate tasks to reach the business goal. Training and
mentoring is a part of entrepreneurship.

15. Time Management and Organisational Skills:

Effective time management increases productivity and organises your workspace.

Entrepreneurs need to prioritise tasks and avoid procrastination. For ensuring timely
completion of projects, entrepreneurs analyse their and their team's time, set time limit for
each task, complete priority tasks first, delegate work to others, create a to-do list and use
technology to keep the workspace organised.

16. Technical Skills:

Entrepreneurs must learn to use planning, marketing and budgeting software.

Knowledge of software helps in managing projects, tracking sales and allocating a viable
budget for the project.

II. ENTREPRENEURIAL INTERPERSONAL SKILLS:

As an entrepreneur, works closely with others it's important to build good

relationships with team, customers, suppliers, shareholders, investors, and other
stakeholders.

Some people are more gifted in this area than others, but you can learn and improve
these skills. The types of interpersonal skills include:

 Leadership and Motivation: To lead and motivate others to delegate.

 Communication Skills: Entrepreneur needs to communicate to a wide

variety of audiences, including investors, potential clients and team members.

 Listening: Entrepreneurs ability to listen and absorb information and

opinions can make or break the business.

 Personal Relationships: Entrepreneurs should be self-aware, good at

regulating emotions, and able to respond positively to feedback or criticism.
Emotional Intelligence, is the most important skill required.

 Negotiation: Negotiations happens to get favourable prices, and resolve

differences between people in a positive, mutually beneficial way.
  Ethics: It refers to dealing with people based on respect, integrity, fairness,
and trust.

III. CREATIVE-THINKING SKILLS FOR ENTREPRENEURS:

As an entrepreneur, should come up with fresh ideas, and make good decisions about
opportunities and potential projects.

 Creative Thinking: It refers to viewing situations from a variety of

perspectives to generate original ideas.

 Problem Solving: Entrepreneurs should find solutions for present and also
prospective problems. Numerous scientific decision making tools are available
and efforts need to be taken to embrace the same.

 Recognizing Opportunities: Entrepreneurs should recognize opportunities

when they present themselves, spot a trend, create a workable plan to take
advantage of the opportunities so identified.

IV. PRACTICAL ENTREPRENEURIAL SKILLS AND KNOWLEDGE

Entrepreneurs need the following:

 Goal Setting: Setting SMART goals (Specific, Measurable, Achievable,

Relevant, and Time-Bound) to use time and resources more effectively.

 Planning and Organizing: Coordination with people to achieve goals and

strong project-management skills are basic organization skills. Business plan,
and the financial forecasts are also needed.

 Business Knowledge: While an entrepreneur can employ people to do things,

his/her understanding about the operational area of business like human
 resources, finance, marketing, and production gives him/her a better control
over the business.

 Entrepreneurial Knowledge: Entrepreneurial knowledge refers to the

selection of idea, development of a business plan, sources of finance,
knowledge of market and awareness of rules and regulations.

 Opportunity-Specific Knowledge: It refers to the idea of business that will

satisfy customer wants.

 Venture-Specific Knowledge: It refers to the idea of business that is chosen

for operation.

Understanding Entrepreneurial Skills

The following are a few characteristics required to be a successful entrepreneur.

1. Sales

An entrepreneur needs to sell the business idea to potential investors, the

product or service to customers, and themselves to employees. If an entrepreneur is
able to communicate effectively, they are better equipped to sell their ideas and
physical products. In the beginning, entrepreneurs will be the salespeople at their
respective businesses. Those sales skills are necessary to demonstrate value for all
stakeholders inside and outside the company.

2. Focus

One of the main risks an entrepreneur faces is the risk of emotional instability.
This skill can also be thought of as thinking with the end in mind. No matter what
struggles an entrepreneur goes through, a successful entrepreneur has the focus
necessary to keep an unwavering eye on the end goal and can push himself to achieve
it.
 3. Ability to Learn

The ups and downs an entrepreneur goes through are unavoidable. An

entrepreneur needs a high ability to learn from any situation. Even failure, can help
expand one's knowledge and understanding of business.

4. Business Strategy

An entrepreneur can actually learn a business strategy with the flow of business.
The structure and growth strategy is based on sound business sense and skills.

5. Basic Finance Skills

It’s also imperative for an entrepreneur to know how to read and prepare
financial statements, including a balance sheet, income statement, and cash flow
statement. Aside from being required for reporting and tax purposes, these documents
help to track performance, make future projections, and manage expenses.

1.8 STEPS FOR SETTING UP BUSINESS ENTERPRISE

Entrepreneurship is considered as a process, because there are different activities

required to develop a project. Along with these steps, it requires different sets of skills
that is required from an entrepreneur. So, entrepreneurship also becomes a learning
process.

Bygrave (2004), stated that “as with most human behavior, entrepreneurial traits
are shaped by personal attributes and environment”. Personal attributes are the
characteristics of entrepreneurs that make them different from non-entrepreneurs. This
theme has been discussed in the earlier modules. Clercq and Arenius (2003)
established the relationship between human capitals which is: the experience and
 understanding of the entrepreneur, and the success of the entrepreneurial activity.
According to them, those entrepreneurs who invest more resources in improving their
abilities are more apt to reap the benefits through their entrepreneurial activities. At
each of the stages of the business life cycle the entrepreneur faces unique set of obstacles
that needs to deal with and find a solution. One has to be flexible in thinking and adapting
strategy as they move forward in business.

Steps for Setting up Business Enterprise:

The procedure in setting up of a business unit is a time consuming and complex. It

involves various steps, procedures and formalities as below:

1. Identification of business opportunity.

2. Generation of business idea.

3. Feasibility Study.

4. Preparation of a business plan.

5. Launching the enterprise.

Step1. Identification of Business Opportunity:

This is the first step in setting up of a business unit Entrepreneur is an opportunity

seeker. An entrepreneur perceives an opportunity and make efforts to translate the
opportunity into an idea. The entrepreneur must be alert to grab opportunities as they
pop up. Such opportunities must be carefully scrutinized and evaluated.The process of
identifying opportunity involves:

 Identification Of The Needs And Wants Of The Society,

 Environment Scanning And,

  Understanding the competitor’s.

To identify the right business opportunity, an entrepreneur needs to consider the

following:

 Identify Market requirements

 Remove bottlenecks

 Invoke Customers willingness to new experience

 Choice of Sector/Industry that has growth potential

 Show Product Differentiation

 Consider Cash Flow

 Listen to clients and customers

 Observe competitors.

 Observe industry trends and insights.

Step 2. Generation of Business Idea:

The ideas that provide:

 Value for the customer,

 Profit for the entrepreneur and

 Benefit for societyand

 Transformable into products /services, are called business ideas.

Idea is generated through:

 Vision
  Insight,

 Observation,

 Experience,

 Education,

 Training etc.

 Developments in other nations,

 Government organizations and

 Trade fairs & exhibitions

 Environmental scanning and

 Market survey.

An entrepreneur conceives the idea of launching the project and program the
structure of business. Converting a business idea into a commercial venture is core to
entrepreneurship.

The entrepreneur then undertakes detailed investigation of an idea. Then, the

entrepreneur finds out the feasibility of profit. The initiative to develop the idea and
implement it in becomes the crucial phase.

In general, innovation and creativity help a lot in generation of business idea in

entrepreneurship.

 Innovation may be defined as utilization of new ideas, leading to the creation

of a new product, process or service. Entrepreneurship is a source of
innovation.

 Creativity means the ability to bring something new in existence. In business

 terms, refers to new ideas, concepts, process and products.

Entrepreneurship is an art of exploring creative solutions to the existing problems.

Innovation andcreativity are vital for sustainable growth and economic development.

As a prospective entrepreneur, the key questions about an opportunity are as follows:

 What are the conditions that have invoked marketplace opportunity the
proposed idea?

 What is the reason people want and need something new?

 What factors that have ignited this opportunity?

 Will the opportunity be enduring, and long lasting?

 Can the business deliver what the customer wants while generating
durable margins and profits?

Step 3. Feasibility Study:

After the selection of a workable idea, an entrepreneur undertakes various

researches relating to:

 Market Selection,

 Competition,

 Location,

 Machinery And Equipment’s,

 Capital,

 Customer preferences etc. to test the feasibility of the project.

A feasibility study is an evaluation of a project that is proposed to find out whether

the project is profitable or not. It involves examination of the operations part of business.
Project has to be viable not only:

 In technical terms, but also,

 In economic terms.

Thus, the objective of financial analysis is to ascertain whetherthe proposed project

will be financially viable. This study contains thecomprehensive, detailed information
about the business structure, availability of resources and possibility of business running
efficiently. Feasibility study is conducted in the following areas:

1. Market/ commercial Feasibility: It involves study of market situation, current

market, anticipated future market, competition,potential buyers, etc.

2. Technical Feasibility: It involves study of technological aspects like location of the

business, layout, infrastructure, plant and equipment, waste disposal and discharge,
mergers and collaboration, logistics, resource availability and such.

3. Financial Feasibility: It helps to understand requirements of start-up capital, sources

of capital, returns on investment, etc. It helps to assess the financial health of the
business.

4. Socio- economic Feasibility: This determines the extent to which the project meets
its socio economic objectives of development. It involves social cost-benefit analysis, to
know the contribution of the project, towards generation of employment, distribution of
income, foreign exchange generation and balanced development of backward regions.

Feasibility report is a formal document prepared by the experts that gives the
information on the authenticity ofthe feasibility study. The following contents are included
in a Feasibility report:
 A. Viability of the venture.

B. Guidance to the entrepreneur’s planning.

C. Identification of possible roadblocks.

D. Pre-requisite to obtain finance.

Step 4: Preparation of a Business Plan:

A business plan, is a “written document describing the nature ofthe business, the
sales and marketing strategy, and the financial background, and containing aprojected
profit and loss statement.” It serves as the blueprint for how you will operate your
business. It is an effective means of defining your goals and the steps needed to reach
them.

It serves the following purposes:

 Maintaining focus of the Business Focus.

 Facilitating Financing.

 Understanding consumers and competitors.

 Mapping Growth and strategies

 Providing venue for Executive Talent

 To assess feasibility of a venture

1. Executive Summary: It is the summary of what the business want to

accomplish. It reveals the company’s mission statement and provides a
description of its products and services. The experience of the entrepreneur in
 this industry is also mentioned.

2. Description of Business: It includes key information about business, goals and

the customers. This shows how a venture differentiates itself from others inthe
industry and how the products and services will fulfill the needs of the
customers.

3. Market Analysis: The intelligence derived from market in the following areas
namely: Market data, demographics of target audience, pricing systems,
methods of distribution, sales forecast, etc. should be provided.

4. Competitive Analysis: A good business presents a clear comparison of

strengths and weaknesses of direct and indirect competitors.

5. Description of Management and Organization: The information on business

organization, Skills required for the employees, job responsibilities, chain of
command ownership structure, board of directors, and such.

6. Products and Services: Details about the product, the problems it solve, and
the market it serves and expected life cycle of the product will be presented
here. Details about the suppliers, cost, and quality of supplies shall be given.
Possible patents and copyright concerns shall also be mentioned.

7. Marketing Plan: It refers to the action plan of reaching to the market, handling
competition, promotion and distribution of products, the budget required for
such actions and the strategies to establish control over the laid plans.

8. Sales Strategy: This strategy talks about the people required for sales, their
recruitment, training and compensation, fixing of sales targets, monitoring the
achievement of targets, identifying bottlenecks, facilitate performance, assess
target that happen over a cycle of events.
 9. Manufacturing and Operational Plan: The operations plan section describes
the physical necessities of the business' operation, like location, facilities and
equipment. It may also include information about inventory requirements,
suppliers, and a description of the manufacturing process. It provides tactics and
deadlines.
10. Financial Projections: It is generally a report of anticipated revenue for the
first 12 months and projected earnings for the second, third, fourth and fifth
years of business. It includes: Start up projections, incomestatement, cash flow
statement, balance sheet and break even analysis.
11. Appendices and Exhibits: This refers to the additional information provided
to support the credibility of business idea, like market research, product
images, Permits obtained, patent/ Trade Mark or copy right, credit histories,
entrepreneur and Management profile, marketing materials, contracts or other
legal agreements related to the business.

Step 5: Launching the Enterprise and Managing the Business

At this stage, the entrepreneur finds suitable location, designthe premises and set
up machinery. All the legal formalities, as follows, should to be met:

 Acquiring license.

 Permission from local authorities.

 Approvals from banks and financial institution.

 Registration etc.

After the project is set up, the entrepreneur strives to move as per the business
plan. The entrepreneur turns ideas into reality and anticipates changes, to avail of
opportunities and meeting threats as they show up.
Problems in Setting up of a Business

The factors that affect the growth of business are explained below in detail:

1. Lack of legal knowledge: The entrepreneur should have adequate legal knowledge to
handle legal affairs efficiently. Factories Act, Wages & Salaries Act, and Workers
Compensation Act and regulations from various authorities should be known by the
businessman.

2. Lack of experience: The major hurdles that the new entrepreneurs face will be
knowledge about the availability of resources, allocation of funds and research and
development.

3. Lack of finance: A new venture requires adequate capital. It is required to meet business
expenses like purchase of raw material, payment of wages and salaries; payment of interest
on loans etc. Inadequacy of funds will disturb the running of business.

4. Lack of technology: Adaption to newer technologies help in increasing the production

capacity and quality of the products. Lack of suitable technology can hamper the reputation
of the firm.

5. Problem of human resource: A firm requires skilled, qualified and talented employees.
Researches about the impact of the entrepreneur and employee’s skill and capabilities, and
also attitude, on the efficiency of business operations is discussed in earlier modules.

6. Problem of data: Entrepreneur needs thorough understanding of market condition,

competition, technology, consumer etc. The data collected may not be accurate and precise.
Decisions based on outdated data hampers the survival of a business.

7. Problem of marketing: Lack of competition is a sign of lack of attractiveness of market

segment. The prevalence of optimum competition helps the business to gain efficiency,
through proper understanding of the marketing mix variables and devising appropriate
tactics and strategies that keeps the team alert and dynamic.

LEARNING OUTCOMES

 Identically analyses the entrepreneurial opportunities ahead

 Understanding of approaches to entrepreneurship

 Summarize the reason for entrepreneurial development

 Critically analyze the need entrepreneurship development

 Understanding of the concepts of personality

 Know the impact of risk on business

 Summaries personal characteristics of entrepreneurs.

 Recognize of importance of data in decision making.

SHORT ANSWER QUESTIONS

1. List out the three roles played by entrepreneurs.

2. What are the approaches to entrepreneurship?
3. What are the changes in liberalization economy?
4. What are the Entrepreneurial Initiatives in India?
5. What is meant by personality?
6. How does dynamic market affect business?
7. What are the importance of entrepreneurial skills?
8. What are the components of entrepreneurial process?
LONG ANSWER QUESTIONS

1. What are the important functions performed by entrepreneurs, after conception of a

business idea?
2. Explain the revolution impact of entrepreneurship.
3. Explain the role of entrepreneurship in economic development.
4. Critically analyse the barriers to entrepreneurship?
5. Discuss 12 characteristics of successful entrepreneur?
6. How is risk classified?
7. Why are interpersonal skills required for entrepreneurs?
8. Explain the problems in setting up a business.
 UNIT II
ENTREPRENEURAL ENVIRONMENT

CONTENTS

LEARNING OBJECTIVES...................................................................................................... 70

2.1 ENTREPRENEURSHIP ENVIRONMENT......................................................................... 70

2.2 ROLE OF FAMILY AND SOCIETY ................................................................................... 79

2.3 OBJECTIVES AND CONTENTS OF ENTREPRENEURSHIP DEVELOPMENT TRAINING .. 87

2.4 PHASES AND EVALUATION OF ENTREPRENEURSHIP DEVELOPMENT TRAINING ..... 98

2.5 INSTITUTIONAL SUPPORT TO ENTREPRENEURS ..................................................... 105

2.6 INSTITUTIONAL FINANCE TO ENTREPRENEURS ...................................................... 112

2.7 CENTRAL GOVERNMENT INDUSTRIAL POLICIES AND REGULATIONS...................... 120

2.8 STATE GOVERNMENT INDUSTRIAL POLICIES AND REGULATIONS .......................... 129

LEARNING OUTCOMES ..................................................................................................... 141

SHORT QUESTIONS .......................................................................................................... 142

LONG QUESTIONS ............................................................................................................ 142

LEARNING OBJECTIVES

 Evaluate the various environmental factors that affect the entrepreneurial

development.
 Enumerate inspiration to becomingentrepreneur.
 Examine the challenges faced by entrepreneurship development training
 Explain the importance of entrepreneurship training
 Discuss the functions of NSIC, SIDO, SII and SSIDC.
 To identify the role of financial institutions for entrepreneurship development.
 Describe the industrial policy
 Name the most important sectors in the industrial policy

2.1 ENTREPRENEURSHIP ENVIRONMENT

The ENTREPRENEURIAL ECOSYSTEM is a COMPLEX ADAPTIVE SYSTEM that is similar to

a natural ecosystem.

To explain further:

1. Interconnected Entrepreneurial Actors may be: potential or existing ,

2. Entrepreneurial Organisations may be : firms, venture capitalists, banks,

 3. Institutions like: educational institutions , public sector agencies, financial
institutions

4. Entrepreneurial Processes: which refers to new business formation rate, count

of high growth firms, levels of successful entrepreneurship, growth of serial
entrepreneurs and degree of closure mentality within firms and levels of
entrepreneurial motivation.

Matthews and Brueggemann (2015) described an internal ecosystem as a company’s

activities that are independent of other companies and an external ecosystem that includes
all of the other actors that the company is dependent upon in some way.

Thus, concept of entrepreneurial ecosystems can include:

1. The vendors, customers and other parties that a particular firm directly interacts
with , and also other individuals, firms and organizations that the firm might not
directly interact with, but that play a role in shaping the ecosystem.

Researchers have studied how entrepreneurial ecosystems can:

1. Generate geographic clusters of technology-based ventures, like in Silicon Valley

(Cohen, 2006)

2. Facilitate growth in entrepreneurship in specific regions (Neck, Meyer, Cohen, &

Corbett, 2004), and,

3. Provide the platform to create dynamic entrepreneurial ecosystems

Any business works within the framework provided by these elements of society. Thus,
the term business environment includes all the conditions and circumstances that affect the
total organization or any of its part. Business may be understood as the organized efforts of
an enterprise to supply consumers with goods and services for a profit. Businesses vary in
size, as measured by the number of employees or by sales volume etc. They may be profit
oriented or cause oriented like: improving quality of life and contributing to economic
growth. Business and society are interdependent.

Entrepreneurship environment refers to the various facets within which enterprises have to
operate. The term business environment refers to:

Some important works of researchers in this area is given below:

 Ahmad and Xavier (2012) stated that, the entrepreneurial environment refers to
a combination of factors that play a role in entrepreneurship and entrepreneurial
activities.
 Bernhofer and Li (2014) stated that, the entrepreneurial environment
encompasses the cultural, economic, and political environments and that
individuals have different motivations in different environmental backgrounds.
 Nam and Hwansoo (2019) adopted an external perspective and defined the
entrepreneurial environment as the sum of the legal and institutional
environment, market environment, financial environment, and entrepreneurial
infrastructure, among other aspects.

Business environment is classified as Macro Environment and Micro Environment.

I. Macro Environment
Macro environment is also known as general environment and remote environment. They
are uncontrollable. This environment has a bearing on the strategies adopted by the firms
and any changes in the areas of the macro environment. This is generally called as “STEEP”
and is broadly classified as:

(1) Political environment

(2) Economic environment
(3) Social environment
(4) Technological environment
(5) Legal environment and
(6) Cultural environment.

1. Political Environment: It is concerned with general stability of the country in which an

enterprise is expected to perform and the political ideology of party in power towards
business. Political forces define the business climate by the constraints they impose and
by the activities they permit. Political factors include: Political ideology, Political climate and
leadership style.

2. Economic Environment: It refers to the economy where the business primarily

operates. It includes: Economic resources, Economic conditions and Economic policies.
Labour policies. Trade and tariff policies and Incentives and subsidies etc.

3. Socio Environment: It refers to the background or the social setting in which the people
grow, shapes their basic believes, values and norms. It includes: Consumer opinion, Culture,
etc.

4. Technological Environment: Technology represents the application of scientific

knowledge for practical purpose. It includes the expertise, procedures and systems used by
enterprise to make profound changes in the transformation process and in goods and
services. It results in effective utilisation of productive resources, competitive strength, risk
efficiency and Improvement in productivity.
5. Legal Environment: It refers to the regulatory framework within which an enterprise
operates, like the regulations governing the business activities.

6. Cultural Environment: Culture influences the values and priorities in a system. It

influences the way employees work, consumers react, leaders take decision, nature of
competition and influences the organistion structure also.

In today’s liberalized economy, International business environment also plays a vital role. It
includes: growth of Multinational Corporation, globalisation, GATT/WTO and International
Capital Market

Political - Political climate, Leadership Quality

Economic - Economic Policies, Availability and cost of
labour, quantum of trade, Tariffs, Incentives,
Subsidies provided by Central and state government
Social - Consumer preference and awareness,
Labour- Attitudes, Opinions, Motives
Technological - extent of Competition , level of Risk,
Efficiency, Productivity, Profitability
Legal - Rules and Regulations
Cultural - Structure, motivations and Values

The business environment poses threats to a firm or offers immense opportunities

for potential market exploitation. The success of every business depends on adapting itself
to the environment within which it functions. Hence, it is very necessary to have a clear
understanding of the concept of business environment

Features of business environment are as follows:

1. Totality of External Forces: Business environment is the sum total of all things
external to business firms and, as such, is aggregative in nature.
2. Specific forces (such as investors, customers, competitors and suppliers) affect
individual enterprises. General forces (such as social, political, legal and
 technological conditions) have impact on all business enterprises and thus may
affect an individual firm indirectly only.
3. Dynamic Nature: Business environment keeps on changing whether in terms of
technological improvement, shifts in consumer preferences or entry of new
competition in the market or political philosophy.
4. Uncertainty: Business environment is largely uncertain as it is very difficult to
predict future happenings, especially when environment changes are taking place
too frequently, particularly in situations like pandemic and war.
5. Relativity: Business environment is a relative concept since it differs from
country to country and even region to region because of the political conditions,
cultural variations, etc.,
6. Multi-faceted: The changes in the environment may be a challenge or threat to
some entities, where as it may serve as an opportunity, depending upon the
knowledge and circumstances.

Benefits of Understanding Business Environment

1. It helps an organization to identify market opportunities and take an edge over

competitors.
2. Observation of changing environment provides an opportunity for the firms to
update themselves instead of getting lost by threats.
3. It gives the firms required capability to cope up with the change.
4. It gives firms, a possibility to prepare for future trends.
5. It shows firms, the new avenues for growth.
6. It enables understanding about competitors strategies and prepare for a counter
battle or proactive actions.
7. Proactive business units gain the goodwill of the stakeholders, whose interests
are vested upon the firms.
 8. It keeps the human resources adaptive to change and helps in upskilling for the
changing needs.

II. Micro Business Environment

There are mainly two types of micro business environment: internal and external.

 A business has absolute control in the internal environment, whereas

 It has no control on the external environment.

It is therefore, required by businesses, to modify their internal environment on the basis of

pressures from external.

Internal Environment: Internal environment encompasses the owner of the business, the
shareholders, the managing director, the employees, the customers, the infrastructure, and
the organization culture. It includes:

1. Human Resources
2. Financial Factors
3. Marketing Resources
4. Physical Assets
5. Organisational Structure and,
6. Miscellaneous Factors
This can be discussed further in detail as follows:
1. Human Resources: The knowledge, skills, aptitude, morale, organizational
Commitment, work engagement of people in organization plays a vital role on the
success and failure of an organization. An organization that invest on its resources
turn out to be successful.
2. Financial Resources: The money required for starting and running the business
is available from financial institutions and also the public. The extent of capital
that can be mobilized, the interest rates in which money is available, and the
 incentives offered to the business by the Government and other financial
institutions, determine the viability of a business enterprise.
3. Marketing Resources: The marketing efficiency of a firm determined by its
product line distribution market share and brand equity helps firm gain a
competitive advantage.
4. Assets: A business has tangible assets like land buildings machinery and
technology and also intangible assets like brand strength and good will. The cash
flow and the fixed assets serve as an internal strength for the firm.
5. Organisation Structure: The structure of the organisations determine it
efficiency in decision making and adoption of Strategies and readiness to embrace
change. Organisation structure that facilitate Quikr communication and decision
making usually gain and early mover advantage.
6. Other Factors Like Research & Development Capacity, culture of an organisation,
Technology advancements have a bearing on the sustainability of the business.
This is required to facilitate the transition particularly in the industry 4.0 era
where Artificial Intelligence and machine learning is becoming the buzz word.

External Environment The external environment of an organisation comprises of all

entities that exists outside its boundaries, but have significant influence over its growth and
survival. An organisation has little or no control over its external environment but needs to
constantly monitor and adapt to these external changes. A proactive or reactive response
leads to significantly different outcomes. The following are the components of external
environment.

1. Customers: Understanding the needs and wants of a customer and making an

offering to satisfy them forms, a basis of any business.
2. Employees: Employing the correct staff and keeping staff motivated is an
essential part of an organization’s strategic planning process. Training and
development play a critical role in achieving a competitive edge; especially in
 service sector marketing. Employees have a substantial influence on the success
of the enterprise. They help in executing the policies and plans of business. If this
factor is not given, as much attention as it requires, it may prove to be non-
beneficial for the organisation as employees after customer, are the backbone of
the organisation.
3. Suppliers: Suppliers provide the materials required for manufacturing A
supplier’s behavior will directly impact the business it supplies Close supplier
relationships helps in managing the costs and also quality of the supplies, which
is a vital component to manage competition.

4. Shareholders: A shareholder invests in a business. They have the right to vote on

decisions that affect the operations of company. Relationships with shareholders
need to be managed carefully as rapid short term increases in profit could
detrimentally affect the long term success of the business. Shareholders benefits
by dividend from business and business benefits from the decisions made by the
shareholders in the governance process.

5. Media: Organizations need to manage the media so that it helps promote the
positive things about the organisation and conversely reduce the impact of a
negative event on their reputation. Some organizations will even employ public
relations (PR) consultants

6. Competitors: Product is differentiation is the key element of branding.

Competitor analysis and monitoring is crucial if an organisation is to maintain or
improve its position within the market. . As a business, it is important to examine
competitors’ responses to the changes, and differentiate themselves from them,
so that, firm can maximize the benefits.
2.2 ROLE OF FAMILY AND SOCIETY

Role of a family in successful running of a business is more relevant in the case of

entrepreneurial and small scale ventures. Aldrich and Cliff (2003) recommends that a
family embeddedness perspective that acknowledges people are part of networks of social
relations. This is more appropriate in the context of entrepreneurship research. In ethnic
minority enterprise, social and family networks have been found to be significant. These
networks help ethnic minority entrepreneurs to gain a cultural resources or social capital
which is not available to the mainstream groups. For example, cheap family labor, pooled
savings and access to trusted networks which facilitate trade and provide access to
information, thus providing a particular competitive advantage. Such informal networks
have also been found to be important as a means of mobilizing resources and generating
sales. It is the family and the community that lies at the heart of ethnic firms' social
networks. Thus, the impact of the family is obvious as enterprises are established and run in
a social setting of which the family plays an important role in it.

 Entrepreneurs are inseparably linked to their families and rely on their support in
pursuing their entrepreneurial endeavors (Rogoff & Heck, 2003).

 Family members share a common identity, have strong mutual bonds of trust, and
often have opportunities to discuss business ideas (Aldrich & Cliff, 2003; Ruef,
Aldrich, & Carter, 2003).

 Family constitutes one of the most common entrepreneurial teams (Ruef, 2010)

 Significant entrepreneurial potential can be found within the family (Nordqvist &
Melin, 2010).
  A substantial share of all companies are founded and run by families all around
the world (La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1999; Villalonga &
Amit, 2009).

1. Strong ties in terms of kinship relationships between family members bind the
family closer together than any other type of entrepreneurial team
(DiscuaCruz, Howorth, & Hamilton, 2013).

2. The family provides the entrepreneur with a diverse set of resources (Dyer &
Handler, 1994; Sirmon & Hitt, 2003), which have the potential to impact the
individual entrepreneur as well as the family business.

3. The family and the business are intertwined, denoted as family influence (Dyer,
2006; König, Kammerlander, & Enders, 2013). As the family business is
composed of multiple family members, the structural family ties willspill over
to the business (Arregle, Hitt, Sirmon, & Very, 2007).

Hence, family background has been considered as one of the major factors to
motivate a person to enter into a business, existing or new. If a person is exposed to a
family culture where innovating thoughts became Business Empire or children tend to
view this as a tradition which they need to take further. This belief inspires many of them
to create a separate venture for themselves and also to inherit their tradition of business
success.

Zivetz (1992) states that extended family 'corporations' dominate large scale
industry in India. These domestic corporations owe part of their success to their ability
to put trusted family members in key business positions. Many businesses are
established with the explicit purpose of providing work for unemployed or
underemployed family members. Thus, the influence of family in entrepreneurship is
considered as an important factor to be explored.

The nature of family has an impact in entrepreneurship. There is a notion in the

Western countries that the independence offered by the nuclear family creates
conducive environment for entrepreneurial activities. They also argue that the joint
family culture of the Eastern societies create hindrances for an individual to become an
entrepreneur because s/he has to be in the joint family and has to fulfill other
responsibilities which makes entering into entrepreneurship difficult.

Many researchers have found the impact of family background in

entrepreneurship. Researchers conducted by Western scholars show that, nuclear
families have strong influence in entrepreneurship in their society.

 However, in a study by Redding (1980) it was found that unlike the American
entrepreneur, characterized by individualism, there is growing evidence that
Asian entrepreneurs rely on familial ties in developing their business
[Redding, 1980, cited in Thomas, 2000].

 This fact is illustrated by the numerous businesses owned and operated by joint
families among the Gujaratis, Parsees, and Marwaris in India, (Thomas, 2000).

 Entrepreneurship is influenced by the support that family can provide over time
(Jennings, Breitkreuz, and James 2014).

 The family is considered as a resource provider of physical, emotional, and

material resources for entrepreneurship (Stewart 2003).

 Family acts as an incubator for entrepreneurs and nascent ventures sharing

resources such as building and equipment (Clarysse et al. 2005), emotional
connections (Steier 2007), closely-knit relationships and obligations (Stewart
2003), interest-free loans, assets, and inexpensive labour as well as access to
 business related acquaintances and specialized knowledge (Anderson and
Miller 2003; Stewart 2003).

 On the other hand, family business may be affected by family conflicts (von
Schlippe and Frank 2013; Nicholson 2015).

 Danes and Morgan (2004) highlight that conflicts related to work/family life
balance, unfair distribution of resources (money, time, energy) between family
and business systems may create increasing tensions.

 Nicholson (2015) states that conflict dynamics lurk in the context of families
such as parent-offspring conflict, affinal bonds and sibling rivalry.

 Von Schlippe and Frank (2017) state that as family members engage in the
entrepreneurial process, emotional issues may develop due to pressures of
engaging in creating and subsequently manage a business venture over time.

Family perspective on entrepreneurship embraces the relevance of family as a

fundamental social unit. It can support and also affect entrepreneurship. There are
various strands on the role the parents and grandparents in influencing their children
toward entrepreneurship.

In a survey on role of family members in influencing them to entrepreneurship,

women entrepreneurs told that the most important person to inspire them into
entrepreneurship was their husbands. Some of them told that their brothers were their
inspiration for them to become entrepreneur. Other family members such as
grandparents, mother, and sisters have inspired respondents to become entrepreneur in
limited cases only. Thus, the role of father (for both men and women) and husband
(for women) is really strong for providing inspiration to become entrepreneur.

Parental profession has some effect in the choice of entrepreneurship as a

profession. The role of father was more influential. The influence of mother and
 grandfather was not so strong. Birth sequence of the person also was somewhat related
to choice of the entrepreneurship. Many of the entrepreneurs were first child of their
families. This means, those who have to look after their family tend to find
entrepreneurship as their choice. Family-owned companies are good not only for the
families involved, but also for both the local and global economies.

There are advantages and disadvantages to running any business, from a small
business to a larger, publicly traded company. However, family firms come with their
own unique advantages and challenges.

Advantages of a Family-Run Business:

There are many advantages to running a family business:

1. Stability

The leadership of a family business is usually determined by the position of each

individual in the family. Thus, there is generally continuity in leadership, which ensures
overall stability.

2. Commitment

Family firms tend to have a greater sense of commitment and accountability at their
heart than non-family firms. This desire for both the family and business to stay strong
fosters additional benefits, including a greater understanding of the industry, the
organisation and the job; stronger customer relationships; and strong sales and
marketing.

3. Flexibility

While non-family businesses tend to have very clearly delineated responsibilities for
 every role, family members will sometimes be required to perform overlapping tasks.

4. Long-term Outlook

Non-family firms draw up their goals for the next quarter. Family firms, however, think
years ahead. A longer-term perspective is a good way to foster a culture of clear strategy
and decision-making throughout the business.

5. Decreased Cost

During economic downturns the board of directors needs to work out how to keep the
business afloat while still paying staff. In family firms, family members would be
contributing financially to keeping the business alive. It may be pay cut, contributing
personal finances, or pausing the payment of dividends while the company gets back on
its feet. Technically in family behind the business, long-term business success is crucial to
their financial survival, which gives more flexibility where finances are concerned.

Disadvantages of Family-Run Businesses:

Family run business comes with its own perils too:

1. A Lack of Family Interest

In a family business, if future generations are forced to take up the business, even if they
have no real interest, it can result in bad management.

2. Conflict between Family Members

The dynamic between family members, and a vague boundary between family life and
work life may all cause conflict within any family-run business.

3. A Lack of Structure

Family businesses rely firmly on trust. But, it is important to follow both internal rules,
and external corporate law to run the business smoothly.

4. Nepotism

Some family businesses promote family members to senior management roles, even
without enough education, experience or skills to discharge their responsibilities. It would
be right to place more qualified non-family members in these positions. But this causes
unrest.

5. Succession Planning

Many family business owners fail to create succession plans. They refuse to admit
eventually that someone else will need to take the control of business. In case of death or
scandal it requires a family business to appoint a successor in a very short space of time.
Without the right plans in place, it can be very hard for a business go ahead in such
circumstances.

Some businesses may be fortunate enough to have the next generation with the
skills and attitude needed to take the business forward. Others may have family members
who are interested but who do not feel are right to take on the business, while others may
have a next generation who do not have the desire to continue.

It is important to document the succession plan, the company goals and more so
that when the time comes, the takeover is smooth. A successful family business will need
to be built upon an appropriate structure - and this structure may shift as it moves from
generation to generation. There are five different business structures that a family
business can adopt:

1. Owner-Operator: A business with a single owner, who runs the day-to-day

operations of that business. There should be successor who will take over this
role when the current owner-operator retires.
 2. Partnership: An approach where two or more partners have ownership of the
business, and these owners are the people who benefit from any profits.

3. Distributed: The distributed model avoids the tasks of having to choose new
partners as successors. Instead, business ownership is transferred to the
family’s descendants - whether or not they actually work within the business.
However, the family may define a compensation policy that ensures that those
who do contribute to the success of the business are better rewarded.

4. Nested: Certain assets are owned by individual branches of the family, with
other assets owned by the family as a whole. The core business is run as a profit-
making enterprise, with dividends paid to the family branches so they can create
their own profit-making ventures.

5. Public: This approach can work well when the business is looking for a large
amount of external funding, or when its owners simply don’t have the time,
resources or inclination to be involved on a day-to-day basis. However, it may
not work so well if the owners want to maintain significant control over how the
business is run.

Conflict is likely in any business setting. There are a number of strategies that
family-run businesses can adopt to ensure that conflicts are recognised, aired and
resolved before they become unmanageable:

1. Regular communication.

2. Family councils.

3. Separating work life and family life.

4. External mediation.
2.3 OBJECTIVES AND CONTENTS OF ENTREPRENEURSHIP
DEVELOPMENT TRAINING

According to McClelland, need for achievement motivates individuals to USE

opportunities and to take advantage of favorable trade conditions. This could be motivated
through planned training activities. Lot of efforts has been undertaken by the governments,
both at the centre and in the states and Non-Government Organizations to promote
entrepreneurial development in the country through entrepreneurial development
programmes. The skills required for an entrepreneur can be gained through training and
development.

Entrepreneurial development programmers can play an important role in influencing

potential candidates to take advantage of new business opportunities and establish new
business ventures, which is important for economic development. Programmes can be
designed both to help potential candidates to start new ventures or to help existing
entrepreneurs to improve their skills or solve particular business problems.

Entrepreneurial development programmers can play an important role in influencing

potential candidates to take advantage of new business opportunities and establish new
business ventures. Programmes can be designed both to help potential candidates to start
new ventures or to help existing entrepreneurs to improve their skills or solve particular
business problems.

‘Entrepreneurs are not only born but can also be trained and developed’.
Entrepreneurial development programmes help the potential entrepreneur to set-up his
own business enterprise appropriate to them. Entrepreneurial development is an organized
and continuous process. The basic purpose of entrepreneurial programme is to motivate the
potential persons to take up entrepreneurship as their career.
 Inculcating entrepreneurial skills for setting up and operating business enterprise
can be called development of entrepreneurs. Entrepreneurial development prefers to
enhance the skill and knowledge of entrepreneur through training and development.
Training is related to skill and development is related to knowledge.

One trained and successful entrepreneur can set right example for others to follow.
Trained entrepreneurs naturally become catalysts of industrial development and economic
progress. EDP is a comprehensive programme involving the following process.

 Improving the motivation, knowledge and skills of the potential

entrepreneurs.

 Kindling the entrepreneurial behaviour in their day to day activities.

 Supporting them in the development of their own enterprises.

In the past it was believed that only those persons who have got business family
background can become successful entrepreneurs. Now-a-days it is widely accepted that,
persons who gain proper knowledge and training can become entrepreneurs. This is
supported by David C. McClelland. The following are the major competencies, which can be
inculcated in an entrepreneur by proper training:

 Initiative: It helps the person to be a daring entrepreneur who initiates a business

activity. It refers to the official action taken to solve a problem.

 Looking for opportunities: It helps persons to always look out for opportunities,
as and when these arise.

 Information seeker: Training entrepreneurs to always search for information

from all sides in the pursuit of reaching business goals.
 Persistent: Trains entrepreneurs to face failures and how not to be pulled down
by failures and encourages them to try again.

 Quality Conscious: The interest of excelling in quality and to raise existing

standards is instilled.

 Commitment to work: The entrepreneur is prepared to put in everything, at

his/her command, for accomplishing goals.

 Efficiency seeker: The entrepreneurs has to make an earnest effort for

completing the desired task within minimum cost and time.

 Proper planner: The entrepreneur undertakes meticulous planning and proper

execution for the attainment of desired goals.

 Problem Solver: An entrepreneurs finds out ways and means for-tiding over the
difficult times.

 Self-confidence: The entrepreneurs should be confident about their strengths

and abilities.

 Assertive: The entrepreneur should be stubborn in promotion of interest of his

ventures.

 Persuasive: Having ability to make people do what he wants them to do.

 Efficient monitor: By ensuring that everything happens the way it intends to

happen.

 Employee’s well-wisher: Take all measures for promoting welfare of workers.

 Effective strategists: The entrepreneur must be trained to device most effective

strategies aimed at promoting the objectives of an enterprise.
 James J Berna has listed the following competencies in a successful entrepreneurial.

 Being an enterprising person.

 Being growth oriented.

 Interested in advanced and improved technology.

 Adapt to change

David McClelland conducted a five year experimental study in one of the prosperous
district of Andhra Pradesh in collaboration with Small Industries Extension and Training
Institute (SIETI) Hyderabad. This experiment is known as ‘Kakinada Experiment’. The
Experiment proved that entrepreneurial competency can be developed in human minds
through education and training. Various qualities like motivation, knowledge, risk bearing
capacity, locating and exploiting opportunity etc., so essential for the success of any venture,
can be imbibed in to prospective entrepreneur through proper orientation.

Entrepreneurial Development Programme (EDP) is primarily concerned with

enabling a person in developing and strengthening his entrepreneurial skills, motives and
capabilities which are so essential for playing his entrepreneurial role more effectively. It
helps in utilization of local resources, more employment generation and promotion of small
scale units and overall development of an area. EDP results in the overall improvement in
the personality of an individual, transformation of outlook and ideas getting translated into
actual enterprise.

General business management education is not considered to have significant

influence on entrepreneurial propensity (Hostager and Decker 1999). The Report of
National Knowledge Commission on Entrepreneurship (2008), Government of India,
observed the linkages between Education, Innovation and Entrepreneurship. The high level
growth of an entrepreneur is depended upon the quality of education imparted in the
institutions, the innovative qualities implied and conversion of the traditional education
system to the market oriented and commercial. There is a demand for education programs
specifically designed to expand learner’s knowledge and experience in entrepreneurship.
Entrepreneurship education is also considered to be influential force that determine the
health of the economy. A number of international, regional, national, and local performers
are taking part in the global experiment of entrepreneurship education and training.
However, the effectiveness of entrepreneurship education is largely driven by the type and
design of such education, as defined by the materials and modes of rendering the programs
(Arthuret al., 2012). Entrepreneurship education and training can be classified into two
categories: entrepreneurship education and entrepreneurship training. They are
distinguished from one another by the variety of program objectives or outcomes.

The objectives of entrepreneurial training are:

 To encourage self-employment and develop small and medium enterprises.

 To encourage new venture establishment and help expansion of the existing

ventures in rural areas through designing special programmes.

 To develop the entrepreneurial skills to potential entrepreneurs.

 To help the entrepreneurs to define or redefine their business objectives

and help in the realization of the same.

 To make the entrepreneurs ready for threats and risks.

 To train in strategic decision making.

 To develop team building and coordination skills.

  To develop the communications skills.

 Help to define the vision of their ventures and work in coordination for the
realization of the same.

 To train the entrepreneurs with the legal procedures and norms involved in
establishing a new venture.

 To inculcate the basics of industrial relations.

The various methods of providing training to the entrepreneurs are as follows:

1) Lecture Method: It provides information to the trainees orally. In case of any

doubt arising in the minds of trainees, clarification can be given spontaneously by the
instructors.

2) Written Instructional Method: When the training contents are to be adopted in

the future by the trainees, this method is used and it is most popular in case of standardized
production system.

3) Individual Instruction: In this method, only one person is chosen for providing
entrepreneurial training to impart a tough skill.

4) Group Instruction: When the training is to be provided to the group of different

individuals, this method is used particularly when these persons have to perform the same
type of activities and similar instructions are to be given to all the candidates.

5) Demonstration Method: In this method, the main focus is on providing practical

knowledge rather than theoretical knowledge.
 6) Meetings: In this method, a group of people discuss the different issues faced by
them. They share their views, ideas and different conclusions are derived on the basis of
various alternatives and suggestions.

7) Conference: This method is generally used for imparting knowledge regarding

new ideas and techniques to the trainees.

1) Basics of Entrepreneurship: The meaning, history, features, qualities, significance,

advantages of being an entrepreneur, role in economic development of the country, etc., are
discussed with the potential entrepreneurs.

2) Motivational Inputs: Achievement Motivation Training (AMT) aim to enhance the

confidence, self-awareness, innovativeness, achievement need, and other entrepreneurial
skills. Behavioural psychology techniques are also used here.

3) Management Inputs: To inculcate management concepts in potential entrepreneurs,

basic management functions like production, marketing, finance and labour relations are
taught to them.

4) Support System and Procedure: Different supporting institutions are available to

support the entrepreneurs and the entrepreneurial ventures. The participants are
introduced to the supporting institutions and their schemes and roles. The potential
entrepreneurs get familiarized with the service agencies, financial & non-financial
institutions and different programmes and policies of the government.

5) Project Feasibility Study: The information related to prospective business opportunities

present in the area where EDP is conducted is provided to the trainees. Once the trainees
select some business opportunities, assistance is provided to them for preparing the project
feasibility reports to be submitted to the banks and various other financial institutions.
Trainees will be provided with information about market survey, feasibility study project
appraisal, technical and commercial viability analysis etc.

6) Field Visits/Industrial Exposure: The trainees can have a real life exposure to industrial
activities. Apart from this, first-hand knowledge and exposure related to the various issues
and opportunities in industrial enterprises can be gained with the help of industrial visits.

7) Technical Knowledge: It is very important for the entrepreneurs to have the technical
knowledge about the selected field of enterprise. Therefore, the trainees are required to have
information about the economic aspects of the technology such as costs and benefits
associated with a particular technology.

8) Market Survey: Since, the entrepreneurs should also have enough knowledge about how
a market operates, therefore, EDPs also provide the trainees with opportunities to conduct
market surveys for project of their choice. In order to groom trainees in most significant
manner, the inputs of training are planned efficiently so that the trainee entrepreneurs
become enable to deal with the various responsibilities of business and face challenges
which could arise during the development and management phase.

The course contents of an EDP should be formulated as per the objectives of the EDPs.
It should consist of the following:

1. General Approach to Entrepreneurship:

The entrepreneurship role, expectation, entrepreneurial environment, innovative

behaviour, future challenges and prospects are covered. Appropriate strategies enabling the
potential entrepreneur to tackle different risk inherent in an innovation activity should also
be included.

The risks may be:

  Technical Risks: The risk of not knowing enough about the technical processes,
materials etc.

 Economic Risks: the risk of market fluctuations and changes in relation to raw
materials etc.

 Social Risks: The risk inherent in the development of new relationship.

 Environmental Risks: The risk which result from environmental changes in the
work as an outcome of the new activity.

Facilities provided by the government and other agencies involved in promotion of

entrepreneurship is also an important aspect.

2. Motivational Training:

Motivational inputs include psychological games, tests, goal setting exercises, role
play etc. The motivational inputs aims at increasing the participants, understanding of the
entrepreneurial personality and entrepreneurial behaviour and bring about introspection,
changes in self-concept, value, skills thereby leading to positive entrepreneurial behaviour.
This is based on learning and reinforcement principle.

3. Developing Management Skills:

Exposure to different types of management problems, will sharpen their management

skills. Training for exposing managerial skills will be arranged in keeping the situational
requirements. However, managerial aspects should include production planning, labour
laws, cost analysis, financial accounting, selling arrangements, taxation laws etc.

4. Training for Project Management:

Required knowledge about project feasibility, viability and implementation should

also be given to the potential entrepreneurs. Under project preparation, technical feasibility
includes selection of technology, availability of raw materials, selection of location and site,
availability of plant and machinery, infrastructure facilities, roads, transport, power,
manpower/personnel requirement.

Similarly, market analysis, level of competition, capital cost, working capital

requirement, estimated cost of production, projected sales volume, profitability estimates,
expected rate of return, projected cash flows and break even analysis should be
incorporated.

Exposure to financing of the project should be done. Financing sources generally

includes sources of financing, promoter’s contribution, level of institutional financing, seed
capital, investment subsidy etc. Importance of timely implementation of project, scheduling
of various activities, provision for effective supervision and need for avoiding delay and
consequent cost escalation should also be covered.

5. Structural Arrangement:

They should be given adequate awareness about government policy regarding

development of industries, small scale industries, registration and licensing procedures,
forms of organisation like proprietary, partnership, private company and Joint Stock
Company, institutional setup etc.

6. Support System:

Participants should be familiarized with the incentives/concessions available, tax-

incentives, tax holiday, backward/zero industries districts concessions, soft loan scheme,
special schemes for technicians etc. This is continued by familiarizing them with procedure
for approaching government departments and agencies, applying for and obtaining these
concessions from them.

7. Factory Visits/In-Plant Training:

 Knowledge about the production process should be given by visiting some of the
similar units in production. Entrepreneurs who select relatively sophisticated products will
be expected to have a good idea of the product and the process facilities should be arranged
for in-plant training or prototype development on exceptional basis.

Entrepreneurship education in India faces cultural and economic limitations. The

significant challenges faced by entrepreneurship education in India are given below:

 Cultural barriers: Entrepreneurship can develop only in a society in which

cultural norms allow change in pathways of life. Unfortunately, India People are
more sensitive and having emotional mind-set regarding work and productivity.
An entrepreneur needs continuous focus and this has kept some people away
from their own start-ups.

 Difficulties in establishment: Establishing a business in India is more time

taking as compared to other countries. The reason for such delay is administrative
that is attributed to too many rules and regulations, and paperwork (Ashish
Gupta, 2004). Handling electricity, transportation, water, and licensing problems
pose serious challenges.

 Incomplete Entrepreneurship Education: Indian youth is afraid to start their

own business because they are not confident, not capable, and lack knowledge in
starting a business according to a survey by Entrepreneurship Development
Institute, India (EDII) in 2003.

 Lack of a standard framework: Entrepreneurship education lacks broad vision,

goals, and systematic planning. The lack of a standard framework is a challenge to
the development of entrepreneurship education in India.
  Dependence on government: Insufficient private-sector participation and lack
of sustainable business models in the entrepreneurship education act as barriers
to its development in India

2.4 PHASES AND EVALUATION OF ENTREPRENEURSHIP

DEVELOPMENT TRAINING

As seen in the previous module, entrepreneurial training is very helpful in motivating

and developing the entrepreneurial knowledge and skills among individuals.

Entrepreneurial Development Programme (EDP) refers to a programme which is

formulated to assist the individuals in reinforcing their entrepreneurial motives, and
attaining competencies and skills which is essential for performing an entrepreneurial role
successfully.

According to N. P. Singh, "Entrepreneurship Development Programme is designed to

help an individual in strengthening his entrepreneurial motive and in acquiring skills and
capabilities necessary for playing his entrepreneurial role effectively is necessary to
promote this understanding of motives and their impact on entrepreneurial values and
behaviour for this purpose”.

In recent times, EDP has become a professional task for the development of funded
and private businesses. The phases of entrepreneurial development training and evaluation
of the same is discussed in this chapter.

An entrepreneurial development programme consists of three broad phases:

1. Pre-training Phase

2. Training Phase
 3. Post-training Phase

1. Pre-Training Phase: This phase lists the activities and the preparations needed to start
the training programme. The main activities of this phase are:

(a) Arrangement of Infrastructure for training

(b) Preparation of training contents and application form

(c) Sourcing guest faculty

(d) Structuring tools and techniques for selecting the trainees

(e) Constitution of selection committee

(f) Publicity campaign for the programme.

Thus, initial stage involves the identification and selection of potential entrepreneurs
and providing initial motivation to them.

2. Training Phase: In this phase, the training programme is implemented. The objective of
this phase is to bring desirable changes in the behaviour of the trainees. The trainers have to
assess to what extent the trainees have moved in their entrepreneurial pursuits. The
following changes in the behaviour of participants have to be observed:

(a) Change in entrepreneurial outlook, role and skill

(b) Motivation to involve in entrepreneurial venture and risk

(c) Entrepreneurial behaviour that the trainee lacks

(d) The knowledge of technology, resources and other related entrepreneurial

knowledge acquired, and skill in choosing the right project.

3. Post-Training or Follow-up Phase: Under this phase the extent to which the training
objectives are achieved is assessed. Monitoring and follow up shows the drawbacks in the
earlier phases and suggests guidelines, for framing the future policy. In this phase
infrastructural support, counselling and assistance in establishing new enterprise and in
developing the existing units are reviewed.

The common problems in EDPs are discussed as follows:

a. The level of trainer-motivations in motivating the trainees to start their own

enterprises.

b. Commitment and sincerity of Entrepreneurial Development Organizations in

conducting the EDPs. At times, EDPs are used as means to generate income for the ED
organisations.

c. Non-conducive environment and constraints that affects the trainer-

motivators’ role.

d. The attitude of the supporting agencies like banks and financial institutions
serves as stumbling block in the success of EDPs.

Most of the problems are related to implementation, not the strategy.

EDPs suffer on many counts. The problems are the part of those who are involved in
process such as:

 The Trainers

 The Trainees

 The Entrepreneur Programme Organization

  The Supporting Organization

 The Concerned Governments.

There are other problems which are explained as follows:

1. Lack of National Level Policy:

There is no suitable national level policy in India for entrepreneurship development.

The Government did not formulates and enforce a policy for the promotion of
entrepreneurship. Continuity of a programme, with the change of Government also poses a
threat to EDP effectiveness.

2. Difficulty in Pre-Training Phase:

Ill-planned training methodology and inconsistency during pre-training phase,

content, theme and the focus of the programme, disturb the quality of the EDP’s.
Identification of business opportunities, finding and locating target group, selection of
trainee and trainers etc., also affect this stage.

3. Over Estimation of Trainees:

Assuming that the trainees have aptitude for self-employment and training EDP will
motivate and enable the trainees in the successful setting up of their enterprise is also a
concern.

4. Duration of EDPs:

The duration period of these EDPs varies between 4 to 6 months, which is too short a
period to instil basic managerial skills in the entrepreneurs. In that short period the trainees
may not develop their skills. Training should be reinforced intermittently.

5. Lack of Infrastructure Facility:

 These programmes are conducted in the rural and backward areas. In that area there
are many problems regarding class rooms, guest speaker, transportation, accommodation
etc.

6. Inappropriate Selection Procedure:

Because of competition, the institutions do not follow uniform method for the
selection of trainees or prospective entrepreneurs. Some of institutions are still debating
whether to have a proper identification and selection of entrepreneurs for preparing
successful entrepreneurs.

7. Shortage of Competent Administration or Faculty:

Experience revealed that entrepreneurial failures are mostly due to incompetence of

faculty and administration. There is a problem of non-availability of competent teachers and
even they are available, they are not prepared to take classes in the rural and backward
areas.

8. Non-Availability of Inputs:

Non-availability of various inputs like raw materials, power and roads with poor
follow up by the primary monetary institutions resulted in the failing of entrepreneurship
development programmes.

9. Lack of Standardization:

The course content of training is not properly standardized. Usually a broad module
is being adopted by interventions. That may not be applicable to all trainees.

10. Other Problems:

Those involved in and concerned with the selection and follow up activities have
either limited manpower support or a narrow linkage with other support agencies. There is
a low institutional commitment for local support to the entrepreneurs and involvement in
the marketing of the products of the units. Since, there is an element of cynicism, a re-
orientation in the attitude of supporting organization is recommended.

Evaluation of EDPs begins with assessing the purpose underlying entrepreneurial

development. The objective of EDP shall increase the production, to help the entrepreneur
for selection of the product or project and for formulation of the project, growth of people,
social responsibility etc. Evaluation of EDPs means to check-

 Whether the objectives are met?

 What are the impediments in implementation?

1. Whether the Objectives are met?

This can be assessed with the help of following aspects:

 Selection Strategy: The success of an EDP depends largely on proper selection of

trainees. The Behavioural Science Centre (India) has been rating the selection of
potential entrepreneurs with positive self-concept, initiative, independence,
problem solving, belief of success, environment and time bound planning.

 Financial Results: In order to judge the financial health of units, return on capital
employed, net profit over sales, net profit over net-worth and other ratios would
be used. This will show the financial performance as a result of EDP’s.

 Check the Knowledge: It refers to the change in the level of education, training
and experience of the entrepreneur.
  Socio-cultural background of Entrepreneur: It refers to the environment in
which the entrepreneur was raised. It reflects the values and attitudes of the
entrepreneur.

 Environmental Variables: Environmental variables include Government

policies, market conditions, availability of technology and labour situation.

These are important in assessment of the training effectiveness.

Many researchers have identified the need for evaluating entrepreneurship

education and training programmes. It is necessary to assess the effectiveness of
entrepreneurship courses on a number of grounds:

 Net benefits of entrepreneurship programmes should be more than their

costs and risks;

 Training programmes are expensive in terms of money from agencies and

time for participants;

 Extra costs might be borne by guest speakers, mentors and unpaid

consultants associated with programme delivery; and

 Participants may take additional risks if they decide to implement advice

from entrepreneurship programmes. Thus, researchers suggest that central
to such evaluations is an assessment of the cost-effectiveness of a
programme and its opportunity costs.

Inspite of the fact that, performance may improve after training programme, it is hard
to ascertain whether the performance is because of the training or other factors like market,
personal efforts, competition and such.
 Cushion summarise several often-quoted stages of success measurements of small
business training:

 Knowledge and skills required;

 Delivery of training;

 Learning occurring in recipient;

 Behaviour change as a result of learning;

 Behaviour leading to a change in business performance; and

 Change in business performance measured.

EDP is not merely a training program but it is the process of –

1. Enhancing the motivation, knowledge and skills of potential entrepreneurs.

2. Reforming the entrepreneurial behaviour in their day- to-day activities.

3. Encouraging them to develop their own ventures.

2.5 INSTITUTIONAL SUPPORT TO ENTREPRENEURS

There are various State and Central Government agencies supporting small-scale
industries some of their activities and functions are discussed in the following sections.

The National Small Industries Corporation (NSIC), was set up in 1955 in New
Delhi to promote aid and facilitate the growth of small scale industries in the country.
NSIC offers t h e following assistance for the small–scale enterprises.

1. Single point registration: Registration under this scheme for participating in

 government and public sector undertaking tenders.

2. Information service: NSIC provides information on business leads, technology

and policy issues.

3. Raw material assistance: NSIC addresses raw material requirements of small-

scale industries and provides raw material on convenient and flexible terms.

4. Meeting credit needs of SSI: NSIC helps sanctions of term loan and working
capital credit limit of small enterprise from banks.

5. Performance and credit rating: NSIC gives credit rating by international

agencies up to 75% subsidy to get better credit terms from banks and export
orders from foreign buyers.

6. Marketing assistance programme: NSIC participates in government tenders

for small enterprises, to get orders for them.

SIDO is established for development of various small scale units in different

areas. It is a nodal agency for identifying the needs of SSI units coordinating and
monitoring the policies and programmes for promoting the small industries. It
undertakes various programmes of training, consultancy, evaluation needs of SSI and
development of industrial estates. There are 27 offices.

The activities of SIDO are divided into three categories as follows:

(A) COORDINATION ACTIVITIES OF SIDO:

To coordinate various programmes and policies of various state governments relating to

small industries.

(1) To build relation with central industry ministry, planning commission,

 state level industries ministry and financial institutions.

(2) Implement and coordinate the development of industrial estates.

(B) INDUSTRIAL DEVELOPMENT ACTIVITIES OF SIDO:

(1) Develop import substitutions for components and products based on the
data available for volumes and value based imports.

(2) To give essential support for the development of ancillary units.

(3) To guide SSI units costing market competition and to encourage them to
participate in the government purchase tenders.

(4) To recommend the central government for reserving certain items to be

produced at SSI level only.

(C) MANAGEMENT ACTIVITIES OF SIDO:

(1) To provide training, development and consultancy services to SSI to

enhance their competitive strength.

(2) To provide marketing help to various SSI units.

(3) To assist SSI units in selection of plant and machinery, location, layout
design and required process.

(4) To provide updated information related to the small-scale industries

activities.

The small industries service institutes have been set up to provide consultancy
and training to small entrepreneurs both existing and prospective.
THE MAJOR FUNCTIONS OF SISI INCLUDE:

(1) To serve as liaison between central and state government.

(2) To provide technical support services.

(3) To offer entrepreneurship development programmes.

(4) To start promotional programmes.

THE SISIS ALSO PROVIDES ASSISTANCE IN THE FOLLOWING AREAS:

(1) Economic information/ EDP consultancy.

(2) Trade and market information.

(3) Project profiles.

(4) State industrial potential surveys.

(5) District industrial potential surveys.

(6) Modernization and in plant studies.

(7) Workshop facilities.

(8) Training in various trade/activities.

The government of India constituted a board, namely, Small Scale Industries

Board (SSIB) in 1954 to advice on development of small scale industries in the country.
The SSIB is also known as central small industries board. T o facilitate co-ordination
and inter-institutional linkages, the small scale industries board was constituted. It is
an apex advisory body.
 The industries Minister of the Government of India is the chairman of the SSIB.
The SSIB comprises of 50 members including state industry minister, some members
of parliament, and secretaries of various departments of Government of India, financial
institutions, public sector undertakings, industry associations and prominent experts
in the field.

The State Small Industries Development Corporations (SSIDC) were sets up in

various states under the companies’ act 1956, as state government undertakings to
serve to the primary developmental needs of the small tiny and village industries in the
state/ union territories. Incorporation under the companies act has provided SSIDCs with
greater operational flexibility and wider scope.

The important functions performed by the SSIDCs include:

 To gather and distribute scarce raw materials.

 To provide machinery on hire purchase system.

 To give assistance for marketing of the products of small-scale

industries.

 To construct industrial estates/sheds, providing allied infrastructure

facilities and their maintenance.

 To offer seed capital assistance on behalf of the state government

concerned and to provide management assistance to production units.

The District Industries Centers (DIC’s) programme was started in 1978 to

provide integrated administrative framework at the district level for promotion of small
scale industries in rural areas. The DIC is a single window interacting agency at the
district level providing service and support to small entrepreneurs. Registration of small
industries is done at the district industries centre. PMRY (Pradhan Mantri Rojgar
Yojana) is implemented by DIC. Management of DIC is done by the state government.

The main functions of DIC are:

(1) To prepare model projects for reference of the entrepreneurs.

(2) To prepare action plan to implement the schemes

(3) To take-up industrial potential survey and to identify the types of feasible
ventures which can be taken up in the industrial, service sector and business
sectors.

(4) To guide entrepreneurs in selecting the machinery and equipment, sources of it

supply and procedure for importing machineries.

(5) To give guidance for appropriate loan amount and documentation.

(6) To assist entrepreneurs for availing land and shed equipment and tools, furniture
and fixtures.

(7) To appraise the worthiness of the project proposals received from

entrepreneurs.

(8) To help the entrepreneurs in obtaining required licenses/permits/clearance.

(9) To assist the entrepreneurs in marketing their products

(10) To conduct product development work suitable to small industry.

(11) To familiarize entrepreneurs in clarifying their doubts about the matters of

operation of bank accounts, submission of returns to government departments.
 (12) To conduct artisan training programme.

(13) To act as the nodal agency for the district for implementing PMRY (Prime
Minister Rojgar Yojana).

(14) To function as the technical consultant of District Rural Development

Agency (DRDA) in administering Integrated Rural Development Program
(IRDP) and Training Rural Youth for Self-Employment (TRYSEM)
programme.

(15) To help the specialized training organizations to conduct Entrepreneur

development programmes.

For ensuring larger flow of financial and non-financial assistance to the small
scale sector, the government of India set up the Small Industries Development Bank of
India (SIDBI) under Special Act of Parliament in 1989 as a wholly owned subsidiary of
the IDBI. The important functions of IDBI are as follows:

(1) To initiate technological up-gradation and modernization of existing units.

(2) To widen the channels for marketing the products of SSI sector in domestic and
international markets.

(3) To promote employment oriented industries especially in semi-urban areas

The SIDBIs financial assistance to SSIs is channeled through existing credit delivery
system comprising:
 State financial corporations,

 State industrial development corporations,

 Commercial banks and regional rural banks.

 The equipment finance scheme provides direct finance to existing well run small-
scale units taking up technology up-gradation/modernization. The venture capital fund
scheme is exclusively for small-scale units, with an initial corpus of Rs 10 crore. SIDBI
also provides financial support to national small industries corporation (NSIC) for
providing leasing, hire-purchase and marketing assistance to the industrial units in the
small scale sector.

2.6 INSTITUTIONAL FINANCE TO ENTREPRENEURS

Central and State Governments have established many institutions have

established many institutions to foster the growth of entrepreneurship in the country. The
activities cover a wide range of services like financing, technical guidance, equipment
support, training, marketing and providing subsidy and grants.

The following institutions are available for providing the benefits:

Financial Institutions

 Industrial Development Bank of India(IDBI)

 Industrial Finance Corporation of India(IFCI)

 Small Industries Development Bank of India(SIDBI)

 National Small Industries Corporation Ltd(NSIC)

 State Small Industries Corporation(SSIC)

 Regional Rural Banks(RRBs)

 State Financial Corporation’s(SFCs)

 State Industrial Development Corporations(SIDCs)

 Cooperative Banks and Gramin Banks

 The IDBI was established on July 1, 1964 by the Government of India under an Act
of Parliament as the principal financial institution in the country.

Main Functions of IDBI

 The IDBI provides assistance through the scheme of refinance and bills
rediscounting scheme.

 Refinancing of loan sand the State Financial Corporation’s (SFCs).

 Set up Small Industries Development Fund (SIDF) for coordinating financial

and non-financial inputs required for growth of small industries sector.

 Constituted National Equity Fund (NEF) to give equity type of support to tiny
and small scale units which are engaged in manufacturing activities.

 Introduced the single window assistance scheme for grant of term loans and
working capital assistance to tiny, small and medium scale enterprises.

 Set up a Voluntary Executive Corporation Cell (VECC) for counseling small

units and for providing consultancy support in specified areas.

IDBI played a major role, during the pre-reformer (1964–91), in encouraging

industrial development in India in in line with Government-ordained ‘development
banking’ charter.

IDBIAS a Commercial Bank

To keep up with reforms in financial sector, IDBI was reshaped from a

development finance institution to a commercial institution. With the Industrial
Development Bank (Transfer of Undertaking and Repeal) Act, 2003, IDBI attained the
status of a limited company viz., IDBI Ltd.
 Subsequently, in September 2004, the Reserve Bank of India incorporated IDBI as
a 'scheduled bank' under the RBI Act, 1934. Consequently, IDBI, formally entered the
portals of banking business as IDBI Ltd.

The Industrial Finance Corporation of India was set up by the Government of India
under IFC1 Act in July 1948. It is an important financial institution which gives financial
assistance to the entrepreneurs through rupee and foreign currency loans, underwriting,
direct subscriptions to shares, debentures and guarantees.

It also extends other financial facilities like:

 Equipment procurement,

 Equipment finance,

 Buyer’s and supplier’s credit,

 Equipment leasing and

 Finance to leasing and

 Hire-purchase companies.

The IFCI has devised new promotional schemes such as:

 Consultancy fees, subsidy schemes for assisting small scale

entrepreneurs in marketing sector.

 Interest subsidy schemes for women entrepreneurs.

 Pollution control in small and medium scale enterprises.

 Modernization of tiny, small and medium scale industries

 SIDBI was setup in April 1990 a saw wholly owned subsidiary of IDBI (Industrial
Development Bank of India). The Bank has been delinked from IDBI with effect
fromMarch27, 2002. The Bank caters all SSIs- tiny, village and cottage through its Head
Official at Lucknow.

National Small Industries Corporation Limited (NSIC) is a Public Sector Unit

established by the Government of India in 1955. It falls under Ministry of Micro, Small &
Medium Enterprises of India.

In Tamil Nadu the SSIC is Tamil Nadu Small Industries Development Corporation
Limited (TANSIDCO), functions with the specific objective of playing catalytic role in the
promotion and development of Small Scale Industries and monitoring the industrial
dispersal throughout Tamil Nadu.

It establishes industrial parks throughout the state, providing the necessary

infrastructure for small-scale industries, dispersing government subsidies for the sector,
and provides technical assistance for new industries.

TANSIDCO’s activities are as follows:

 Development of industrial states with infrastructure facilities and provision

of work sheds & developed plots

 Raw Materials Supply Scheme

 Marketing Assistance Scheme

  Guidance to Entrepreneurs

Regional Rural Banks have been created with a view to serve primarily the rural
areas of India with basic banking and financial services. But, RRB's may have branches
setup for urban operations too.

Functions of the RRB

RRBs perform the following functions:

 Providing loans and advances to small and marginal farmers and

agricultural laborers, whether individually or in groups, and to co-operative
societies, agricultural processing societies,co-
operativefarmingsocieties,primarilyforagriculturalpurposesorforagricultu
raloperationsandotherrelatedpurposes;

 Providing loans and advances to artisans, small entrepreneurs and persons

of small means engaged in trade, commerce and industry or other
productive activities within its area of co-operation; and

 Receiving deposits.

IFCI provides financial assistance only to large sized industrial undertakings. In order to
cater to the needs of the small scale units, the government of India passed the State
Financial Corporations Act in 1951. There are 18 SFCs functioning in the country. The
functions of SFCs are as follows

 To g r a n t term loans to small scale and medium scale industrial units.

  It under writes the issue of stocks, shares, debentures and bonds of industrial
units.

 Itgrantsloanstotheindustrialconcernswhichisrepayablewithin20years.

 It subscribes to debentures floated by industrial concerns.

 It provides financial assistance to small road transport operators, tour

operators, hoteliers, hospitals, nursing homes, etc.

The State Industrial Development Corporations have been setup by the State
Governments as companies wholly owned by them. SIDCI’s are intended to act as
instruments for promoting the industrialization in the respective States.

The co-operative banks are small-sized units which operate both in urban and non-urban
centers. They finance small borrowers in industrial and trade sectors besides professional
and salary classes. They are governed by the Banking Regulations Act 1949 and banking
laws (co-operative societies) act, 1965. The co-operative banking structure in India is
divided into following 5 categories:

1. Primary Co-operative Credit Society:

This is an association of borrowers and non-borrowers residing in a particular

locality. The funds of the society are derived from the share capital
anddepositsofmembersandloansfromcentralco-operativebanks.Theborrowing powers of
the members as well as of the society are fixed. The loans are given to members for the
purchase of cattle, fodder, fertilizers, pesticides, etc.

2. Central Co-operative Banks:

 This federations of primary credit societies are of two types: membership of
primary societies only, and membership of societies as well as individuals. The funds of
the bank consist of share capital, deposits, loans and overdrafts from state co-operative
banks and joint stocks. These banks provide finance to member societies within the limits
of the borrowing capacity of societies.

3. State Co-operative Banks:

The state co-operative bank is a federation of central co-operative bank. Its funds
are obtained from share capital, deposits, loans and overdrafts from the Reserve Bank of
India. The state co-operative banks lend money to central co-operative banks and primary
societies and not directly to the farmers.

4. Land Development Banks (LDB):

The Land development banks are organized in 3 tiers namely; state, central, and
primary level. They meet the long term credit requirements of the farmers for
developmental purposes. The state LDBS, oversee the primary LDBs. They are governed
both by the state government and Reserve Bank of India. The supervision of land
development banks has been taken over by National Bank for Agriculture and Rural
development (NABARD). The sources of funds for these banks are the debentures
subscribed by both central and state government. These banks do not accept deposits
from the general public.

5. Urban Co-operative Banks

This refers to primary co-operative banks located in urban and semi-urban areas. These
banks, till 1996, were allowed tolend money only for non-agricultural purposes. Now, they
lend to small borrowers and businesses.

Functions of Co-operative Banks

 Though Co-operative banks perform the banking functions, they differ from
commercial banks:

 Commercial banks come under the companies’ act of 1956, or a separate act
of a parliament. Co-operative banks are established under the co-operative
society’s acts of different states.

 Commercial banks have branch banking structure. Co-operative banks have

a three tier setup at State, district and primary cooperative level.

 Only some of the sections of banking regulation act of 1949are applicable to

co-operative banks. Hence only controlled by RBI.

 Co-operative banks function on the principle of cooperation and not entirely

on commercial parameters.

The Narasimham committee on rural credit recommended the establishment of

Regional Rural Banks (RRBs) assuming that they would be much better suited than the
commercial banks or co-operative banks in meeting the needs of rural areas. Hence the
Govt. of India passed the Regional Rural Banks Act, 1976. The main objective of RRBs is to
provide credit and other facilities particularly to the small and marginal farmers,
agricultural laborers, artisans and small entrepreneurs and develop agriculture, trade,
commerce, industry and other productive activities. This bridges the credit gap in rural
areas.
2.7 CENTRAL GOVERNMENT INDUSTRIAL POLICIES AND
REGULATIONS

Industrial policy is a document that sets the tone in implementing, promoting the
regulatory roles of the government. It was an effort to expand the industrialization and uplift
the economy to its deserved heights. It signified the involvement of the Indian government
in the development of the industrial sector. To achieve self-reliant and self-sustained
economy, the path of heavy-industry-led-growth was pursued. The policy environment,
relied on (i) import substitution, (ii) inward-oriented growth, and (iii) a system of controls
and subsidies.

Responding to the industrial policy framework, public sector in India witnessed a

notable expansion. However, a need was felt to make the public sector market-oriented.
Hence, corrections were made and the policy was reformulated accordingly. In the new
policy framework, public sector played a supportive role with the initiative for growth from
the private capital and enterprise. The real transformation was triggered by three factors.
One, India began to see relatively younger entrepreneurs, unencumbered by protectionist
baggage, were determined to prove their worth in a more competitive economy. Two, tariff
rates and quantitative import restrictions were growing - which increased the threat of
imports. Three, MNCs began to enter India in greater numbers and created a global
competition from within.

Soon after Independence, it was considered desirable by the Government to define

the scope of State participation in economic activity. This aimed at removing all constraints
on industrial growth in the economy. The Government announced a new industrial policy on
July 24, 1991.

Objectives:
 The main objectives of the Industrial Policy of the Government are

1. To maintain a sustained growth in productivity;

2. To enhance gainful employment;

3. To achieve optimal utilisation of human resources;

4. To attain international competitiveness; and

5. To transform India into a major partner and player in the global arena.

To achieve these objectives, the Policy focus is on deregulating Indian industry;

allowing freedom and flexibility to the industry in responding to market forces; and
providing a policy regime that facilitates and fosters growth. Economic reforms initiated
since 1991 envisages a significantly bigger role for private initiatives. The policy has been
progressively liberalized over years to at present, as would be evident in subsequent
paragraphs.

Industrial Licensing Policy

 Industrial licensing was abolished for all projects except for a short list of
industries related to security and strategic concerns, social reasons, hazardous
chemicals and overriding environmental reasons, and items of elitist
consumption.

 Only three industries groups where security and strategic concerns predominate
were reserved exclusively for the public sector.

 In projects where imported capital goods are required, automatic clearance were
given in the following cases:

Where foreign exchange availability is ensured through foreign equity,

 If the CIF (Cost, Insurance and Freight) value of imported capital goods
required is less than 25 per cent of the total value of plant and equipment, up
to a maximum value of Rs.2 crore.

 There was no requirement of obtaining industrial approvals from the Central

Government (except for industries under compulsory licensing) for location not
falling within 25 kms of cities having population of more than one million.

 Industries of non-polluting nature such as electronics, computer software and

printing can be located within 25 kms of the periphery of cities with more than
one million population. Other industries were permitted only if they are located
in designated industrial areas.

 The mandatory convertibility clause was not applicable for term loans from the
financial institutions for new projects.

 Entrepreneurs were required to file an information memorandum on new

projects and substantial expansion.

 The exemption from licensing applied to all substantial expansions of existing

units.

Foreign Investment:

 Automatic approval is available to FDI of 50 per cent, 51 per cent, 74 per

cent and even 100 per cent in specified industry groups.

 To provide access to international markets, majority foreign equity holding

up to 51 per cent equity was allowed for trading companies primarily
engaged in export activities.

 The Foreign Investment Promotion Board was constituted to negotiate with

a number of large international firms.
Foreign Technology Agreements:

Automatic permission was given for foreign technology agreements in identified high
priority industries up to a lump sum payment of $ 2 million, 5 per cent royalty for domestic
sales and 8 per cent for exports, subject to total payments of 8 per cent of sales over a 10-
year period from date of agreement or 7 years from commencement of production.

Public Sector:

Portfolio of public sector investments will be reviewed with a view to focus the public
sector on strategic, high-tech and essential infrastructure. Whereas some reservation for the
public sector is being retained, there would be no bar for areas of exclusivity to be opened
up to the private sector selectively. Similarly, the public sector will also be allowed entry in
areas not reserved for it.

MRTP ACT:

The MRTP Act was amended to remove the threshold limits of assets in respect of
MRTP Companies and dominant undertakings. Provisions relating to restrictions with
regard to prior approval of the Central government for establishing a new undertaking,
expanding an existing undertaking, amalgamations, mergers etc., have been deleted.
Emphasis will be placed on controlling and regulating monopolistic, restrictive and unfair
trade practices.

Indian Policy Statement, 1973:

Indian Policy Statement of 1973 identified high priority industries with investment
from large industrial houses and foreign companies were permitted.

 The policy provided for closer interaction between agriculture and

industrial sector.

 Priority was given towards generation and transmission of power.

  The list of industries reserved for the small-scale sector was expanded.

 Special legislation was made to protect cottage and household industries

were introduced.

Indian Policy Statement 1977:

 Targeted small-scale and cottage industries.

 Household and cottage industries to increase self-employment.

 Tiny sector investment up to 1 lakhs.

 Small scale industries for investment up to 1-15 lakhs.

 Basic industries: infrastructure and development of small-scale and village

industries.

 Capital goods industries: meeting the requirement of cottage industries.

 Development of agriculture and small scale industries such as petrochemicals,

fertilizers and pesticides.

 Restrict the control of big business houses.

 Role of the public sector

 Development of ancillary industries.

 Revival and rehabilitation of sick units.

Industrial Policy, 1980

 Promotion of balanced growth.

 Extension and simplification of automatic expansion.

  Taking over industrial sick units.

 Regulation and control of unauthorized excess production capabilities

installed for industrial houses.

 Redefining the role of small-scale units.

 Improving the performance of the public sector.

New Industrial Policy, 1991:

The features of NIP, 1991 are as follows:

 Public sector de-reservation and privatization of the public sector through

disinvestment.

 Industrial licensing.

 Amendments to Monopolies and Restrictive Trade Practices (MRTP) Act,

1969.

 Liberalized Foreign Investment Policy.

 Foreign Technology Agreements (FTA).

 Dilution of protection to SSI and emphasis on competitiveness

enhancement.

The four major principles related to public sector units which have guided the new
policy framework are stated as follows:

1. Partial disinvestment of equity of PSUs for the commercialization of

enterprises and subject them to open public scrutiny.
 2. PSUs to be encouraged to raise fresh equity directly from the public rather
than from the government. This depends on their ability to attract capital
from the public, which, in turn, depended on their financial performance.

3. Public sector monopolies need to be subjected to competition from new

private enterprises in most sectors.

4. Steps were taken to make institutional relationships between the

government and the PSUs contractual and less ad hoc.

The list of policy announcements in the above line is as follows:

1. Exclusive reservation for public sector has been reduced to railway

transportation and atomic energy. Even in the reserved industries, private
investment is to be considered selectively on a case to case basis.

2. The priority areas for growth of public enterprises in future will be the
following:

 Essential infrastructure goods and services,

 Exploration and exploitation of oil and mineral resources,

 Technology development and building of manufacturing capabilities in

areas which are crucial in the long-term development of the economy and
where private sector investment is inadequate and

 Manufacture of products where strategic considerations predominate such

as defense equipment.

3. Steps have been taken towards a market orientation of public enterprises

with a view to making these units behave competitively.
 4. Public enterprises which are chronically sick will be referred to the Board
for Industrial and Financial Reconstruction.

5. Budgetary support in the form of non-plan loans to loss-making PSUs is

phased out.

6. Boards of public sector companies will be in the proportion of (1/3rd

outside directors and government nominee directors restricted to 1/6th or
maximum 2) and given greater powers.

7. PSUs are empowered to decide on mergers and acquisitions; to help them

vertically integrate and move up the value chain so as to maximise returns.

Positive Effects

1. In the post-liberalization era companies are doing away with their not-so-profitable
businesses, because:

 Corporates are using downsizing as a business tool and linking

productivity to profitability.

 Sale of a company is no longer an admission of failure but seen as vision.

2. More ambitious players have been consolidating themselves by way of mergers and
acquisitions. Mergers succeed:

 By boosting profits through avoiding overlapping activities;

 By increasing savings from post-merger economies of scale;

 By enhancing borrowing opportunities through improved gearing;

 By raising equity through more lucrative financial ratios;

  Offer tax-breaks where one merging company is making profits;

 Raising equity holdings to ward off take overs;

 By improving market capitalisation

To facilitate mergers and acquisitions government is promoting single- window

forum on the lines of the J.J. Irani Committee’s recommendations.

India’s share in world market capitalisation is now more aligned with its share in
global GDP. Future increase in market cap will have to depend on a breakthrough in
economic growth.

Economic reforms have created an environment conducive for low-cost innovation.

This, combined with increasing pressures for inclusiveness, will contribute to creating an
income-faster than earlier forecast. India is increasingly becoming a center for low- cost
innovation and new business models.

Indian businesses have emerged with leaner, process, quality and financing,
operating discipline, financial discipline and efficiency. They have cleaned up their shop
floors, restructured their balance sheets and improved their products in terms of
functionality and quality. Companies have developed the ability to quickly respond to
changes in market conditions.

Negative Aspects

There are several aspects of industrial policy which affect industrial investment and
production.

 Industrial licensing policy related to new (large and medium) industrial

undertakings and their expansion.
  Policy concerning the control of monopolies and economic concentration –
and the reservation of certain lines of production for the decentralised,
small- scale sector

 Technology import policy is the policy regarding the import of capital goods,
components and raw materials.

 A provision of industrial finance, development of the capital market, as well

as fiscal incentives/disincentives to investment and production.

2.8 STATE GOVERNMENT INDUSTRIAL POLICIES AND

REGULATIONS

The Vision 2023 Tamil Nadu document envisages Tamil Nadu to be the most
prosperous and progressive State with no poverty by the year 2023. Under this strategy, one
of the 10 thrust areas identified in the document is acceleration in the economy and
achievement of long term goals by increasing the share of manufacturing in the State
economy at the annual rate of 14% ultimately reaching the target of 22% by 2023

The United Nations Report on Probity in Public Procurement has recognized Tamil
Nadu as the first State to have a legislative frame work to deal with Public Private
Partnership procurement. The Tamil Nadu Infrastructure Development Fund (TNIDF) and a
Project Preparation Fund (PPF) have also been set up with Rs.2000 crore and Rs.200 crore
respectively.

Among the Indian States, Tamil Nadu is now ranked:

 First in the number of factories

 First in the number of workers employed in the factories sector

 Third in Gross Industrial Output and

  Third in Net Value Addition

A comparison of the total operating costs across various investment destinations in

India would place Tamil Nadu ahead of the rest and in a very favorable position to offer
investor’s opportunities they would find hard to resist. Chennai serves as the most cost
effective production base for export markets by many MNCs.

Tamil Nadu is known as a major exporter of Leather and Leather Goods, Textiles and
Garments, Automobiles and Components, Engineering Goods, Castings, Pharmaceuticals,
Spices, Agro-Products, Marine Products, Electronic Hardware and, of course, Software.

With more than 1,780 IT / IT Enabled Services (ITES) companies, over 3, 75,000
professionals and annual IT exports of Rs.50, 000 crore, Chennai, with its IT Bay Area, towers
over other major cities as an IT and ITES powerhouse2.

In the post-liberalization era, Tamil Nadu introduced Industrial Polices in 1992, 2003
and 2007. The Vision 2023 Tamil Nadu document which lays out the road map of
development for the State, aims to achieve a consistent economic growth rate of 11% per
annum in a highly inclusive manner and to identify and remove the bottlenecks in
development and prioritize critical infrastructure projects. The document identifies 10
themes for the State which includes inclusive growth, world class infrastructure and healthy
investment climate. The Vision 2023 Tamil Nadu document envisages a 14% annual growth
in the manufacturing sector and an investment of Rs.15 lakh crore in the next 10 years. In
order to attain the growth targets fixed for the respective economic indicators, the
formulation of a New Industrial Policy has become imperative.

 To position Tamil Nadu as the most preferred State for manufacturing, with
 a reputation for efficiency and competitiveness and to attract incremental
investments of over 10% every year in Manufacturing.

 To achieve an annual average growth rate of 14% in the manufacturing

sector in Tamil Nadu.

 To make Tamil Nadu the innovation hub and the knowledge capital of India,
on the strength of world class institutions in various fields and the best
human talent.

 To enhance Tamil Nadu’s position in high technology industries including

Aerospace, Nano technology etc.,

 To achieve rapid industrialization of the Southern districts of Tamil Nadu

 To achieve inclusive and sustainable industrial development in Tamil Nadu

 To create gainful employment opportunities for an additional 2.0 million

persons

 To double exports from Tamil Nadu.

The State Government has initiated steps to address the issues of power availability,
land for industries, skilled manpower, roads and ports, industrial water etc. To achieve the
targeted growth rates during the XII plan period (2012–2017), substantial investments were
needed to create additional capacities in various components of infrastructure. The
following are the targets for capacity addition during the XII plan period:

 To invest not less than US $ 30 billion, through private and public sectors, in
infrastructure development

 To increase the power generation capacity adequately to meet the future

demand by commissioning Mega and Ultra Mega Power Projects
  To establish a land bank of at least 53,000 acres throughout the State

 To augment industrial water supply

 To augment capacities for handling and safe disposal of industrial effluents

and solid wastes

 To establish Corridors of Excellence

 To improve Port connectivity; to upgrade the minor ports at Nagapattinam,

Colachel, Cuddalore and Manappadu as major ports and to upgrade other
ports as Intermediate ports

 To augment social infrastructure like housing, health care, technical

education/skill development, etc. to support the manufacturing sector.

The Government will give a special thrust to:

 Automobile and Auto components Sector

 Renewable Energy Equipment manufacturing Industries.

 Aerospace industry and

 Bio-technology and Pharmaceuticals Sector.

Tamil Nadu Skill Development Corporation: The Tamil Nadu Skill Development
Mission implemented through a society has been reorganized as a Special Purpose Vehicle
(SPV) with participation from private sector under section 25 of the Companies Act, 1956 as
a body corporate in the name, Tamil Nadu Skill Development Corporation for providing skill
training through different departments.

Thrust will be given for creating a skilled and balanced workforce with a special focus
to enable women to enhance their employability. The Government will take the lead in
partnering with the industry in developing a curriculum for the industrial training institutes
to make their graduates industry-ready. Technical institutes and polytechnics will be
incentivized to align themselves with the industry needs and organize skill development
programmes jointly to improve the employability of their students.

1. Industry-Institution Collaboration: A framework for industry-institution

collaboration and public-private partnership for ITIs, Polytechnics and Engineering
colleges will be formulated. The Government will facilitate setting up of Technology
Parks within and around Higher Learning Institutions and Universities.

2. Cluster Level Skill Development: This Initiative will focus on specific existing
clusters in the auto, leather, textiles, and electronic hardware sectors. A Cluster
Human Resources (HR) Skills Development Committee will be established in each
major cluster with the membership of engineering colleges, polytechnics, ITIs, arts
and science colleges in the vicinity and the participating industries to set targets for
training and the revision of course content of these institutions.

3. Training Subsidy: The Government will offer training subsidy as an incentive on a

case to case basis taking into account the capacity of employment generation and the
potential for significant improvement of skills.

4. Inclusive Development: As envisaged in the Vision 2023 Tamil Nadu document,

Tamil Nadu will exhibit a highly inclusive growth pattern and will be a poverty free
state with opportunities for gainful and productive environment for all those who
seek it, and will provide care for the disadvantaged, vulnerable and the destitute in
the State. Industries employing differently-abled persons would be incentivized
 suitably, by supporting skill development programs to enable their productive
employment.

1. Technology Incubation Centres: Realizing that technology is a key element

contributing to productivity, quality, competitiveness and market acceptability of products
and that technology and business incubators have emerged as useful instruments for
innovation, the Government will encourage development of “Centres of Excellence and
Innovation,” in areas such as chip and electronic hardware design, leather product design
and automotive design in collaboration with academic institutions of excellence, industry
and Government of India to develop a pool of Technocrats. The centres will also network
with Angel Investors and Venture Capitalists (VCs) to provide mentoring and financial
support to the start-ups. The centre will enable the tenant companies to gradually mature
over a period of 2-3 years and then shift to a commercial place for transacting actual
business.

2. Subsidy for Quality certification / Patent registration: The Government will

reimburse 50% of the expenditure incurred by the industrial units subject to a maximum of
Rs.1.00 lakh, in getting the BIS, ISO 9000 / 14000 or any other national or international
certification or patent registration.

3. Promotion of R & D: In order to encourage Research and Development in

manufacturing sector, companies investing in R & D facilities will be incentivised as follows:

For capital goods to be used in setting up hi-technology R & D centers VAT would be
zero rated. Such capital goods shall not be used for commercial production and be used
exclusively for R & D.
 Appreciating the significance of the contribution of the Services sector to the growth
of the manufacturing sector, Government has planned to set up an exclusive Integrated
Financial Services Centre which shall house leading national and international financial
intermediaries including banks, insurance companies, mutual funds, consultants, brokerages
etc.

Tamil Nadu Investment Promotion Programme: The Tamil Nadu Investment

Promotion Programme has been launched in the state with financial assistance from Japan
International Cooperation Agency (JICA) to further improve the investment climate through
strengthening the policy framework and enhancing the quality of urban infrastructure.

Tamil Nadu is a major exporter of a variety of manufactured goods like automobiles,

auto components, Engineering goods, Textiles and Garments, Leather products, Electronic
Hardware, Chemicals, etc., apart from Software and Support services.

Flexibility in labour laws will be adopted without compromising labour welfare.

Subject to applicable labour laws and within the parameters of the Industrial Employment
(Standing Orders) Act, 1946 (Central Act 20 of 1946), flexibility in employment conditions
including flexible working hours for women and shorter and longer duration of working
hours, 24x7 operations (3 shifts), employment of women in the night shifts and flexibility in
hiring contract labour will be permitted.
 Industrial buildings exceeding 15 mts height but not exceeding 2 floors will not be
treated as Multi-Storeyed Buildings (MSBs, attracting declaration of MSB areas and
application of special rules for MSBs under the Town and Country Planning Act). An
additional Floor Space Index (FSI) incentive of 50% will be given for non-MSB flatted tiny,
small and medium scale industries.

To avoid procedural delays in getting statutory clearances from various authorities,

the Government of Tamil Nadu has established a Single Window facilitation mechanism
under the Guidance Bureau to accord in-principle composite approval for pre- project
clearances at the State Government level. A Committee headed by the Chief Secretary will
monitor the progress of final approvals of all such cases.

The Tamil Nadu Industrial Development Corporation (TIDCO) will be mandated to

facilitate various Infrastructure projects including Power, Port development, SEZ, waste
treatment, handling and disposal, etc.

All major industries in categories A&B districts will be eligible for the following
standard incentives:

1. Capital Subsidy and Electricity Tax Exemption: Irrespective of the location of the
project, new or expansion manufacturing units will be given a back- ended capital
subsidy and electricity tax exemption on power purchased from the Tamil Nadu
Generation and Distribution Corporation Ltd. (TANGEDCO) or generated and
consumed from captive sources based on employment and investment in fixed assets
/eligible assets as the case may be, made within the investment period as detailed
below:
 Electricity Tax Exemption
Investment in Fixed Direct Capital
(In number of years) from
Assets/Eligible Fixed Employment Subsidy (Rs.
Date of Commercial
Assets (Rs. In crore) (In numbers) In crore)
Production

5 – 50 100 0.30 2 years

50 – 100 200 0.60 3 years

100 – 200 300 1.00 4 years

200 to 500 400 1.50 5 years

500 – 1500 600 1.75 5 years

1500 -3000 800 2.00 5 years

3000 and above 1000 2.25 5 years

New or expansion manufacturing units located within SIPCOT Industrial parks in

respect of A & B districts will be provided an additional capital subsidy of 50% over and
above the eligible limit, enumerated in the table above.

New or expansion manufacturing units located outside the SIPCOT Industrial Parks in B & C
districts will be provided an additional capital subsidy of 10% and 25% respectively over
and above the eligible limit, enumerated in the table above.

2. Stamp Duty Concession: 50% Exemption from Stamp duty on lease or sale of land
meant for industrial use shall be offered for projects located in Industrial parks
promoted by SIPCOT in A and B category districts. In the case of Ultra Mega projects,
it will be 100%, irrespective of location. Normal registration charges will however
apply in these cases. For computation of stamp duty, property in such industrial parks
would be valued at actual land or building value paid by the manufacturing units to
 such industrial park.

3. Environmental Protection Infrastructure Subsidy: Dedicated Effluent Treatment

Plants (ETP) and / or Hazardous Waste Treatment Storage and Disposal Facility
(HWTSDF) set up by individual manufacturing units would be eligible for an
Environment Protection Infrastructure subsidy of Rs.30 lakhs or 25% of capital cost
of setting up such ETP/ HWTSDF, whichever is less.

Individual Manufacturing Units adopting Zero Effluent or Waste Water Discharge,

Clean Development Mechanism and Emissions Trading Mechanism will be given a higher
amount of subsidy on a case-to-case basis.

Apart from the above standard incentives, Mega, Super-mega A, Super-mega B and
Ultra-mega projects will be eligible for a structured package of incentives as detailed below
(For A & B category districts) if they satisfy both the investment and the minimum
employment criteria fixed for each category.

Investment Investment Range (Rs.in Fiscal Incentives Offered

Category crore)

A Districts B Districts For A & B group districts

Mega Above 500 – Above 350- Net output VAT+CST paid will be

1500 1000 given as Investment promotion

subsidy/ soft loan for 10 years from
creating an creating an
the date of commercial production
employment of employmen
with a ceiling of 80% of investment
300 in 3 years t of 200 in 3
made in EFA within the investment
years
period.
 In respect of expansion projects the
cap will be 70%. Base volume
principle and sliding scale will be
applied.

Super Above 1500 Above 1000 Net output VAT+CST paid will be

Mega A –3000 – 2000 given as Investment promotion

creating an creating an subsidy/ soft loan for 12 years from

date of commercial production with a
employment of employmen
400 in t of 300 in 5 ceiling of 90% of investment made in
years EFA within the investment period. If
5 years
ceiling is not reached within 12 years,
addl. period up to 6 years will be
considered.

In respect of expansion projects the

cap will be 80%. Base volume
principle and sliding scale will be
applied.

Refund of VAT paid on capital goods

will be given as subsidy during the
investment period.

However, this subsidy will be

included for capping of incentive
based on Net Output VAT+CST

Super Above 3000 Above 2000

Mega B – 5000 – 4000 Net output VAT+CST paid will be

given as Investment promotion
 creating an creating an subsidy/ soft loan for 14 years from
employment of employmen date of commercial production with a
600 in 6 years t of 500 in 6 ceiling of 100% of investment made
years in EFA within the investment period.
If ceiling is not reached within 14
years, addl. period up to 7 years will
be considered

In respect of expansion projects the

cap will be 80%. Base volume
principle and sliding scale will be
applied. Refund of VAT paid on
capital goods will be given as subsidy
during the investment period.

However, this subsidy will be

included for capping of incentive
based on Net Output VAT+CST.

Ultra Mega Above 5000 Above 4000 Gross output VAT and CST paid will
creating an creating an be given in the form of Investment
employment of employmen Promotion Subsidy/ soft loan for 16
700 in 7 years t of 600 in 7 years (or) till the cumulative
years availment of the gross Output
VAT+CST paid by the Company
reaches 100% of eligible investment
within the investment period,
whichever is earlier.

Input VAT refund as Investment

Promotion subsidy for a period
 concurrent with the period of output
VAT+CST refund or soft loan.

Refund of VAT paid on Capital Goods

and tax paid on Works Contract will
be given as subsidy during
investment period. However, these
two subsidies will be included for the
ceiling fixed for Gross Output
VAT+CST based incentive.

In respect of expansion projects, the

cap will be 80%. Base volume
principle and Sliding scale will be
applied.

LEARNING OUTCOMES

 Understanding of entrepreneurial environment

 Summarize the advantages of family business.
 Examine the various methods of EDP training
 Understanding of phases of conducting EDP
 Examine the role of various institution aiding ED
 Understanding of various industrial policies of the country
 Critically analyze the various schemes of Government
SHORT QUESTIONS

1. How does cultural factors affect business?

2. How can one build a long-term vision for a family business?
3. List out the objectives of entrepreneurial training.
4. Define Training.
5. Discuss the important functions of SSIDC.
6. Which is the main objective of industrial policy of central Government?
7. What are the mega projects?

LONG QUESTIONS

1. Distinguish between: (i) Internal and External Business Environment

2. How does the family affect entrepreneurship development?
3. Explain the contents of entrepreneurship development training.
4. How to measure the effectiveness of entrepreneurship training programmes?
5. Explain the functions of SISI. Enumerate various types of assistances rendered by
it.
6. What is the impact of Industrial Policies of Indian economy?
7. Analyze the growth of industries
CONTENTS

LEARNING OBJECTIVES ...................................................................................................... 144

3.1 BUSINESS PLAN PREPARATION ..................................................................................... 144

3.2 PREFEASIBILITY STUDY ................................................................................................. 153

3.3 SELECTION OF PRODUCT .............................................................................................. 160

3.4 PRODUCT DEVELOPMENT ............................................................................................ 168

3.5 FORMS OF OWNERSHIP ............................................................................................... 177

3.6 CAPITAL BUDGETING.................................................................................................... 184

3.7 PROJECT PROFILE PREPARATION AND MATCHING ENTREPRENEUR WITH THE PROJECT 194

3.8 FEASIBILITY REPORT PREPARATION AND EVALUATION CRITERIA .................................. 203

LEARNING OUTCOMES ....................................................................................................... 209

SHORT QUESTIONS ............................................................................................................ 210

LONG QUESTIONS .............................................................................................................. 210

LEARNING OBJECTIVES

 Explain the business plan and its format

 To analyse the steps involved in pre-feasibility study

 Identify criteria involved in product selection

 Illustrate the process of product development

 Appraise the features of ownership pattern

 Explain the scope and importance of capital budgeting

 Describe the project profile

 Describe the content of feasibility report

3.1 BUSINESS PLAN PREPARATION

Business plan is the blue print of the procedure to be followed to convert a business
idea into a successful business venture. It identifies an idea, studies the external environment
to identify the opportunities and threats, strengths and weakness, and assesses feasibility of
idea and source resources to make the plan successful.

The following are objectives of the business plan:

 To give directions to the vision of the entrepreneur.

 To evaluate the prospects of business

 To monitor the progress after implementing the plan.

 To persuade partnership to the business.

 To seek financial support.

  To view the concept in terms of market viability and operational and
financial feasibility.

 To clarify ideas and identify gaps in information

Documenting the business plan is the first step that an entrepreneur takes. The
various steps involved in preparing a business plan are:

Before preparing the plan entrepreneur should:

 Review available business plans.

 Draw key business assumptions on which the plans will be based (e.g.
inflation, exchange rates, market growth, competitive pressures, etc.)

 Scan the external and internal environment to assess the strengths,

weakness, opportunities and threats.

 Seek professional advice from a friend/ relative or a person who is already

into similar business.

1. Idea Generation:

Value addition is the buzz word that an entrepreneur needs to focus while generating
new ideas at the inception stage. It involves generation of new concept, ideas, products or
services to satisfy the existing demands, latent demands and future demands of the market.
The various sources of new ideas are:

 Consumer/ Customers
  Existing Companies

 Research & Development

 Employees

 Dealers, retailers

New methods of generating new ideas are:

 Brainstorming

 Group discussion

 Primary data from various stakeholders

 Calling for ideas through advertisements, mails, internet

 Value addition to the current products / services

 Market Research

Screening of the new ideas helps in identifying workable ideas and eliminating
impractical ideas.

2. Environmental Scanning:

It is carried out to assess the prospective strengths, weakness, opportunities and

threats of the business enterprise. It requires scanning of both external and internal
environment. The Objective for a successful environmental scanning should be to maximize
the information collected through numerous resources and analyse them to understand
whether the given information would be supportive / obstructive to the business venture.
This can be seen in detail as follows:

2a) External Environment: An analysis of the external environment comprises of

the following:
  Socio-cultural Appraisal: The understanding of the values, beliefs, norms,
fashions and fads of a society, helps in understanding the level of rigidity/
flexibility of a given society towards a new product/ service/ concept.

 Technological Appraisal: It evaluates the technological know-how available

to convert the idea into a product and assess the possible modern technologies
expected in the future.

 Economic Appraisal: It is the assessment of present inflation, per capita

income and consumption pattern, balance of payment, consumer price index
and such metrics to determine the status of the economy.

 Demographic Appraisal: It assess the population pattern of a given

geographical region like age profile, distribution, sex, education profiles,
income distribution etc., to identify the size of target customers.

 Governmental Appraisal: It assess the various legislations, policies,

incentives, subsidies, grants, procedures etc., formulated by government for a
particular industry to take advantage of the schemes announced to help that
industry.

2b) Internal Environment: The analysis of the internal environment comprises of

the following:

 Raw Material Availability: It assess the availability of raw material presently

and in near future and also the environmental concerns associated with it.

 Production/ Operation: It assess the availability of required machineries,

equipment’s, tools and techniques required for production/ operation.

 Finance: It considers the start-up expenses, fixed expenses and running

working capital expenses are assessment.
  Market Analysis: It evaluate and provide the present, potential and latent
demands of the market.

 Human Resource Analysis: It helps to determine the kind of human resource

required and its demand and supply in market and also in calculating the cost
and level of competition in hiring and retaining the human resource.

As stated above the objective of the environmental scanning should be to gather

information from as many sources as possible and to maximize this information for
enhanced probability of success in the business.

3. Feasibility Study:

This is done to find whether the proposed project (considering the above
environmental appraisal) would be feasible or not. It is important to demarcate
environmental appraisal & feasibility study at this point. Environmental appraisal is carried
out to assess the external & internal environment of the geographical area/ areas where
entrepreneur intends to setup his business enterprise whereas feasibility study is carried
out to assess the feasibility of the project itself in a particular environment in greater details.
Hence, though feasibility study would be dependent on environmental appraisal yet it is far
more descriptive. The various variables/ dimensions are

3a) Market Analysis: Market analysis is to be conducted to estimate the demand and
market share of the proposed product / service in future. A preliminary discussion
with consumers, retailers, distributors, competitors, suppliers etc is carried out to
understand the consumer preferences, existing, latent and potential demands,
strategy of competitors, practices of distributors, retailers etc.

3b) Technical/ Operational Analysis: This is done to assess the operational ability
of the proposed business enterprise. The cost and availability of technology may be
of critical importance to the feasibility of a project.
This analysis collects data on the following parameters:

 Material availability

 Material Requirement planning

 Plant location

 Plant capacity

 Machinery & equipment

 Plant layout

3c) Financial Feasibility:

 Cost of Land & building:

 Cost of Plant & Machinery

 Preliminary cost estimation for conducting market survey, preparing

feasibility report, expenses in registering & incorporating machine,
establishment expenses, expenses in raising capital from public & other
miscellaneous expenses

 Provision for contingencies and unexpected expenses

 Working capital estimates

 Cost of production, with fixed and variable expenses.

 Sales & production estimates for estimating profitability.

 Profitability projections

 Gross profit
4. Drawing Functional Plans:

The functional plan helps to evolve the strategies for all the operational areas:
marketing, finance, HR & production.

4a) Marketing Plan: Marketing plan lays down the strategies in terms of Marketing
Mix (Product, Price, Place & promotion).

4b) Production/ Operation Plan: Production plan is drawn for business in

manufacturing sector and operational plans are drawn for business in service sector.
The contents are discussed in operational analysis.

4c) Organizational Plan: This defines the type of ownership and proposed
organizational structure.

4d) Financial Plan: Financial plan indicates the financial requirements of the
proposed business enterprise as discussing in the financial aspect part.

5. Evaluations, Control & Review:

In this dynamic business environment, it is important to evaluate, control and

review the business periodically and introduce changes to keep up with the market share
and competition.

The common format for a business plan is as follows:

1. Executive Summary (should not exceed 2 pages): Name, Address, Contact

Information of the Company, Contact details of key people of the organization,
Description of the business, its products and services, and the customer problems
being solved, Description of the market for the products and services on offer,
Overview of the venture’s competitive advantages, Mentioning the brief
 description of managerial and technical expertise of key people, Highlighting
financial forecasts through charts and graphs.

2. Vision and Mission Statement

3. Company history (if venture is existing)

4. Business and Industry Profile

A. Industry Analysis: Industry background and overview, significant trends, Rate

of growth, Essential success factors in the industry.

B. Outlook of the Future stages of growth

C. Goals and objectives of the venture Operational Goals, Financial Goals, Other
Goals

5. Business Strategy

A. Desired Image and Position in the Market

B. SWOT Analysis: Strengths, Weaknesses, Opportunities, Threats

C. Competitive Strategy: Cost Leadership, Differentiation, Focus

6. Company Products and Services: Description, Patent or Trademark Protection,

Description of Production Process, Future Product Offerings

7. Marketing Strategy: Target Market, Customers motivation to buy, Market Size

and Trends, Advertising and Promotion, Pricing, Distribution Channel

8. Location and layout of the Plant (if applicable)

9. Analysis of the Competitor

10. Management Team Description

 11. Plan of Operation

12. Financial Forecasts

13. Loan or Investment proposal

14. Appendices (supporting documents etc.)

Important Points to be considered while writing a Business Plan:

1. Submitting a “rough copy”, that is not edited and formatted properly.

2. Lack of current financial information or industry comparisons will raise doubts

about the entrepreneur’s planning abilities.

3. Business plan should have substantial explanations for all the points mentioned.

4. The business plan should mention the risks and weaknesses also.

5. Even if an outside source is used to prepare the financial projections, the owner
must fully comprehend the information.

6. The owner needs to discuss the potential impact of competitive factors and the
economic environment.

7. The availability of the equity capital supports the business plans while seeking
financial support.

8. Business owner should personally guarantee loans to prove his interest in the
business.

9. The viability of the business should support the request for the loan.

10. Too much focus on collateral is a problem in a business plan. The banker looks
towards projection profits for repayment of the loan, so the emphasis should be on
cash flow.
3.2 PREFEASIBILITY STUDY

A Business Feasibility Study can be defined as a controlled process for identifying

problems and opportunities, determining objectives, describing situations, defining
successful outcomes and assessing the range of costs and benefits associated with several
alternatives for solving a problem.

The Business Feasibility Study is used to support the decision-making process by cost
benefit analysis of the actual business. It is conducted during the deliberation phase of the
business development cycle, just before the commencement of a formal Business Plan.
(Drucker 1985; Hoagland & Williamson 2000; Thompson 2003c; Thompson 2003a).

Analysis shows that only one in fifty business ideas are actually commercially viable.
Hence Business Feasibility Study helps to safeguard against wastage of further investment
or resources (Gofton 1997; Bickerdyke et al. 2000). A comprehensive viability analysis
provides an abundance of information that is also necessary for the Business Plan.

A Business Feasibility Study is dependent on the market research and analysis. It

provides the stake holders with varying degrees of evidence that a Business Concept will be
viable (Hoagland & Williamson 2000; Thompson 2003c; Thompson 2003a; Wickham 2004).

The following represents the dimensions of Business Viability (Thompson 2003c;

Thompson 2003a):

 Market Viability

 Technical Viability
  Business Model Viability

 Management Model Viability

 Economic and Financial Model Viability

 Exit Strategy Viability

Purpose and Goal of Feasibility Study:

A feasibility study should include clear supporting evidence for its guidance. The
intensity of the guidance can be weighed against the study’s ability to prove the continuity
that exists among the research analysis and the proposed business model. This relies on a
mix of numeral data with qualitative and skilled-based documentation.

A feasibility study helps ensure looking at both the positive and negative sides of the
business venture. A feasibility study also identifies reasons not to proceed.

Who Should Write The Feasibility Study?

A feasibility study is prepared by the entrepreneur in consultation with lawyers,

accountants, marketing consultants in its preparations of different levels or step in the plan.

Entrepreneurs will offer an equity partnership to another person who might provide
expertise in preparing the business plan or involve them in the management team, to make
an objective assessment.

Incorrect assumptions affect the success of the project. Therefore, accurate

information, exact statement, and the latest financial records are essential. There are three
types of feasibility:

 Operational,
  Technical and

 Economic Feasibility.

The risk of the project is assessed before the potential returns of the investments. It
identifies if there exists a sizeable market for the proposed product/service. It determines
the investment requirements. It identifies the sources of funding. It shows the necessary
technical know-how to convert the idea into a tangible product. It involves an examination
of the operations, financial, HR and marketing aspects of a business.

A project that is technically possible may not be economically viable. Technical

Consultancy Organisations (TCOs) serve this purpose. There are district-wise industrial
potential surveys available with the SISIs and DICs that may serve as a good starting point of
the Project Reports published by the directorate of industries and private consulting firms
may also be used. All the facets of the feasibility of the proposed project idea, viz.

 Marketing

 Technical, Financial

 Economic and

 Legal

I. Market Analysis

Market Feasibility:

It determines the demand analysis. The major factor of market feasibility is market
potential industry overview, and competition analyses.

Demand Analysis:
 It includes setting the market segments, valuing market potential, setting market
factors (Stevens & Sherwood, 1982).

The market for a product or service is made up of several smaller markets, that each
has identifiable characteristics, and this one of the most important concepts that the demand
analyses is based on.

Segmented market provides detailed characteristics of consumers. A market can be

segmented bases as demographic, geographic, product benefits, and product usage (Stevens
& Sherwood, 1982).

Competitor Analysis and Industry Overview:

This refers to the process of identifying the competitors and estimating the strategies
of the competitor to determine their strengths and weaknesses. Industries are dynamic. So
it is necessary to consider the threats that are causing the industry to change. These threats
may include competition strengthens, technological evolution and innovation, regulation
changes, globalization, or customer needs.

A market is an aggregate of buyers and sellers. For a seller, market analysis is

concerned with the aggregate demand of the proposed product/service in future. After all,
the whole universe cannot be your market. The following information is required about
customers:

 Trends in consumption.

 History of supply position

 Possibilities and constraints in production

 Competition in Imports and Exports

 Cost structure
  Elasticity of demand, i.e. response to price changes

 Consumer behaviour, intentions, motivations, attitudes, preferences and

requirements

 Distribution channels that is prevailing.

 Administrative, technical and legal constraints that affect the marketing of

the product

II. Financial Analysis

Various types of costs and the final return on investment is calculated. The cost
analysis is closely linked with the demand analysis. Risk analysis helps in the determination
of the ROI. The ROI is the deciding factor of financial feasibility.

Cost Analysis:

A business does not always show the different types of costs of the final product or
service that went into the product. Costs are traced through the business operations. The
business cannot be determined as feasible without dependable cost values.

The different types of costs are fixed cost, the variable cost, cost of goods sold, etc.
There are two types of the process while measuring the evaluation of an investment, time
value process and non-time value process. Return on investment is a non-time value process.
Hence net present value and internal rate of return gain its significance.

The objective of financial analysis is to ascertain whether the project will meet the
burden of debt and satisfy the return expectations of the investors. The aspects to be
considered while conducting financial analysis are:

 Investment outlay and cost of project

 Modes of financing
  Profitability estimates

 Break- even point

 Perfection of cash flows

 Investment worthiness and

 Projected financial position

III. Technical Analysis

The issues involved in the assessment of technical analysis are about inputs,
throughputs and outputs.

1. Input Analysis: Input analysis is mainly concerned with the identification,

quantification and evaluation of project inputs: machinery and materials. Ensuring
the availability of right kind and quality of inputs at the right time and cost throughout
the project period. It involves long-term contracts with the potential suppliers. The
activities involved in developing and retaining supply sources are referred to as
supply chain management.

2. Throughput Analysis: It refers to the production/operations that would be

performed. The inputs undergo a process of transformation in several stages of
manufacture. Location of the facility, sequence, layout, quality control measures, etc.
is the issues that are to be considered here.

3. Output Analysis: This refers to product specification in terms of physical features-

colour, weight, length, breadth, height; functional features; chemical-material
properties; as well as standards to be complied as per the national and international
requirements.

IV. Economic Analysis

 Economics is the study of costs and benefits. The entrepreneur is concerned whether
the capital cost as well as the cost of the product is justifiable. This cost-benefit analysis goes
into financial calculations for profitability analysis. There is a difference between the
economic and commercial feasibility. Economic feasibility talks about the unit cost of the
product, whereas commercial feasibility conveys whether adequate units will be sold.

Social- cost-benefit- analysis (SCBA) discusses the possibilities of getting subsidized

electricity, and foreign exchange. Projects that score high on SCBA tend to be attractive to
the support agencies.

V. Ecological Analysis

Certain projects have significant ecological implications like power plants and
irrigation schemes, and for environment polluting industries. The concerns that are usually
addressed in consideration of the following:

 The likely damage caused by the project to the environment.

 The cost of restoration measures required to contain the damage

VI. Legal and Administrative

The entrepreneur has to be clear about the administrative and legal issues involved
in the project. These include, choice of the form of business organisation, registration and
clearances and approvals from the diverse authorities. Even knowledge about how the
proposed product/ service is defined or listed by the agencies like DIC, SIPCOT, or banks is
important to claim certain benefits.
3.3 SELECTION OF PRODUCT

A Strategic Decision:

Product selection is a strategic long term decision to which the organisation commits
itself for a long time. Product decision is the base for every other decision like the technology
used, the capacity of the productive system, the location of the production facilities, the
organisation of the production function, the planning and control systems.

The competitiveness and profitability of a firm depends upon the products and
services that it produces, and on the cost of production. The design of a product or service
determines its cost. Similarly, a change in design may result in the production of the same
product in a less expensive way, using the existing capacity. It involves marketing, research
and development and operations management function.

Producibility:

In product selection process, product function, cost, quality and reliability are some
of the vital inputs. It is important to look at the complete range of products produced
because, a new product may either use the capacity of processes/sub-processes already
established or may require the establishment of capacity of some processes/sub-processes.
This decision is made on the current and future value provided by the product.

As the environment changes, as new technology is developed and as new tastes are
formed, the product should benefit from these developments. This decision is based on the
current and future value provided by the product.

Product Selection Stages:

Output possibilities are generated from many sources:

 a) Through' market research from the field by conducting consumer
surveys, dealer surveys, opinion polls etc.

b) Through research laboratories which develop a breakthrough idea by

pure research or applied research for new knowledge.

These ideas can be generated by using techniques like brainstorming, panel

discussions, scenario building, technology forecasting etc

The output ideas thus generated will be screened to find its match with corporate
objectives and policies and their market viability. A detailed economic analysis is then
performed to determine the probable profitability of the product or service. For non-profit
organisations, this takes the form of a cost-benefit analysis. Development of the product or
service from a concept to a tangible entity and by design and testing is performed.

Product selection is not a sequential process. Steps may overlap each other. New
ideas or product/ process improvements become an ongoing process.

New ideas keep entering the output selection process. This product selection process
therefore ensures a continuous match between what is demanded and what is produced. The
production process has also to be designed along with the product or service. It may become
necessary to establish a large capacity for the production process right from the beginning.

At the research stage, the priority should be generation of new ideas. Consideration
of one new idea, may generate a better idea. Some techniques for idea generation, like
brainstorming, do not permit criticism of suggested ideas at the idea generation stage.

Once a number of potential new product or service ideas have been generated, the
process of screening them to evaluate and select the 'best' idea is considered. This happens
in two phases:
 1. A qualitative phase where the new product idea is studied in terms of
suitability to corporate objectives.

2. Quantitative phase where the potential costs and revenues (or benefits)
generated by new product are quantified and economic viability of the new
product or service idea is evolved at.

Screening:

The new product or service idea is assessed to establish its market viability so as to
add it to the current outputs of the organisation. A product or service has to have sufficient
demand. Sufficient demand is a relative term that differs from one organization to another.

The demand for a product or service is dynamic. The current demand for a product
or service may be low. But, an organisation may still decide to retain the new output idea if
it assesses that the demand will grow in future. New product or service ideas should
capitalise on the strengths of the organization and reduce the weaknesses.

In product selection, many organisations try to get synergistic results by exploiting

one or more of the following four factors that is familiarity with:

1. Similar products or services

2. The same or similar production or transformation process to produce the

product

3. The same or similar markets or market segments

4. The same or similar distribution channels.

Any new idea for a product or service should be seen in relation to the effect on the
existing products or services. A new product may find a market for itself by cannibalising
one of the existing products. Competition is also a major determinant of choice of new
product idea.

For totally new products or services, even if there is no competition presently, very
soon competition will perhaps develop and it is the desire to remain ahead of the competition
that provides the motivation for continuous inflow of new product ideas.

Sometimes a new product or service idea having very poor match with the existing
strengths and weaknesses of the organisation will be adopted. This is possible when the
organisation feels that the existing products or services have reached the decline phase of
their product life-cycles either on their own or due to some changes in the environment like
government policy, introduction of better and cheaper substitutes, changes in prices of some
inputs etc.

Economic Analysis:

For commercial organisations, economic analysis becomes synonymous with

profitability analysis. The cash flows generated as well as consumed, if the new product or
service idea is implemented, have to be estimated for the life of the project. However, since
there is a time value of money these cash flows cannot be directly added or subtracted. So,
the cash flows are discounted to take care of the time value of money and the net present
value of all cash flows is obtained-or else the cash flows are used to find an internal rate of
return.

Non-Profit Organisations:

For non-profit organisations, there may not be a cash inflow at all or else the cash
inflows may occur at externally fixed prices. For such organisations economic analysis means
a cost benefit analysis. The benefit means an addition of resources to the society as a whole
whereas the costs means using up real resources. Wherever free market conditions exist, the
market prices can be used to value the costs and benefits. Otherwise, economic prices are
first estimated and then used to value those costs and benefits. Economic analysis is, difficult
for non-profit organisations than for organisations because of this factor.

Factors considered for selection of product are discussed as follows:

Gap in Demand and Supply:

The size and scope of the potential and unsatisfied market demand, will determine
the need to for choice of a particular product. One rule of thumb in developing a product
selection criteria template is that the product with the most demand possesses the greater
chance of business success. There must be existing demand for the chosen product, in simple
terms.

Availability of Finance:

Adequate funding is required to carry out pre-launch activities such as development,

production, promotion, marketing and distribution amongst others, of the selected product.
Hence, the quantum of funds that the product idea can attract to the project, remains a major
determinant.

Access to Required Materials:

Factors like the source of the materials, the quality and the quantity of the raw
materials are key management decisions. Continuous availability of materials, access to
location of availability, availability of alternative sources of materials are very important in
finalizing a product decision.

Technical Considerations:

The technical dynamics of the chosen product on the existing production line should
be invested against factors such as available technology, power requirement and automation
of processes and use of labour. The product may warrant new equipment or refurbishing of
used machinery. The product must also be deemed technically satisfactory to the user.

Profit Viability/Marketability:

The product should give optimum return on investment. It should also utilize ideal
capacity or helps with the sales of existing products.

Qualified and Skilled Personnel:

Qualified personnel will be required to handle the production and marketing, on an

ongoing basis. The cost associated with manufacturing the product must be low. This
requires employment of skilled labour who will mitigate damages and wastages.

Government Policies and Objectives:

The thrust of government policies on economics and commerce, over time, is usually
in the national interest, which may or may not be at odds with the objectives of the business.
However, this will influence the decisions of a business with regard to what product should
be introduced in the market.

The potential of the product can be assessed by considering the impact of the
following dimensions:

I. Demographic and Physical Environment:

 Size of the population should be adequate

 Distribution of the population should be suitable

 Climate and weather conditions should be appropriate

 Communication and transport infrastructure should be up to the mark.

 Distribution network should be strong.

II. Political Environment:

The political environment should be analyzed by considering the following

factors:

 The government should be conducive to the conduct of business

 Government involvement in the private business transactions should be

comfortable.

 Government’s attitude towards imports / exports should be conducive.

 Political system should be stable

 Whether the government quotas, and other trade barriers can be eased.

III. Economic Environment:

The economic environment considers the following factors:

 Predicted economic growth levels.

 Gross national product and the balance of payment position of the country.

 Percentage share of exports and imports in the overall economy.

 The country’s import to export ratio.

 Rate of inflation, and foreign currency or the exchange regulations.

 The per capita income of the country

 The discretionary income spent on the consumer goods

IV. Social and Cultural Environment:

 Socio-cultural environment of a country affects the demand pattern of people in
the country. Some of these factors are as follows:

 The proportion of the literate population.

 The average educational level of the people.

 The percentage of the population with disposable income.

 Characteristics of the target market.

 Requirement for product modification or adaptation.

V. Market Access:

The following factors define the level of market access for a product in a country:

 Legal aspects of distributorship in the foreign market,

 The documentary requirements, and the technical, or environmental import

regulations covering the product.

 Is the market free and open?

 The intellectual property protection laws

 Judicial system to settle disputes.

 The tax laws

VI. Trade Restrictions:

A country may impose restrictions on the import of products from other countries
in the form of licensing or other quantitative restrictions. There may be certain
regulations aimed at protecting environment, child law, public health, public safety, and
such. Certain countries may impose anti-dumping duties or the countervailing duties.
 VII. Incentives/Facilities Offered for Export:

It is quite possible that the exporting country offers various incentives or facilities
to promote the exports. These incentives relate to the duty drawback, facility of duty free
import of raw materials and other inputs required for the manufacture of the export
products, import of capital goods for the promotion of exports at concession rates of
import duties.

VIII. Quality and Niche Marketing:

For sustained increase in their sales and overall profits niches should be
concentrated.

3.4 PRODUCT DEVELOPMENT

Product development concerns itself with modifications or extensions provided to

ideas so as to improve the functioning, the cost and the value-for-money of the product.
Development effort improves the performance of the product, adds options and additional
features and even adds variants of the basic product.

At the design stage, detailed specifications are provided so that manufacturing can
produce what has been designed. This means not only providing dimensional specifications
but even specifications regarding capacity, horse power, speed, colour etc. are laid down and
the task of manufacturing is to convert the design into physical entities.

Product Variety

There are two distinctly different priorities that can affect the design of a product or
a service,

 One is standardization.
  Another is customization.

1. Standardization:

It has the following advantages:

 Ease in producing.

 Reduction in variety

 Better use of productive facilities,

 Lower unit costs.

 When the service is strong and the price is low, organisations will
minimise unit costs

 Simplifies operational procedures

 Reduces the need for many controls.

 Possibility to get quantity discounts.

 Steady flow of materials through work centres

 Reduces the number of production set-ups related to change in flow.

 It reduces the total inventory of raw materials, work-in-process and

finished goods.

 It provides economies of scale in production itself.

2. Customization:

By adding variety, an organisation attempts to satisfy the varied needs and tastes of
its customers and competes on non-price considerations. This is possible through
modularization. A product is designed using modules or sub-assemblies that are
interchangeable and each different combination of modules gives a new variety of the
product.

a) Design Simplification becomes a solution to modularization. It gives pay-offs

through lower production costs and in some cases by lower material costs
also.

b) Structuring of Options is a major part of making a product line competitive,

when not competing on costs alone. But it is complicated since each option
may not have the same margin. A lot of sales effort is required explaining
options. It complicates the customer's choice. Options given to customers may
create additional difficulties where the product is made-to-order. All options
are not used to the same extent. Low-usage option parts become hard to plan
and control, when mixed with a high-usage option part.

c) CAD/CAM: A part can be computer designed (computer-aided design) and its

fabrication instructions can be generated by computer-aided manufacturing
(CAD/CAM). All the preparation time is in programming where detailed
instructions regard the physical task to be performed and the sequence in
which these have to be performed are written into a programme. This then
allows for very small batch sizes without losing on economy. This has paved
way for computer-integrated manufacturing (CIM), the direction towards
which manufacturing in some industries is proceeding.

Design Characteristics and Trade-offs:

The key elements to be considered in product design are:

a) The new design must meet the need and perform the function for
which it is designed.
 b) The total cost incurred in producing the new design should not be
excessive; else that will affect its demand. Hence, it should be kept in
control.

c) The quality of the new design should be high and cost effective.

d) The new design should function normally without failures for the
expected duration. It must provide for redundancies and high
reliability of elements.

The other elements which are also important in a product design, perhaps to a lesser
degree are:

a) The new design shall be more attractive, without sacrificing on the

other attributes.

b) The new design should be environmentally sustainable.

c) The new design should not pose a hazard.

d) The new design should be easily and quickly producible.

e) It should be easily repairable with a minimum of down time, to avoid

production lags.

f) The design should be available when desired by the recipient.

g) Timings and accessibility are important for design of services

because services cannot be inventoried.

The Impact of Product Innovation on Process Innovation:

The design of a product or service has very close linkages with the design of the
process required to produce it. In some cases, the product design itself becomes feasible only
because of technological innovations. Throughout the product life- cycle, the process of
product development goes on.

New Product development usually follows a process divided into stages, phases or
steps, by which a company conceives a new product idea and then researches, plans, designs,
prototypes, and tests it, before launching it into the market. They are discussed as follows:

1. Ideation

2. Product definition

3. Prototyping

4. Detailed Design

5. Validation/Test Marketing

6. Commercialization

Step 1: Ideation:

The first step of the New Product Development process (NPD), is called “Ideation”.
This is where new product concepts originate. Small team to explore the idea, and provide
initial definition of the product concept, analysis of business, performs market research, and
explores it’s technical and market risk.

A wrong product concept increases opportunity cost. The Corporate Development

organization and executives constantly scan for new product ideas. Competitive analysis and
market scanning provides insight on the developments and changing trends in the market.

Engineering should be brainstorming, too. The Ideation step is often the most
challenging and a product development checklist can be used to pinpoint risks in this stage
and throughout the rest of development.
Step 2: Product Definition (Discovery)

It is also called “scoping,” or discovery. This step involves refining the definition of
the product concept. The detailed assessment of the technical, market and business aspects
of the new product concept and core functionality are presented in detail.

The differentiation element for the new product is clearly defined. This step helps in
defining the initial marketing strategy. The ARR (Annual Recurring Revenue) or Acquisition
Costs are estimated at this stage.

Step 3: Prototyping

In this step, the product team creates a detailed business plan. This plan usually
involves intensive market research which explores the competitive landscape for the new
product and the proposed product fits. A financial model for the new offering and pricing is
determined in this stage.

For tangible new products, manufacturability of the proposed new product is also
considered. This helps in deciding how the new product will perform in the marketplace.
This step reduces the market risk for the new product in all businesses.

Step 4: Detailed Design

In this phase, prototype of the product is refined by working with customers in an

iterative fashion: getting their feedback and incorporating it into the prototype. Marketing,
sales and manufacturing begin to create the launch and manufacturing platforms to support
the emerging product. This is often led by program management and includes prototyping,
also.

Step 5: Validation/Test Marketing

 Validation and testing means ensuring the prototype works as planned. It means
validating the product from the customers and markets viewpoint and testing the viability
of the financial model for the product.

The feedback from the customers during the Development phase is tested in “real
world” conditions to the possible extent. The marketing strategy is also finalized at this point.
Revisions if any should be done at this stage itself, to get the final product ready for
consumption in the market.

Step 6: Commercialization

During this step of the product development process the team realizes everything
required to bring the final product to market, including marketing and sales plans. The team
begins to operationalize the manufacture and customer support for the product.

Gate Reviews:

Gate review refers to presentation specific, pre-defined deliverables, and the

outcomes required to move on to the next phase of the product development process. Each
of these reviews

Minimum Viable Process: A Modern Approach

The traditional six-step process described above is the established new product
development process. But, there is escalation process known as Minimum Viable Process
which avoids lengthy and repeated reviews.

The Minimum Viable Process recognizes that each portion of the process has many
activities done concurrently and iteratively. The team engages with Senior Management in
three check-ins that show that the concept is sound, that there is a fit between the market
and the product, and that everything is prepared for the product launch. These check-ins
demonstrate that continued investment is warranted.
 Thus, a Minimum Viable Process has a maximum of three major steps, with three
check-ins after each step.

Step 1: Concept Fit

Step 2: Product/Market Fit

Step 3: Development

Step 1: Concept Fit: The requirements of this stage are:

 Product ideas are matches the vision

 The team has autonomy to innovate and iterate

 The technology is tested

 Projects should have right staff with the right resources

 Projects should be facilitated for faster iterative development

 There should be obviously good commercial potential

The team should prove the management that continuous revenue is foreseeable, and
large potential market. This phase should include market research and clarify how the
proposed product will leverage the company’s brand, and the team should be able to
describe the product’s unique value proposition. The product’s fit with the current
distribution channels and its projected customer base should be proved.

It should also be checked that, the proposed project meets the company’s current
strategic priorities.

Step 2: Product/Market Fit: Activities during this phase of the development process
include:
  Vetting the technology

 Defining use

 Estimating the cost of development

 Confirmation and quantification of the commercial potential

By the end of this phase, there should be tested prototypes with users to confirm fit
with the intended market. They should have identified use cases and found best fits in the
market. The technical and market risks associated with the project. There should be a
detailed budget, with identified calculation of the costs associated with developing the
product, and its profit potential should be defined. The product in greater detail, and
demonstrates its technical feasibility. The time and budget for the proposal and the business
model should also be worked out.

Step 3: Development: This process involves:

 Developing the Minimum Viable Product (MVP)

 Confirming the business plan

 Research on consumer behavior

 Acquiring infrastructure required for consumers use.

 Training for the sales force

The product prototype is created and communication strategies for customer contact
are devised. To exit this phase is to enter the selling phase. The market plan is hence clearly
created.

The management-by-exception approach is the lean way to develop new products.

Combined with the three-step, Minimum Viable Process ensures that organizations have the
predictability and process quality that management needs to make good investment
decisions. Reducing product risk and adding value is done in this method.

3.5 FORMS OF OWNERSHIP

The sole proprietorship is a form of business that is owned, managed and

controlled by an individual who has to arrange capital for the business and who
alone is responsible for its management. Sole proprietor is therefore, entitled to
the profits and has to bear the loss of business. The sole proprietor can take the
help of family members and make use of the services of manager and other
employees.

This is also called single ownership or single proprietorship. Small

factories and shops are often found to be sole proprietorship organizations. This
is because not much legal formality is required to establish it. Sole proprietor
has unlimited liability in the sense that the personal property is used to solve
business debts.

Merits of Sole Proprietorship:

A sole proprietary organization has the following advantages:

 A sole proprietorship business is not governed by any specific law. The

business activity should be just lawful and, should comply with the
rules and regulations laid down by local authorities.
 All the decisions relating to business operations are taken by one
person. This gives better control to business.
 There is a direct relation between effort and reward which motivates
the sole proprietor to bear the risks of business.
  Small business is entitled to certain concessions from the government,
like electricity and water supply concessions.
 Since the sole proprietor personally supervises various activities
he/she can avoid wastage in the business.

Limitations of Sole Proprietorship:

 The sole proprietor cannot raise all the require capital which reduces
the scope of the business.
 The business liability extends as personal liability.
 Most sole proprietor business lack continuity.

According to the Indian Partnership Act, “Partnership” is the relation between

persons who have agreed to share the profits of a business carried on by all or anyone of
them acting for all. The persons who have agreed to join in partnership are individually
called “Partners” and collectively a ‘firm’. A partnership firm can be formed with a minimum
of two partners and it can have a maximum of twenty partners. Partnership business, usually
grows out of the need for expansion of business with more capital, better supervision and
control, division of work and spreading of risks.

Features of Partnership:

The features of partnership are as follows:

1. Partnership is formed on the basis of an agreement between two or more

persons to carry on business. With the terms and conditions of partnership laid
down in a document known as Partnership Deed.
2. A partnership can engage in any occupation like production and/or distribution
of goods and services to earn profits.
3. Partners are entitled to share in the profits and are also to bear the losses, if any.
 4. Each partner is a principal who can act on his own right, and he can act on behalf
of other partners as their agent.
5. The liability of partners is unlimited as in the case of sole proprietorship.
6. Every partner has a right to take part in the running of the business. Even if
partnership business is run by some partners, the consent of all other partners is
necessary for taking strategic decisions.
7. No partner can transfer his share in partnership to any other person, unless with
the consent of all other partners.
8. While registration is not necessary, the partners if they so decide, may register
with the Registrar of Firms.
9. A partnership comes to an end if any partner dies, retires or becomes insolvent.
However, if the remaining partners agree to work together under the original
firm’s name, the firm will not be dissolved and will continue its business after
settling the claim of the outgoing partner.

Limitations of Partnership:

A partnership form of organization suffers from the following major limitations:

1. The retirement, death, bankruptcy or lunacy of any partner can put an end to the
partnership. Further, the partnership business can come to a close if any partner
demands it.
2. A partner’s liability may arise not only from his own acts but also from the acts
and mistakes of co-partners over whom he has no control.
3. All partners reconcile need to their views for the common good of the
organization. But, when some partners may adopt rigid attitudes, and lack
harmony it may cause conflict.
4. The withdrawal of a partner’s share requires the consent of all other partners.
 5. Since the agreement among partners is not regulated by any law, large financial
resources cannot be raised by partnership. Hence growth of business cannot be
ensured.
6. Limited membership (restricted to 20) and their limited personal resources do
not permit large amounts of capital to be raised by the partners, thus restricting
large-scale business.

A co-operative form of business organization is a voluntary association of persons for

mutual benefit. The main principle underlying a cooperative organization is mutual help, i.e.,
each for one and all for each. A minimum of 10 persons are required to form a co-operative
society. It must be registered with the Registrar of Co-operative Societies under the
Co-operative Societies Act. The capital of a co- operative Society is raised from its members
through share capital and loans from the State and Central Co-operative Banks.

Type of Co-operative Societies

Co-operative societies may be classified into different categories according to the

nature of activities performed by them. The main types of co-operative societies are:

1. Consumers’ co-operative societies.

2. Producers’ co-operative societies.

3. Co-operative marketing societies.

4. Co-operative credit societies.

5. Co-operative farming societies.

6. Co-operative housing societies.

1. Consumers’ Co-operative Societies: Consumer’ co-operatives are organized by
consumers to eliminate middlemen and to establish direct relations with the manufacturers
or wholesalers. These societies are formed by consumers for a steady supply of goods and
services of high quality at reasonable prices, from the manufacturers or wholesalers for sale
at reasonable prices. The profit if any, is distributed among members as dividend and also
bonus in proportion to the purchases made.

2. Producers’ Co-Operative Societies: Producers’ co-operative are for procuring inputs for
production of goods or services. These societies provide raw material, tools and equipment
and other common facilities to its members. The society provides inputs to the members and
takes over their output for sale to outsiders. The distribution of bonus is based on the goods
delivered for sale by each member.

3. Co-operative Marketing Societies: Co-operative marketing societies are voluntary

associations of small producers, to ensure a steady and favorable market for the output of its
members. The output is pooled together and sold at the best price. The sale proceeds are
distributed in proportion to the contribution of the members to the pool. These co-
operatives eliminate middlemen.

4. Co-Operative Credit Societies: Such societies are formed to provide financial help in the
form of loans to members. The share capital is raised by the members through the deposits
made by them and outsiders. The funds are used in giving loans to needy members thereby
protecting them from the exploitation of moneylenders, who charge very high rates of
interest. It encourages the habit of thrift among their members.

5. Co-Operative Farming Societies: In co-operative farming societies, small farmers join

together and pool their resources for cultivating their land collectively to achieve economies
of large scale farming and maximizing agricultural output. Such societies are particularly
important in the case of countries like India, where agriculture suffers from excessive sub-
division and fragmentation of land. Co-operative farming makes it possible for members to
use modem tools and equipments, good seeds, fertilizer and irrigation facilities in order to
achieve higher production.

6. Co-Operative Housing Societies: They are formed to provide residential accommodation

to the members. They undertake the purchase and development of land and/or construction
of houses/flats on the land or loans at low rates of interest to build houses.

A company is defined as a voluntary association of persons having separate legal

existence, perpetual succession and a common seal. As per the definition, there must be a
group of persons who voluntarily agree to form a company. Once formed the company
becomes a separate legal entity with a distinct name of its own. Its existence is not affected
by change of members. It must have a seal to be imprinted on documents whenever required.
The capital of a company consists of transferable shares, and members have limited liability.

Features of a Company:

The following are the chief characteristics of the company form of organization:

 A company comes into existence only after its registration and completion
of necessary legal formalities prescribed under the Companies Act.
 A company has a legal entity separate from its members. Thus a company
can carry on business in its own name, enter into contracts, sue, and be
sued.
 A company, because of its distinct entity, is regarded as an artificial person.
The business is run in the name of the company by the elected
representatives called directors.
 A company has continuous existence. Death, insolvency, or change of
members has no effect on the life of a company. Termination of a company
can be done only through the prescribed legal procedure.
  Every company must have a common seal with its name engraved on it.
Anyone acting on behalf of the company must use the common seal to bind
the company.
 The liability of the members of a company is limited to the extent of capital
agreed to be contributed.
 The capital of a company is divided into parts called shares which are
freely transferable by its members. Transferability is restricted in private
company.

From the preceding discussion it is clear that the company form of organization is best
suited to those lines of business activity which are to be organized on a large scale, require
heavy investment of capital with limited liability of members. That is why enterprises
producing steel, automobiles, computers and high technology products are generally
organized as companies.

Limited Liability Partnership (LLP), was introduced in India under Limited Liability
Partnership Act 2008, in April 1, 2009.

Features of a LLP:

 LLP is a separate legal entity which can own assets in its name.
 The partners have the right to manage the business directly
 One partner is not responsible or liable for another partner’s misconduct
or negligence.
 Minimum of two partners and no maximum is prescribed for this form.
 This is applicable ‘for profit’ business.
 It has perpetual succession.
  The rights and duties of partners in LLP will be governed by the agreement
between partners. The duties and obligations of Designated Partners shall
be as provided in the law.
 Liability of the partners is limited to the extent of his contribution in the
LLP.
 LLP shall maintain annual accounts. The audit of the accounts is required
only if the contribution exceeds Rs. 25 lakhs or annual turnover exceeds
Rs.40 lakhs.

3.6 CAPITAL BUDGETING

Concept of Capital Budgeting:

 Capital budgeting is a planning process that is used to determine the worth of

long-term investments of an organization.

 The long- term investments of the organization can be made in purchasing a new
machinery, plant, and technology.

 It helps in planning capital required for completing long-term projects.

 Selection of a project is a major investment decision for an organization.

Therefore, capital budgeting decisions are included in the selection of a project.


Nature of capital budgeting can be explained as under:

 Capital expenditure plans involve a huge investment in fixed assets.

 Capital budgeting decisions involve the exchange of current funds for the
benefits to be achieved in future.

 The funds are invested in non-flexible long term funds.

 Preparation of capital budget plans involves forecasting of profits over

years in advance, to judge the profitability of projects.

Since it is based on future estimates, any error may lead to serious consequences. The
problem will be followed a series of years.

Capital Budgeting decisions affects the fixed assets only which are the sources of
earning revenue, i.e., the profitability of the firm, special attention must be given to their
treatment.

Capital budgeting decisions have gained greater importance because:

1. Impact of Capital Budgeting in Long-Term:

 The effects of capital budgeting will extend into the future, and will have to be
suffered for a longer period than the consequences of current operating
expenditure.

 A wrong investment decision can endanger the very survival of the firm.

 Capital budgeting changes the risk complexion of the enterprise.

2. Involvement of Large Sum of Funds in Capital Budgeting:

 Capital investment decisions require large amount of funds, the supply of

which is restricted by scarce capital resources.

 A wrong/incorrect decision would result in losses and affect profits from other
investments as well.

3. The Impact of Capital Budgeting is not Reversible:

 The capital budgeting decisions are not easily reversible.

 Absence of market for second-hand capital goods for possibility of conversion

of such capital assets into other usable assets, results in a heavy loss to the
firm.

4. Capital Budgeting is the most Complex Decision:

 It is a difficult task to estimate the accurate future benefits and costs in terms
of money as there are external factors like economic, political and
technological forces which affect the benefits and costs.

1. Project Identification and Generation: Proposal for investments are generated

based on addition of a new product line or expanding the existing one. It may be a
proposal to either increase the production or reduce the costs of outputs.

2. Project Screening and Evaluation: This step judges the desirability of a proposal by
matching the objective of the firm to maximize its market value. The time value of
money has to be considered.
 The total cash inflow and outflow in consideration of the uncertainties and
risks associated with the proposal has to be analyzed. Provisioning has to be done for
the same.

3. Project Selection: The approval of an investment proposal is done based on the

selection criteria and screening process defined for every firm, keeping in mind the
objectives of the investment being undertaken. Once the proposal has been finalized,
the different alternatives for raising or acquiring funds have to be explored which is
called preparing the capital budget. The average cost of funds has to be reduced.
Periodical reports and tracking the project for the lifetime needs to be fixed in the
initial phase itself. Profitability, Economic constituents, viability and market
conditions stand as vital criteria for final approval.

4. Implementation: The different responsibilities like implementing the proposals,

completion of the project within the requisite time period and reduction of cost are
allotted. The management monitors the implementation of the proposals.

5. Performance Review: The comparison of actual results with the standard ones is
done. The unfavourable results are identified and difficulties of the projects are
removed for further execution of the proposals.

Factors Affecting Capital Budgeting:

The following factors affect capital budgeting:

 Availability of Funds

 Working Capital

 Structure of Capital

 Capital Return
  Management decisions

 Need of the project

 Accounting methods

 Government policy

 Taxation policy

 Earnings

 Terms of Lending of financial institutions

 Economic value of the project

The capital budgeting process is based on the following five principles:

 The capital budgeting decisions are based on the incremental cash flows of
the project, and not on the accounting income generated by it. Sunk costs are
not considered in the analysis.

 The external factors that can impact the implementation of the project and
eventually the cash flow of company has to be fully considered while
preparing / planning the capital budgeting.

 All the cash flows of the project should be based on the opportunity costs.
The existing cash flows already generated by an asset of the company which
may be forgone, if the project under analysis is undertaken should be
analyzed.

 The time value of money concept states that, cash flows of the project
received earlier has more value than the cash flows received later.
  All the cash flows from the project should be analyzed only after providing
for taxes.

 The financing costs pertaining to a project should not be considered while

evaluating incremental cash.

The techniques in capital budgeting are calculated as follows:

I. Non-Discounted Cash Flow Technique (NDCF)

1. Payback period

2. Accounting Rate of Return method

II. Discounted Cash Flow Technique (DCF)

1. Net present value method

2. Internal Rate of Return Method

3. Profitability index.

They are discussed in detail as follows:

I. Non-Discounted Cash Flow Technique

1. Payback Period:

 The payback (or payout) period is defined as the number of years required to recover
the original cash outlay invested in a project.

 If the project generates constant annual cash inflows, the payback period can be
computed dividing cash outlay by the annual cash inflow.
  Accept-Reject Criteria: The projects with the lesser payback are selected.

2. Accounting Rate of Return Method:

 The Accounting rate of return (ARR) method uses accounting information, as

revealed by financial statements, to measure the profit capacities of the investment
proposals. The formula for ARR is given below:

 Where, Average Income = Average of post-tax operating profit

 Average Investment = (Book value of investment in the beginning + book value of

investments at the end) / 2

 Accept-Reject Criteria: The decision criteria lean to the projects having the rate of
return higher than the minimum desired returns.

II. Discounted Cash Flow Technique

1. Net Present Value Method (NPV):

 The net present value (NPV) method is a process of calculating the present value of
cash flows (inflows and outflows) of an investment proposal, using the cost of capital
as the appropriate discounting rate, and finding out the net profit value, by
subtracting the present value of cash outflows from the present value of cash inflows.

 The equation for the net present value is:

  It is assumed in the above equation that, all the cash outflows are made in the initial
year (t)

2. Internal Rate of Return Method (IRR):

 The Internal Rate of Return or IRR is a rate that makes the net present value of any
project equal to zero.

 The internal rate of return (IRR) equates the present value cash inflows with the
present value of cash outflows of an investment.

 It is called internal rate because it depends solely on the outlay and proceeds
associated with the project. In Internal rate of return method, the value of NPV is
assumed as zero and discount rate that satisfies this condition is found out.

 The formula to calculate IRR is:

 Where, CFo = Investment

 Ct = Cash flow at the end of year t r = internal rate of return

 n= life of the project

 Accept - Reject criteria:

 If IRR > Cost of Capital, Accept the proposal

 If IRR < Cost of Capital, Reject the proposal

 If IRR = Cost of Capital, it is an indeterminate situation whether to Accept

or Reject the proposal.

3. Profitability Index (PI):

  The Profitability Index shows the relationship between the benefits and cost of the
project. Hence it is also called as, Benefit-Cost Ratio. It is the ratio of the present value
of future cash benefits, at the required rate of return to the initial cash outflow of the
investment. It may be gross or net, net being simply gross minus one.

 The formula to calculate profitability index (PI) is as follows.

 The profitability Index helps in giving ranks to the projects on the basis of its value,
the higher the value the top rank the project gets. Therefore, this method helps in the
Capital Rationing.

 Accept – Reject Criteria:

 PI > 1 (NPV is Positive) -> Accept

 PI < 1 (Negative) -> Reject

 PI = 1 -> May Accept or Reject Merits of Profitability Index

Both NPV and IRR will give the same results (i.e. acceptance or rejections) regarding
an investment proposal in following two situations.

1. When the project under consideration involve conventional cash flow. i.e. when an
initial cash outlays is followed by a series of cash inflows.

2. When the projects are independent of one another i.e., proposals the acceptance of
which does not preclude the acceptance of others and if the firm is not facing a
problem of funds constraint.
 The reasons for similarity in results in the above cases are simple. In NPV method
a proposal is accepted if NPV is positive.

 NPV will be positive only when the actual rate of return on investment is more
than the cut off rate.

 In case of IRR method a proposal is accepted only when the IRR is higher than the
cut off rate.

 Thus, both methods will give consistent results since the acceptance or rejection
of the proposal under both of them is based on the actual return being higher than
the required rate i.e.

 NPV will be positive only if r > k,

 NPV will be negative only if r < k,

 NPV would be zero only if r = k

MIRR is superior to the regular IRR in two ways.

1. MIRR assumes that project cash flows are reinvested at the cost of capital whereas
the regular IRR assumes that project cash flows are reinvested at the project's
own IRR. Since reinvestment at cost of capital (or some other explicit rate) is more
realistic than reinvestment at IRR, MIRR reflects better the true profitability of a
project.

2. The problem of multiple rates does not exist with MIRR. Thus, MIRR is a distinct
improvement over the regular IRR but we need to take note of the following:

 If the mutually exclusive projects are of the same size, NPV and MIRR lead to
the same decision irrespective of variations in life.
  If the mutually exclusive projects differ in size, there may be a possibility of
conflict between NPV and IRR. MIRR is better than the regular IRR in
measuring true rate of return. However, for choosing among mutually

3.7 PROJECT PROFILE PREPARATION AND MATCHING

ENTREPRENEUR WITH THE PROJECT

A project profile is a simplified description of a proposed project. It defines the

following:

 Purpose and ownership of the project

 Estimate of the activities involved

 Total investment that will be required,

 Annual operating costs and,

 Annual income.

 Costs involved

 Assumptions regarding demand for the output and

 Other assumptions or estimates made.

What is the Difference between a Profile and a Detailed Project Design?

Although a profile is normally the first step towards the development of a detailed
project design, there are important differences between the two.
 S. No. Project Profile (PP) Project Design (PD)

1. Profile is simple and makes Project design has complete details about the
compromises to reduce project.
complexity.

2. This gives overview of the project PD presents details of costs, revenues and
risks.

3. It does not consider replacement PD presents estimate of machinery

costs. replacement costs.

4. Cost of financing is not included in The cost of investment and also working
PP capital is included in PD.

5. It uses broad estimates of costs Accurate information on cost and income is

and income. presented.

6. PP excludes associated costs. PD includes costs of training, book keeping,

sanitation approvals, packaging, labelling,
decoration, surveyors and such.

The Principal Elements of a Project Profile:

The project profile, as prepared with the applicants, consists of five parts. The last
part differs for income generating projects and non-income generating projects.

Part 1: Background Information: This section provides general information about:

 The applicants,

 The location of the project

 Its characteristics,

 Objectives
  Justification for the investment,

 Demand anticipated

This provides the background to the proposal. Agreement should be obtained from
the applicants as to the general purpose and characteristics of the eventual project as well
as who would likely be involved in its operation and management.

Part 2: Investment: Requirements for the investment to be realized, the average working
life of the items and the providers (loan, donation, contribution of the community) are
determined.

Part 3: Operating Costs and Income per Activity: This section describes income and costs
directly resulting from carrying out activities made possible by the project, and which change
according to the scale of activity

Part 4: General and Maintenance Costs: Some types of costs like hiring a manager, nurse
or other employee; operating a vehicle; local land or property taxes; or office expenses are
not a part of the project.

Preliminary Estimate of Viability for income generating projects only. The

preliminary estimate of project viability, namely:

 Annual Net Income and

 Annual Net Income less Annual Investment Costs and

 Number of Years of Net Income Needed to Cover the Investment is

elaborately described.

Part 5b: Preliminary Beneficiary Estimates (non-income generating projects). This section
relates the overall cost of establishing and running the project to the number of beneficiaries
and also considers how operating costs will be paid for the following calculations are made:
  Investment Cost per Beneficiary

 Annual Operating Cost per Beneficiary

Though it looks simple, the following factors should be considered while preparing
project profile:

1. Demand: The correct estimation of demand is important for any type of project. A
project is not worth undertaking, if it does not have to a demand - either from the
market or from potential users. Understanding the demand determines its overall
feasibility, and decides the location of the project, the scale of the investment, and the
nature of the product or service to be offered.

For income generating projects the two key factors are:

 The quantity that can be sold,

 The price that the buyer will pay.

On the other hand, starting point in the absence of markets must be to identify who
are the expected beneficiaries, both direct and indirect.

Supply as an Influencing Factor:

Supply can also have a considerable bearing on the viability of a project. If operations
will require inputs of raw materials or considerable quantities of labour, it is important to
consider the availability of that supply. Similar to the sale of outputs from a project, input
availability also changes by season, continuous supply of labour or material or technology or
incentives, should be ensured.

Describing Project Operations:

 For preparing the project profile, the following must be considered:

Project Beneficiaries

 The Production Cycle

 Units to be sold

 Classification of costs

There are three types of costs to be considered in preparing a project profile:

 Investment costs

 Production or Operating costs

 General costs or Overheads

 Environmental Sustainability

Environmental sustainability deals with the impact of the proposed project on the
natural resources and environment in the area of the project. It is important to note that,
many sources of financing for projects will not approve activities that lead to environmental
damage. Even if the project may looks profitable, it will be impossible to obtain the required
loans or grants to implement it, unless environment issues are considered. This often
involves considering 'mitigation' measures that will reduce the environmental impact.

 The project profile consists of the following:

 Name of the proposed project;

 Location of the project;

 Exchange rate

 The name of the main beneficiary group

  Description of the beneficiaries

 A description of the project, in the following terms:

 The nature of the demand

 The possible environmental impact

 Any other relevant information

The Investment:

Investment need is broken down into three categories - materials, labour and
professional services. This model will have to be followed if the information is later to be
entered into the computer. At the profile stage it is not necessary to provide detailed
information as to each investment item.

Preliminary Estimate of Viability (Income Generating Projects Only):

Three principle measures of project viability are calculated for income generating
projects. These are:

 The net income per year,

 The number of years of net income required to pay back the investment
required, and

 The net income after allowing for replacement of the original

investment.

These items provide a glimpse on the viability and guide the development of detailed
project proposals. Each of these three tests is explained below:
 1. Project Net Income per Year: Net income is the income left after all costs (both
operating and general). A profile that yields a positive figure for Net Income develops
into a project.

2. Number of Years Required to Repay the Investment: While it is necessary that an

income-generating project earn more than it costs to operate, it is also important to
note how many years of the net income are needed to cover the cost of the original
investment.

The number of years required to repay the investment, the better. A risky
project should have a shorter number of years to payback. As a rule of thumb, no
income-generating project that requires more than 7 or 8 years to repay the original
investment should be selected for further development, unless there are strong social
or other reasons to proceed. For a risky project, this figure should be around 4-5
years.

3. Net Income after Allowing for Investment Replacement: It is worth considering

how the net income will be affected if the 'annual replacement reserve', calculated as
part of the Investment costs table, is charged to the net income used above.

To calculate the net income after allowing for investment replacement, it is to

subtract the annual replacement reserve from the net income calculated previously.
If the figure is positive, the net income is large enough to provide for replacement of
the current investment items; else the project should not be considered.

Preliminary Beneficiary Estimates (Non-Income Generating Projects Only):

The non-income-generating projects are chosen based on their contribution that they
will make to the social, cultural or productive. These are difficult to measure and then assess
that those relating to financial success. It is important to evaluate a project based on its social
contribution, than on financial contribution, in this category.

Not all profiles will emerge from the evaluation process with positive results. The
nature of the product needs to be rethought to better fit the type of demand foreseen. An
alternative problem may arise if more than one proposal seems to be viable. Unless the
differences between the completed profiles are very large the evaluation process presented
may not be accurate to select between different proposals. Where the viable profiles include
both income generating and a non-income generating projects, the profile evaluation can be
of no help because these two types of projects are simply not comparable. Now that the
profile is ready, the fit between the profile and the entrepreneur must be seen.

Matching Entrepreneur with the Project:

An entrepreneur possessing the skill and aptitude for a small scale unit prepares a
business plan and takes a number of steps to establish the business. The various steps to be
taken by entrepreneurs to start a small business unit are discussed below:

Step 1: Selection of the Product

An entrepreneur selects a product according to one’s own capacity and motivation.

The entrepreneur may design a new product or imitative an established product.

The economic viability of product should cover the following demand aspects,

1. The existing demand in the domestic market

2. The potential demand

3. Degree of substitution of an existing product and import possibilities.

4. The demand for ancillary product

 The information can be obtained from various publications, state development agencies
etc.

Step 2: Selection of forms of ownership

The most commonly chosen firms of ownership for small business are:

1. Sole proprietorship

2. Family business

3. Partnership

4. Private limited company

This is discussed in detail in the earlier modules.

Step 3: Selection of Site

An entrepreneur has few options for the selection of site:

1. State development corporations like SIDCO, SIPCOT, DIC etc., provide spaces

2. Industrial estates provide spaces with certain infrastructure and

advantages.

3. Private developers provide plots for business purpose.

4. Purchase of private lands

5. Choosing a site/shed in free trade zone provides many opportunities.

Step 4: Designing Capital Structures

The initial capital of a new venture comes from the following sources,

 Own capital
  Long term loan

 Loan from banks and financial institutions

Though institutional lending has increased rapidly, it has not yet become the
dominant source of funds for small industry. Banks still play a vital role in providing working
capital.

Step 5: Acquisitions of manufacturing know-how?

Many institution like government research laboratories, research and development

divisions of industries and also individual consultants provide the manufacturing know –
how for ancillary units, the main unit provide required know-how.

Even the plant and machinery suppliers, are equipped with technology. The suitable
source should to be identified.

Step 6: Preparation of Project Report:

The project report being compiled by the entrepreneur should accomplish the
purpose of providing the overall details of the proposed project. The technical, economic and
functional viability of the project should be iterated. This completed process matches the
entrepreneurial intentions to the objectives of the project.

3.8 FEASIBILITY REPORT PREPARATION AND EVALUATION

CRITERIA

A feasibility report is a report that evaluates a set of proposed project paths or

solutions to determine if they are viable. The person who prepares a feasibility report
evaluates the feasibility of different solutions and then chooses their recommendation for
the best solution. They then present the feasibility report to their company and make their
recommendation.
The objectives of the feasibility studies are:

 Comprehension of all elements of an undertaking, concept, or plan.

 Knowing possible difficulties during the implementation of the project.

 To establish the viability of the project.

Apart from description of the products or services to be marketed, the types and
quality of products that will be offered, timeline for preparation, implementation and break
even, the description of the project also includes its social, economic and environmental
impact on the surroundings.

The Market:

The market portion of the feasibility study identifies the target market segments and
describes the potential of the overall industry. It includes prediction of the future direction
and the demand for the products and services. It also shows the future changes that are
expected in the market.

Competition:

The details about the major competitors and the barriers to enter the market should
be analyzed.

Technical Considerations:

The study will identify the type, size and location of any production facilities,
buildings, equipment, distribution areas and inventory requirements and storage, along with
the technology to be adopted.

Organizing Venture:
 The organizational structure should be designed to manage and control its
operations, marketing and sales. Right manpower should be identified.

Financial Projections:

Projections of future sales, expenses, profits and cash flow are intended to impart
good understanding of the outcome of the project.

The initial capital requirements, working capital needs and availability of supplier
credit, alternative sources of funds, such as bank loans or venture capital partners should be
considered.

A feasibility study is an investigative process that seeks to determine the viability of

a business venture. It is conducted before a business plan is even considered.

A business plan describes the steps needed to move a proposal from a mere idea to
the reality of implementation.

What is the Purpose of a Feasibility Report?

The purpose of a feasibility report is to determine the feasibility of solutions or

project paths and choose the best option. The feasibility report provides various approaches
to a project and helps the understanding of each approach. Based on the evaluation
presented in the report, leaders can decide whether to take the report's recommendation for
an approach. This way best practice decision is made regarding a project.

Typical Recommendations:

The recommendations of a report usually revolve around:

1. The area where the improvement has to be made.

 2. Identify the criteria for responding to the need in consideration of the goal,
objectives and options to achieve them.

3. Determine the solution options of the various approaches recommended, one

approach should be chosen for action, and its consequences should be determined.

4. Match of each option to the criteria:

The project should provide a systematic and quantifiable way to compare how
well to solution options meet the objectives.

5. The report should sum up the findings and give a comparative evaluation of
the extent to which each of the options meets the criteria.

6. Formulate recommendations based on the conclusion. Indicate which course

of action that should be taken to address the problem.

The report is divided into various sections as follows:

1. Introduction

2. Technical Background

3. Requirements and Criteria

1. Introduction: It indicates the document’s purpose and the requirements that must
be met and provide an overview of the contents of the report.

2. Technical Background: Some recommendation or feasibility reports may require

technical discussion in order to make the rest of the report comprehensive. It may
even have comparative data of various solutions proposed. This may be included in
the body of the report or as a part of annexure at the end of the report.
 3. Requirements and Criteria: A critical part of feasibility and recommendation
reports is the discussion of the requirements to reach the final decision or
recommendation.

Sections to Include in Feasibility Report:

Feasibility typically includes a few key sections:

 An executive summary presents the main points of the report and gives an
overview of the report. It should be written clearly and concisely. Some
elements for consideration in executive summary are:

 Brief description of the report, and the problem addressed

 Major ideas presented in the report

 Crisp explanation of how the project or problem relates to the overall

mission of the organization

How to Prepare a Good Feasibility Report:

Feasibility Report is a detailed study that examines the profitability, feasibility, and
effectiveness of a proposed investment opportunity. The report, no matter, should be
prepared before understanding any business establishment or expansion.

A feasibility report can be prepared by the prospective investor or consultancy firms

who charge fees depending on the value of the project and the proposed investment
opportunity. Based on the Feasibility Report, the entrepreneur decides whether to accept or
reject the project. If the project is viable and acceptable, the entrepreneur has to estimate
the initial capital outlay and decide source of funds.

The Uses of Feasibility Report:

The Feasibility Report can be used by the entrepreneur in the following areas:
  To meet the stipulated requirements of financial institutions.

 To provide the information for decision-making regarding the proposed

investment. By showing the market potentialities, technical and financial
implications of the proposed opportunities, the feasibility report helps the
entrepreneur to make a decision about the project.

 To assist the entrepreneur in developing future plans.

 To serve as the basis for measuring the performance of the proposed

project.

Typical questions addressed in these reports include

 Is it possible? Can this be done within the allotted budget, time frame, legal
and regulatory conditions, and technical capabilities?

 Is it financially viable? Will it have long term benefits that outweigh costs?
Is there a less expensive or financially risky way to achieving the same
result? How does it compare to the cost of doing nothing about this
situation?

 Will it be accepted by the community? Will people be in favor of this idea?

Will anyone be opposed to it? How much public support is necessary to
make this successful?

The evaluation criteria include:

 Financial Costs: Companies typically consider the financial impact of a project before
taking action, so financial costs must be presented.
  Tax Impacts: Different approaches can be evaluated based on how they would
change the company's taxes when compared to other approaches.

 Public Perception: How different approaches would influence an organizations

image or perception should also be highlighted in a feasibility report.

 Environmental Effects: The report should present details on its environmental

impact. A project even if it’s financially viable, may not be accepted, if they are
environmentally detrimental.

 Resources Needed: The quantum of resources needed and ensuring continuous

supply should be ascertained and presented in the report.

Evaluation of Solutions:

This section accomplishes the purpose of a feasibility report, which is to determine

the feasibility of solutions and project paths. In the evaluation section potential approaches
based on the evaluation criteria is compared and driven to the recommendation stage.

Final Recommendation:

The last section of a feasibility report contains your direct recommendation for the
best approach. The key to writing the final recommendation section is directly stating what
the recommendations are, and why is it recommended.

LEARNING OUTCOMES

 Analyse the different kind of business plan

 Examine the criteria involved in product selection and subsequent strategies
 Classify the phases of product development process.
 Compare the similarities between the types of organization
 Select the suitable capital budgeting methods.
  Compare the entrepreneur with the project
 Evaluation criteria formulate the evaluation criteria of feasibility study

SHORT QUESTIONS

1. Who reads a Business Plan?

2. What is product selection?
3. What are the criteria for new product development?
4. How many minimum members are required to form partnership firm?
5. What is Capital Budgeting?
6. What do you mean by matching entrepreneur with project?
7. How do you write a feasibility report?

LONG QUESTIONS

1. Give the essential requirements of developing business plan.

2. How should an organisation balance the different design characteristics in product?
3. What are the factors considered for product development?
4. Explain the features of partnership.
5. What is the process of capital budgeting?
6. What are the process in matching entrepreneur with the project
7. Explain the sections of feasibility report
CONTENTS

LEARNING OBJECTIVES.................................................................................................... 212

4.1 FINANCE AND HUMAN RESOURCE MOBILISATION................................................. 212

4.2 OPERATIONS PLANNING ........................................................................................... 221

4.3 MARKETING AND CHANNEL SELECTION ................................................................... 231

4.4 CORPORATE STRATEGIES.......................................................................................... 242

4.5 PRODUCT LAUNCHING ............................................................................................... 252

4.6 INCUBATION .............................................................................................................. 261

4.7 VENTURE CAPITAL..................................................................................................... 273

4.8 START- UPS ................................................................................................................ 287

LEARNING OUTCOMES ..................................................................................................... 294

SHORT QUESTIONS .......................................................................................................... 295

LONG QUESTIONS ............................................................................................................ 295

LEARNING OBJECTIVES

 Examine various resources required in the business enterprises,

 Explain the features of operation plan
 Explain the basics of marketing channels
 Explain the concept of corporate strategy;
 State the importance of product launch
 Explain the importance of incubation centers in the ED
 Explain the features of venture capital
 Explain the importance of startups

4.1 FINANCE AND HUMAN RESOURCE MOBILISATION

Setting up a new business can be a big challenge for an entrepreneur. It requires a lot
of efforts, money and time to get it started. Once all required market, technical and human
researches are done and registration process finishes, an entrepreneur needs to focus upon
mobilization of resources for bringing the enterprise into existence. The lists of resources
are:

1. Financial Resources

2. Human Resources

3. Physical Resources

4. Raw Material

5. Method or Technology

The ways to mobile them is discussed as follows:

 Resource mobilisation refers to the coordination of all activities involved in gathering
new and additional resources for an organisation. It involves collection of resources from
outside the enterprise. Taking appropriate measures to make use of the existing resources
is also considered as mobilisation of resources. This is also called as new business
development. Mobilisation can be explained through the five M’s as follows:

1. Financial Resources:

Even the simplest form of business needs funds for getting registered and
procurement of other inputs to be processed into a marketable product. Financial resources
can be obtained from a variety of sources like:

 Owner’s Funds,

 Finance From Family & Friends,

 Borrowed Funds etc.

These sources can broadly be divided two categories:

I. Long term financing sources are used to buy fixed assets and maintain
minimum working capital like equity funds, preference shares, debentures,
long term bank loan, public deposits etc.

II. Short term financing sources are required to meet trade credit, short term
bank loans etc.

Thus, employment of resources completely depends on the nature of business

financial needs and this classification is based on the span of financial requirement.

2. Human Resources / Men:

 The success of an organisation heavily depends upon the skills and abilities of the
human resource chosen by them. At this stage, the entrepreneur accepts the challenge of
acquiring the right number of employees of a right type and placing the right person. It
includes skilled as well as unskilled employees through all hierarchical levels.

A strong team is one of the basic drivers of a successful enterprise. To select the most
suitable team there are various internal and external sources available like, employment
exchanges, contractors, advertisement in the classified section of local newspapers, online
advertisements etc. Human resource management should be seen from the following
aspects:

 Total manpower required

 Identifying required skills

 Training and development need identification

 Identifying Legal compliances attached

 Estimation of future manpower requirements

3. Raw Materials/ Material

The materials needed for any business or service must be in place before manpower
can be of use. Supply chain departments grew out of this need and have been a very useful
and effective aspect of business management. Because, unless the materials required for
production is made available, the human resources are of no use.

4. Physical Resources/ Machinery

An entrepreneur needs to acquire physical resources like land and building, plant and
machinery, furniture and fixtures, and raw material. Every entrepreneur should design and
develop a suitable procedure for procurement of sustainable business resources. This aspect
of resource mobilisation could be costlier as it requires heavy investments to set up
workplace requirements. The physical resource mobilisation process development depends
upon the needs of business structure. Some businesses do not require much physical
resource as in software technology oriented business whereas some manufacturing units
require a huge physical resource investment like capital intensive industries. The quantum
of physical resources depends on the size of the organisation also. Larger the firm, higher
would be the requirement and vice versa.

The entrepreneur should realistically assess his need before making any purchase.
The physical resource mobilisation should consider the following:

 Franchise

 Lease agreement or acquisition

 Land and building

 Furniture and fixtures

 Infrastructure

 Technological know-how

 Plant and machinery

5. Method or Technology:

Method is defined as the sequence of activities designed to perform the task. In the
service industry, methods include the chain of tasks required to create, design, sell, and
deliver a service, as well as the systems created by the infrastructure to support the
achievement of business outcomes. Technical know-how, patents, copyrights and business
processes are some well-known methods.
 The sources of funds can broadly be divided into two categories:

1. Traditional Sources of Funds

2. Modern Sources of Funds

1. Traditional Sources of Funds

a. Owner’s Funds: It is one of the earliest sources of funds. While starting a business,
an entrepreneur is the first to invest his own money. These funds may be in cash form or be
associated with assets. It proves to outside investors or banks that the person has a long term
commitment to the project and is willing to take risk.

b. Financing by Friends and Family: This is money loaned from the entrepreneur’s
spouse, parents, friends and family. This form of capital investment is considered as patience
lending by the banks and other external investors which is repaid when the business starts
growing or the share of profit increases. However, this should not lead to inadequate capital
or ownership right transfer in income and assets.

c. Moneylenders / Non-Institutional Funds: This form of raising funds is common

in rural areas or where the institutional credit system has not been established. It is more
time efficient than other institutional sources of funds. However, the rate of interest charged
is extremely high. The Government of India in coordination with the Reserve bank of India
is taking all possible measures to get rid of this non- institutional market.

Considering this, non-institutional credit may be a costly affair so, the entrepreneur
shall avoid medium term or long term funds borrowings from this source. This will add to
the interest than to capital.

2. Modern Sources of Funds:

 a. Angel Investment Funds: The angel investor is defined as “An individual who
invests in small start-ups or entrepreneurships.” Angel’s investors invest in small start-
ups or entrepreneurs. They are typically one of the earliest equity investments made in new
start- up companies usually in exchange for convertible debt or ownership equity. Angels are
high net worth individuals who invest their personal funds in start-ups.

The capital provided by angel investors may be:

 One-time investment to meet the initial huge expenditure at the time of

setting up a firm or

 An on-going injection of money to support the working capital needs of

the firm. Some angel investors invest through crowd funding platforms.

Angel investors are mostly organised into an Angel group or Angel network to gather
their investable capital, share the researches of relevant industries and other key resources
that can help them reap profitable opportunities. These specialized groups are equipped
with research and analysis, so they provide advice on portfolio also.

Angel investors are often experienced entrepreneurs, who can become valuable
advisers to an upcoming company. Angels, often take an ownership stake in the enterprise
in exchange of their personal funds’ investments. Such sale of company’s stake is called
“private placement”.

b. Incubators: The concept of incubators originated in the United States of America.

A business incubator is an organization that helps start-ups and new entrepreneurs to grow
by providing them development services like management training, affordable office space
and other physical infrastructure, shared offices, marketing support or financial aids.
 Business incubators provide support from the conception of business idea to a
successful enterprise and mentoring at various stages of the business lifecycle. Financial
support is one of the important supports.

In India, agencies like Department of Science and Technology, Department of

Biotechnology, Department of Higher Education, Ministry of Micro, Small and Medium
Enterprises, Department of Electronics and Information Technology act as incubators. The
Niti Aayog under Atal Innovation Mission is resolved to provide the funds to these agencies
for setting up of the business incubators.

c. Venture Capital: Venture capital is the process of raising capital from individuals
and firms that invest in high growth and high risk firms. It is the source of long term finance,
for investors investing in new start-up businesses and small businesses with long term
growth potential.

The venture capital generally comes from:

 Investors,

 Investment Banks and

 Other Financial Institutions.

This investment may be:

 Monetary Form or
  Technical Expertise or

 Managerial Expertise.

Consider the risk and also potential return, investing venture capital wisely requires
domain knowledge and expertise. This form of raising capital is suitable for start-ups that do
not have access to capital market, or raising bank loan and funds by issuing debentures.

Venture capitalists get a stake in the firm. They have a say in strategic decisions made
by the firm. However, raising venture capital is difficult and may not be the ideal option for
all kinds of enterprises. Hence, the entrepreneur needs to research thoroughly before raising
funds from this source.

For the venture capitalist, investment criteria are as follows:

 Management team

 Technology and product

 Proprietary product or service

 Scalability and market

d. Private Equity Funds: Private equity calls for collective investment. It is typically a
limited liability partnership contract with a term of 10 years, generally with annual renewals.
It consists of capital that is not listed on a public exchange market. It comprises of funds and
investors that directly invest in private companies.

Unlike angel and venture investors, the private equity fund investors invest at the
later stages of the company. They generally take interest in operating activities of the firm
and help they improve. A private equity fund is raised and managed by investment
professionals of a specific private equity firm. There are more than 100 private equity funds
in India.
  It allows firms with high liquidity when compared to other conventional modes
of funds i.e. high risk bank loans, or listing to public exchanges.

 Prices of shares of the company are determined by mutual negotiations

between buyers and sellers and not by market demand and supply forces. It
leads to under-pricing of the holdings.

Thus, there are various sources of finance an entrepreneur can opt for based on
availability, accessibility and structural requirements of the enterprise.

Preliminary contracts are the contracts entered into by the entrepreneur before the
formal commencement of the enterprise to bring it into running mode. They are also called
pre-incorporation contracts and are usually entered into by the promoters of the
enterprise/company for acquiring some property or right for the company which is yet to be
incorporated. Usually an entrepreneur enters into the preliminary contract with the
following parties:

1. Vendor: Vendor are parties from whom the enterprise purchases its various assets
and raw material. A contract to purchase the agreed assets and material before the
commencement of the enterprise are called preliminary contract with the vendors. An
entrepreneur must ensure that the contract with the vendor clearly communicates the term
so as to avoid any discrepancy regarding terminology, performance expectation and service
content. The contract period and timely execution should also be monitored.

2. Suppliers: They are parties who supply goods and services. They supply basic
utility and services like power, water, telephone, internet and raw material etc. An
entrepreneur after deciding to do business with the supplier must document the terms of
trade in a written contract covering the issues like- supply condition, ordering and delivery
period, payment terms, etc. This written formal document is called the preliminary contract
with the suppliers.

3. Financial Intermediary: The bank which provides funds to the new enterprises
serves as the usual financial intermediary. Preliminary contracts with bankers are the
contracts entered to acquire the initial funds for formal establishment of the enterprise. The
contracts with the bankers with clear terms and conditions will avoid any pitfalls.

4. Customers: Customers are the buyer of the products. All the contracts entered
with these initial customers are called preliminary contract. These contracts comprise of the
terms & conditions regarding:

 Purchases,

 Type of goods,

 Nature and Quality of goods,

 Quantity of goods,

 Price and

 Delivery options.

4.2 OPERATIONS PLANNING

An operational business plan is a written document that describes the nature of the
business, the sales and the marketing strategy which is optimal for success. It provides the
vision, directions and goals for the organisation. It helps in securing financing; provides step-
by-step guide to running a business to successfully create a product or service that gain a
market.
 An operation plan is an extremely detail-oriented plan. It clearly defines how a team
contributes to reaching company goals. It outlines the daily tasks required. It makes sure
that, each manager and each employee know their specific obligations. Tasks are mentioned
within a defined timeline. Mapping out the day-to-day tasks that ensure a clear path to your
business and operational goals is essential to success.

The operations plan answers the following questions:

 The strategies and tasks that need to be completed or achieved.

 The individuals responsible for those tasks and strategies.

 Timeline for each strategy be completed.

 Cost of each activity.

This strategic plan is a manual that ensures all its employees execute day-to-day
operations in a manner that ensures reaching the long-term business goals.

The operational business plan acts as a blueprint for the business processes. It acts as
an important guide to senior managers and other key stakeholders.

It navigates business in the right direction. It guides the business through certain
obstacles.

The Purpose of Operational Plans of a Business:

 The purpose of the business plan is to outline, the business’s operation and
growth projections.

 It provides a framework that outlines the management approach

  It ensures to cover many aspects relating to financial, marketing, staffing and
other resources required to run a business.

 It helps the business move from start-up to success.

 It helps the business to stay focused and operate efficiently.

 It is the perfect tool to developing and managing the business.

Different types of Operational Plans of a Business:

There are 3 levels of planning which include:

1. The strategic plan,

2. Tactical plan and

3. Operational plan.

Operational Plan is very specific and detailed.

1. Strategic Plan:

 Top Management is engaged.

 Entire organization is involved.

 Mission of the company

 It is very broad and general

2. Tactical Plan:

 Mid-level Management is engaged.

 Planned for all

 Specific actions to support or work towards the Strategic Plan are determined
  They are not very detailed.

3. Operational Plan:

 Low-level Management is engaged.

 This is for a unit within a single area of the business

 Day-to-day activities and processes that will support the Tactical Plan are
fixed.

 They are accurate and detailed.

The Operational Plan can be subdivided into:

1. Single-use plan and

2. The standing plans.

A single-use plan is developed to carry out a course of action that is not repeated in
the future. These plans are used once to achieve unique objectives for the business.

The standing plan is developed for activities that occur repeatedly over a period of
time in order for the business to help solve repetitive problems.

The size and complexity of the project, determines the level of details required for an
operational plan.

It involves:

 Risk Assessment,

 Financial requirements,
  Stakeholder’s priorities,

 Equity,

 Socio-cultural issues and

 Gender

It is important to estimate the project lifespan, sustainability and exit strategies.

There are also many broad things to consider when shaping an Operational plan which
include the following:

 Opening and closing time of ordering and purchasing

 Opening and closing of procedures for security

 Staffing and resource requirements for human resource management

 Incident management for advertising and marketing

 Risk management

 Calendar of events

 Monitoring progress of the process laid out.

The determining of Operational plans of a business fit into process of business

management every day. It determines the routine procedures and running of the business
and activities which should be practiced regularly.

Business management in structured around the Operational plan. Without these

management of a business requires both single-use plans and standing plans.
 Operational Plan that is put in place, help to set the goals and achieve particular
objectives and targets. It helps the operational side as well as the physical side like staffing,
and such. Operational Plans ensures that all areas of the business are done in a constructive
way.

There are certain terminologies that are associated with determining the Operational
plans of a business. They are:

 Objectives processes

 Delivered progress

 Quality standard

 Budgeting

 Procedures

 Desired outcomes

Through operational plans, the existing workers gain the missing knowledge gaps in
this area. Operational business plans serve as important information for the workers to
understand where senior management is focusing upon.

Everyone running a business, whether it is a large or small company needs to know

the fundamentals about having a business plan of some sort.

Very often, a strategic business plan also functions as an operating plan.

A strategic plan helps to outline long-term goals and fulfil the big vision. Operating plans
define what processes need to be finished to achieve those goals. An operating plan supports
the efforts of a strategic plan. The success of the strategic plan heavily depends on the
efficiency of the operating plan.

The presence of a strategic plan is essential to any company. However, an operational

plan is needed for day-to-day work to make sure that the organizational goals are reached.

Even small businesses and individuals too can benefit from operational planning. A
lack of planning is one of the top reasons that start-ups fail. It was found that only about half
of employees know what is expected from them at work. Without a robust operational plan
in place, organizations are risking losing their workers and their success.

One of the main differences between a strategic and operational plan is the period of
time covered. In a strategic plan, the goals are typically attainable in several years, while the
operational plan goals are short-term ones and can be achieved during the next year in most
cases.

A strategic plan exists to outline the long-term vision of the company and how each
department will work together to achieve the goals. An operational plan focuses on specific
departments and their roles in achieving short-term goals. A large department may have
multiple plans to maintain a clear and detailed focus.

Members of an organization's executive management team will handle the creation

of a strategic plan, as those responsible for the overall vision and goals. Department heads
may create an operations plan since they are the ones to implement the processes.

When reporting on a strategic plan, which may happen as often as quarterly or once
a year, executive management will outline how an organization is performing on specific
measures. The reporting should be at a high level to avoid getting lost in details that don’t
help an organization reach their goals.

An operational plan report is much more detailed and typically is prepared and
reviewed more often. When you have a regular review of reporting, your team reviewing the
reporting more frequently and individuals can make sure all team members remain on track
and can handle the necessary tasks and processes to achieve the short-term goals related to
the business operations.

Operational plans may not have specific measures to quantify results or report on,
and these updates may be more qualitative or anecdotal. Operational plan provides
employees with a manual on how to operate the company.

It should be created in alignment with other foundational documents like an

organizational mission statement, vision document, or business strategy. It addresses the
following:

 Who does what?

 Mitigation of risks

 Resource allocation for task.

 Internal and external risks facing the business.

An operational plan is a specific, detailed work plan that identifies how you’ll reach a
specific goal or outcome. Usually, operational plans are part of a larger strategic or business
plan. The operational plan provides the steps for how the company will reach the goals
outlined in the strategic or business plan.

Most operational plans identify:

 Who: Who in the company will manage each stage or step of the operational plan?

 What: What specifically the company needs to do to reach the outlined goals?

 When: When each specific task needs to be completed in order to achieve a

favourable outcome?
  How: How to reach the set goals, including how the company will use resources like
time, money and labour?

1. Strategic plan and objectives to be fixed.

2. Critical events should be provided.

3. The most critical activities required to achieve these aims should be targeted.
Resources available should be optimized and activities of the team should be
delegated to keep the team in line with the results.

4. Operational plan, uses key performance metrics or indicators that determine project
progress and provide visibility to team activities. Lagging indicators look backward
and leading indicators look to the future.

A leading indicator could be a new product, higher customer satisfaction levels, or

new markets. Lagging metrics show the efforts are falling short only after executing the
operations.

Leading KPIs include predictive measures that allow early identification of problems
before they become critical and impact business performance.

5. The key to defining appropriate KPIs is involving the whole team in the process,
discuss goals and identify measurements that are right for the team instead of
working independently or outsourcing them.

6. By understanding the company's metrics and what they mean, the team will be able
to work together more effectively with colleagues to reach common goals.
Advantages:

1. It Clarifies organizational goals

2. The operational plan outlines the day-to-day activities for running the organization
— teams, managers, and employees understand their contribution, which is crucial
for reaching company goals.

3. It shows how individual team members contribute to the overall company or

department goals.

4. Increases team productivity

5. This translates into higher profits.

6. Having a plan helps in keeping projects and teams on track.

7. When operations are managed properly, teams are able to consistently increase
revenue and develop new products.

8. With an operational plan in place, teams are able to innovate better and faster.

9. Thus, Improves competitive advantages

10. Coordinating the different parts with an operational plan will make your workflows
run more smoothly.

11. This allows you to deliver high-quality deliverables on time, and keeping you ahead
of the competition.
Disadvantages:

1. If the employees are unsure of what is required of them, their productivity will suffer.
An operational plan provides this vital information to employees in each department
and across the company as a whole.

2. Human error is a common problem in manufacturing that can often occur when
transitioning from production to sale.

3. The success depends on coordination across parts.

4. A failure at one stage can have an adverse impact on the subsequent process.
Disruptions in one process can end up affecting the entire process, making the entire
operational plan useless.

4.3 MARKETING AND CHANNEL SELECTION

Stern & El-Ansary define marketing channels as – “Sets of independent

organisations involved in the process of making a product or service available for use
or consumption.” A marketing channel consists of individuals and firms involved in the
process of making a product or service available for use or consumption by consumers or
industrial users.

All goods have channels of distribution, and marketing is dependent on distribution.

A marketer must decide the best route or channel for his particular product to be taken to
the market. Thus, a marketing channel is the series of interdependent marketing facilitators
who transfer title of a product from producer to ultimate consumer or industrial user.

The title may be:

 Transferred directly
  When the commodity is bought or

 Sold indirectly,

 When the transaction is negotiated through a functional middleman (agent or

broker)

Characteristics:

Channels provide utility, improve exchange efficiency and help to match supply and
demand. Each channel system has a different potential for generating sales will significantly
affect other marketing mix variables.

A zero-level channel gives producers greater control over their products distribution
otherwise intermediaries stand between the producers and final buyers in indirect channels.
The number of participants in any one type on the same level in the channel, determines its
width. This is because many manufacturers find it necessary to use more than one kind of
channel for the same market for enhancing reach.

Most companies now use a mix of channels where each channel reaches a unique
segment of buyers and delivers the required products segment at optimum cost.

1. Many organisations lack financial / human resources to carry out direct

marketing. So, they reach out to the many customers through the
intermediary.

2. For many smaller products, direct marketing may not be feasible.

3. Organisations prefer investing their money in their core business rather

than establishing retailing or other channel functions. This does not
provide the expected returns to be carried out as a major activity.
 So, intermediaries make the goods available and accessible to target markets. Their
specialization, experience, and scale of operations, help the organisations to easily reach out
to the target markets.

A marketing channel system decision affects the other marketing decisions like
segmentation, targeting, and positioning.

Channel decisions include long-term commitments with other firms which is

incorporated in a firm’s policies and procedures.

In managing the intermediaries, the firm must also decide on:

 A ‘push’ strategy which uses the manufacturer’s sales force, Trade

promotional money, or other means to induce intermediaries to carry,
promote, and sell the product to end-users.

This is adopted in case of low brand loyalty in a category, the product is an impulse
item or the product benefits are understood.

 In ‘pull’ strategy, the manufacturer uses advertising, promotion, and

other forms of communication to persuade consumers to demand the
product from intermediaries, thus forcing them to order it.

This strategy is appropriate for high brand loyalty and high involvement products.
Consumers understand the differences between brands, opt for a specific brand during their
purchase. Consumer awareness, preference and demand, determines the strategy to be
adopted.

Thus, the firm must decide how much effort has to be devoted towards push versus
pull marketing. In designing the marketing channel, the marketer must analyse customers’
desired service output levels which is determined by lot size, waiting time, convenience,
product variety, service backup.

The channel objectives are fixed based on:

a. Characteristics of the products.

b. Evaluation of intermediaries

c. Influences of competitors’ channel

d. Environmental changes

Three strategies are available to decide on the number of intermediaries to be used

at each channel level:

 Exclusive Distribution: The distributor has an exclusive relation with the

producer and is not allowed to keep competitors’ products and brands. It
limits the number of intermediaries and the producer maintains control over
the service levels and outputs offered by the resellers.

 Selective Distribution: The distributors can keep products of very few

limited producers in one category of products.

 Intensive distribution: This consists of the manufacturer placing the goods

or services in as many outlets as possible. The distributors handle many
competitors’ products and brands

Each channel may serve a different purpose:

 Communication: These marketing channels work to deliver a particular

message to a target audience through promotional email or such medium.
Direct selling, catalogue direct, network marketing and digital advertisements
discussed in the following section, falls under this category.
  Distribution: These channels represent the methods through which the
product arrives at the customer. Value added resale channel discussed in the
following section, comes under this category.

 Service: These marketing channels finalize business transactions. Thus,

facilitating payment for their products to the producers.

There are a variety of marketing channels as follows:

1. Direct Selling:

It involves communicating directly with potential clients. This is suitable for

smaller businesses. Direct selling is easy, when then customer is known. It is cos
effective as it reduces distribution costs or other marketing materials. This results in
profit from a successful product sale.

2. Catalogue Direct:

In this channel, a potential customer goes through a printed or digital

catalogue which includes prices, product descriptions, images and such details. The
customer selects the products they want from the catalogue and places an order. This
channel eliminates face-to-face interaction with potential customers. It also provides
the customer, a variety of product options.

3. Network Marketing:

In this channel sellers use their personal networks to make sales usually they
use their personal social media to inform their family and friends about the product.
This type of marketing channel focuses on informing people about the product and
making a sale directly to them through information, images, reviews and rankings.
4. Value-added resale

This channel purchases a product and adds value to it, before reselling it to its
target audience. By adding value to the original product, the company can market its
items as desirable to the customer.

5. Digital Advertisements:

The company sells products through website. Digital advertisement channels

include advertisement in social media platforms or other websites, or own social
media platforms. Based on the method used, digital marketing may add cost to the
business.

6. Events:

An event allows marketers to communicate with potential customers with a

specific purpose, such as promoting a new line of products. It should provide the
opportunity for customers to interact about the product, understand its value and
result in potential purchase. The events require marketing to ensure that, people
know the location, time and other details of the event.

7. SEO Marketing:

SEO, or search engine optimization, refers to the results that a potential

customer sees when they search for something online. It's important to optimize the
search engine results page, as it can lead to higher traffic to the organization’s
website.

8. Email Marketing:

This is also a communication marketing channel. This channel refers to

promotional emails sent to a target audience that contains a specific message related
to an upcoming sale, a new product release or alterations to a familiar product.
 A channel of distribution is an organized network or system of institutions or
agencies, which, in combination, perform all the activities required to link the producers and
final users.

Trade channels are classified as conventional and non-conventional with further

divisions. It is represented below:

1. Conventional Channel:

i. Direct Channels: Manufacturers -> Customers

Direct channels of distribution can take the following forms:

 Direct selling or salesmanship.

 Vending machines.

 Manufacturers retail shop.

  Factory outlets

 Direct mail order business.

ii. Indirect Channels of Distribution:

 Manufacturers - Retailers - Customers

 Manufacturers – Wholesalers – Retailers – Consumers

 Manufacturers – Agent – Wholesaler – Retailer – Consumer:

 Manufacturers – Wholesaler – Consumer:

2. Integrated Channels:

i. Vertical Channels:

These are capital intensive, professionally managed and centrally

programmed networks that are established to achieve operating economies and
maximum market impact. They are designed to achieve technical, managerial and
promotional economies through integration of flow of marketing from production to
consumption. They may further be classified as under:

 Administered Channel: This is developed in such a manner that the co-

ordination of marketing activities is achieved by using the programs of one or few
firms. An example of this type of system could include a large retailer such as Wal-
Mart dictating conditions to smaller product makers, such as producers of a
generic type of laundry detergent.

 Contractual Channel: In this type, independent channels integrate on

contractual lines to achieve economies of scale and maximize the market impact.
  Corporate Channel: The, channel components are owned and operated by the
same organisation which comes with a huge investment.

ii. Horizontal Channels:

In this channel, two or more companies join hands to exploit a marketing opportunity.
The factors motivating horizontal integration are rapidly changing markets, competition,
technology development, excess capacity, seasonal and cyclical changes in consumer
demand and the risks involved in handling financial risks individually.

Channel Levels:

A channel comprises several intermediaries. Each intermediary moves the product

one step further towards the final consumer, and as such, each intermediary forms a level of
the channel.

There are channels with different number of levels:

 A Zero Level Channel: In this type of a channel, there are no intermediaries or zero
level of intermediaries.
 One Level Channel: This channel comprises of only one selling intermediary such as
a retailer.

 Two Level Channel: This channel is mostly seen in the consumer goods markets,
where, there are two intermediaries in between the manufacturer and the final
consumers: namely a wholesaler and a retailer.

LEVEL CHANNEL

Zero Level Manufacturer – Consumer

1 Level Manufacturer – Dealer – Consumer

Manufacturer – Franchisee – Consumer

Manufacturer – Manufacturers’ Agents – Consumers

Manufacturer – Large Retailer/Consumer Cooperatives –

Consumer

2 Levels Manufacturers – Agents or Brokers – Retailer – Consumer

Manufacturers – Wholesaler – Retailer – Consumer

3 Levels Manufacturer – C&F Agent – Stockist – Retailer-Consumers

4 Levels Manufacturer – C&F Agent – Redistribution Stockist – Retailer –

Consumer

 Three Level Channel: This channel consists of three levels of intermediaries in

between the manufacturer and the final consumer.
  More than Three Levels: Longer marketing channels that have more than three
intermediaries.

 Channels used in Consumer and Industrial Products: The producer and the
consumer are a part of every channel.

This can be represented as follows:

For industrial goods, usually shorter channels (up to length 1) are used. Mostly direct
channel, i.e., zero level is used. Every customer may have different specifications or need
some changes in the standard specifications, in case of industrial goods manufacturers’ sales
personnel form this channel.

Industrial market is made up of a smaller number of large buyers, compared to

consumer market and the buyers are usually concentrated in few areas. In case of
geographically disperse markets small manufacturers can take help of agents for selling
activities.

Because of the features like intangibility, perishability, inseparability, distribution of

services becomes critical. Mostly direct channel, i.e. zero level is adopted. Most services are
sold directly from provider to the consumer or industrial buyer. However, some service
providers may take help of agents who can provide the information to the customers, book
the orders, and collect the payment on behalf of the service providers, where the channel
length does not exceed 1 level. Franchising is a common option when it comes to services.
4.4 CORPORATE STRATEGIES

A corporate-level strategy is an action taken to gain a competitive advantage through

the selection and management of a mix of businesses competing in several industries or
product markets.

 The competitive strategy identifies how to build and strengthen the business’s
long-term competitive position in the marketplace.

 It is a blueprint for the growth of the firm.

 It sets the overall direction for the organization.

 It defines the extent, pace and timing of the firm’s growth.

 It clarifies the choice of businesses, products and markets.

 It aims to create value for the shareholders

Most corporate level strategies have three major components:

a) Growth or Directional Strategy: It outlines the growth objectives and methods and
approaches to accomplish these objectives. It provides a portfolio strategy to manage their
businesses, and ensures that each business is compatible with others in the portfolio.

Portfolio strategy plans the necessary moves to establish positions in different

businesses. The top management views its product lines and business unit as a portfolio of
investments from which it expects a profitable return. Making decisions on how many, what
types, and which specific lines of business the company should be guided by the strategy.
This may involve decisions to increase or decrease the breadth of diversification by shutting
down some lines of business, or adding new lines, and changing emphasis among the
portfolio of businesses. A portfolio strategy is concerned of geographical markets for
acquisition of inputs, locating various value chain activities and sales. It facilitates efficient
allocation of corporate resources, links the businesses with dispersed activities and works
on a synergy leading to corporate advantage.

b) Corporate Parenting Strategy: It captures valuable cross-business strategic fits and

turns them into competitive advantages. It decides how resources are allocated and manage
capabilities and activities across the portfolio. Corporate parenting views business in terms
of resources and capabilities. It focuses on the core competencies of the parent corporation
and on the value created between the parent and its businesses. This is done through:

 Right choice of business.

 Superior acquisition and development of resources.

 Effective use of resources.

 Sharing and transferring of resources among businesses.

Organizations go through a progression from growth through maturity, revival, and

eventually decline. The corporate strategy alternatives are:

 Stability / Consolidation,

 Expansion / Growth,

 Divestment / Retrenchment and

 Combination Strategies.

All the organizations must decide its orientation towards growth by addressing the
following three questions:
  Whether to expand, cut back, or continue the operations without changed?

 Whether to concentrate the activities within the current industry or to

diversify into other industries?

 Whether to expand or grow through internal development or through

external acquisitions, mergers, or strategic alliances?

Economic Reasons for Choosing a Particular Type Corporate Strategy

Some of the major economic reasons for choosing a particular type corporate strategy
are:

 Utilizing operational and financial economies.

 Uncertainty avoidance and efficiency.

 Enhancing management skills to create corporate advantage.

 Addressing the inefficiency in factor markets, and

 Long term profit potential of a business.

Non - Economic Reasons for Choosing a Particular Type Corporate Strategy

The non-economic reasons for the choice of corporate strategy are:

 Dominant view of the top management,

 Employee incentives to diversify for higher compensation

 Desire for more power and management control,

 Ethical considerations and

 Corporate social responsibility.

 There are four types of generic corporate strategies as follows:

 Stability strategies that make no change to the company’s current

activities

 Growth strategies that expands the activities

 Retrenchment strategies that reduce the organization’s level of

activities

 Combination strategies which the name says, is a combination of

above strategies

Each one of the above strategies has specific objectives:

 A concentration strategy seeks to increase the growth of a single

product line

 A diversification strategy adds new product lines.

 A stability strategy is used for slow and steady improvements in

growth

 A retrenchment strategy for harvesting, turnaround, divestiture, or

liquidation is used to address poor-organizational performance.

This is discussed in detail as follows:

1. Stability Strategy

In Stability strategy the organization retains its present strategy and focuses on
its present products and markets. The firm maintains the existing level of effort; and is
satisfied with incremental growth. It does not invest in new factories and capital assets,
increased market share, or penetrate new geographical territories. Strategy when the
 industry in which it operates or the state of the economy is in turmoil or when the
industry faces slow down or when the industry is going through rapid expansion and
need to consolidate their operations before going for expansion.

A firm is said to follow stability/ consolidation strategy if:

 It serves the same markets with the same products;

 It has the same objectives with focus on incremental improvement of

functional performances; and

 It concentrates its resources for developing a competitive advantage.

Adopting a stability strategy means, a firm’s growth targets are modest and that they
wish to maintain a status quo. Stability strategy is a defensive strategy. It is suitable when an
organization devotes its efforts to improving its efficiency while not being threatened by
external change. Attitude of stake holders also forces firms to stick on this strategy.

Niche players and small firms adopt this approach, as they can reduce their risk and
defend their positions by adopting this strategy.

2. Growth Strategy:

Firms choose expansion strategy when they are confident about resource availability
and past financial performance. The most common growth strategies are diversification and
concentration. Diversification is defined as the entry of a firm into new lines of activity,
through internal or external modes.

It creates value through economies of scale and market dominance. Diversification is

also chosen to tackle government policy, performance problems and uncertainty about
future cash flow. It is a risk management tool, which reduces a firm’s vulnerability of
competing in a single market or industry. Investments in new products, services, customer
segments, or geographic markets including international expansion will result in
international development. Acquisitions and joint ventures enhance external development.
Concentration can be achieved through vertical or horizontal growth. Vertical growth occurs
when a firm takes over a supplier or a distributor. Horizontal growth occurs when the firm
expands products into new geographic areas.

3. Retrenchment Strategy:

Wrong management decisions result in deteriorating financial performance.

Management then redirects their attempt to turnaround the company by improving their
firm’s competitive position or divest or wind up the business if a turnaround is not possible.
It focuses on operational improvement when the state of decline is shallow. Growth and
stability may also be possible alternative strategic response.

4. Combination Strategy:

The three generic strategies can be used in combination; This Strategy is designed to
mix growth, retrenchment, and stability strategies. This strategy may be applied
simultaneously.

Expansion strategies are designed to allow enterprises to maintain their competitive

position in rapidly growing national and international markets. Hence to successfully
compete, survive and flourish, an enterprise adopts an expansion strategy.

It fulfils their long-term growth objectives of the enterprise. It gives significant

growth when compared to incremental growth obtained in stability strategy. It accelerates
the rate of growth of:

 Sales,

 Profits and
  Market share faster by

 Entering new markets,

 Acquiring new resources,

 Developing new technologies and

 Creating new managerial capabilities.

Growth offers economies of scale and scope to an organization, which reduce

operating costs and improve earnings. Organizations also gain a greater control over the
immediate environment because of its size. This influence is important for survival in mature
markets where competitors aggressively defend their market shares.

Conditions for Opting for Expansion Strategy:

Firms adopt expansion strategy under the following circumstances:

 With new opportunities in the environment, the firm is ready to expand its
business.

 When a firm wants to protect its dominant position in the industry.

 In volatile situations, growth would act as a cushion.

 When the firm has surplus resources, this leverage is used for expansion.

 When the regulatory framework restricts the growth of the firm in its existing
businesses, it may resort to diversification to meets its growth objectives.

Growth of a business enterprise entails realignment of its strategies in product –

market environment. This is achieved through the basic growth approaches of:

 Intensive expansion,
  Integration (horizontal and vertical integration),

 Diversification and international operations.

Intensification strategy concentrate on their primary line of business. A company may

expand externally by integrating with other companies. An organization expands its
operations by moving into a different industry by pursuing diversification strategies. An
organization can grow by “Going International”.

Intensive expansion strategy involves safeguarding the present position and

expanding in the current product-market space to achieve growth targets. This is helpful for
enterprises that have not fully exploited the opportunities existing in their current products-
market domain. A firm concentrates on its primary line of business by increasing its size of
operations. Intensive expansion of a firm can be accomplished in three ways:

 Market penetration,

 Market development and

 Product development first suggested in Ansoff’s model.

Net present value becomes the primary decision point, when it comes to choosing
among alternative strategies. The firm should assess its strengths and weaknesses against
its competitors to ascertain its competitive advantages.

The firm must have adequate financial, technological and managerial capabilities for
expansion. Technological, social and demographic trends should be monitored before
implementing product or market development strategies, particularly, in a volatile business
environment.
 In contrast to the intensive growth, integration strategy involves expanding
externally by combining with other firms. Combination of firms may take the merger or
consolidation route.

 Merger implies a combination of two or more concerns into one final entity. The
merged concerns go out of existence and their assets and liabilities are taken
over by the acquiring company.

 A consolidation is a combination of two or more business units to form an

entirely new company.

 Firms use integration to:

 Increase market share,

 Avoid the costs of developing new products internally

 Reduce the risk of establishing new business,

 Fasten the process of entering the market,

 To be diversified and

 To reduce the intensity of competition by taking over the competitor’s

business.

There are many forms of integration: Vertical and horizontal integration are the most
common.
 i) Vertical Integration: Vertical integration refers to the integration of firms
involved in different stages of the supply chain. If an organization tries to gain control of its
inputs it is backward integration or if it controls its outputs it is called forward integration
or both.

Backward integration is also called to as upstream integration and forward

integration is also called as downstream integration. Forward integration moves a firm
closer to the ultimate customer.

A firm adopts vertical integration by taking control of the business operations at

various stages of the supply chain to gain advantage over its rivals. Vertical integration also
requires an organization to develop additional product market and technology capabilities,
which may require high investments.

Factors conducive for vertical integration include:

(1) Taxes and regulations on market transactions,

(2) Obstacles to the formulation and monitoring of contracts,

(3) Economies of scale and

(4) Reluctance of other firms to make investments specific to the transaction.

 The following are a few of these alternatives for relationships between vertically
related organizations.

 Long-term explicit contracts

 Franchise agreements

 Joint ventures

 Co-location of facilities

 Implicit contracts (relying on firm’s reputation)

Horizontal Combination / Integration:

The acquisition of additional business in the same line of business or at the same level
of the value chain (combining with competitors) is referred to as horizontal integration. It
can be achieved by internal expansion or by external expansion by way of mergers and
acquisitions of firms offering similar products and services. A firm may diversify by growing
horizontally into unrelated business. Diversification is discussed earlier in this module and
international operations will be discussed in further modules.

4.5 PRODUCT LAUNCHING

Product launch is a process adopted by a firm when it decides to launch a new product in an
existing or a new market. It can be with an existing product in the market or new innovative
product which the firm has introduced. Product is launched after understanding customer
needs, product design, testing of the product, marketing & advertising and ensuring the
product reach.
A Product launch passes through a number of steps such as:

 Ideation phase
 Development phase,
 Testing phase,
 Analyze phase and
 Launch of the product or service.

The Market Launch encompasses the marketing plan and its implementation to check that
the product reaches the target market. Brand launch is defined as the creation of a new brand
in the marketplace and positioning it.

A good product launch helps in the following:

1. Create Awareness

Launching a product or brand through articles, events and promotional events ensure that
the campaign gets noticed and people become aware of the product or brand.

2. Planning and Staffing

The launch forms the basis for planning strategies to be implemented, resources and staffs
requirements and deciding the training needed to be given when the product is launched in
the market.

Advantages & Disadvantages of Product Launch:

The advantages of product launch are:

1. The product launch is communicated to the audience through a press release, articles,
social media, and events. Hence, people get aware of the launch. It evolves an
excitement in their minds.
 2. This helps the promotion of a product through word-of-mouth, social media, and
communities.
3. A product launch prepares employees to handle customer queries
4. New product paves the path to unexplored revenue streams. That allows expansion
of the business and entering into new ventures.

There are disadvantages of a product launch:

1. Considering the investment of time and resources for training employees, press
releases, promotional activities and events during the launch, the risk of the product
failure will result in huge loss.
2. Different types of products need different approaches to launch, whether soft launch
or hard launch. The choice of launch is directly associated with the impact of launch.

The product launch is the culmination of all the effort towards a new product
cycle from innovation, the revival of a product cycle which appears to have leveled off,
or justanother product in the total product lifecycle causing a change in market share.
It encourages growth.

The new product affects the company's product mix. It may increase sales in
one product area and decrease sales in another. Focus should be on increasing the
total sales of all products. It can affect the consumers' behavior and attitudes. So when
the product is launched, monitoring the sales reaching the target, and following the
consequential changes in the company, the consumer and the environment becomes
important.

The success or failure of the product in the market depends largely on:

 The skill with which the operational plan is conducted by the

production,

 Marketing and
  Functions of finance departments,

 The market and

 The environment into which it is launched.

Hence, there need to be emergency plans in place to react to such unexpected

problems.

The product launch has three steps:

 Launch to the company,

 Launch to the market and

 Launch to the consumers and

 This is followed by the launch evaluation.

The launch to the company results in completed company organization. The

launch to the market involves the production anddistribution of the product combined
with the marketing to the retailers. In the launch to the consumer:

 For the industrial products,

 The launch can be just to the company

 To the customers,

 The distributors and agents.

The following has to be taken care:

 Product should reach all the retail stores,

  Booking the slot for TV. advertising for the launch date and
 Printing of in-store promotional materials before launch.

Once the product is launched to the consumers, there is constant checking of

product, production, distribution, marketing, sales and costs. The checking will
intimate the problems that are occurring which should be addressed swiftly. The
following should be taken care after the launch:

 The sales should increase as predicted.

 Retails should be interested in providing shelf space

 The consumers should accept the product.

 Market research should be conducted for pre and post evaluation.

The post-launch evaluation leads to the following decisions:

 To be dropped,

 Improved or

 Accepted immediately into the company's product mix.

During this time of evaluation, improvement should continue and the

marketing, the production and its costs should be monitored. The internal company
launch is made to all who are to work on some aspect of the launch. This is most
important to keep the staff enthusiastic. Even the smallest launch has a certain stress,
and a large launch with plant commissioning and new market channel organization can
cause major stress to people. There are constant problems which have to be solved
such as time lapse and inadequate resources, people working long hours, increased
intellectual and physical effort. The people concerned should be properly explained
and motivated to produce the expected results.
 The raw materials, production, distribution and quality assurance team are
presented, with the details of the:

 Product,
 Raw materials,
 Production methods
 Control mechanism
 Physical distribution method
 Predicted shelf life and
 Storage conditions, and
 Quality, quantity and timing of targets and
 The allowable variations.

The problems that might occur and any improvements on yields, quality and
costs expected during continuing production are discussed at this stage. Everyone is
fixed with a clear responsibility. All the proceedings are shared among team members
so that, everyone is aware of the advancements. The sales people must be able to
answer questions put to them by customers, be skilledin the merchandising and in-
store promotions and understand the sales targets that they have to meet at certain
times.

The brandname, product name and aesthetic packaging are all presented and
the sales people are given a final product proposition: They are used to persuade the
retailers about the benefits of the product, and its improvements compared to the
competing products. The final product proposition includes:

 The product description,

 The promotional programme,

 The list price,

  The retail margins and

 Retail price, and

 Any introductory offers,

 Discounts and specials.

The sales communication is also presented at the sales force during a

conference. Retailers are interested in the types of consumer promotionsto be used,
the budgets involved, manufacturers and service operators, performance of the
product, its effect on their end productand the technical help provided.

The retailers and other distributors also have a detailed research on the
launched product and address the following concerns:

 Is it saleable?

 The strength of the promotion by the manufacturer.

 The 'deals' offered in line with the product type and past experience with
themanufacturer.

 Will the new product be profitable and marketable than the existing
similar product?

Industrial products are launched at trade fairs, where they canbe presented to
a large number of manufacturers at the same time. They are also launched to a few
manufacturers or even one manufacturer with a long association with the company so
that there is the opportunity to solve that manufacturer’s problems and gain
knowledge of the effects of the product in their processing.
 Contract Launch is where the new product is contracted to a retailer under
their own- label brand or where a new ingredient is contracted to only one or two
manufacturers. These are mainly me-too products or product improvements or line
extensions. In this the prices and quantities are known and there are no promotional
expenses and no guarantees for the future relationship when the contract period is
over.

A few large retailers, usually national or international supermarket chains, will

undertake the product development themselves and then contract out the production
ofthe new products. Some retailers look out for small innovative manufacturers and
induct the products into their organization.

The launch to the consumer depends on the type of product, the budget and the
general policy of the company. From consumer’s side: newness,the amount of 'learning'
needed to adopt them and costs of trying them become important. For a line-extension
or an improved product, the product can be introduced quickly to a large market also.

There are three types of consumer launch:

1. National Launch: The product is distributed to the entire market area. This
methodis used if the competition is stiff to launching a similar product that if the
product change is minor.
2. Area Launch: The product is launched in specific areas with good potential. Some
companies will choose to launch only in certain areas due to their production
capacity or the distribution system which cannot cater to a national or global
market.
3. Rolling Launch: It starts with one or two areas. When the product is successful,
it islaunched into another area(s). This is continued until it is selling through the
entire market. The rolling launch is used when the product is innovative and the
 production and marketing are still under trial. The product can be improved or
the production may be made efficient in terms of quality and quantity, and to
make the marketing mix more effective. If the company needs a learning period,
a rolling launch is chosen.

The activities in the launch are highly coordinated as in the operational plan.

Logistic aspects of distribution are of prime importance in the launch.

Failure in any part of the market channel will upset everyone from the primary
producer to the consumer and can do irreparable damage to the product image. The
time schedules in the operational plan are very important to ensure that distribution
at right place, at the right time for production, the sales force, the supermarketsand
the consumer. The product should be made available in distribution centres at
strategic points in or near the markets; the inventory held in each and its transport
needs have to be recorded and controlled. If the stocks are not available in the market
when the product is launched, many potential sales and profits may be lost.

Promotion and advertising needs to be coordinated in time and

presentation. TV advertising needs to be coordinated with the in-store promotion
for reinforcement. The packaging and in-store promotions should be aligned. The
TV advertising must be simple, because it may be aimed at awareness. But the in-
store promotions aim at education. Timing of the promotions needs to be well
planned and maintained. There must be readiness to unexpected changes in the
market.

The following has to be considered while launching a new product:

1. A launching page about the new product should be created in the website.
 2. An email campaign should be created to promote signing up by customers, for
additional information.
3. The press, the bloggers and industry influencers should be reached to create
content about the product, which will have a wide reach.
4. Planned public relation activities should be made to get the people talking about the
product.
5. Adequate advertising should be made to generate the desired traffic towards the
launched product.
6. The advertisement copy should be designed and kept ready to be launched at the
time of launching the product.
7. A strong supply chain should be created.
8. Adequate inventory should be maintained right from the point of production to
point of distribution.
9. Appropriate networking with the media, customers, vendors or any other stake
holders should be developed to spread the product information.
10. The feedback rating and review of the product so launched should be collected and
shared in press, media and social platforms.

4.6 INCUBATION

According to the ,
 The defines it as

, explains

A business incubator is an organization established to accelerate the growth and

success of an entrepreneur through various kinds of support. An incubator provides
resources and services such as physical space, capital coaching, common services and
networking connections. Incubators mentor and provide business assistance and monitor
services. The new ventures are made aware of risks and helped in minimizing the cost of
failures.

A business incubator will focus on a range of services such as:

 Administrative services (photocopying, bookkeeping, etc);

 Business advice services (coaching, counseling, mentoring, training),

  Technical services (technical advice, access to expensive equipment, etc),

 Funding and networking (between clients, links to wider business

community).

 Other services (loan & venture capital funds, lobbying for special services/
bureaucratic treatment, etc.)

Clients can be resident, non-resident or affiliated to the incubator.

Resident clients pay a highly subsidized rent or enjoy a rent free period. Eventually,
rents will be raised to commercial levels sufficient to cover at least the basic services
provided to them. After a specified period clients move to external premises and make
way for new clients.

An incubator becomes sustainable through commercial income. This is only

achieved where the actual income has a realistic chance of covering costs. In case of
resident clients, larger undertakings can ensure consistent commercial rents.

For financial stability incubators resort to:

 An equity stake in its clients business or

 A royalty on gross sales for a period or

 Both,

Incubator staffs share in the success of tenant companies by way of success pool
performance schemes.

Incubators role is involved in three stages:

1. Pre incubation period.

2. Intense incubation period.

 3. After care services.

 Pre-incubation program support potential entrepreneurs define their

business ideas and develop their plans to evolve them as potential client.
They provide short training programs and initial coaching sessions at their
premises. Pre-incubation at distance are basic services that are
supplemented by on-line support.

 After the period of intense incubation support, exit route for successful
businesses should be designed.

 After-care services ensure smooth transition and, support for future

growth, such as internationalization.

In developed economies commercial property is available for new start. But in

developing economies, exit can be problematic and the exit strategy needs to clearly
identify how successful enterprises can leave incubation, while remaining located in the
area.

Scaling up the operations of incubators is a challenge. Lower-cost services to a

larger client base are becoming possible with internet penetration and virtual training. In
countries where Internet penetration is increasing, geography cannot be cited as a barrier
to access to incubation services.

Objectives and Strategic Planning for Business Incubation

In both developed and developing economies, small and medium enterprises

(SMEs) are considered crucial to fostering economic and social development and their
growth is supported with a wide range of policies by the government.

The failure rate of small new businesses in their initial years is high in both
developed and developing economies. This is due to the competitive environment within
which the businesses are launched. The effectiveness of the business idea also plays a role
in the success of the business. The lack of experience of the entrepreneur who is launching
the business and problems in the environment such as shortage of capital, legal difficulties
and lack of information also add to business failure. Many initiatives are provided by the
governments to reduce business failure rates through addressing problems in the
environment discussed above. New entrepreneurs are assisted to tackle their lack of
experience through training programs, advisory and support services of many
institutions.

1. Business incubators provide a) Physical facility like rental space, electricity, high
speed internet access, market research facilities, and conference hall facilities.

2. Support services like:

(a) Marketing assistance.

(b) Access to bank loans, loan funds and guarantee.

(c) Presentation skills.

(d) Higher education resources.

(e) Link to strategic partners.

(f) Access to angel investors or venture capital.

(g) Comprehensive business training programmes.

(h) Participating in Advisory boards and mentoring.

(i) Management team identification.

(j) Training in business etiquette.

 (k) Technology commercialization assistance.

(l) Regulatory compliance.

(m) Intellectual property management.

(n) Accounting facilities/financial management training

(o) Market Research

3. Networking facilities with other members.

Business incubators are perceived to be important economic development

programmes. They create value by combining the entrepreneurial drive of a start-up with
resources generally not available to new ventures. The primary objectives of business
incubators are creating employment opportunities in the local economy and
commercializing technologies.

A non-business organization incubator or an academic institution incubator is

usually not for profit. They have an objective of promoting an enterprise and facilitating
the implementation of the process of creating an enterprise. The role of these incubators
is to make science and technology researchers, students and entrepreneurs come together
to create an enterprise.

Organizations such as Microsoft, Infosys, Wipro and Intel are other models of
business incubators. They promote their own employees to spin off an idea and create new
products or change an existing set up. If the idea is successful, the founders are given a
return on their innovation. There are few venture capitalists that run their own incubators
themselves. The major advantage of an incubator is that it protects the entrepreneur from
the impact of the macro and micro business environment.
 Strengths of incubators include:

1) Shared Operating Costs:

Tenants in a business incubator share a wide range of overhead costs, including

utilities, office equipment, computer services, conference rooms, laboratories and
receptionist services. Basic rents are usually nominal for the region in which the business
is operating. It allows entrepreneurs to realize additional savings. However, incubators do
not allow tenants to remain in the programme forever. Usually lease agreements at
incubator facilities run for three years, with some programmes offering one or two one-
year renewal options.

2) Consulting and Administrative Assistance

Incubator managers and staff members provide advice and/or information on

business issues, from marketing to financing business expansion. Small business owners
consider people responsible for as a resource that should be fully utilized.

3) Access to Capital

Many business incubators help entrepreneurs acquire capital by means of

revolving loan and micro-loan funds. They link businesses to investors by referral. They
assist entrepreneurs in preparing presentations to venture capitalists and assist
companies in applying for loans. These programmes act as a qualifying filter, whose
acceptance provides legitimacy in the business community.

4) Universality of Incubator Concept

This concept works in all communities of all sizes, demographic segments and
industries. They work based on the characteristics and requirements of a specific region.
 5) Comradeship of Fellow Entrepreneurs

Many small business owners have launched successful ventures from incubators.
The presence of fellow entrepreneurs motivates others success by gathering
entrepreneurs together under one roof, incubators creates a dynamic environment
wherein business owners can:

 Mutually support one another in their endeavors;

 Share information on business-related subjects and

 Establish networks that is important to the success of the business.

 They provide the requisite knowledge to entrepreneurs during the inception stage.

 Encourages successful start-up ventures.

 Promotes innovation, as entrepreneurs have ready access to required infrastructure

for their ideas.

 Enhance probability of success of start-ups, ensuring societal and economic benefits.

 Act as a centre for innovation for industries

 Create employment

 Act as a nodal point for aggregation of stake holders

 Provide expertise in policy framework development.

 Promote regional growth and development.

 Considerations to weigh when choosing an incubator include:

 The entrepreneurs need to study the details of offer by every building owner to
determine the legitimacy of their claim as incubators.

 Incubators take some time to establish their reputation unless they are sponsored by
a high-profile corporation or a well-funded government agency.

 The programme leadership often acts as a determinant of the fundamental quality of

an incubator programme. The incubators are managed by people with backgrounds
in business, by general college or agency administrators; the managers should be able
to provide long-term business plans that convey how they intend to guide the
incubator to financial independence.

 The company’s needs for target market, transportation, competition, and future
growth plans should be adequately addresses by the incubators.

 The incubator should have a stable financial base. Since most incubators maintain a
stringent screening process to ensure that their resources are used appropriately, the
small business owner should have a complete business plan to impress them.

In May 2017, India had the third-highest number of start-up incubators and
accelerators in the world after China and the USA, according to National Association of
Software and Services Companies (NASSCOM) with 140 incubators. However, the gap with
the top two is still huge. China and USA have over 2,400 and 1,500 incubators and
accelerators, respectively.
 More than 40 percent of the incubators in India are concentrated around
Bangalore, Mumbai and Delhi-NCR. The number of incubators based in Tier II cities is also
in the rise.

The Nudge Foundation, supported by Infosys co-founder Nandan Nilekani, Tata

Trusts and other industry, launched N- Core, an incubator for non-profit start-ups working
towards poverty alleviation, in July 2015 in Bangalore. Chipmaker Intel India, IIT-
Bombay’s Society for Innovation and Entrepreneurship and the Central Government’s
Department of Science and Technology jointly started a hardware incubator
programme in 2004.

Most incubators in India are run by academic institutions (nearly 51per cent) while
the rest are either corporate (nine per cent), independent (32 per cent) or government-
supported (eight per cent). Start-up Incubation is also known as start-up accelerators. This
holds significant importance in a country like India. Incubation programmes provide
support functions, mentorship and resources to individual entrepreneurs, with the expert
advice and technical guidance that are needed for the survival of new start-ups.

B-school today has an incubation centre so that great ideas can be nurtured from
all the sources. There are number of incubation centres supported by the ISBA which is
the apex Indian professional body supporting business incubators are also growing
gradually.

1. SINE, IIT Mumbai:

It is one of the earliest incubators in academia with a potential to create start-

ups focusing on economic growth, strategic value and social relevance. It supported
the growth of Webaroo, Bhugol GIS and SMSGupshup.com, Think LABS Techno
solutions, an educational robotics venture, Myzus Technologies and Elnfinitus
are also from SINE. These start-ups have been successful in raising venture capital
investment after incubation of up to rupees three crore from the market. SINE can
 incubate an average of 15 companies at a time.

2. Technology Business Incubator, IIT Delhi

TBI has been in active operation since 2000. It has been conceived and
programmed by the Foundation for Innovative and Technology Transfer (FITT).This
supports incubation applications from either IIT-D students, alumni or one of the
members of the Academic staff only.

3. Techno Park Technology Business Incubator (T-TBI), Kerala

It was established in 2006 with the support of the Government of Kerala. It

has been renamed as Kerala Start-up Mission. It is a joint association of Techno Park
Thiruvananthapuram and the Department of Science and Technology (DST),
Government of India. T-TBI offers fully furnished working spaces spread over 15,000
sq.ft, expert opinions and guidance from the industry, marketing and legal
management consultancy and financial assistance.

This has successfully incubated more than two hundred companies. In early
2011, T-TBI was chosen as the world’s best software incubating company and the first
Indian organization to have achieved this status.

4. Start-Up Village

It is a not-for-profit business incubator in Kochi setup in April 2012, run by

Government of Kerala. The government earmarked Rs.100 crore for Start-up Village
and wants to incubate over a thousand start-ups in 10 years.

Student entrepreneurs are offered various perks to be a part of this incubator.

5. Indian Angel Network (IAN):

Founded in 2006, IAN brings together highly successful entrepreneurs and

 CEOs from India and around the world who are interested in investing in start-ups
and early stage ventures. This equity based business incubator focuses on healthcare,
gaming and animation cloud computing, retail, mobile VAS, media and entertainment,
alternative energy, education and clean technology. NSTED and DST has supported
in establishment.

6. Centre for Innovation, Incubation and Entrepreneurship (CIIE), IIM Ahmadabad

They want entrepreneurs to build their ideas from wherever they are
stationed, so that the local economy benefits from its growth. Hence, they do not
provide physical space for incubation.

CIIE has incubated more than 50 companies, with only few owned by IIM
students. CIIE has been incubating businesses in the areas of internet and mobile
technology, clean technology, social sector start-ups and healthcare.

7. NSRCEL

It is an incubation centre run and managed by IIM, Bangalore, in 2002. They

offer various types of incubation offers all the basic facilities to start-ups including
office space, desktops, Hi Speed Internet facility, Un-interrupted Power supply etc.
The incubator provides mentoring from their eminent faculties and also offers seed
money support to some of the incubate companies. The funding is primarily through
government grants and its disbursement is in accordance with the guidelines that
have been laid down by the primary funding agency.

8. Atal Incubation Centre:

Atal Innovation Mission (AIM) is Government of India’s flagship initiative to

promote a culture of innovation and entrepreneurship in the country. AIM intends to
support the establishment of new incubation centres called Atal Incubation Centres
(AICs) that would nurture innovative start-ups in their pursuit to become scalable
 and sustainable business enterprises.

Most of the AICs established would be sector specific in areas such as

manufacturing, transport, energy, health, education, agriculture, water, sanitation,
Cyber Security etc. to promote unprecedented technological innovation in these
sectors.

Academic institutions such as higher educational institutes, R&D institutes etc.

as well as non-academic institutions such as corporate sector enterprises, alternative
investment funds registered with SEBI, business accelerators, group of individuals,
and individuals etc. are eligible to apply.

AIM will provide a grant-in-aid of up to Rs. 10 crore for a maximum period of

5 years to cover the capital and operational expenditures to establish the A/c.

The applicant has to provide 10,000 sq. ft. of ready-to- use, built-up space, for
the exclusive use of the AIC.

9. AngelPrime:

AngelPrime was launched in 2011 in Bangalore. The areas that AngelPrime

aims to incubate in are mobile payments, e-commerce and smartphone / tablet apps.

4.7 VENTURE CAPITAL

Timely and adequate availability of finance is a major problem that becomes acute
when an entrepreneur is a new technocrat, with innovative ideas to develop a new product,
but lacks his own capital. Finance required for such proposal is more risky in nature, because
the innovative ideas of the entrepreneur have not been tried on a commercial scale. But, if
the venture becomes successful, it has potential for high returns. In this scenario, Venture
Capitalist comes to help by providing risk bearing capital, known as Venture Capital.
Venture Capital may be defined as,

The most important feature of Venture Capital business is that, it meets the needs of
a business where the probability of loss is high because of the uncertainties associated with
the enterprise, but the returns expected are also higher than normal. Thus, the Venture
Capitalist invests in a business with high risk, and high return on capital.

Venture Capital is different from other forms of finance on the following basis:

1. Venture Capital is provided largely in the form of equity, when the investee
company is unable to float its equity shares independently in the market or from other
sources in the inception stage. Thus, risk capital is provided, which is not available otherwise.

2. The venture capitalist, though participates in the equity, does not intend to act as
the owner of the enterprise. The venture capitalist does not participate in the day-to-day
management, but renders his skill, experience and expertise. Venture capitalist nurtures the
new enterprise till it enters the profit-earning stage.

3. The Venture Capitalist does not intend to retain the investment in the start-up. He
divests the shares, as soon as the company becomes profitable. At this stage venture
capitalist withdraws himself from the venture and in turn provides finance for another
venture.

4. A Venture Capitalist profits through capital gains arising out of sale of his equity
holdings, rather than through regular returns in the form of interest on loans.
 5. A Venture Capitalist may earn royalties on sales depending upon the expected
profitability of the business which are at times, partially or fully waived.

A venture capital fund provides finance to the venture capital undertaking at different
stages of its life cycle according to requirements. These stages are broadly classified into two,
viz. (a) Early stage financing and (b) Later stage financing.

Early Stage Financing includes:

 Seed capital stage,

 Start-up stage and

 Second round financing.

A. Early Stage Financing:

 i) Seed Capital Stage: This stage is associated with research and development.
The concept, idea, process pertaining to high technology or innovation is
tested on a laboratory scale. The ideas developed are by Research and
Development wings of companies or scientific research institutions. Based on
laboratory trial, a prototype product development is done. Then, the
possibilities of commercial production of the product are explored. The risk of
investment at this stage is high. Only few venture capital funds invest in the
seed capital stage of product development. Such financing is provided to the
innovator in the form of low interest personal loans.

ii) Start-up Stage: This is venture capital finance during the start-up stage of the
projects that is selected for commercial production. A start-up refers to
launching or beginning a new activity which may be the one taken out from
the Research and Development stage of a company or a laboratory or may be
based on transfer of technology from abroad. Such product may be an import
substitute or a new product/service which is yet to be tried. But the product
must have effective demand and should have market in the country. The
entrepreneurs who lack financial resources for undertaking production,
approach the venture capital funds through offer of equity.

Before making such investments, venture capital fund companies assess the
managerial ability, capacity and the commitment of entrepreneur to make the project idea
as success.

iii) Second Round Financing: After the product has been launched in the market,
becomes comparatively less risky than the first two stages, finance is provided
in the form of debt, on which venture capitalist earn a regular income.

B. Later Stage Financing: Business requires additional finance, after establishment which
cannot be secured by offering shares by way of the public issue. Venture capital funds prefer
later stage financing, because income at a shorter duration and capital gains subsequently
are anticipated. Later stage financing may take the following forms:

i) Expansion Finance: Expansion finance may be needed by an enterprise for

adding production capacity once it has successfully gained market share and
expects growth in demand for its product. Expansion of an enterprise may be
by growth or by way of acquisition or takeover. In the case of organic growth,
the entrepreneur retains maximum equity holdings of the entrepreneur.

ii) Replacement Finance: In this form of financing, the venture capitalist

purchases the shares from the existing shareholders of the company who are
willing to exit from the company. Such a course is often adopted when the
promoters do not intend to list its shares in the secondary market. The venture
capitalist perceives growth of the company over 3 to 5 years and expects to
earn capital gain at a much shorter duration.

iii) Turn Around: When a company is operating at a loss after crossing the early
stage and entering into commercial production, it tries a change in its
operations by modernising or expanding its operations, by addition to its
existing products or removal of the loss-making products, by reorganising its
staff or undertaking new marketing strategies as such. This needs infusion of
additional capital which the venture capitalists provide them.

Apart from providing finance, the venture capitalist also provides management
support to the entrepreneur by nominating its own directors on the Board of the company
to effectively monitor the progress.

iv) Buyout Deals: A management buyout means that the shares (and
management) of passive shareholders, are purchased by active shareholders
who are actively involved in the operations of the enterprise. The buyout
 happens to derive the full benefit from the efforts made by them towards
managing the enterprise. Such shareholders are funded by venture capitalist.

The venture capital provide finance to undertakings through

1. Equity and

2. Debt instruments.

Investment is also made partly by way of equity and partly as debt. The stage of
financing, the degree of risk involved and the nature of finance required determines the
mode of financing by the venture capital.

These instruments are detailed below:

a) Equity Instruments: They are ownership instruments and provide the rights of
the owner to the investor. They may be:

i) Ordinary Shares on which no dividend is assured. These shares carry a little

higher dividend, but no voting rights are given to the investors. There may be
different variants of equity shares also.

ii) Preference Shares carry an assured dividend at a specified rate. Preference

shares may be cumulative/non-cumulative, participating preference shares
which provide for an additional dividend, after payment of dividend to equity
shareholders. Convertible preference shares are exchangeable with the equity
shares after a specified period of time.

The venture capital has choice of the instrument in this mode.

 b) Debt Instruments: Venture Capital Finance prefers debt instruments to ensure a
return in the earlier years of financing when the equity shares do not give any return. The
debt instruments are of various types:

i) Conditional Loans: On conditional loans, no interest rate as lower rate of

interest and no payment period is prescribed. The Venture Capital funds,
recover their funds, by taking a share in the sales of the undertaking for a
specified period of time. The percentage of share is pre-determined by Venture
Capitals. The recovery by the Venture Capital Finances depends upon the
success of the business enterprise.

ii) Convertible Loans: Sometimes loans are provided with the stipulation that
they may be converted into equity at a later stage or as agreed upon between
the two parties.

iii) Conventional Loans: These loans are the usual term loans carrying a
specified rate of interest and are repayable in instalments over a number of
years.

Exit Routes:

As discussed earlier, a venture capitalist does not intend to stay with an

establishment. Once the business gains profitability situation, a venture capital looks for
realization of shares or capital gains. Then he looks foe new ventures to invest his funds, this
is termed as exit route. There are several alternatives for venture capitalist to exit from an
investee company, as given below:

1. Initial Public Offering: When the shares are listed on the stock exchange(s) and
are quoted at a premium, the venture capitalist offers his holdings for public sale
through public issue.
 2. Buy back of Shares by the Promoters: In terms of the agreement entered into
with the investee company, promoters of the company are given the first
opportunity to buy back the shares held by the venture capitalist, at the prevailing
market price. If they don’t do so, other alternatives are forwarded by the venture
capitalist.

3. Sale of Enterprise to Another Company: By selling the holdings to outsider who

is interested in buying the entire enterprise from the entrepreneur, a venture
capitalist can recover his investments.

4. Sale to New Venture Capitalist: A venture capitalist can sell his equity holdings
in the enterprise to a new venture capital company. Such sale may be distress sale
by the venture capitalist to realise the investments and exit from the enterprise.

5. Self-liquidating Process: In case of debt financing the principal amount, along

with interest is realised in instalments over a specified period of time.

6. Liquidation of the Investee Company: If the investee company incurs losses,

the venture capitalist recovers his investment by negotiation or settlement with
the entrepreneur.

Regulatory Framework:

(The contents are adopted from www.sebi.gov.in)

Securities and Exchange Board of India registers and regulate the Venture Capital
Funds in India. The SEBI guidelines, as amended in 2000, are as follows:

1) Definitions

A Venture Capital Fund has been defined to mean a fund established in the form of a
trust or a company including a body corporate and registered with SEBI which–
 i) Has a dedicated pool of capital, raised in the specified manner, and

ii) Invests in venture capital undertakings in accordance with these

regulations.

A Venture Capital Fund may be set up either as a trust or as a company. The purpose
of raising funds should be to invest in Venture Capital Undertakings in the specified manner.

A Venture Capital Undertaking means a domestic company –

i) Whose shares are not listed on a recognized stock exchange in India, and

ii) Which is engaged in the business for providing services, production or

manufacture of articles or things and does not include such activities or
sectors which have been included in the negative list by the Board.

The negative list of activities includes real estate, non-banking financial services, gold
financing, activities not permitted under Government’s Industrial Policy and any other
activity specified by the Board.

2) Registration of Venture Capital Funds

A venture capital fund may be set up either by a company or by a trust. SEBI is

empowered to grant a certification of registration to the fund on an application made to it.
The Applicant Company or trust must fulfil the following conditions:

i) The memorandum of association of the company must specify, as its main

objective, the carrying of the activity of a venture capital fund.

ii) It is prohibited by its memorandum of association and Articles of Association from

making an invitation to the public to subscribe to its securities.

iii) Its director, or principal officer or employee is not involved in any litigation
connected with the securities market.
 iv) Its director, principal officer or employee has not been at any time convicted of an
offence involving moral turpitude or any economic offence.

v) The applicant is a fit and proper person.

In case an application has been made by a Trust, the instrument of Trust must be in
the form of a Deed and the same must have been duly registered under the Indian
Registration Act, 1908. It must also comply with the above-mentioned conditions
(ii) to (v).

On receipt of the Certificate of Registration, it shall be binding on the venture capital

fund to abide by the provisions of SEBI Act and these Regulations. Venture Capital Fund shall
not carry on any other activity than that of a Venture Capital Fund.

3) Resources for Venture Capital Fund

A Venture Capital Fund may raise moneys from any investor – India, foreign or non-
Resident Indian – by way of issue of units, provided the minimum amount accepted from an
investor is Rs. 5 lakh. This restriction does not apply to the employees, principal officer or
directors of the venture capital fund, or non-Resident Indians or persons or institutions of
Indian Origin. It is essential that the venture capital fund shall not issue any document or
advertisement inviting offers from the public for subscription to its securities/units.

Moreover, each scheme launched or fund set up by a venture capital fund shall have
firm commitment from the investors to contribute at least Rs. 5 crore before the start of its
operations.

4) Investment Restrictions

While making investments, the venture capital fund shall be subject to the following
conditions:
 1. A Venture Capital Fund shall disclose the investment strategy at the time of
application for registration.

2. A Venture Capital Fund shall not invest more than 25% of its corpus in one
venture capital undertaking.

3. It shall not invest in the associated companies.

4. It shall make investment in the venture capital undertakings as follows:

A. At least 75% of the investible funds shall be invested in unlisted equity shares
or equity-linked instruments (i.e., instruments convertible into equity shares or
share warrants, preference shares, debentures compulsorily convertible into
equity),

B. Not more than 25% of the investible funds may be invested by way of

 Subscription to initial public offer of a venture capital undertaking whose shares

are proposed to be listed, subject to a lock in period of one year.

 Debt or debt instruments of a venture capital undertaking in which the venture

capital fund has already made investment by way of equity.

5) Prohibition on Listing

The securities or units issued by a venture capital fund shall not be entitled to be
listed on any recognized stock exchange till the expiry of 3 years from the date of issuance of
such securities or units.

6) Private Placement of Securities/Units

A venture capital fund may receive moneys for investment in the venture capital
undertakings only through private placement of its securities/units. For this purpose the
venture capital fund/company shall issue a placement memorandum which shall contain
details of the terms subject to which moneys are proposed to be raised.

Alternatively, it shall enter into contribution or subscription agreement with the

investors, which shall specify the terms and conditions for raising money.

Fund Based Services The venture capital fund shall also file with SEBI a copy of the
above memorandum/ agreement together with a report on money actually collected from
the investors.

7) Winding up of Venture Capital Fund Scheme

A Scheme of a Venture Capital Fund set up as a Trust shall be wound up, in any of the
following circumstances, namely:

 When the period of the scheme, if any is over or

 If the trustees are of the opinion that the winding up shall be in the interest
of the investors, or

 75% of the investors in the scheme pass a resolution for the winding up, or

 SEBI so directs in the interest of investors.

A Venture Capital Company shall be wound up in accordance with the provisions of

the Companies Act.

8) Powers of the Securities and Exchange Board of India

SEBI has the following powers:

 a) To appoint inspecting/investigating officers to undertake
inspection/investigation of the books of accounts, records and documents of
Venture Capital Fund.

b) To suspend the certificate granted to a Venture Capital Fund if it contravenes

any provisions of the SEBI Act or these guidelines or fails or defaults in
submitting any information as required by SEBI or submits false/misleading
information, etc.

c) To cancel the certificate in the following cases:

 Venture capital fund is guilty of fraud or has been convicted of an offence

involving moral turpitude.

 Venture capital fund has been guilty of repeated defaults mentioned in (b)
above.

 Venture capital fund contravenes any of the provisions of the Act or the
Regulations.

Investments in Venture Capital Funds or Venture Capital Undertakings in India can

also be made by foreign venture capital investors, incorporated outside India. To regulate
such investors, SEBI issued the above mentioned Regulations in the year 2000. The salient
features of these regulations are as follows:

Registration:

A foreign venture capital investor (FVCI) must be registered with SEBI after fulfilling
the following eligibility conditions and on payment of application fee of US $1000:
 1) Its track record, professional competence, financial soundness, experience,
reputation of fairness and integrity.

2) RBI has granted approval of investing in India

3) It is an investment company, trust, partnership, pension or mutual or endowment

fund, charitable institution or any other entity incorporated outside India.

4) It is an asset/investment management company, investment manager or any other

investment vehicle incorporated outside India.

5) It is authorised to invest in Venture Capital Fund or to carry on activity as Venture

Capital Fund.

6) It is regulated by an appropriate foreign regulatory authority or is an income tax

payer. Otherwise, it submits a certificate from its bankers about its promoters’
track record.

7) It is a fit and proper person.

SEBI will grant the Certificate of Registration on receipt of the registration fee of US
$10,000 on the following conditions:

 It would appoint a domestic custodian for the custody of securities.

 To enter into an agreement with any bank to act as its banker for operating a
special non-resident rupee/foreign currency account.

Investment Criteria:

FVCls must disclose their investment strategy to SEBI. They are permitted to invest
their total funds committed in one venture capital funds, but for investing in venture capital
undertakings they have to follow the norms as prescribed by SEBI domestic VCFs.
Powers of SEBI:

SEBI has the following powers as regards FVCls:

a. Power to conduct inspection/investigation in respect of conduct and

affairs of FVCls.

b. Power to issue directions in the interest of the capital market and

investors.

c. Power to suspend or cancel registration.

4.8 START- UPS

A start-up is a company that is in the first stage of its operations which are initially
bank rolled by their entrepreneurial founders as they attempt to capitalize on developing a
product or service. They have limited revenues, high cost of operation and job creation. A
start-up is new organization designed to search for a repeatable and scalable business model.

These start-ups needs an appropriate ecosystem to thrive. It includes

 Adequate funds

 Government to create an environment

 Ready availability of essential services like office space, location, supplies

telecom connectivity etc.; and

 Mentors to provide strategic advice.

According to Professor Myles Bassell from Brooklyn College,

 Render forest presented 6 types of start-ups which are explained as follows:

1. Big Business Start-Ups:

Companies with large capital and presence in different markets, to be more profitable
and create new revenue, have to innovate in new business models that help them meet those
goals. Such new business developed by large companies fall in this type.

2. Social Entrepreneurship Start-Ups:

There are entrepreneurs establish non-profit organizations, or a combination of the

search profit, but especially with an objective to improve their environment.

3. Buyable Start-Ups:

As in the case of who come up with successful apps in the market, generate something
new, but at some point are acquired by a tech giant, some start-ups present themselves to be
buyable by large organisation.

4. Scalable Start-Ups:

The common example of this is, the Tech Start-ups. Technology companies have a
huge potential to grow due to the nature that allows access to a global market. To be scalable
is the potential of a newly established company to obtain financing from investors and grow
to a global presence.

5. Small and Medium Sized Enterprise Start-Ups:

 These types of businesses can be classified either by number of employees or by the
revenue generated. The traditional way of creating wealth is to start new businesses with
proven business models. Hence they need not be sophisticated in the initial phase.

6. Lifestyle Start-Ups:

They are usually people who want to satisfy their needs by being in activities that are
entirely on what they like. Simply said, a business revolves around a person’s passion.

Start-Ups have their lifecycle.

The stages are as follows:

1. Bootstrapping stage

2. Seed stage

3. Creation stage

(i) Bootstrapping Stage:

In this stage, the entrepreneur initiates a set of activities to turn an idea into a
profitable business. However, the entrepreneur considers a higher risk or even uncertainty
level, continues working on the new venture idea, constitutes a team, uses personal funds,
and asks family members and friends to investment in the idea. Bootstrapping is defined as
highly creative way of acquiring the use of resources without borrowing. The purpose of this
stage is to position the venture for growth by demonstrating product feasibility, cash
management capability, team building and management, and customer acceptance.
Additionally, angel investors are likely to invest in this stage. According to Harrison et al.
(2004), “bootstrapping is a way of life in entrepreneurial companies”.

(ii) Seed Stage:

 Here, the founder enters into a new stage, characterized by team work, prototype
development, market entry, valuation of the venture, seeking for support mechanisms like
accelerators and incubators, and average investments to grow the start-up. For most start-
ups this stage is considered as highly uncertain. The initial capital so raised is used to
produce the product and/or service. Many start-ups fail in this stage, due to non availability
of support mechanisms or they would turn to a low profit enterprise with a low success rate.
But, those who succeed in receiving support would have a higher chance of becoming
profitable companies. Thus, valuation is done at the end of this stage.

(iii) Creation Stage:

Creation stage occurs when the company sells its products, enters into market, and
hires employees. At the end of this stage, organization/firm is formed and corporate finance
is considered as the main choice for financing the firm. Venture capitals could facilitate the
creation stage, by funding the venture.

Some of the common challenges are as follows:

1. Financial Challenges:

Finance is an integral part of the start-up process in which any start-up would face
problems in different stages. While bootstrapping the founder negotiates with family
members and friends to convince them to invest in his/her idea. He/she invests in the
business, and since the idea is in its early stages, he/she might need more money to expand
it. Afterwards, in the seed stage, founder looks for angel investors and convinces them with
reasonable valuation plans. In the creation stage, the founder prepares a plan along with
support documents to utilize / attract venture capital.

2. Human resources:
 Start-ups normally start with one or few cofounders. With time, founder needs more
experts to develop the business. Then, the founder negotiates with people, make a team and
hire employees. If the founder lacks enough knowledge of the field, the start-up might fail
due to human resource management issues.

3. Support Mechanisms:

The support mechanisms include angel investors, hatcheries, incubators, science and
technology parks, accelerators, small business development centers, venture capitals, etc.
Lack of access to such support mechanisms in various stages of business increases the risk
of failure.

4. Environmental Elements:

Many start-ups fail due to lack of attention to environmental elements, such as the
existing trends, limitations in the markets, legal issues, etc. While a supportive environment
facilitates the success of start-ups, inefficient ones could result is failure.

5. Revenue Generation

As the operations get intense, the expenses grow. With reduced revenues, start-ups
concentrate on the funding aspect, and diluting the focus on the fundamentals of business.
Hence, revenue generation is critical, for efficient management. The challenge is to generate
enough capital, for supporting growth and expansion stages.

6. Team Members

Apart from founder(s), start-ups normally start with a team consisting of some members
with complementary skill sets specialized in a specific area of operations. Assembling a good
team is the first major requirement. About 1/4th of the start-ups failed because of lack of a
proper team.

7. Supporting Infrastructure
 The support mechanisms that play an important role in the lifecycle of start-ups are
incubators, science and technology parks, business development centers and such. Lack of
access to such support mechanisms increases the risk of failure.

8. Creating Awareness in Markets

The environment for a start-up is difficult than for an established firm due to uniqueness
of the product, as it requires building everything from scratch. The market has to tapped, to
make it a success.

9. Tenacity of Founders

Establishing a venture is filled with delays, setbacks and problems without adequate
solutions. The entrepreneur should be persistent, persuasive, and should never give up till
he/she achieves desired results. When the product could be ahead of its time or may require
complimentary technology /products for the use by the customers. “A lot of times, people
don't know what they want until you show it to them” says Steve Jobs. The start-ups mostly
fall in the “new and untried” category where the success rate is minimal.

10. Regulations:

It is still a challenge to register a company. Regulations pertaining to labor laws,

intellectual property rights, dispute resolution etc. are rigorous in most countries.

11. Lack of Mentorship

says Milan Hoogan, Erfolg Life Sciences., Most of start-ups have

brilliant ideas and/or products, but have little or no industry, business and market
experience to get the products to the market.

12. Lack of a Good Branding Strategy

 Inadequacy of effective branding strategy is another issue that lags start-ups from faster
growth. Hemant Arora, of Times Network states that “branding demands paramount
attention as it gives an identity and occupies a space in the consumer minds”.

13. Replicating Silicon Valley:

Indian start-ups get influenced by Silicon Valley models which may not succeed in
Indian scenario and they require modifications when transplanted to our context. To create
a position for them in a market, start-up companies set up technologies such as Internet,
Computer, E-commerce, telecommunications etc. Start-ups are the companies that are
usually involved in implementing the innovative ideas and processes. The major problem in
any start-up is to have a clear vision to create a new innovative business ideas and finding
business opportunities.

 “Vision of “Make in India” is to facilitate investment ,enhance skills development,

create job opportunities, build world class infrastructure, sustainable development
and innovations in Indian manufacturing, creating a self-reliant economy, developing
National Industrial Corridors and smart cities and participation in global production
network.

 “Startup India, Stand up India” movement was started by honourable Prime

Minister on 15th August, 2015 to boost entrepreneurship and employment and to
encourage bank financing for start-ups.

 To encourage confidence in the start-ups Foreign Direct Investment (FDI) limits for
most of the sectors are increased and Intellectual Property Rights (IPRS) are
strengthened.

 “Exemption on Capital Gain Tax, Credit Guarantee scheme, inspection for three years,
no tax on profit, Mobile apps and portals for registration, Startup India hub’s setup
 for clearance, if money is invested in another start-up than no capital gains, easier exit
policy and favourable labour and environment laws, self-certification based
compliance are notable features. Entrepreneurs can register the company in one day
instead of 15-20 days, Building Research parks, setting up innovative centres at
National Institutes, new Intellectual property rights protection, fast tracking and 80
percent reduction in patent fees etc for encouraging start-ups.

Between January-September 2015, Angel Funds and VCFs have invested $7.3 billion
in early stage Indian Start-ups. India’s first generation e-commerce and mobile
entrepreneurs have become angel investors which is a sign of maturing of startup ecosystem.
However, there is a danger that too many mentors/ angel investors with little experience
may lead to a situation of unsuccessful start- ups.

LEARNING OUTCOMES

 Critically analyse various sources of Fund required

 Infer the importance of operation plan for entrepreneurship development

 Recognize the importance of marketing channels

 Analyse various strategies for growth

 Measure the effectiveness of the product launch

 Critically analyse the role of incubators

 Illustrate the stages of financing by venture capitals

 Discuss the major challanges faced by the entreprenurs while creating startups
SHORT QUESTIONS

1. State long term and short term financing sources.

2. What is an operational plan?
3. What is meant by market?
4. What is mean by corporate Strategies?
5. What is functional Strategies?
6. What is meant by product launching?
7. SINE nurtured several ventures. Name any two.
8. Which incubator is tied up with DST?
9. What is venture capital entrepreneurship?
10. List out the Challenges of start-up.

LONG QUESTIONS

1. Discuss various aspects taken into consideration during the process of human
resource procurement.
2. Discuss various types of Operational plans of a business.
3. Explain the types of marketing channels.
4. What is corporate level strategy? Why is it important for a diversified firm?
5. Illustrate the steps in the product launch.
6. What do you mean by a business incubator? Elaborate the advantages of an incubator.
7. Enumerate the important exit routes and explain the important ones.
8. Discuss the start-up revolution in India.
CONTENTS

LEARNING OBJECTIVES.................................................................................................... 297

5.1 PROCESS MONITORING AND CONTROL .................................................................... 297

5.2 PROJECT INTERNAL AND EXTERNAL EVALUATION .................................................. 304

5.3 CONCEPTS AND SYMPTOMS OF INDUSTRIAL SICKNESS ........................................... 312

5.4 CAUSES AND CONSEQUENCES OF INDUSTRIAL SICKNESS ........................................ 320

5.5 PREVENTION AND REHABILITATION OF BUSINESS UNITS ...................................... 328

5.6 GROWTH STRATEGIES FOR SMALL BUSINESS .......................................................... 335

5.7 ROLE OF SMALL BUSINESS IN INTERNATIONAL TRADE ........................................... 345

5.8 E- COMMERCE AND SMALL BUSINESS ....................................................................... 352

LEARNING OUTCOMES ..................................................................................................... 365

SHORT QUESTIONS .......................................................................................................... 365

LONG QUESTIONS ............................................................................................................ 366

LEARNING OBJECTIVES

 Explain the need for monitoring

 Explain the significance of project evaluation
 Explain the basic aspects of industrial sickness
 Analyse the repercussions of industrial sickness
 Explain the need for rehabilitation programme.
 Analyse the stages of small business growth
 Describe the importance of global business
 Identify the application of e-commerce in small business

5.1 PROCESS MONITORING AND CONTROL

Monitoring has not been viewed in its real sense and hence is the weakest point in
project management in India. The Planning Commission has advised the States to strengthen
and streamline: time and close overruns.

Project monitoring is important when there is complexity arising out of:

 Technological advancement

 Geographical dispersal of project works and

 The number of people involved

In these cases, formal and structured arrangement/direct supervision/oral

instruction is required to monitor the efficiency of the project.

Project monitoring system involves:

 Determining what data to collect;

 How, when and who will collect the data;

  Analysis of the data; and

 Reporting current progress.

Monitoring is a mechanism through which it is possible to evaluate the progress of a

project for identifying deviations and taking corrective measures.

The various steps here are:

 Collection of information,

 Arriving at a conclusion

 Making a fact based decision

 Implementing the decision

 Progress control charts and

 Achievement indicators are the common techniques used.

When a project finally reaches execution, periodic verification of actual performance

in various activities with the planned action, becomes necessary. This should confirm to the
cycle of planning implementation control re-planning. The periodic updating is determined
by the tightness of control exercised and amount of staff involved in updating.

The monitoring system should be so designed as to summarize the output reports and
bring them to the knowledge of persons in charge of the most critical activities in a timely,
accurate and meaningful information system. The system should incorporate elements of
exception and comparability of actual performance with the target and the reasons for
deviations. By doing so, the bottlenecks can be minimized in future. The ability to evaluate a
project progress against the project plan is the heart of project monitoring.
 Project monitoring enables a continuing feedback on the project implementation. The
entire activities of the project should be organized towards the right direction, in order to
accomplish the main objectives of the project such as:

 "Completion of project on schedule date,

 Within the approved cost or

 Within the admissible increase in statutory variations,

 Quality performance and

 In accordance with the performance guarantee parameters envisaged in the

contracts."

Thus, monitoring involves:

 Follow up of the instructions, directives and guidelines given in the

sanction letter and follow up of the best practices for project activities
and subsequent supervision.
 Review of progress of projects by authorities concerned, for taking
corrective action, if needed.

Figure: Project Monitoring

 The project activities shall be monitored as follows:

1. The basic activities required for the project with appropriate deadline and
resources. This work should be coordinated by the concerned project
department usually called Project Monitoring and Co-ordination Section
(PMC).

2. PMC will then expedite the approvals. Monthly progress report will be
collected and assessed.

3. For the procurement items, project team will submit the position of order
placement on its sub-vendors, stating the details of items, total quantity, date
of supply and such other information.

4. Together with inspection for the quality assurance shall be reviewed and
monitored. Status report should be obtained periodically. With this process of
review and monitoring of progress, delays, defects if any, comes to notice and
corrective action would be possible.

5. Vendor shall submit periodic report on dispatches made as per agreed

schedules. In case of any delay, reasons for the same will be indicated.

6. Project Monitoring and Co-ordination Section (PMC) makes the report on the
progress of the activities, receipt of materials and equipment’s. Any delay in
any of the areas is highlighted so as to take necessary action immediately.

The team members who interact with each other are:

 Project Manager

 Finance Team

 Vendors
  Procurement Team

 Technical Team

Project control involves:

 Regular comparison of performance against set standards,

 A search for causes of deviation

 Commitment to monitor adverse variances.

It serves two major functions:

 Ensures regular monitoring of performance, and

 Motivating project staff to work for achieving project objectives.

Effective control is critical for realization of project objectives. The main reasons for
poor or ineffective control of performance of projects are:

 Characteristics of the project, like large, complex projects involving many

agencies and people which make it difficult to control. Tracking physical and
financial performances, non-routine task and co-ordination and communication
problems becomes difficult in this case.
 A project manager requires ability to monitor a wide range of factors, sensitivity
to symptoms indicative of potential problems and comprehending the
combined effect of multiple forces. Project managers with steady rhythm of
normal operations and routine work, lack experience, training, competence and
inclination to control projects.
 Poor control and information systems:
 Delay in reporting performance,
  Incorrect data or unreliable information and
 Inadequate data collection
Reports Maintained for Control:
 Cost report
 Change management register
 Risk register
Challenges with Project Control:

1. Lack of commitment and support from senior management who exhibit passive
control or delay decision making.

2. Perceived control as an added overhead to other costs certified, as it normally

adds to 0.5% to 3% of the project.

3. In the absence of harmony among team members, during project life cycle, the
confrontation dynamics pops up thereby evoking suspicion among team
members.

4. Many organizations still use manual process and inappropriate risk metrics that
does not provide a big picture.

The purpose of control is the ability to establish standards of performance for each
organisational unit. Standards are developed from the sequential steps stated as a part of the
action plan and from the set targets. Performance can be measured against these standards
and corrective action shall be taken. Tracking performance is difficult because of the
assumed condition underlying the action plan and budget changes and because the manager
adjusts himself to match current conditions. Sometimes, organisational changes cause
difficulties, when new executive is assigned to problems or reaping benefits not of their
planning. To track performance accurately, a robust and flexible system is needed to keep up
with all the changes in plans.

Control calls for the setting up of a plan, a budget, and aim to be achieved. There
cannot be a plan without having control; neither there cannot control without a plan.

Targets may be:

 Level of sales or production,

 Cost standards,

 Quality standards or

 Any other measurable attribute.

Figure: Controlling the Implementation

Communicating the plan to those concerned with implementing it is very vital. If the
members of the team do not know what the goals are, they cannot be blamed for not scoring
the goals.
 There must be a system of monitoring the actual achievement, quantified in
appropriate units, whether these are monetary values or physical quantities.

 Since Key performance indicators are identified, timely monitoring and control helps
proper decision making and reduction in project cost.

 The project completion and accurate costs are predictable much in advance.

 The financial health of the project at all stages is clearly monitored.

 The scope of the project will not be diluted.

 It forms a benchmark for future projects and gives a structure to the project.

 It improves organizations reputation in the market.

 It gains competitive advantage over other organizations who struggle with less
mature projects.

 Satisfied employees and stakeholders.

5.2 PROJECT INTERNAL AND EXTERNAL EVALUATION

Post project evaluation of the project is made to determine how far the forecasts and
projections have been achieved, the value of the extensive exercise carried out, and the
effectiveness of the investment decision. The purpose is to draw attention to issues and
inconvenience that need more attention. Further, it helps in improving the policies of funding
institutions. The exercise results in learning from evaluation of future projects. Post Project
evaluation of implementing projects provides details on quality, time and cost on future
projects too.

The principal clients of a project evaluation include:

  External clients –national authorities, project partners and the funders

 Internal clients – the project management team, field and technical

specialists

To be useful, an evaluation must reflect to the needs and interests of the stakeholders
and provide information that helps their decision-making.

Financial institutions, involved in the financing of are known for the intensity with
which they conduct the project appraisal or evaluation before supporting investment on the
project.

 How much is actually achieved out of the forecasts and projections made?

 Was that degree of expertise worthwhile?

 How were their decisions proved in reality?

 What is the outcome of the evaluation experience?

Financial institutions have initiated systematic attempts to answer these questions.

The main motivation was the massive growth of public expenditure on social programmes
like uplift of the poor, rural development, etc., which are not subject to make measures of
performance.

In the subsequent years, the evaluation has been applied much more widely, beyond
the public sector. This may be due to:

 The recognition of the private sector corporations,

 Wider social responsibilities,

 Growing restlessness with traditional financial indicators and

  Increased scope and responsibilities of audit.

All these have contributed to the organized review and analysis of project
investments after they have been made. With redefined business practices, it is likely to
become the norm. Evaluation is meant:

 As retrospective review or

 As a review of something already ongoing.

It is also called as ex post (a posterior). In economic method, the central focus of any
investment analysis is the comparison between the situations: with the investment and
without it. The net effect of the investments is found by deducting the flow of costs and
benefits without investment from the flow. This represents the circumstances with
investment. Both flows must be projected on the basis of certain hypotheses.

The only feature that might be considered different to ex-post analysis, from ex-ante
analysis, is the correction which is to be made, to the recorded prices and costs for purposes
of economic analysis.

 Financial figures need adjustment by a price index, to eliminate the effects

of inflation.

 Shadow prices, if adopted at the time of appraisal, should be reassessed, if

the long-term outlook for the national economy has changed considerably
in the due course.

 Similar amounts of money in different periods should represent roughly the

same amount of real resources.

Some important types of evaluation of projects with their objectives are discussed below:
 1. Performance Evaluation: It requires that, the project manager or senior project
staff prepare a summary document on all aspects of project performance. It may take
place at any time during project cycle. The focus is on one of elements of a project i.e.,
performance related to time, cost, scope and on deliverables.

2. Audit: It is a technique for evaluating the quality of a project management’s handling

of finances and equipment’s for project purposes. The audit is conducted by a
contracted third party. Large projects usually have a financial audit and inventory
study at least annually.

3. Results Evaluation: This shows indicators of achievement. This verifies whether the
project output matches the project objectives.

4. Cost-benefit Analysis: The cost-benefit analysis is an effort to ascertain whether the

benefits from the project, actually justify the resources spent to attain them. This
analysis is possible where the financial projects can be compared to costs.

5. Impact Analysis: Impact analysis is an effort to ascertain whether the project

actually had the impact it would have on the development need.

There are a number of principles of project evaluation that make sure evaluations are
credible and contribute to the overall success of the organization. These principles offer a
foundation that guides the evaluation process completely. Project evaluation principles
include:

 Improve Performance: team learns new methods from each evaluation

which can contribute to the continual improvement of business practices.

 Contribute to organizational learning: providing continuous feedback may

promote continuous learning and organizational growth.
  Share project participation: Distributing the results of the project
evaluation to stakeholders increases the level of their participation, thus
promoting transparency and reliability.

 Focus on results: Practicing regular evaluations may help to direct the

projects towards achievable results.

 Use credible processes: When conducting a project evaluation, it is

important to use provable and dependable processes, practices and strategies.

 Conducting ethical evaluations: Selecting and implementing a particular

method of project evaluation requires vigilant attention to ethics for the sake
of employees and the sensitivity of the project.

 Continuous Evaluation: Building an organizational habit of evaluation serves

to equip and improve teams and project outcomes.

Whether or not self-evaluation delivers open and constructive self-criticism and

results in objective evaluations, depends on the open-mindedness, audacity, and self-
confidence of the institution, its management, and its employees.

The ex-post project evaluation system is presently applied extensively by

international funding agencies to all projects completed. The purpose of these studies is to
reach conclusion and make suggestions that are as specific and concrete as possible, for
improving the policies of funding institutions. The policies may relate either in general areas
like:

 Infrastructure development,

 The role of national investment banks in development, or

 On procedural enquiries such as the participation in project

preparation,
  The selection and use of consultants or

 Regulation governing the procurement of materials and services with

loan funds.

The only difficulty in relying on the ex post evaluation system for drawing attention
to issues that need thorough treatment is that, the projects approved for support under
policies that are not necessarily still present.

The reviews have produced the main identifiable impact of the evaluation effort on
changes in policies of funding agencies, including the too large and multifaceted
organisations.

Project evaluation has contributed to the following matters:

 Strategies for development finance companies,

 The concept of sector lending,

 Development of policy to land reform,

 Pricing structures ,

 New policies for promoting the development of domestic financial

markets, or

 The use of project start-up plans.

This involves establishing key indicators, and information system to furnish details
on a regular basis about the current values of these indicators for comparison with the
projected values.
 The concept of post project evaluation by funding agencies has led to the recognition
of the need for transparency at the appraisal stage concerning their decisions and
participations. This means:

 A record of the assumptions and hypothesis underlying the forecasts and

decisions;

 Information on changes in a project

 The risks foreseen and

 Their acceptability is clearly defined.

This section is a discussion on the post project evaluation with reference to the pre-
investment feasibility reports and detailed project report. Here, the actual performance is
compared with projections, which are included into the feasibility reports.

Annual reviews are self-evaluations that are conducted by the project management
with the participation of stakeholders. They usually serve the annual progress reporting.
Interim evaluations should take place midway through project implementation. This is
useful when a number of planned activities have been delivered and a considerable part of
project funds have been spent. Most project managers choose independent final evaluations.
However, it can serve to reassure the stakeholders that the project is going as planned.

An external evaluation can replace an independent evaluation. Additional evaluations

can also be done if considered useful by the project management. An evaluation is indicated
if the project or line management believes that readjustment of the project objectives or
strategy should be done. Independent evaluations are more expensive than internal ones,
but it will be worth, if the project benefits from new ideas generated by an outside
perspective. Innovative projects can benefit from an outside assessment of the viability of
their approaches it is recommended that, projects of four years’ duration or more, shall have
both independent interim and independent final evaluations.
 The specific details of the project evaluation criteria differ from one project to
another. Generally, a project evaluation process is spread over the project constraints
including time, cost, scope, resources, risk and quality. Organizations may include their own
business goals, strategic objectives and identified metrics.

Project evaluation can be classified into three main types:

 Pre-project evaluation,

 Ongoing evaluation and

 Post-project evaluation.

1. Pre-Project Evaluation is a way to determine the effectiveness of the project

before executing it.

2. Ongoing Project Evaluation ensures that, the project is proceeding as planned

3. Post-Project Evaluation reviews the project’s paperwork, interviews the project

team and analyses all relevant data to resolve issues in the current and upcoming
projects.

Project evaluation has four phases: planning, implementation, completion and

dissemination of reports.

1. Planning
 The ultimate goal of this step is to create a project evaluation plan, a document that
explains short-and-long-term goals and critical criteria that shows whether these goals and
objects are being met. It includes project framework, best practices and metrics that
determine success. Stakeholders will get progress reports throughout the project’s phases.

2. Implementation

While the project is running, it should be monitored for all aspects to make sure the
project is meeting the schedule and budget. This can be done by creating status reports and
meeting with team and hold the team accountable for delivering timely tasks and maintain
baseline dates to know when tasks are due.

3. Completion

When the project is completed and problems are identified during the process, the
short- and long-term impacts of what was learnt in the evaluation should be recorded and
shared.

4. Reporting and Disseminating

Once the evaluation is complete, there is a need to record the results. A project
evaluation report has to be created for future use. The stakeholders may want a meeting to
get the results.

5.3 CONCEPTS AND SYMPTOMS OF INDUSTRIAL SICKNESS

In a capitalist economy wherein competitive forces have an upper hand, the

industrial sickness issue usually does not invite Government intervention. The 'survival of
the fittest' principle applies and those who cannot withhold the competition will have
sickness which will be followed by natural death or extinction. This is an important
characteristic of free competition in a capitalist economy.
  Efficiency will be rewarded with profits and growth and

 Inefficiency will be reprimanded by extinction.

A system of rewards and punishments are essential part of capitalism. An industrial

unit which falls sick and fails to renew it will get wiped out. This remains as of the logic of
competitive industry. Indeed this fear creates the push for industrial units to display the
entrepreneurial qualities like efficiency and innovation, not only to survive but also to
stand out amidst the competition.

Growth of industry leads to:

 Greater utilization of natural resources,

 Production of goods and services,

 Creation of employment opportunities, and

 Improvement in the standard of living.

India has been determined to develop the country’s industrial base ever since it’s
Independence. It has devised various policies for the development of industries in the
public and private sectors. However, these industries have had numerous problems from
time to time. Thus in a competitive economy, there are built in forces to ensure efficiency
in the functioning of the industrial and other sectors. In the post-independence period,
when the problem of industrial sickness gained the attention of various organizations’ like
RBI, SBI and other term-lending institutions , this problem of industrial sickness started
being dealt in a different manner.
-- Companies (Second) Amendment Act 2002

-- RBI Notification 1 Nov. 2012

-- State Bank of India

-- Reserve Bank of India (RBI)

 -- ICICI

-- Sick industrial companies (special provision) act 1985

 To a common man: A sick unit is one which is not healthy

 To an Investor: It is one which is not giving dividends.

 To a Banker: It is a unit which has incurred cash losses in the previous year
and is about to repeat the same in the current and following years.

 To an Industrialist: It is a unit which is making losses and about to extinct.

1. Reduction in capacity utilization

2. Wide spread decline in that industry

3. Increase in overdrafts

4. Increase in customer complaints

 5. Too many outstanding bills

6. Sluggish growth or no growth

7. Falling goodwill of the company in the market

8. Poor administration and Management skills

9. Window-dressing and falsified accounting

10. Inefficient administrative procedure

11. Failure or delay in payment of statutory liabilities

12. High rate of rejection of goods by the customer

13. Falling sales and profits

14. Diversion of fund to other activities other than running the unit

15. Increased litigations against a company

16. Poor human resource practices resulting in frequent turnover of personnel

in the industry

17. Major changes in ownership.

Some more important signals of industrial sickness are:

 Shortages of working capital to meet short-term financial obligations

 Large Inventories

 Failure to submit data to banks and financial institutions

 Increased breakdowns in plants and equipment’s

 Delay or default in the payment of statutory dues like provident fund, sales tax,
 excise duty, employees’ state insurance, etc.

 Decline in technical efficiency

The continuation of various signals for a prolonged period of time becomes

symptoms of sickness. The various symptoms ultimately reflect on:

 Performance of the plant,

 Utilization of capacity,

 Financial ratios,

 Share market and financial practices,

 Production, marketing and labor relations in the industry.

Symptoms can be external like:

 Natural calamities,

 War,

 Government rules and regulations,

 New policy, etc., in which case the unit may not be in a position to play an effective
role.

There may be internal symptoms that fall within the purview of daily routine of the
unit.

It should, therefore, be made mandatory on the part of the financial institutions,

banks and the entrepreneur to have a system under which signals of sickness are noticed
in time, so that corrective action may be taken. It would, be appropriate to enlist the
important signals to identify sickness at the incipient stage like:

1. Absence or little movement in stock

2. Decline in production and/or sales

3. Increased requests for enhancement in credit limits

4. Continuous irregularity in cash credit amount

5. Negotiable instruments like bills, cheque, etc., being dishonored

6. Heavy cash drawing

7. Reconstitution of the firm at short intervals

8. Negligence in turn-over of account

9. Frequent rejection of goods by buyer

10. Increase in written-off expenses

11. Labor problems

12. Excessive dependence on external funds

13. Continuous increase in losses

14. Refusal of suppliers to supply raw materials

15. Unreliability inventory practices

16. Disharmony among the directors or partners

17. Low morality of the employees

18. Slackness in payments to suppliers, employees, banks etc.

 19. Undue delay in annual accounts.

20. Routing transactions through other banks

21. Industry being gripped by recessionary trends

22. Low profile market reports

23. Inflationary trends in stock valuation

There are various stages of industrial sickness which re manifested by various

symptoms:

1. Normal Unit: It generates required internal surplus

 Functions efficiently in all operational areas

 Good current ratio

 Positive net worth

 Favorable debt equity ratio

2. Towards Sickness: This stage is characterized by:

 Continuous decline in profits

 Prospective losses in succeeding years

 Poor operational efficiency

3. Incipient Sickness:

 Continuation of cash loss from the previous year to current and also
forthcoming years
  Bad Debt Equity ratio

 Reduction in net worth

4. Sickness:

 All the above symptoms along with a current ration less than 1:1

5. Chronic Sickness: This stage is marked by:

 Cash loss more than the net worth

 No access to Finance

 Interrupted manufacturing process

 No hope for revival of the unit

5.4 CAUSES AND CONSEQUENCES OF INDUSTRIAL SICKNESS

Industrial sickness results in many socio-economic problems. When an industrial unit

falls sick, the dependants have to face an uncertain future. They will be loss of job, or loss of
wages and compensation not in time, thus, resulting in extreme hardship. Sickness is
undoubtedly, a global phenomenon. Even in industrially advanced countries there are
numerous cases of bankruptcy or liquidation.

These sick units are supported back to growth through:

 Mergers,

 Amalgamations,

 Takeovers,

 Purchase of assets or
  Nationalisation.

When the problem becomes unmanageable, the unit is permitted to die its natural
death.

Industrial sickness has become a major problem of the India’s corporate private
sector. There are, five major causes of industrial sickness, viz.

 Promotional,

 Managerial,

 Technical,

 Financial and

 Political.

An industrial unit may become sick at its nascent stage or years after establishment.
Two major traditional industries of India, namely: cotton textiles and sugar, fell sick due to
short-sighted financial and depreciation policies. Heavy capital cost escalation arising out of
price inflation aggravates the problem. The historical method of cost depreciation is
inadequate when assets are to be replaced at current cost during inflation.

The depreciation funds are often used to meet working capital needs. Hence it does
not become readily available for replacement of worn out plant and equipment. Hence, the
industrial unit is constrained to operate with old and obsolete equipment, thereby eroding
its profitability. Eventually, the unit is driven out of the market by competitors with
advanced process and technique.
 The factors leading to sickness can be due to reasons of:

 Finance,

 Technical issues,

 Mismanagement,

 Non-availability of raw materials,

 Power or natural calamities or a combination of such factors.

The causes of industrial sickness may be divided into two broad categories:

1. External and

2. Internal.

External causes are those which are beyond the control of its management. The causes are:

 Delay in land acquisition and building construction

 Delay in obtaining financial as-sistance from public financial institutions

 Delayed supply of machinery

 Problems with recruitment of technical and managerial staff

 Administrative delays on the part of Government in sanctioning licences,

permits, etc.

 Inadequate basic inputs like power and coal.

 Unexpected cost over runs

  Lack of demand or shift of demand, to products of competitors due to delays
in project implementation

 Unsatisfactory performance by financial and technical collaborators.

 Changes in the scale of operation and product mix and,

 Changes in the policy of the Government regarding distribution of goods.

Internal Causes: The primary cause seems to be

 Lack of experience of the promoters in a specific line of activity.

The other causes are:

 Differences among various management people.

 Mechanical defects and breakdown
 Inability to purchase raw materials at an economic price and at the right
time
 Failure to establish controls
 Deteriorating labour management relations and
 Faulty financial planning and lack of adequate capital

It is often observed that many projects fail due to:

 Improper feasibility study.

 Lack of long term view

 Management on the basis of myopic vision,

 Inadequate analysis and

 Improper approach.

 Inadequate information about the expertise and competence

  No periodic assessment (or review) of the economic viability

 Changes in the political and economic environment

 An unrealistic project being made operational.

 Market obsolescence

 Non-availability of raw materials and

 Constant power shortages

 Unsupportive banks

In the last decade, three major industries affected by industrial sickness are jute,
engineering goods and textiles. Some of the industries such as the real estate, light consumer
goods, automobile, and diamonds suffer the impact of steep fall in demand, inadequate
supply of finance, large proportion of non-performing assets and con-straints of finance due
to huge amounts of funds getting blocked in delayed receivables

The importance of detection of sickness at the initial stage has been stressed by the
RBI. Guidelines were issued on October 1981 and subsequently modified in February 1982
for guidance of the Central Government, State Governments and financial institutions, in
handling the problems of industrial sickness.

The salient features of these guidelines are the following:

a. The administrative ministries in the Government have a central role in monitor-ing

sickness and coordinating action for revival and rehabilitation of sick units. In suitable
cases, they will also establish standing committees for major industrial sectors where
sickness is wide-spread;
b. The financial institutions will be monitored by obtaining periodical returns from the
assisted units and from the Directors nominated by them on the Boards of such units.
These will be analysed by the Industrial Development Bank of India. The results of
such analyses will be conveyed to the financial institutions concerned and the
Government.

c. The financial institutions and banks will initiate necessary corrective action for sick
unit based on a diagnostic study. In case of growing sickness, the financial institutions
will also consider taking of management responsibility where they are confident of
restoring a unit to health, as per the guidelines of ministry of finance.

d. When the banks and financial institutions are unable to prevent sickness or revival of
a sick unit, they will deal with their outstanding dues with the normal banking
procedures. However, they will report the matter to the Government which will
decide whether the unit should be nationalised or whether any other alternatives can
revive the undertaking.

e. Where it is decided to nationalise the undertaking, its management may be taken over
under the provisions of the Industries (Development and Regulation) Act, 1951, for a
period of six months to enable the Government to take necessary steps for
nationalisation.

f. Finally the industrial undertakings presently being managed under the provisions of
the Industries (Development and Regulation) Act, 1951, will also be dealt with in
accordance with the above principles.

g. The Government has also provided certain concessions to assist revival of sick units
without direct intervention. Government has amended the Income tax Act in 1977 by
addition of Section 72A by which, tax benefit can be given to healthy units when they
take over the sick units by amalgamation.
 The Central Government has set up a Board for Industrial and Financial
Reconstruction (BIFR) for detecting, preventing, as well as taking ameliorative, remedial and
such other measures to revive the sick units.

Progress in the right disposal of sick company cases registered with BIFR has been
slow on account of the conflicting interests between the companies and the creditors (banks
and financial institutions, government bodies/agencies). The rehabilitation schemes met
with 40-45% failure.

The rate of registration/sickness increased substantially during 1997-98 due to

 The industry recession

 Poor financial market conditions and

 The stringent approach of banks/financial institutions

The Industrial Reconstruction Bank of India (IRBI) set up in 1985 which was renamed
as Industrial Investment Bank of India (IIBI) disbursed a cumulative financial assistance of
Rs. 10.090 crores in March, 2000 itself.

Small Industries Development Fund (SIDF) in the IDBI provided special financial
assistance to the small-scale sector, for providing refinancing assistance not only for
development, expansion and modernisation, but also for the rehabilitation of the small-scale
sick industries.
 The Committee on Industrial Sickness and Corporate Restructuring under
chairpersonship of Dr. Omkar Goswami submitted its report in July 1993.

The main recommendations of the Committee with respect to sick companies are:

1. For early detection of sickness the definition of sickness should be changed

to:

 Default of 180 days or more on repayment to term lending institutions and

 Irregularities in cash credits or working capital for 180 days or more.

2. Amendment of the Urban Land (Ceiling & Regulation) Act, 1976 to improve
generation of internal resources of sick companies.

3. Empower the BIFR for speedier restruc-turing, winding up and sale of assets
of companies; and

4. A sick company’s own reference of BIFR should be voluntary, not

mandatory.

(Source: http://reports.mca.gov.in)

The modifications were brought in the Sick Industrial Companies (Special Provisions)
Act, 1985 by the 1994 Amendment Act

In the definition of sickness, the period for the registration of an industrial company
as sick has been reduced from seven to five years. Furthermore, the condition of incurring
cash losses during the preceding two years has been waived. This means that an industrial
company would be considered a sick industrial company once its net worth is completely
eroded and has been regis-tered for not less than five years.

5.5 PREVENTION AND REHABILITATION OF BUSINESS UNITS

Increasing occurrence of sickness has been a matter of great concern for Government
and society and managements of banks and financial institutions because of its implications
for increasing the problem of unemployment, wasting the use of available installed capacity
and creating social unrest in the country because of unemployment. It undermines public
confidence in the functioning of the industrial sector which affects the overall investment
climate of the country. This, also results in locking up of bank credit and the rollover of credit
and profitability of the commercial banks.

A unit that is declared sick would already have consumed large resources. For
utilizing the assets and infrastructure already created, the unit has to be revived from
sickness. Rehabilitating a sick unit is important because, the cost of setting up a new unit
might be substantially higher as compared to the cost of rehabilitating a sick unit. Knowledge
of the factors responsible for leading the unit to sickness, will help to address the revival
package.

Revival of a sick unit is important, because of the following reasons:

 Abandoning the unit in a vital sector may lead to other socio-economic adverse
effects.

 The ancillary unit’s dependent on the sick units will have a chain effect and
make all such dependent ancillary units becoming sick.

 Banks and financial institutions need to get back the investments through the
revival of sick units and made to generate profit. Though banks and financial
 institutions that support a revival programme for the sick unit may be required
to fund the unit again, they will be prepared to implement revival packages if
there is scope for improvement in unit’s performance, thereby ensuring their
returns.

Before attempting to rehabilitate a sick unit, a detailed and through viability study
has to be made to ensure that the revival programme will be fruitful. It is not advisable to go
far any revival programme if there is uncertainty that need further study. The viability study
is required in Technical, Commercial, Managerial and Financial factors.

1. Technical Factor:

 By studying the manufacturing process of the unit, requirement for new process
should be developed. The necessity of switching to the latest manufacturing process,
the associated cost and of such switchover, should be explored.

 The production capacity of different production sections should be checked for any
kind of imbalances. The capacity of the project should be substantially improved
without much investments by adding machines/equipment required for balancing
the various production systems.

2. Commercial Factor

 Commercial failure of a project is may be due to defective product design and

consequent market rejections. Such situations show that the products offered by
competitors are better in attracting consumers. Hence, the scope for product
improvement and the cost involved has to be studied.

 A product that is accepted in the market many lead the enterprise to sickness, because
of poor profit margins. Minor modifications in designing and packaging of the product
 with revision in price may be accepted by the consumer. It should ensure better
returns to the company. This is possible by carrying out test marketing for the
improved product.

 Every product follows a life cycle which passes through four stages, viz.

 Introduction

 Rapid Expansion

 Maturity

 Decline

Profit margins are low and sign of sickness appear when the product is in its
'decline' stage. Product improvements can only can help the products at this stage.
The decline once started cannot be contained inspite of product improvements.
Product diversification proves to be a feasible solution. While attempting to
rehabilitate a unit whose product has already reached its 'decline' stage, the
feasibility of switching over to diversified products, by using the existing production
facilities has to be studied. The cost-benefit analysis of additional investments
required for product diversification and expected benefits should be studied.

3. Managerial Factor

To study whether the sickness is due to reasons beyond the control of the
present management or due to the poor management is vital to device revival
strategies of a sick unit.

If the sickness is due to reasons beyond the control of management but the
management is still committed to the project.

 It will inject additional funds to revive the unit.

  It will strengthen the existing management by inducting professionals as
Directors at various functional areas like technical/finance/marketing/
research and development etc. The managerial appraisal will be done to make
changes in the existing organizational set up, to reduce the man power without
affecting the organizational efficiency.

4. Financial Factor

When a project that has long term debt becomes sick, it becomes necessary to
ease the burden of debt. This necessitates restructuring of the debts. Banks and
financial institutions offer the following concessions in their package of rehabilitation
assistance.

 Reduction in interest rate of existing loans.

 Conversion of short-term loans into long term loans.

 Conversion of part of long-term loans into equity

 Making debts repayable in easy instalments or adjusted interest rates.

 Revising the schedule of repayment for the term loan.

 Sanction of additional loan to meet the additional capital expenditure.

 Enhancement of working capital limits.

 Liquidating unwanted assets.

A sick unit is defined in terms of its capacity to generate internal funds. It fails to
generate internal funds on a regular basis and depends on its survival on frequent infusion
of external funds. Hence, a detailed analysis on rehabilitation is essential.
1. Objectives of Rehabilitation Scheme

 To help the unit to operate at a profitable level.

 To balance the irregularity in the account, in a phased manner. Thus, the

rehabilitation scheme involves two aspects:

 Preparation of feasibility report before implementing the scheme.

 Closely monitoring the performance unit during the revival period.

2. Features of Rehabilitation Scheme

 The scheme should be carefully drawn and supported by the bank and the
borrowers.

 Due to the existing debt burden, the scheme should be weighed based on
breakeven point. The unit should be capable of operating at a much higher
level than before. The following queries in this regard will be helpful:

 To operate at a higher level under present market conditions

 Capacity of present plant and machinery to manufacturing output at higher

level of activity.

 Organization’s capacity to cope with increased level of activity.

 Infusion of additional funds at the current stage should be carefully

monitored, considered the negative net worth prevailing presently.

 Enough funds must be available to the unit to operate at the desired level
with a view to ensuring continued internal generation of surplus, to support
repayment.
  The rehabilitation should be decided by the concerned authorities within a
reasonable time with increased time for such decision, the magnitude of the
problem also increases.

3. Decision on Rehabilitation:

The decision for rehabilitation should be based on likelihood of possible recovery.

Bank should also support the borrower in coming out of the sickness. In other words, bank
decision to rehabilitation a unit could be justified if it can:

 Generate adequate activity and employment.

 Control the business activity effectively.

 Commit additional funds, if necessary.

 Elicit co-operation from workers, suppliers of materials etc.

4. Preparation of Rehabilitation Scheme

(a) Assessment of Feasibility of the Project

The following needs to be considered:

 Project feasibility to operate above the breakeven point

 Changes required in the pricing policy.
 Availability of raw materials to produce goods at the desired level of
activity.
 Constraints related to power, transport, space, skilled workers etc.
 Capacity of existing machineries to cope with the increased level of activity.
 Borrowers’ preparedness to accept the financial discipline being imposed
by the bank.

(b) Assessment of Additional Funds

 Additional funds are required for the following

 Outstanding liabilities and payments to creditors.

 Minimum funds required to purchase machineries to raise the productive
capacity to the desired level.
 Minimum workings capital requirements.

Operating deficits in the short run arising as per cash flow estimates and any other
shortage therein to be provided for.

As per the non-notified Companies Act, 2013 provisions with respect to Revival and
Rehabilitation of Companies, the sickness has to be determined by the tribunal. After filing
of an application by secured creditors representing a certain percentage of outstanding debt,
the applicant, the Central Government, a state government, a public financial institution, or
a scheduled bank, in terms of the parameters laid in Section 253 of Act and in case of
satisfaction on the company being a sick company, the tribunal shall provide reasonable time
to the sick company to repay the debt. The application for revival and rehabilitation shall be
then made within 60 days of above determination before the tribunal by any secured
creditor. Then an interim administrator under Section 256 will be appointed to carry out the
required work as laid under the ‘Act’ including the appointment of the Committee of
Creditors On submission of report by an interim administrator, the tribunal under Section
258 is of the resolve that company cannot be revived and rehabilitated, it shall either order
for winding up of the company or advise certain measures for the company’s rehabilitation.
The tribunal shall appoint a company administrator for preparation of scheme of revival and
rehabilitation of the sick company.

After the preparation of scheme, it shall be placed before the creditors of sick
company for their approval by company administrator within a period of 60 days from his
appointment or within such extended time as may be prescribed. The scheme shall then be
examined by the Tribunal and copy of draft scheme be sent to different stakeholders for
suggestions and objections. The tribunal may then, make such modifications to the draft
scheme as suggested or objected and accordingly then sanction be accorded by the tribunal
to the scheme. The scheme should be filed with the Registrar.

After an amendment through Insolvency and Bankruptcy Code, 2016 to Section 4 (b)
of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, earlier incorporated
provision for references and inquiry in accordance with the Companies Act, 1956 was
substituted with references and inquiry in accordance with the IBC, 2016. The term of 180
days from the commencement of the IBC has been provided for companies to make
reference, appeal or inquiry.

IBC consolidates the existing laws concerning the reorganization and insolvency
resolution of corporate persons. Presently, the IBC moved away from the tests of “sickness”
as charted under the SICA and the Companies Act, 2013 to the test of ‘cash flow’ On
determination of sickness, the further process as charted in the IBC begins. The separate
processes laid out in the provisions for corporate insolvency resolution process and
liquidation of companies have comprehensively simplified and covered the hitherto
repealed or modified provisions in labyrinth of laws. The term ‘sick’ is no more part of the
IBC and instead of the code deals with corporate entities irrespective of sick or not.

5.6 GROWTH STRATEGIES FOR SMALL BUSINESS

Growth refers to “an increase, expansion or development”. Business growth is a stage

when the business attains the point for its expansion and looks for more opportunities to
generate more profit. Business growth can come in many forms and the focus should not be
only on revenue or asset growth. Viewing so, may end up in the risk of missing out on making
efforts that can result in incredible returns.

Indeed, business growth means a lot of things:

 Increase in sales,

 Market expansion, and

 Growth of business value.

Small scale industries have attracted considerable attention in the literature as a

result of their significance in the generation of economic wealth. The ability of small scale
industries to create, access and commercialize new knowledge in global markets is primary
to their continued competitiveness.

Most big companies have started as a small business. They evolved over time, from
one stage to another, to become the grown large companies. Most businesses go through
five different stages of growth, with its own opportunities and challenges. It is known as
business life cycle. Some businesses pass through all five stages, while others may
experience a few. This is dependent on the type of business and other factors.

Once the current growth stage of a business is identified, it helps in choosing the right
business growth strategies to progress to the next stage.

Stage 1: Seed and Development: The new business starts at this stage, still as an idea that
is under exploring and fine-tuning. In this stage, a lot of market research and inquiry to verify
and determine whether the business idea is a good one to attract customers is done.

Stage 2: Start-up: In this phase, the business is established, and new customers are moving
in. Unexpected issues with customers, cash flow, or day-to-day operations pop up. This stage
is about survival and adaptability. So it’s critical to adjust and resolve things until business
achieves some form of stability.

Stage 3: Growth and Establishment: At this stage, the business is producing a steady
income with an increasing customer base. However, the business will not have reached break
even. It requires quick improvements in the bottom line, by hiring qualified employees,
investing in equipment, increasing productivity, reducing waste and so on.

Stage 4: Expansion: Businesses at this stage have become steady, lucrative, and established
in the industry. In this stage, business owners explore other opportunities like gaining share
of the market through partnerships, new product development, or franchising. The objective
in this phase is to expand, but without stretching the resources.

Stage 5: Maturity and Possible Exit: In the maturity stage, a business has shown steady
profits in a long run. For some business, this is the right time to exit by selling it or handing
it over to a new administration. Others may turn up with a new expansion strategy for the
business.

There are different types of business growth models. In the early stages, the model
for company’s growth is clear-cut business activities that can improve the margins. But when
the business evolves to an older phase in its lifecycle, there is a need to build a strategic
growth map to complement the business model.

One can also use a combination of some strategies or their variations, taking into
consideration the company’s size and capabilities. The following strategies are mostly
adopted:

1. Product Development:
 The firm tries to grow by developing improved products for the present market. The
most appropriate growth strategies for a small firm are those concerning:

 Product development and

 Market development.

It can best be attained by:

 Identifying new markets for existing products or

 By developing new products or services for existing customers.

Doing so, the small scale industries can progress from having an established
mainstay activity into more complex businesses. small scale industries practice:

 Product innovation strategies in emerging markets and

 Marketing innovation strategies in mature/ niche markets.

2. Pricing:

Pricing is where large and small businesses compete in rating pricing in the market.
However, small scale industries compete in fixing attractive price for retaining their
customers as well as attracting other potential customer through networking based on
pricing.

3. Human Resource:

The ability of an organization to succeed is dependent on the staff in direct customer

contact positions that represent the organization and influence customer satisfaction; they
perform the role of marketers. Hence cautious recruitment, training and ongoing mentoring
of employees can contribute to improvements in both productivity and service quality.

4. Product Expansion
 This is also known as product development which involves launching new services or
products in the existing markets. Firms use this strategy by presenting different variations
of their core product lines to reach large audience. This is based on the existing
infrastructure. New products can be added:

 By investing in research and development of additional products or

 Obtaining rights to produce a product of another company.

5. Readiness for Change

Mergers and acquisitions are methods that prove worthwhile as a result of the
changes in the market. With the right resources, a company can even acquire a competitors
business and take up their business structures. This may help in:

 Reduced costs,

 Increased efficiencies and

 Business growth.

6. Market Penetration

Start-ups use a market penetration strategy to market their existing products or

services to an already existing market. This is to increase the market share, which is
measured as the percentage of units a company sells when compared to competitors. Some
of market penetration strategies employed by most companies are:

 Reducing the selling price of products or

 Increasing product promotions to improve the pull strategy

 Expanding distribution channels and

 Zeroing in on the competitor’s client base

7. Market Development:

A market development strategy refers to launching existing products or services to a

different audience, apart from the present ones. The two main reasons are:

 Business is growing that, profits can be used to expand or

 Business is falling that, the owner wants to test the waters elsewhere.

When the market gets saturated and the competition becomes stiff, the products (or
services) remain the same, but the market changes. It can be a different geographical location
or a different target audience.

8. Improving Conversion Rate:

Only a section of the audience that a small business gets in front every day ends up
converting as customers. Calculating the conversion rate is done by taking the number of
people who convert and dividing it by the total number of visitors or people who are exposed
to the business. Small business grows in revenue by improving business's conversion rate.

9. Create a Sales Funnel:

Sales can be increased by creating a sales funnel. By doing so, the customers will have
an idea of where they are in the process of working with the business. The firm might be able
to reduce confusion and friction around making a sale.

10. Market Segmentation:

This business growth strategy divides a market into different segments, such as
geography, demographics, market behaviour, or customer behaviour. For a small business
operating in a market occupied by bigger competitors, this growth strategy can help. By
segmenting the market, the firm can identify and focus on a sector that your competitors
haven’t reached and succeed there by carving out a niche.
11. Alternative Channels:

Using alternative channels is an accepted business growth strategy for small

businesses, especially in the digital era. It involves using another channel or platform to
promote a firm’s business, to connect with customers, and make a sale. Alternative channels
include:

 Online selling through website

 Selling through platforms like Amazon, and eBay

 Using paid search ads to uphold business, and

 Selling through wholesalers

12. Partnerships:

This is a growth strategy where two or more businesses decide to work together for
mutual benefits and gains. Based on the nature of small business, partnering with another
business can help in managing a big project with ease, transferred knowledge, skills, and
technology with little or no cost attached. For a successful partnership, a business should
have a culture and brand values that are similar. The reach and reputation of proposed
partner businesses should also be weighed.

13. Diversification and Market Development

In market development, a firm reacts to new market opportunities, by introducing

existing products to new markets or new customer groups. It increases sales by selling
current products in the new markets. Diversification guides the firms towards introducing
new products to new markets.

Different types of diversification strategies are:

  Horizontal Diversification: This involves creating a new product line for the current
customer base

 Vertical Diversification: In which a business starts competing with some of its

suppliers or customers

 Concentric Diversification: Where a company creates a new product or service

that’s similar or related to an existing product or service

 Conglomerate Diversification: Where, new products or services are designed for a

different target audience.

It requires:

 A good market research

 Heavy investment

 Hiring more people and

 Building new infrastructures.

14. Acquisitions and Mergers

With this growth strategy, a business can purchase another business (acquisition) or
two companies can decide to merge as one (merger). Considering the amount of resources
required it is viewed as a growth strategy for mature businesses. The three different types:

 Upstream Acquisition: A smaller business merges with a bigger one to form a

business.

 Downstream Acquisition: When a business purchases another and the acquired

company becomes a part of the purchasing business
  Lateral Acquisition: occurs when two companies of the same size, decide to form a
bigger business

15. Cost reduction and Removal of Unprofitable Products and Services:

An analysis of the costs and revenues of each individual product or service improves
profit by removing unprofitable products and services. Some of the goods or services offered
may underperform, but an analysis to find the worst-performing will help to cut costs. Some
of the cost reduction strategies are:

 Use sophisticated software to track expenses

 Maximum possible automation of administrative work

 Evaluate of business processes

 Reduction of traditional marketing methods, and focus on online marketing

efforts

 Outsourcing where ever necessary

 Efficient time management practices

16. Customer Retention

Customer retention is about nurturing and converting both existing and new
customers into repeat and loyal customers. Retaining customers, lowers business costs
because, it’s easier to keep existing customers than attracting new ones. Repeat customers
spend more, and spread word of mouth campaigns that help business growth. Market share
can be increased by setting up a customer relationship management (CRM) system. This will
help to ensure the hold on firm’s market share, even during expansion of customer base. A
customer relationship management system helps the firm to stay on top of customer
relationships through tactics like birthday emails with discounts, thank you emails for
customers, anniversary wishes, and getting feedback from loyal customers.

17. Online Marketing:

Online marketing refers to all marketing efforts carried out online to advertise a
business to the general public. With increasing internet users globally, the following online
marketing strategies shall be adopted: Create a business website: Having a site adds
credibility to and keeps business open all the time.

 Engage on Social Media: There are lots of social media sites. Identifying where the
majority of the target audience can be found and creating a social media marketing
strategy, helps business growth.

 Being active on review sites: On review sites, users:

 Search for businesses,

 Rate them and

 Post reviews.

By becoming active on review sites, small business can be identified more easily
online. It also connects directly with existing and potential customers by:

 Responding to comments,

 Adding images and videos and

 Sharing up-to-date information.

18. Estimate Growth

Tracking Key Performance Indicators periodically, will help a business identify where
it is growing, and areas requiring attention and creating a reporting structure. There are
many quantifiable indicators of growth worth evaluating, like social media engagement,
website traffic, and search rankings. Some common growth indicators are:

 Demand

 Profit and losses

 Revenue

 Sales

 Workforce and network strength and

 Market share

5.7 ROLE OF SMALL BUSINESS IN INTERNATIONAL TRADE

The participation of micro, small and medium-sized enterprises (MSMEs) in

international trade has remained limited due to the lack of relevant skills, lack of knowledge
about international markets, non-tariff barriers, rigid regulations, and limited access to
finance. The size of the company decided its participation in international trade. The WTO
announced a number of initiatives to help MSMEs gain significance in international trade.

Some of them are:

 Informal Working Group on MSMEs

 Global Trade Helpdesk
 Working Group on Trade, Debt and Finance
 Government procurement
 Intellectual property
 Enhanced Integrated Framework (EIF) and
 The Standards and Trade Development Facility (STDF)
 Under the liberalised economies, Small Scale Industries (SSl's) contribution gains
significance. Initially, export business was the main source of foreign exchange earnings for
the country. Today, the forex reserves are seen differently, however, export continues to be
the main objective. Hence the governments are giving more incentives to the export sector.
An entrepreneur in the export business has to know the export environment and procedures
of India and also of the countries to which the products or services have to be exported. The
entrepreneur should possess knowledge of the needs and wants, culture and customs of
people of that country.

Foreign Trade (Development and Regulation) Act, 1992 defines export as taking out of
India any goods by land, sea or air which includes re-export of imported goods in any form
or condition. The foreign exchange rules for export promotion have been completely
liberalised. Exchange is now available for:

 Business visits,

 Participating in fairs and exhibitions,

 Remittances,

 Purchase of documents.

All exporters other than export houses are allowed to open an office overseas or to
have a representative abroad, which helps the earning of additional foreign exchange.

The Reserve Bank of India is now empowered to grant approval for foreign
investments upto 51 percent of foreign equity in high priority industries and trading
companies primarily engaged in export activities, The RBI will also automatically approve
foreign technology agreement involving payment upto Rs one crore. Exporters may be
placed in two categories:
 1. Manufacturer - Exporters

2. Merchant - Exporters

A manufacturer exporter starts exporting directly from the very beginning of the
business dependent upon the preparation and managing capability. Merchant-exporters, do
not manufacture any goods, but, they export goods produced by others. This avoids the
hassles of fulfilling export formalities to the manufacturer.

There are two categories of exports.

1. Outright (Sale) Exports: Normally, most exports are made on an outright sale
basis against a firm price and no return of the unsold goods is made.

2. Consignment Exports: The importer abroad is at liberty to return the unsold

goods, although exports may or may not be against a firm price.

Simple procedures both for exports and imports are introduced. Regional licensing
authorities are empowered for this purpose. The number of documents are reduced and
standardised, the new documents are fewer in number. There is now only one application
form for export licenses.

For entering the export business, the following conditions are to be fulfilled:

 A good office in a business locality, equipped with communication

devices.

 Expertise with respect to export documentation, marketing. shipping

and other procedures

 Exporter's Code Number issued by RBI has to be obtained through an

application with prescribed documents.
  The Importer-Exporter Code Number (lEC) has to be obtained from the
Regional Licensing Authority under the office of the Director-General
of Foreign Trade (DGFT), Ministry of Commerce.

 The unit must be registered with the respective Export Promotion

Council to entitle the benefits granted under the EXIM Policy.

 There are different EPCs for different kinds of goods.

 A current account has t be opened with an authorised foreign bank.

 Registration must be made with sales tax authority.

There are sequences of steps to be followed:

 Market Study,

 Identifying Buyers,

 Completing Enquiries,

 Sending Samples Or Arranging Inspection Visits,

 Scrutinising Export Orders,

 Arranging Money From Banks,

 Packaging befitting the international standards,

 Pre-Shipment Inspection,

 Excise And Customs Clearance,

 Booking The Material,

 Obtaining Insurance Cover,

  Submission Of Documents To Banks, And

 Collecting payment through bank.

There are Indian agencies and organisations which help in the identification of
foreign markets. Foreign trade agencies and delegations, trade journals and literature,
industrial exhibitions also provide required information. While identifying the market, the
following must be considered such as:

 The size of the market,

 Characteristics of demand,

 Consumer requirements,

 Trade channels and

 The cultural and social differences

That may have a bearing on the business. The existing competition and potential
competition from other countries should be ascertained. Precise marketing strategy has to
be drawn on the selection of a target market, determination of the product, the price and
promotion and distribution policies. This needs an export-marketing plan.

The quality and a timely delivery schedule and labour costs have to provide a
competitive edge in the international market. Obtaining Quality certification will improve
the credibility and lead to easy acceptance in the international market.

Financial assistance is provided by many organisations like EXIM Bank, ICICI, IDBI,
NSIC and Commercial Banks. There are two types of export finance available for exporters:

 Pre-shipment and

 Post-shipment finance.
Pre-shipment finance is available for the following:

 Packing credit
 Advance against cash incentives
 Advance against red clause UCs and
 Advance against deemed exports

Post-shipment finance is available for:

 Foreign bills negotiation/purchase

 Advance against foreign bills for collection
 Advance against cash incentives and duty drawbacks
 Advance against International Price-Reimbursement Claims (IPRC)
 Post-shipment Credit in Foreign Currency (PSCFC)

These are fund-based limits in which money is extended as soon as the procedures
are completed. There are also non-fund-based limits to exporters in the form of various types
of guarantees like bid bonds, performance guarantees, and such. In order to avail export
finance the following eligibility conditions have to be fulfilled:

 Exporters Code Number issued by RBI and also the Import-Export Code
number.

 The valid export orders.

 Fulfil the export order within the stipulated time limit.

 Goods intended for export must be permissible for export as per the export
policy.

All the export finance from the bank is covered under Whole Turnover Packing Credit
Guarantee (WTPCG) and Whole Turnover Post Shipment Guarantee (WTPSG) of ECGC
(Export Credit Guarantee Corporation), on deduction of a monthly premium from the
exporter's account.

A company with diversified markets and international activity adds value to its
goodwill and ensures the enterprise's long-term viability. Markets with high business
potential, such as developed nations, demand a variety of innovative products.

Many small business owners are hesitant to export initially, due to the anticipated
costs of establishing the procedures or because of the complications in export registration
process. With the advent of e-commerce exports and increased connectivity across borders,
the process has become simpler. However, with a small initial investment and efforts, the
payoffs can be substantial.

Export from India has numerous advantages and opportunities, including:

 Access to diversified customers and businesses.

 Diversifying market opportunities so that, if the domestic economy

falters, a business can have alternative markets.

 Increase in sales volume.

 Reduced marginal cost of production

 Government agencies funding export efforts.

 Professional development of a company

Exports will result in changes to the company's operational strategy and market position.

 Companies with excess production will have the option of selling their
products in the international market instead of discounting the product in
the market of the origin. Thus, exports acts like insurance for the business.
  Foreign trade generates a flow of funds in various currencies, which helps
in handling exchange rate fluctuations. International trade connects
businesses with international banks, and providing access more attractive
financing.

 Access to information on new technologies, marketing methods, and

foreign-competitor strategies can help the exporter become more
competitive in the domestic market, as and generating new revenue
sources.

The primary factor that is driving small businesses into international markets is that,
small-business owners becoming informed about the ease of expanding overseas, increased
markets, and government incentives.

1. Simplified Structural Barriers: Many former barriers to trade have been

substantially reduced or eliminated. Payment risk factors are eased with letters of
credit, credit cards, online payments and government export subsidies. Expansion of
the Internet makes it possible to research about global markets. Low-cost
containerization and the outsourcing of shipping have reduced transportation
hassles Trade tariffs are eased by the common understanding between nations.

2. Fading Cultural Barriers: The global homogenization of consumer tastes and

preferences for products and services have faded the cultural barriers. The
government helps businesses to enter foreign markets.

5.8 E- COMMERCE AND SMALL BUSINESS

There are millions of small enterprises, including micro-enterprises, in developing

countries (DCs). These enterprises contribute 80-90 percent of all employment. They are
also significant in wealth creation, adding to one fourth of gross domestic product including
exports.

In a competitive environment, Micro and Small Enterprises (MSE) need to compete

more effectively in order to boost domestic economic activity and contribute toward
increasing export earnings. MSEs also play an important role in increasing employment and
incomes and thus contribute to poverty reduction on a continuous basis.

E-Commerce is emerging way of helping business enterprises to compete in the

market and thus contributing to economic stability. E Commerce can help foster economic
growth, increased business opportunities, enhanced competitiveness and better access to
markets. Most small enterprises are not aware of how investment in e-commerce could
benefit their businesses and help them develop a competitive edge. However, due to
improved access to the technical and communication infrastructure, SME’s are venturing
into adopting e-commerce to enhance their business opportunities.

“E-Commerce involves the sale or purchase of goods and services over

computer networks by businesses, individuals, governments or other organisations”.
E-Commerce supports traditional business by adding the flexibility and speed offered by
electronic communications. This can facilitate improvement in operations leading to
substantial cost savings as well as increased competitiveness and efficiency through the
redesign of traditional business methods.

E-Commerce is the application of current and emerging information and

communication technologies (ICTs) to conduct business. The ICTs offer wider scope for small
businesses are mobile phones, electronic mail and other Internet-based services. E-
commerce operates at three levels:

1. B2B E-commerce
 2. B2C E-commerce

3. B2Government E-commerce

E-Commerce may involve selling directly from businesses-to-consumers (B2C E-

Commerce). B2B activity includes portals that operate as electronic marketplaces or as
auction sites. Benefits of e-market places can include:

 Reduced costs,

 Better research and

 Quicker transactions for buyers.

Rewards for sellers are:

 Improved customer service levels and

 Cheaper exposure to customers.

There is also business-to-government activity (B2G E-Commerce) that refers to the

growth in supply of goods and services for online government procurement –potentially a
large growth area in developing countries.

The requirement for micro and small enterprises to consider adopting E-Commerce
is influenced by global, national and regional business trends. These relate to markets, costs,
new technologies and political factors.

They are as follows:

 Adaptation to rapid market changes that influence export-led and domestic

markets.
 Cost reduction and the need to compete more efficiently in both local and
export-led sectors.
 Globalisation of the production and supply of goods and services have
increased the need to integrate small enterprises with the supply chain of
larger businesses.
 Increased customer expectations and consumer power to access web-based
information about products and services.
 Adaptation to new technologies and trading platforms.
 Information orientation in business and the need to access process and
communicate it efficiently and effectively.
 Government deregulation and liberalisation that has resulted in affordable
access to sources.
 Bilateral and multilateral trade agreements which has opened up markets
to producers from developing countries.
 Adaptation to higher quality standards enabled by access to ICT.

Cost

Benefits Market

Competition
E- Commerce
Cost

Offline &
Drawbacks
Online

Risk of
failure
 E-Commerce provides greater benefits to small enterprises by way of improved
efficiencies and raised revenues.

 E-Commerce enables small business entrepreneurs to gain access to better

quality information, and thus empowers them to take informed decisions in
their businesses.

 E-Commerce can give a competitive advantage. It can help strengthen market

position and open up new business opportunities with the potential to improve
profits.

1. Cost Reduction Benefits:

 Reduced travel costs by using a mobile phone, email and other ICTs to
substitute for distribution, storage and transport.

 Reduced cost of materials through access to more information means about

choice of suppliers at competitive prices.

 Reduced marketing and distribution costs by publishing a brochure online can

reach an unlimited number of potential export customers and allow regular
update than restoring to traditional printed materials.

 The Internet provides unexpected opportunities for businesses to reduce the

costs of local trade and global trade.

 Supply chain management can eliminate the need for middlemen leading to
lower transaction costs reduced overhead, and reduced inventory and labor
costs.
  E-commerce helps in improved internal functions by cutting down meetings,
fostering exchange of critical knowledge, eliminating red tape, and enhancing
communications.

2. Market Benefits:

 A web presence can allow entrepreneurs to reach out to customers far beyond
their geographical location.

 It provides more brand awareness, thus offering new opportunities of

promotion of products and services.

 Providing more responsive order taking and after-sales service to customers,

can lead to increased customer loyalty.

 Entrepreneurs can become more aware of competition and market changes,

which can lead to product/service innovation or quality improvement.

3. Other Competitiveness Benefits:

 E-Commerce not only reduces costs but it can also increase the speed of
transactions; Both buying and selling.

 Suppliers and customers, have the liberty to have a 24-hour/7-day sales

service.

 E-Commerce can help entrepreneurs focus their activities thus, making it

easier to build relationships.

These benefits can be derived through modest investments in new technology and
systems. Greater benefits may accrue as the enterprise moves up the E-Commerce adoption
ladder. However, greater market benefits are achieved through better business networking
and the building of personal business relationships, rather than through use of the Internet.
 This emphasizes the importance of adopting an approach towards E-Commerce that
stresses upon business objectives, than blind belief in technology alone, to deliver the
benefits discussed.

There are potential benefits and also pitfalls of adopting E-Commerce. They are:

1. The financial costs,

2. The business 'opportunity costs' and

3. The dangers of failure.

These are detailed below.

1. Financial Costs: Developing E-Commerce for a business will increase costs until
savings due to greater efficiency or increased revenue become evident. Initial start-
up costs like investment in a computer, network connection, building a website,
mobile app can be significant, and there are additional maintenance costs too. To add
on, E-Commerce activity has to run simultaneously with existing business methods.

Enterprises will have to continue to produce paper-based marketing materials

like brochures, stationery and leaflets and also building up their web presence. This
doubles some activities adding to overall costs.

These costs are certain to occur. However, the new revenue stream from E-
Commerce is not very clear, particularly with lower numbers of people online and
with credit cards in developing countries. Hence, many small businesses are skeptical
about E-Commerce.

2. Business Opportunity Costs: It is important that online and offline efforts are not in
competition with each other within a business. Offline activities (such as face-to-face
 meetings) will remain important than online communication. In a long run, risks can
be minimized through effective integration of online and offline activities using E-
Commerce to support existing business processes.

3. Dangers of Failure: Technology and innovation are often described as the catalyst
for change. Ignoring new technology may have significant impact in the ways business
is done in the future. Circumstances like: having no website, or a poor website or
marketed website, may put a business at a disadvantage as compared with
competitors. In a long run, unsuitable or inadequate technology will adversely affect
the success of business in a market.

The organization should also consider the benefits and risks in supporting E-
Commerce activities. Benefits may include:

 Ability to attract more clients and more donor funds due to the interest in E-
Commerce.

 Improving businesses by improving clientele.

 Motivating people concerned in adoption of new technology.

 Gaining direct experience of this growing ICT application.

The risks may be:

 Improving owners and staff's knowledge about E-Commerce.

 Gaining specific skills in using, advising and training on E-Commerce.

 Developing positive but realistic attitudes towards E-Commerce.

 Ability to afford the direct and ongoing costs of any investment required
 Agencies can support E-Commerce in enterprises without themselves having to
implement and use E-Commerce. Having said that, however, one of the best ways to build up
the human capacities noted above is for the agency itself to adopt E-Commerce for its own
operations. This has both pros and cons:

 E-Commerce will support marketing, communication and branding of

activities. It will help business with access, process and disseminate high
volume of information and build the knowledge base.

 By building the internal technical capacity, it makes the business less reliant
on external infrastructure access and technical support.

 E-Commerce will improve business and organizational skills and technical

skills. The motivation and confidence of the staff can be enhanced through a
change management process and training.

 Both efficiency and effectiveness can be improved across a wide range of

activities.

 There is likely to be a high cost of initial investment in time, money and

skills.

 The ability to handle increased amounts and complexity of information is a

vital factor.

 Initial investment may be forthcoming however it should be sustainable in

terms of recurrent costs, required staffing and skills and maintenance.
 Opportunity costs may arise due to time and efforts spent on E-Commerce
activities.

At a national level, there are e-readiness scales that can be accessed online which rank
countries according to the degree of preparation to benefit from development in ICT.
However, e-readiness for E-Commerce will vary because of different factors like their
geographical location and size, technological and human resources. Similarly, their readiness
will be impacted by the sector they operate in –tourism and exporting sectors tend to be
much more ready than those focused on traditional domestic market goods and services. An
analysis of the e-readiness includes:

 Affordable access technologies, local access network infrastructure and

responsive ISPs (Internet Service Providers)

 Awareness of E-Commerce applications, technology and market

opportunities among the entrepreneurs.

 Knowledge of the online environment and viable business models.

 Availability of E-Commerce applications and content in local languages.

 The level of trust towards E-Commerce links by businesses or end

customers.

 Cost factors related to transport, delivery, and other overheads.

 Socio-cultural factors which influence the penetration and use of E-

Commerce.

 Analysis of value chains and market conditions, in line with competitors.

 For small enterprises and their customers in developing countries (particularly those
in rural areas) many factors are still impeding E-Commerce adoption.

These barriers include:

 Limited Internet access,

 Poor telecommunications infrastructure,

 Gaps in the current legal and regulatory framework,

 Multiple issues of trust and

 Lack of payment gateways,

 Uncertainty of benefits and

 Doubts of transparency.

These barriers are gradually coming down, increasing opportunities for all. Some
MSEs are strong in E-Commerce while others are not.

The following model presents the different types of E-Commerce business

applications for small enterprises.
 Figure: Steps to E-Commerce

Step 1: Starting Out:

Presently 'wireless' communications – including short messaging services (SMS) –

provide a cheap and widely available option for enterprises. Mobile phones provide instant
communications with customers and suppliers, even when on the move.

They also provide greater connectivity and network coverage than landlines – users
can be instantly connected by text messages and mobile chat – a powerful marketing and
advertising tool.

Step 2: Getting Online:

Email is a cheap, quick and reliable way to exchange business information with
customers, suppliers, and business contacts that are also connected to email. Messages, but
documents, photographs, drawings, or any can be shared with the customers.
Step 3: Web Publishing

Web publishing can be used to make enterprise information available – by using an

online brochure which may consist of a 3-4 page website giving a basic business profile, some
information about products and services, and contact information – physical and postal
address, telephone and fax, and email contact. It may include an online catalogue which
provides any time access to information.

Step 4: Web Interacting

Web interaction will allow customers (for example) more scope to browse through
images, descriptions and specifications relating to the products and services. It may allow
them to submit email enquiry forms, to order online, to use online services or to use a
shopping cart facility and order confirmation – that could be paid for and fulfilled (delivered)
offline.

Step 5: Web Transacting

It covers the whole transaction process from the placing of an order to online
payment for goods and services via secure networks. For B2C E-Commerce this will involve
making use of secure credit card payment systems.

Step 6: Web Integration

Web integration provides an electronic platform that links customer-facing processes

such as sales and marketing (the "front office") with internal processes such as accounts,
inventory control and purchasing (the "back office"). E-Business links internal systems with
external networks (customers, suppliers and collaborators) via the Internet.
LEARNING OUTCOMES

 Examine the need for monitoring

 Analyse the guiding principles for evaluation

 Critically analyse the causes of sickness

 Describe the industrial sickness

 Illustrate conditions for rehabilitation

 Examine the key parameters for measuring growth

 Analyse the small business scenario in India

 Recognize the application of e-commerce in small business

SHORT QUESTIONS

1. What is the purpose of control?

2. State the need for project evaluation.

3. Distinguish between Internal and External causes of sickness.
4. What are the causes of industrial sickness?

5. List the role of NCLT?

6. What are the common diversification strategies?

7. List some of the initiatives of WTO to aid small business.
8. What is e-commerce?
LONG QUESTIONS

1. Examine the factors contributing for poor control.

2. Enumerate the project evaluation process.
3. How can industrial sickness be mitigated through appropriate solution? Elucidate.
4. Explain the internal and external causes of industrial sickness.
5. Describe the components of viability study for rehabilitation proposal
6. Explain the stages of small business growth
7. Examine how the Indian small Business benefited from foreign trade?
8. Analyse the application of e-commerce in small business.