MASTER OF BUSINESS ADMINISTRATION (MBA) ENTREPRENEURSHIP DEVELOPMENT UNIT I ENTREPRENEURAL COMPETENCE Entrepreneurship concept ~ Entrepreneurship as a Career — Entrepreneur — Perso Characteristics of Successful. Entrepreneur — Knowledge and Skills Required Toi Entrepreneur. UNIT Il 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 - International Business. UNIT III BUSINESS PLAN PREPARATION Sources of Product for Business ~ Pre-feasibility Study - Criteria for Selection of Product ~ Ownership - Capital - Budgeting Project Profile Preparation - Matching Entrepreneur with the Project - Feasibility Report Preparation and Evaluation Criteri UNIT IV LAUNCHING OF SMALL BUSINESS Finance and Human Resource Mobilization Operations Planning - Market and Channel Selection ~ Growth Strategies - Product Launching. UNIT V MANAGEMENT OF SMALL BUSINESS Monitoring and Evaluation of Business - Preventing Sickness and Rehabilitation of Business Units - Effective Management of small Business. Created with @ nitro” professional download the free tral online a atropd.com/profesionalREFERENCES: 1. Hisrich, ‘Entrepreneurship’, Tata McGraw Hill, New Delhi, 2001. 2. P, Saravanavel, ‘Entrepreneurial Development’, Ess Pee kay Publishing House, Chennai - 1997. 3. SS.Khanka, ‘Entrepreneurial Development’, S.Chand and Company Limited, New Delhi, 2001. 4. Prasama Chandra, Projects ~ ‘Planning, Analysis, Selection, Implementation and Reviews’, Tata McGraw-Hill Publishing Company Limited 1996. 5. P.C.Jain (ed), ‘Handbook for New Entrepreneurs’, EDII, Oxford University Press, New Delhi, 1999. Staff College for Technical Education, Manila and Centre for Research and Industrial Staff Performance, Bhopal, ‘Entrepreneurship Development’, Tata McGraw-Hill Publishing Company Lid, New Delhi, 1998. Created with @ nitro” professional download the free tral online a atropd.com/profesionalUNITI Lt 12 13 14 Ls 16 UNIT 21 22 23 24 UNIT HL 31 32 33 34 UNITIV 41 42 43 44 UNIT -V 5 5.2 Contents Entrepreneurial Competence Evolution of the concept of Entrepreneur Characteristics of an Entrepreneur pistinetion between an Entrepreneur & a Manager Functions of an Entrepreneur Types of Entrepreneur Intrapreneur Entrepreneurial Environment Business Environment Types of Ownership Government Policies for Small Scale Enterprise Small Enterprise in International Business Business Pian Preparation Project Identification & Classification Project Formulation Project Design & Network analysis Project Appraisal Launching of Small Business Production & Operation Management Marketing Management, Human Resource Management Accounting for Small Enterprises Management of Small Business Growth Strategies in Small Business Sickness in Small Business Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalUNIT I ENTREPRENEURSHIP DEVELOPMEN’ ENTREPRENEURIAL COMPETENCE, v Evolution of the concept of Entrepreneur v Characteristics of an Entrepreneur Distinction between an Entrepreneur & a Manager Functions of an Entrepreneur ‘Types of Entrepreneur vvvv Intrapreneur Learning Objectives On completion of this chapter, you should be able to: Explain who is an entrepreneur and what his characteristics are, Distinguish between an entrepreneur and a manager Describe the various functions performed by an entrepreneur. Discuss the various types of entrepreneurs. Define Intrapreneur. vvvvyv Normally in a book on Entrepreneurial Development, one would expect in the first chapter to be exposed to the concept of entrepreneur and its related aspects. This chapter is accordingly designed to deal with the same. Let us begin with the evolution of the concept of entrepreneur. Evolution of the Concept of Entrepreneur The word ‘entrepreneur’ has been taken from the French language where it cradled and originally meant to designate an organizer of musical or other entertainments. Oxford English Dictionary (in 1897) also defined an entrepreneur in similar way as” the director or a manager of public musical institution, one who ‘get-up’ entertainment, especially musical performance”. In the carly 16" century, it was applied to those who were engaged in military expeditions. It was extended to cover civil engineering activities such s construction and fortification in the 17" century. It was only in the beginning of the 18" century that the word was used to refer to economic aspects, In this way, the evolution of the concept of entrepreneur is considered over more than two centuries, since then, the term, ‘entrepreneur’ is used in various ways and various Created witr @ nitro” professional download the free tral online a atropd.com/profesionalviews. These views are broadly classified into three groups, namely, risk-bearer, organizer and innovator. Now, are discussing below each of these views. Entrepreneur as a Risk-Bearer Richard Cantillon, an Irish man living in France, was the first who introduced the term ‘entrepreneur’ and his unique risk-bearing function in economics in the early 18" century. He defined entrepreneur as an agent who buys factors of production at certain prices in order to combine them into a product with a view to selling it at uncertain prices in future? He illustrated a farmer who pays out contractual incomes which are certain to the landlords and laborers and sells at prices that are ‘uncertain’. He further states that so do merchants also who make certain Payments in expectation of uncertain receipts. Thus, they too are ‘risk-bearing’ agents of production. Krnight also described entrepreneur to be a specialized group of persons who bear uncertainly. Uncertainly is defied as a risk which cannot be insured against and is incalculable. He, thus, draws a distinction between ordinary risk and uncertainly. A risk can be reduced through the insurance principle, where the distribution of the outcome in a group of instances is known, On the contrary, uncertainly is the risk which cannot be calculated, The entrepreneur, according to knight, is the economic functionary who undertakes such responsibility of uncertainly which by its very nature cannot be insured, nor capitalized nor salaried too. Entrepreneur as an Organizer Jean-Baptiste Say, and aristocratic industrialist, with his unpleasant practical experiences developed the concept of entrepreneur a little further which survived for almost two eenturice He definition associates entrepreneur with the functions of coordination, organization and Supervision. According to him, an entrepreneur is one who combines the land of one, the labour of another and the capital of yet another, and, thus produces a product. By selling the product in the market, he pays interest on capital, rent on land and wages to labourers. and what remains is hisher profit. Thus, say has made a clear distinction between the role of the capitalist as a financer and the entrepreneur as an organizer. He further elaborates that in the course of undertaking a number of complex operations like obstacles to be surmounted, anxities to be suppressed misfortunes to be repaired and expedients to be devised, three more implicit factors are demand to be essential. These are: » Moral qualities for work judgment, perseverance and a knowledge about the business world, > Command over sufficient capital, and > Uncertainty of profits. Crested w @ nitro” professional download the free tral online a atropd.com/profesionalMarshall also advocated the significance of organization among the services of special class of business undertakers. Entrepreneur as an Innovator Joseph A. Schumpeter, for the first time in 1934, assigned a crucial role of ‘innovation’ to the entrepreneur in his magnum opus “Theory of Economic Development’. Schumpeter considered economic development as discrete dynamic change brought by entrepreneur by instituting new combinations of production i.e., innovations. The introduction of new combination of factors of production, according to him, may occur in any one of the following five forms. > The introduced of a new product in the market, > The instituting of a new production technology which is not yet tested by experience in the branch of manufacture concemed. > The opening of a new market into which the specific product has not previously entered. > The discovery of a new source of supply of raw material. > The carrying out of the new form of organization of any industry by creating of a monopoly position or the breaking up of if. Schumpeter also made a distinction between an inventor and an innovator. An inventor is one who discovers new methods and new materials. And, an innovator utilizes inventions and discoveries in order to make new combination, In sum, the concept of the entrepreneur is intimately associated with the three elements risk- bearing, organizing and innovating. Thus, an entrepreneur can be defined as a person who tries to create something new, organizes production and undertakes risks and handles economic uncertainly involved in enterprise. A haracteristics of an Entrepreneur If we go through the business history of India, we come across the make of persons who have emerged as successful entrepreneurs. For example, Tata, Birla, Modi, Dalmia, Kirlosjer and others are well-known name of successful entrepreneurs in the country who started their business enterprises with small size and made good fortunes. Success or otherwise of a small enterprise is, to a great extent, attributed to the success or otherwise of the entrepreneur himself / herself. Then, the question is; what makes the entrepreneurs successful? Whether they had anything common in their personal characteristics? The scanning of their personal characteristics shows that there are certain characteristics of entrepreneurs which are found usually prominent in them. The principal ones are scanned and discussed her: Created with @ nitro” professional download the free tral online a atropd.com/profesional1. Hard Work willingness to work hard distinguishes a successful entrepreneur {rom unsuccessful one, The entrepreneur with his tedious, sweat-filled hours and perseverance revive their business even from on verge of failure. In nutshell, most of the successful entrepreneurs work hard endlessly, especially in the beginning and the same becomes their whole life. 2. Desire for High Achievement The entrepreneurs have a strong desire to achieve high goals in business. This high achievement motive strengthened them to surmount the obstacles, suppress anxities, repair misfortunes and devise expedients and only set up and run a successful business 3. Highly Optimistic the successful entrepreneurs are not disturbed by the present problems faced by them. They are optimistic for future that the situations will become favourable to business in future. Thus, they can run their enterprises ‘successfully in future. 4, Independence one of the common characteristics of the successful entrepreneurs has been that they do not like to be guided by others and to follow their routine. They resist to be pigeonholed. They liked to be independent in the matters of their business. 5. Foresight the entrepreneurs have a good foresight to know about future business environment. In other words, they well visualize the likely changes to take place in market, consumer attitude, technological developments, etc and take timely actions accordingly. 6. Good Organizer Different resources required for production are divorced from each other. It is the ability for the entrepreneurs that brings together all resources required for starting up an enterprise and then to produce goods. 7. Innovative Production is meant to meet the customers’ requirements. (fn view of the changing taste of customers from time to time, the entrepreneurs initiate research and innovative activities to produce goods to satisfy the customers’ changing demands for the products. The research Created with @ nitro” professional download the free tral online a atropd.com/profesionalinstitutes / centers established by Tata, Birla, Kirloskar, etc, are examples of the innovative activities taken by the successful entrepreneurs in our country. Distinction between an Entrepreneur and a Manager Sometimes, the two terms, namely, an entrepreneur and a manager are considered as synonym, i.e., meaning the same. In fact, the two terms are two economic concepts meaning two different meanings. The major points of distinction between the two are presented in following table. Difference between an Entrepreneur and a Manager Points Entrepreneur Manager 1 | Motive The main motive of an entrepreneur is to start a venture by setting up an enterprise. He understands the venture for his persona gratification. But, the main motive of a manager is to render his services in an enterprise already set up by’ someone else. 2 | Stutus ‘An entrepreneur is the owner of the enterprise ‘A manager is the servant in the enterprise owned by the entrepreneur 3 | Risk-bearing ‘An entrepreneur being the owner of the enterprise assumes all risks and uncertainty involved in running the enterprise. A manager as a servant does not bear any risk involved in the enterprise. 4 | Rewards The reward an entrepreneur gets for bearing risks involved in the enterprise is profit which is highly uncertain, ‘A manager gets salary as reward for the services rendered by him in the enterprise. Salary of a manager is certain and fixed. 5 | Innovation Entrepreneur himself thinks over what and how to produce goods to meet the changing demands of the customers. Hence, he acts as an innovator also called a ‘change-agent’. But, what a manager does is simply to execute the plans prepared by the entrepreneur, Thus, a manager simply translates the entrepreneur’s ideas into practice. 6 | Qualification ‘An entrepreneur needs to possess qualities and qualification like high achievement motive, originality in thinking, foresight, risk-bearing ability and so on. (On the contrary, a manager needs to possess distinct qualifications in terms of sound knowledge in ‘management theory and practice. Created with @ nitro” professional download the free tral online a atropd.com/profesionalAfter going through the above points of distinctions, it is clear that an entrepreneur differs from a manager. At times, an entrepreneur can be a manager also, but a manager cannot be entrepreneur. After all, an entrepreneur is a owner, but a manager is a servant, Functions of an Entrepreneur An entrepreneur does perform all the functions necessary right from the genesis of an idea up to the establishment of an enterprise. These can be listed in the following sequential manner: Idea generation and scanning of the best suitable idea. Determination of the business objectives. Product analysis and market research. Determination of form of ownership / organization. Completion of promotional formalities. Raising necessary funds, Procuring machine and material. Recruitment of men, Undertaking,the business operations. VV VVVVVVY Kilby has enumerated about 13 functions of an entrepreneur. While others can also add certain more functions to this list, the said functions appear to be major ones. For our convenience, we have classified all the entrepreneurial functions into three broad categories: > Risk-bearing > Organization > Innovation We have already discussed these functions in the beginning of the chapter under section while elucidating the concept of entrepreneur. Therefore, their discussion has been avoided here for the sake of repitition. ‘Pypes of Entrepreneurs Clarence Danhof, on the basis of his study of the American Agriculture, classified entrepreneurs in the manner that at the initial stage of economic development, entrepreneurs have less initiative and drive and as economic development proceeds, they become more innovating and enthusiastic. Basing on this, he classified entrepreneurs into four types. These are discussed in seriatim, Created with @ nitro” professional download the free tral online a atropd.com/profesional1, Innovating Entrepreneurs An innovating entrepreneur is one who introduces new goods, inaugurates new method of production, discovers new market and reorganizes the enterprise. It is important to note that such entrepreneurs can work only when a certain level of development is already achieved, and people look forward to change and improvement. 2. Imitative Entrepreneurs these are characterized by readiness to adopt successful innovations inaugurated by innovating entrepreneurs. Imitative entrepreneurs do not innovate the changes themselves, they only imitate techniques and technology innovated by others. Such types of entrepreneurs are particularly suitable for the under-developed regions for bringing a mushroom drive of imitation of new combinations of factors of production already available in developed regions 3. Fabian entrepreneurs Fabian entrepreneur are characterized by very great caution and skepticism in experimenting any change in their enterprises. They imitate only when it becomes perfectly clear that failure to do so would result in a loss of the relative position in the enterprise, 4, Drone Entrepreneurs These are characterized by a refusal to adopt opportunities to make changes in production formulae even at the cost of severely reduced retums relative to other like producers. Such entrepreneurs may even suffer from losses but they are not ready to make changes in their existing production methods. Following are some more types of entrepreneurs listed by some other behavioral scientists. 1, Solo Operators ‘These are the entrepreneurs who essentially work alone and, if needed at all, employ a few employees. In the beginning, most of the entrepreneur start their enterprises like them. Active Partners ‘Active partners are those entrepreneurs who start/carry on an enterprise as a joint venture. It is important that all of them actively participate in the operations of the business. Entrepreneurs who only contribute funds to the enterprise but do not actively participate in business activity are called simply ‘partners’. 10 Created with @ nitro” professional download the free tral online a atropd.com/profesionalInventors Such entrepreneurs with their competence and inventiveness invent new products. Their basic interest lies in research and innovative activities. Challengers These are the entrepreneurs who plunge into industry because of the challenges it presents. When one challenge seems to be met, they begin to look for new challenges. Buyers These are those entrepreneurs who do not like to bear much risk. Hence, in order t reduce risk involved in setting up a new enterprise, they like to buy the ongoing one. Lifetimers ‘These entrepreneurs take business as an integral part to their life. Usually, the family enterprise and businesses which mainly depend on exercise of personal skill fall in this type / category of entrepreneurs. Intrapreneur Oflate, a new breed of entrepreneurs is coming to the fore in large industrial organizations. They are called ‘Intrapreneur’. They Having understood the meanings of entrepreneur and intrapreneur, now the two can easily be distinguished from each other on the following basses: S.No Difference Entrepreneur Intrapreneur 1 | Dependency ‘An entrepreneur is independent in | But, an intrapreneur is his operations dependent on the entrepreneur, i.¢., the intrapreneur does not raise the owner funds. 2 [Raising ofFunds | An entrepreneur himself raises | Funds are not raised by funds required for the enterprise. _| the intrapreneur.z re Createdw @ nitro” professional download the free tral online a atropd.com/profesionalRisk Entrepreneur bears the risk | An intrapreneur does not involved in the business fully bear the risk involved inthe enterprise. 4 | Operation ‘An entrepreneur operates from|On the contrary, an outside. intrapreneur operates from within the organization itself. l aes _ Let us sum up Difference people have defined entrepreneur differently. The commonest definition of an entrepreneur is a person who organizes, manages and takes the risk of running an enterprise. He arranges everything required to set up an enterprise i.e., funds, lands, people, material and machinery. The entrepreneurs retain common characteristics of independence, motivation, optimistic, dynamic, innovating and risk-bearing ability. An entrepreneur differs from a manager on various counts. The former is owner, whereas the latter is servant. Entrepreneurs is rewarded with profit which is highly uncertain. On the other hand, gets salary as a rewarded for the services rendered by him in the enterprises. The main functions performed by the entrepreneur are risk-bearing, organization and innovation. The entrepreneurs are broadly classified into four types, namely, imitative, innovative, Fabian and drone entrepreneurs. The entrepreneurs emerging from within the confines of organization are called ‘intrapreneurs’. The intrapreneurs’ are top executives encouraged to catch hold of new ideas to convert them onto products. Intrapreneurship serves as a sced-bed for the development of innovative entrepreneurship. Innovation is the hallmark of entrepreneurship. 12 Created with @ nitro” professional download the free tral online a atropd.com/profesionalUNIT- ENTREPRENEURIAL ENVIRONMENT > Business Environment > Types of Ownership > Government policies for small scale enterprise > Small enterprise in international business Factors influencing the emergence of entrepreneurship Entrepreneurship ‘The factors influencing emergence of entrepreneurship can be categorized as > Intemal > External (or) > Economic; and non-economic Internal factors The intemal factors are related to the personality of an individual and they are psychological in nature that motivate a person to become an entrepreneur. Such factors are like a seed of entrepreneurship, existing within an individual. All that is required is the right type of external environment for seed to grow. We have covered the characteristics of entrepreneur in detail in chapter 2. we can recall a few of them here such as the need for achievement, being innovative, courageous, confident, self-reliant, etc. if an individual does not posses these internal characteristics, he/she has to develop them to become a successful entrepreneur. The negative factors are lack of confidence and courage. Some people have ideas but lack confident and courage to go on their ows. This inhibits the entrepreneurship. Pure entrepreneurs, first generation entrepreneurs are clear examples of entrepreneurship emerging because of force of intemal factors. Family Atmosphere Family background plays a very significant role in fostering entrepreneurship. Personality of a Person is influenced by the family background right from birth. The seed of entrepreneurship in an individual develops roots in the right family atmosphere. For example, Children in the Marwari families in India, are brought up in an environment which develops entrepreneurial qualities in them from an early age. The joint Hindu Family system also promotes 13 Created with @ nitro” professional download the free tral online a atropd.com/profesionalentrepreneurship by providing the right environment, developing skills and building strong traditions and customs. By and large, certain type of family environment prepares family, members for certain types of business, profession or occupation. Those born in rich business families have the advantage of experience over a new ones. First generation and the second generation entrepreneurs are two examples. In North Indian families a lost of freedom and facilities are given to children, Freedom and_development go together. Some of their children do not give much importance to education as they know that they do not have to hunt for jobs but have ready businesses to take care. South Indian families on the other hand, believe in high education as they go in for jobs. The risk taking abilities are comparatively low among south Indians. In some families even if a child wants to be an entrepreneur, this is objected to by the partners. They feel more secure with fixed income which comes regularly in salaried employment. In India, a major share of entrepreneurship is family based. Most of the businesses are family based. This means that the family controls the business. The ownership is with the family. Recently a survey of the enterprises in India revealed that family owned small businesses have grown at a faster pace than the corporate large business houses. The internal factors that are psychological in nature can be classified as follows: Demographic Personal characteristics Social factors variables & Age > Technical expertise > Parental role models > Gender > Managerial > Cultural role models > Birth order expertise > Family support > Education > Entrepreneurial > Community > Ethnic expertise background > Leadership skills | > Nationality > Personal values Personality traits ‘Cultural factors Environmental factors > Need for] > Individualism 7] > Lack of employment achievement collectivism opportunities > Focus of| > Uncertainly > Little opportunity control avoidance for advancement > Risk taking > Materialism > Economic resources > Tolerance of| > Dynamism > Political climate ambiguity > Need for independence 14 Created with @ nitro” professional download the free tral online a atropd.com/profesionalExternal Factors In contrast to the intemal factors, the extemal factors lay outside in the environment and they influence the irfternal factors. They also, motivate and push a person to take decisions to become an entrepreneur. ‘The various external factors that influence an entrepreneur are given below: Political environment Social and cultural environment Economic environment Leal environment Technological environment spose Political environment The political environment influences govemment policies which in tum influence entrepreneurship. In our country, we have various regional political parties with different ideologies. At the centre, there is a coalition govem different States. Andhra Pradesh and Kammataka are able to promote entrepreneurship effectively and many new entrepreneurs are starting their venture there. Entrepreneurs will invest only where there is political stability. In case of an unstable government, the policies an programmes of the government keep changing, causing chaos and entrepreneurs will not be able to give their best due to the frequent changes in the government policies. Entrepreneurs try to influence politicians by lobbing to get support. Thus, the political influence works both ways. When there is political instability leading to uncertainty in the political environment, the growth of entrepreneurship suffers. On the other hand, such growth takes place when there is political stability as there will be not be any frequent changes in the policies and programmes of the government, Entrepreneurs would like to wait and Watch before they start their venture, This factors plays a very important role in of the growth of entrepreneurship. In addition, the growth of entrepreneurship has a major influence on Government policies. There is a very close relationship and dependency between these two factors. Social and Cultural Environment This factors is an extended version of family environment. Just as political and government Policies are interdependent, even family environment, social and cultural environment are closely related. The Hindu joint family system is part of the Indian culture. The system creates a bondage within the family, children have elders’ presence and guidance to grow with, There is discipline and respect for elders. It is like as small organization. The values of sharing, sacrifice and adjustment develop in a joint family. The eldest family member of the house is called a Karta. It promotes joint ownership, capital and decision making. However, there are some drawbacks and limitations to joint Hindu family system. A family may have members who ate 15 Created with @ nitro” professional download the free tral online a atropd.com/profesionalentrepreneurial by nature and others who are risk averse. They may put a_block and may not allow the young members to develop. The case may also be reverse, a few people who are entrepreneurs will work hard and other non-enterprising individuals will also get the benefits because of joint ownership and capital. One will find community and caste system influencing the growth of business as well. Baniyas have been a dominant business community in India for centuries. The Jains, Gujarat is and Manwai businessmen can be seen in almost every part of not only the our country but all over the world. Similarly, in South India we have Shettys n Kamataka, Chattier in Tamilnadu and Komtis in Andhra Pradesh. Some communities are found in certain businesses. Gujarat is and Marwaris are engaged in manufacturing, banking and trading. In abroad, they identify the Patels with Motels, Patels belong to a Gujarati community who own Motels in USA in India, pawn brokers are usually from the Marwai community. Pawn brokers are money lenders who lend money against jewellery, property etc, Diamond industry, both export and domestic, is dominated by Jains from Palanpur. India has a long history and legacy and it is not easy to remove these socio cultural systems which have strong roots. The beliefs and practices are followed generation after generation. The social status counts a lot while making the choice of a career. In India, it is a fact that salaried persons enjoy better social status in society, besides enjoyed security of job, assured income, lesser working hours and fewer responsibilities. Even in the matrimonial market, preference is given to an employed person than an entrepreneur. Preference for salaried employment has gone to such an extent that educated unemployed youth are prepared to pay for obtaining a job than to utilize that amount of money for self-employment. All these are due to social environment, The socio-cultural environment and values have an important bearing in the emergence of entrepreneurship in any society. The value of orientation ta work, leisure, taking initiatives, being innovative etc, are some other aspects that are influenced by social environment. To become an entrepreneur, a person must have the willingness to work hard. But in our county, leisure orientation is more than work orientation. Preference for leisure than for work is a rule rather than an exception. A change in this orientation is necessary to bring about growth of entrepreneurship. ‘When entrepreneurs command a lot of respect and regard from the society, more people will be motivated to become entrepreneurs. So, if we want to develop entrepreneurship in our country, the entrepreneurship has to be given its due recognition. Once such a recognition is given by the society, more and more people would wish to become entrepreneurs. The social-cultural system is dependent on the educational system. For bringing any significant change in socio-cultural environment, the youth should be made aware of the importance of entrepreneurship in society. Socio-cultural values that needed for the growth of entrepreneurship and the concepts of entrepreneurship should become a part of the curriculum in schools, colleges 16 Created with @ nitro” professional download the free tral online a atropd.com/profesionaland universities. The educational institutions should emphasize more on the development of job creators rather than job seekers. Economic environment Economic environment pertains to the economic background of the individuals such as ‘Whether a person has ancestral property or property earned on his own. Details regarding current income, Standard of living and Financials status that he enjoys, etc. aepe They will influence the size of business and the capacity to take risks. These are micro level factors. Similarly, macro level factors such as, market structure, competition, profitability, investments availability of land, capital, labour, raw materials, market, etc., also have influence on entrepreneurship. The availability of excellent infrastructure also encourages entrepreneurship. Is the economic period in boom or depression? This also has a bearing on the growth of entrepreneurship. If the economy is in growth stage, then many would like to become entrepreneurs and vice-versa is depression. The capacity to take risks increases during the period of economic growth as the retum n investment is relatively high. Even an inefficient entrepreneur, may do well in a boom period, but in depression, only the efficient and capable business units with managerial capability will survive and grow. Legal Environment Businesses have to operate in a legal environment. There are laws, rules and regulations framed by various Acts under the constitution, which have to be followed by entrepreneurs. For example, if we want to start a shop, we have to register our firm under shops and establishments Act. The act has certain rules and regulations which specify that there should be a weekly holiday, child labour cannot be employed, lunch break should be provided etc. Labour inspections, appointed by the Government are empowered to visit any firm and verify various aspects pertaining to its functioning, If rules and regulations are not followed, the inspector will impose penalty, depending on the gravity of the violation of the rules. Entrepreneurs starting manufacturing units also have several laws governing their industrial establishments. For example, the Factories Act, 1948 makes it mandatory that if more than 20 persons are employed in a factory, proper drinking water and toilet facilities should be provided to them. Besides, we have sales tax and excise duty which have to be paid before goods leave a factory. There are central and state laws. For example, sales tax is levied both by central and state governments. And each state has its own rules and regulations. So, depending on the location of 17 Created w @ nitro” professional download the free tral online a atropd.com/profesionalan industry, an entrepreneur mist abide by the laws prevailing in the area where his industry is located. ‘We also have income Tax Act, Provident Fund Act and Employees State Insurance Scheme (ESI, each spelling out its own set of rules and guidelines to be followed by an entrepreneur, owning a factory. Fines are levied for noncompliance of any statutory requirement For example, under income tax aet, one has to file ‘annual return’ etc. ‘Also there are several laws protecting the interests of the workman, such as Minimum Wages Act 1948, Payment of Wages Act 1936, Payment of Bonus Act 1965, Trade Unions Act 1926, Workmen’s Compensation Act, 1923 and industrial Disputes Act 1947, So, lot of administrative work is involved in complying with the requirements of all such enactments. Lay off, Retrenchment and Closure Under chapter VB of the industrial disputes act, any industrial establishments employing 100 workers or more must obtain the prior approval of the appropriate government authorities for lay off, retrenchment and closure. However, the act is getting amended and will be applicable to industrial units employing 1,0000 or more workers, in India 80% country's 28 million workforce in organized sector fall in the category of less than 1000 workers. Also section 10 of the contract labour act does not permit companies to outsource labour for any acidity (for example security, canteen, gardening etc) Because of too many laws, small business entrepreneurs who generally run a one-man show, find it very difficult to cope up with the legal compliance and administrative work connected with various laws. Technological Environment ‘As discussed earlier in chapter, and in the new economy, technology is expected to play a more vital role than ever before. ‘The future is heavily weighted in favour of knowledge-based businesses. The new entrepreneurs must have knowledge about the latest technological developments and also should be able to predict the life of the technology. The life cycle of technologies is getting shorter. In the changing scenario, the importance of technology is increasing. Many o the entrepreneurs are hesitant to enter into businesses which are technology oriented. But the first generation entrepreneurs do not hesitate take up such technology oriented projects. Take the example of computers. Many of the traditional companies and entrepreneurs either die not either the fray due to lack of confidence and knowledge or were ill suited to the demands of the new technology. Government and Non-Government policies, programmes, incentives ‘The various schemes, incentives and support given by the government are the other major extemal factors having a strong impact on the entrepreneurship. If the policies and programmes of government are not attractive, it may serve as a negative influence. The recent spurt in the growth of IT industry has given a lot of encouragement and freedom so that many people wish to ‘go on their own, Venture capitalists extend a lost of support. Self employment schemes promoted by government and (NGOs) non Governmental Organization influence lots of youth to start on 18 Created wit @ nitro” professional download the free tral online a atropd.com/profesionaltheir own. The details of the support provided by government and non-government organizations will be discussed in the next chapter. These benefits can induce and motivate entrepreneurs. For example, liberal sales tax and excise duty concessions will encourage more people to become entrepreneur. The policies and programmes should have consistency will and plan to achieve certain targets. To be effective, instead of the same programmes and policies for all entrepreneurs, irrespective of the type, programmes should be tailor-made for each type of entrepreneurship. All the factors discussed above are not independent; in fact there is lot of interaction between them. For example, government policies, political environment, legal environment are interconnected. Similarly family, social and cultural, psychological economics factors have close relationship with one another. Entrepreneurship is not influenced by a single factor but by a combination of these environmental factors. For some entrepreneurs, a few factors may influence while for others some it will be some other factors. For example, an entrepreneur may start a business because of the opportunities provided in the form of concessions, and incentives while some other person may want to be his own boss by starting an industry on his own. First set of factors in the examples cited above are mainly economic while the latter are non-economic reasons. These factors may act as motivators and influence the entrepreneur to start and continue a business or act as a barrier and prevent the entry or withdrawal from a business. Barriers to Entrepreneurship Negative factors only serve as barriers preventing individuals to become entrepreneurs. A recent global entrepreneurship monitor (GEM) study conducted in 2001 by the Indian Institute of Management, Bangalore found that the ‘fear of failure’ inhibits entrepreneurship in Indian with 27.8% of the respondents,. Whereas in Korea, it is the highest 64% and in Spain it is the lowest it is only 3%. ‘The study also identified factors such as lukewarm attitude towards entrepreneurship, lack of physical infrastructure and outdated policies and programmes, inhibited, entrepreneurship in out country. Karal M. Vesper identified lack of technical skill, managerial skill, seed capital business know- how, motivation, monopoly, protectionism, patents, social stigma and competency as factors responsible for barriers to entrepreneurship. Risk and uncertainty, paradoxes and contradiction, market imperfections and asymmetries and vacuums are the rules rather than the exceptions. Consequently, business includes confusion, chaotic change, turbulent markets, technology and availability of resources. The three primary driving forces a. Founders b. Opportunity recognition; and 19 Created with @ nitro” professional download the free tral online a atropd.com/profesional©. Resources requirement have to be assessed and the best fit has to be obtained of the lead entrepreneur, the management team with the opportunity. In tum, the lead entrepreneur, the management team and the opportunity must fit with the ability to Marshall and control the resources. The diagram given below explains the real world business environment and the entrepreneurial process. Paradoxes and contradictions Risk and Uncertainly The Founders Ayoreos: somosex pure snydins Aunpoddo Attitudes Motivation Commitment Management ‘Competencies Opportunity Recognition Forgiving Enduring Rewarding Asymmetries Chaos, confusion, in knowledge turbulence I markets, awareness, and technology, and resources FIT versus GAPS information Resource Requirements Marshall Minimize Control Deal Structure Capital market context Created w @ nitro” professional download the free tral online a atropd.com/profesional‘The diagram show how the interaction of the environmental factors influences the real-world business environment that lacks certainty, predictability, stability and smoothness. ‘Types of Ownership Private sector, a business may be owned singly by an individual or jointly by a group of individuals. The ownership provides an individual or a group of individuals with the legal title to business assets, the authority to control a business operation and also the right to enjoy profits eamed. An enterprise owned by a single private individual is called sole proprietorship or individual proprietorship business. All other types of ownership in private sector are owned by groups of individuals. The group ownership is noticeable in a Hindu joint family business, partnership, cooperative or joint stock company. Besides, a business undertaking completely owned by the state, i.e., goverment, is commonly known as a government enterprise or public sector undertaking. A business with joint participation by both private businesspersons as well as government is what we call a joint-sector enterprise. Table will present a brief overview of the chief forms of the business ownership in private sector. Some of the key features of different forms of business ownership in private sector are discussed in the following paragraphs Sole Prop: torship Proprietary establishments are the most common form of privately owned and managed business ventures. The sole proprietor invests own and borrowed funds and uses own skills and abilities in the management of affairs of his/her firm. The proprietor is the only person who has the legal ight or exclusive title of all the assets of his/her business and is solely responsible for its operation. Except for the trade licence and similar minor requirements, normally, no other major egal formalities are necessary to either start or shut down a proprietorship firm. In case a proprietor decides to withdraw from all business activities and in the event of they're being none to succeed him/her, more often the business is sold to someone or closed. However, some other basic characteristics of this of enterprise are: Advantages Easy to start or close Negligibie restrictions Owner's exclusive control Immediate decision and speedy action Direct supervision of employees Direct dealings with customers Flexibility of operation owner enjoys all the profits a Created with @ nitro” professional download the free tral online a atropd.com/profesionalLimitations Inadequacy of resources Limited manpower Owner’s unlimited liability Dearth of managerial skills © Excessive burden on owner Growth and stability of business depend on owner's health, initiative, business acumen and innovational mentality. Family Business ‘The expression “Family Business” denotes a particular type of commercial enterprise that is ‘owned, directly managed and financed by single individuals usually the family heads. ‘The ‘owner, also known as proprietor, accepts all risks and responsibilities and operates his/her business, often with the assistance of some other members of the family. The success and survival of a venture of this kind depend entirely of its owner-operator’s capability and intelligence in practical business matters. Family business firms may be broadly classified into three groups according to their function, namely: () manufacturing or production units; (ii) trading units; and (iii) service units. Cottage or tiny manufacturing units are mostly home-based and these are generally owned and managed by traditional artisans, craftsmen or specially trained individuals. These are engaged in making, among numerous other things, usefull and valuable articles like furniture, handicrafts, pottery, brassware, gold and silver omaments, dairy and farm products, fruit juice, jam and jelly, pickles, agarbattis and so on. Many are involved in service related and / or trading activities supplying houschold and personal requirements of local consumers. Notable among these are pharmacists and pathologists, booksellers and stationers, wholesalers, grocers, retailers, confectioners, restaurateurs, tailors, photographers, electricians, electronic goods repairers, interior designers and job printers etc. again, there are small firms tat either manufacture minor components for large industries or provide industry-related service. A great majority of family businesses are a sort of proprietorship ventures and these are run on a tiny or small scale. These, in reality, do not have much scope for growth or expansion mainly due to the very nature of business. Other causes include: dearth or finance, space, skilled manpower, specialized technical education, managerial skills and, above all, absence of ambition to proper on the part of most owners, However, due to old age or death or owner-operators, many family businesses are often closed sown or sold to other. 22 Created with @ nitro” professional download the free tral online a atropd.com/profesionalHindu Joint Family Business This form of business is found only among the Hindu joint families in India. Under Dayabhaga system of inheritance, which prevalent in West Bengal, Assam and Orissa, following the death of the father, the members of his farnily inherit his business along with other property. It is only after the death of the father that his inheritors will acquire legal title to the ownership of his business. Under the Mitakshara system, which operates in other Indian states, a Hindu family's any of the three successive generations in the male line can simultaneously inherit the ancestral property and business from the day he is bom. The joint family property is known as coparcenaries property and the joint owners are coparceners. This inheritance right is enforceable by the principle of survivorship, that is as long as one is alive. Other basic features of this system are: business is managed by “Karta”, head of the family; rest of the family members are not entitled to take part in the management of the business; business in not dissolve by the death of any member; the liability of “Karta” is unlimited, but that of every other member is limited to the extent of the value of one’s interest. Advantages ‘Male family members are assured of some income from business; Opportunity for all to gain business experience; Business not to be dissolved due to death or insolvency of any member; Continuity of business; Membership of business without any formality or payment of fees; Limited liability for all except “Karta”, Minor members cannot be adjudged as insolvents. Registration not compulsory, Limitations ‘* Only “Karta:” is privileged to head the management of business. * Unless a member severs connection with family business, he cannot question the authority and decision of “Karta”, © One severing connection with business cannot ask for accounts of past profits and losses. Partnership Partnership is a business” relation between two or more persons who have agreed to share the profits of a business carried out by all or any one of them acting for all.” In simple words, when by means of a contractual agreement several individuals associate with common ownership and management of a venture, such a business relationship is termed as partnership. In India all aspects of partnership business are governed by the provisions under the Indian partnership Act 1932. a partnership venture can be set up with minimum 2 and maximum 10 members in banking 23 Created w @ nitro” professional download the free tral online a atropd.com/profesionalbusiness and 20 in other cases. This restriction on upper limit is due to the provision contained under section 11 of the Indian companies act 1956, which stipulates that an unregistered company, association or partnership having more than 20 members (10 in case of banking) must be registered under the said Indian companies Act. ‘Some of the significant features of partnership are; ‘The primary objective of partnership is to share profits(or losses). Arelation without profit motive is not regarded as partnership. ‘A minor person not being legally competent to enter into a contract cannot become a partner in a partnership firm. «A joint Hindu family business or a business set up by a father and his son only cannot be treated as partnership. © A partnership venture must be managed by all partners or by anyone among them acting for all. ‘Types of partnership Partnership is broadly classified in two groups. General or ordinary, and Limited partnership. General partnership is again divided into two subgroups namely. Partnership-at-will, and Joint venture or particular partnership. General or ordinary partnership refers to an arrangement, which makes all the partners jointly and severally responsible for all the debts and liabilities of a business. Simply, defined, all partners will have to bear the risks of unlimited liabilities. In limited partnership; + There must be one or more general partners where liabilities for all debts and obligations of the firm shall remain unlimited and © There must also be one or more limited (also known as special) partners who will be liable for an amount to the extent of one’s capital contribution. However, limited partnership is not permissible in India. artnership-at-will refers to a business formed for an indefinite period, i.e., without any specific agreement about the continuance of partnership. Partnership-at-will can be dissolved at any time as and when a notice to that effect is served by a partner. Particular partnership, also known as joint venture, is formed for a very specific venture or period and it comes to an end as soon as the specific. Purpose or period is over. 24 Crested w @ nitro” professional download the free tral online a atropd.com/profesional‘Types in Partners In partnership, every partner is entitled to take equal part in the management of business. In reality, this rarely happens, instead they assume different roles that are mutually determines and categorically stated I the contractual agreement. And this is done in terms of one’s expertise, experience and keenness in a practical matter. Commonest and the most widely favoured types of partners are discussed hereunder. Active or General Partners Active or general partners are those who actively participate iin the management of a business. This is how they are also known in the trading community and to the general public. Secret partners, active or general, can take active part in the management, but they do so secretly, that is without the knowledge of the people not belonging to the same business, Sleeping or Dormant Sleeping or dormant partners are those who do not take part in the management and their ‘entities are not known to general public. Even if their identities are known to others, sleeping oF dormant partners are also at items called silent partners. Working partners do.not invest any capital but they hold key positions and, in most cases, they are admitted in recognition of their business acumen, knowledge and capability in any particular field. Quasi or Ostensible partners are those who have already retired from active participation but whose investment in the same business is still retained as loan capital and against which they get some return, Holding out Partners denote those persons who without being real partners hold out, that is to say they represent themselves, to general public as if partners and conceal their true identities. As a consequence, such persons will be liable for any partnership debts arising out of their actions payable to outsiders. Deed of partnership In the event of disagreement occurring in future among partners, for proper adjudication of disputes, it is the normal practice that the terms and conditions as agreed upon by partners are ‘written in detail. The facts of the agreement are written down clearly narrating the relevant terms and conditions. This is known as deed of partnership and it is duly executed and legally binding on all partners. According to the Indian partnership act 1932, it is mandatory to have partnership deed. The particulars that are of major significance and incorporated in a partnership deed relate to: * Name and address of the firm; © Nature of business and its duration, if any; © Names and addresses or partners; 25 Created-w @ nitro” professional download the free tral online a atropd.com/profesional© Investment, in cash or kind, by each partner and the manner and timing of such investment; Provision for additional capital, if required in future; Operation of bank account, maintenance of financial accounts and conduct of audit; Sharing of profit or loss (generally both shared in the same ratio); Salaries, interests and commissions, if any payable to partners; ‘Amount each partner can draw from business each month or year and interest, if any, payable y one for such drawing; Management of business and status of each partner; Duties and responsibilities of each partner, Limit on the action each partner will exercise without the consent of others; Criteria for introduction and expulsion of partners; Procedure to deal fairly with any partner to be expelled; Conduct of arbitration of future disputes, both major and minor issues Causes for dissolution and methods of settlement of accounts; and Rights of remaining partners to buy in shares of a retiring partner. were cece Registration of Partnership Registration of a general or ordinary partnership firm is not legally mandatory. Nevertheless, for a firm and / or its partners to enjoy the privileges as conferred on them under the provisions of the Indian partnership act 1932, it is desirable that a partnership business is duly registered with the Registrar of firms. An unregistered firm cannot enforce in any court of law its claim against any third party for recovering any amount exceeding Rs. 100 and moreover its partners cannot seck any legal relief and remedy arising out of any dispute against the firm or any of the co-partners. For registration of firm the particulars to be furnished to the registrar include name and address of the firm, nature of business, particulars of its other branches; names and addresses of its partners and their joining dates; and the date when the firm should also be intimated to the registrar from time to time. However, although limited partnership is now allowed in India, in most of the countries where this form of business is permissible, a limited partnership firm must be registered , otherwise it will be treated as an ordinary partnership business. Advantages ‘Not much of statutory formalities are involved for setting up a unit; Partners mobilize own resources and thus facilitate inflow of required funds; More manpower and expertise add to organizational efficiency; Partners take personal attention for better management and profitability; Partners’ watchfulness ensures proper supervision of workers, higher productivity and better service to customers; 26 Created with @ nitro” professional download the free tral online a atropd.com/profesional* Units having sound financial position may secure loans from financial institutions; * _ Itis possible to take quick actions as the circumstances will demand; Limitations Every partner is liable for business debts to an unlimited extent;; Alll partners will be held responsible for mistake or misdeeds committed by any one of them; * Death, retirement or insolvency of a partner, or any on desiring to quite will result in the dissolution of business. * Disagreement or lack of cooperation among partners, or dishonesty of anyone may disturb the very existence of the business; © Ownership right is not freely transferable because a partner cannot sell his / her share without the consent of others. Cooperative A cooperative society is a voluntary association of ten or more individuals, who come together for the benefit of their common economic interests. A cooperative is a joint enterprise where all the members contribute capital and labour and also manage its affairs with an understanding to primarily distribute among themselves equally the profits earned or benefits derived out of that venture. At least ten individuals are required to form a cooperative society, there being no restriction on the upper limit of the members. Like in West Bengal, cooperative societies are formed, registered and governed in terms of the provisions of the cooperative societies act and Tules as enacted in other states. Areas of Cooperative Operation The cooperative form of enterprise owes its origin to the cooperative movement, based on the concept of cooperation, set to work in the early last century. The principle objective was to help and encourage the weaker and exploited sections of the society to organize themselves and work for their own economic upliftment. The scope of cooperation has since enlarged and the methodology of cooperative operation has undergone a sea change. Cooperative activities are now widely practiced in various areas of economic life. According to the nature of their functions and objectives, some of the major areas of cooperative operation are summarized as follow: Industrial or producers’ cooperatives are organised and managed by small producers who Join hands to effectively meet the competition from large manufacturers. The basic objective is 27 Created-w @ nitro” professional download the free tral online a atropd.com/profesionalto provide individual producer members with necessary raw materials, equipment and finance and also help market their products at affordable prices and gain reasonable profits. Agricultural cooperatives are formed by framers to obtain necessary inputs and assistance (seeds, fertilizers, implements, warehousing facilities and finance etc) for production as well as marketing purpose. Consumers’ or Retail cooperative are set up to directly procure from manufacturers various essential consumer goods and distribute them among the members at prices much cheaper than those prevailing in the market, thus eliminating the presence of middlemen who generally make substantial profits from the resale of commodities. Credit Cooperatives are formed to collect and accumulate members’ own small savings that they distribute among members, requiring immediate financial aid, as loans. This loans thus arranged not only help members meet their urgent needs but also allow them to repay at concessional interest and on affordable terms of security and repayment. Handloom Weavers” Cooperatives have been set up in almost all the states in India under the administrative control of the respective state governments. Sponsored and financially aided by the government and having their own marketing networks all over the country, these organizations operate mainly to market varied products woven manually as also on power- operated looms by individual weavers lacking much of material possessions. Some of these cooperative also supply yams to resource less weavers and accept the finished goods paying them the making charges. The facilities are generally extended to individual weavers enrolled as members with the concemed units. Service Coperativé aic'run with a view to rendering varied scrvice facilities to own members at no-profit-no-loss basis. The facilities include, such services as may be necessary for sustenance or support, for instance, housing accommodation, health care, hospitalization, transportation, cold storage, repair and maintenance and so on. Advantages It is relatively easy and simple to form and establish. Ordinarily talented individuals lacking much of material possessions may benefit by becoming its member. Liabilities of each member is limited to the extent of one’s investment in it. Retirement, death or insolvency of any member does not in any way affect its continuity. Itis managed by a committee directly elected by its members. Members are entitled to get quality goods or services at fair prices, or loans at concessional interests and on affordable terms'of security and repayment. 28 Created witr @ nitro” professional download the free tral online a atropd.com/profesional* Generally members render voluntary services for daily operation and as a result its productivity may be better and establishment expenses much less. * Wasteful expenses on marketing and advertising may be effectively controlled and consequently better earnings may be possible. Unnecessary accumulation of inventory and wastage of goods may be avoided. Shares held by members are easily transferable, Members are assured of prompt marketability of their products affording quick and reasonable returns. Money less members are freed from being exploited by middlemen and financers. Assistance from government may be available, Limitations * Generally people having technical skills or managerial expertise are not admitted as ‘members or appointed as employees. * Want of skilled personnel or absence of coordination among members adversely affect operational efficiency. * Normally, talented people belonging to underprivileged class do not get admission as members. * Groupism, rivalry and mismanagement by vested interests often lead to ineffectiveness or closure of a unit. Joint Stock Company A joint stock company, popularly called limited company, is an association of many individuals, who contribute to a common capital to conduct a business for gain. The common capital is divided into equal parts, each of a certain fixed uniform value, known as shares and the inviduals so contributing are members commonly known as shareholders. The shares can be sold and transferred freely and the liability of a shareholder is limifed to the extent of total fixed face value of one’s shareholding. Section 3, of the Indian companies act 1956, however, denotes a company as “a company formed and registered under this Act, and that “an existing company means a company formed and registered under any of the previous company laws”. In India, all matters concerning formation, registration and operation of joint stock companies are governed under the Indian companies act 1956. Important Features * A joint stock company has a separate and independent legal entity as if an artificial person. 29 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionaleee Its existence continues indefinitely so much so that is not to be dissolved due to the retirement, death or insolvency or any member. Any of its shareholders can freely sell and transfer own shares without the consent of others. Its management is controlled y a board of Directors elected by and from among shareholders. lis shareholders have no right to participate in the general conduct and management of business and affairs of the company. Ithas rights to acquire and transfer property in its own name. Itcan sue others and be sued by others in its own name, It can admit equity as well as preference shareholders, Preference shareholders will have preferential rights to profits and also to refund to capital, in the event of its dissolution, but will not have any voting right. The right of equality shareholders to profits and refund of capital will come next to that of preference shareholders, but they will have the voting rights. It can take up any risky venture, because its liability is limited to the aggregate face value of its total number of shares, Its shareholders are not responsible for the acts of the company. Advantages eee ee eee Liability of every shareholder is limited. Shares are transferable freely. Continuity of existence is certain. Sufficient capital is obtainable, ‘Technical and managerial experts may be employed. Advance technology may be introduced to improve operational efficiency. Risky ventures having higher profit possibilities may be undertaken. Significant economies of large scale production is achievable, Limitations eee eoe Burdensome procedure to be completed for formation and registration. ‘Numerous statutory requirements make the operation difficulty and expensive. Few shareholders control the management and enjoy most of the benefits. Majority of shareholders do not have any control over the general conduct of business. Large workforce, confrontation with management and labour unrest become unavoidable. Dishonest persons tend to defraud smali investors by promoting false companies, causing liquidation of companies or manipulating market prices of shares. 30 Created with @ nitro” professional download the free tral online a atropd.com/profesionalNature of Limited Liability On the basis of the nature of limited, companies are classified into two groups with less resemblances: a. those having liability limited by guarantee and b. the rest having liability limited by shares. Furthermore, a company having its liability limited by shares can operate as a private limited company of a public limited company. Brief details of these types are being discussed hereunder. Company limited by guarantee: The liability of a company of his type will be limited to the aggregate amount guaranteed to be paid by its members. Its members do not contribute any money as capital, but undertake to meet the company’s debts and liabilities, in case it is would up, to such predetermined amounts payable, usually equally, by each of them as declared in the company’s Memorandum of Association. Organizations registered under this category are not required to use the words “Private Limited” or “Limited” with their names. ‘As provided under section 25 of the companies Act 1956, non-commercial organizations engaged in promoting trade, sports, scientific, artistic and cultural activities are generally registered as companies limited by guarantee. These include chambers of commerce, traders’ associations, manufacturers’ associations, exporters’ associations, clubs, research centre and so on. A company limited by guarantee, also known as a grantee company, cannot engage any itself in any activity on a business basis for profit. However, in ese there is any excess of income over expenditure, the same cannot be distributed amont the guarantor-members but will have to be utilized for advancement of the organization’s objectives. Private limited company: a company having its liability limited by shares can be formed as a private limited company and this means that: It cannot openly invite the general public to subscribe to its shares; The number of its shareholders must not be either less than two or more than fifty; The rights of its shareholders to transfer shares are restricted; company’s name. A unit to operate essentially for profit cannot be registered as a guarantee company. Public limited company: an enterprise having its liability limited by shares can also be set up as a public limited company and for which the essential conditions include: + Itwill have at least seven and a maximum of any number of shareholders * Members of the general public may be invited to subscribe to its shares, debentures and bonds; Shareholders will have the right to sell and transfer freely their shares to anyone; and The word “Limited” must be used after the name of the company. Various exemptions and limitations on the private limited and public limited companies have been cited in Table. 31 Created-w @ nitro” professional download the free tral online a atropd.com/profesionalExemptions and Restrictions S.No Regarding Private limited company | Public limited company 1 | Number of sharcholders Minimum 2 and maximum | Minimum 7 and maximum 50 any number 2 [Invitation to general public for | Not permissible Permissible subscription to shares 3 [Financial assistance to help an | Not permissible Permissible intending investor _—_ purchase company’s own shares 4__| Transferability of shares Restricted No restricted 3 | Minimum number of directors to be | Two Three appointed 6 | Increase in number of directors Permissible without prior | Permissible only with approval of department of | prior approval of company affairs, Govt. of | department of company India. affairs, Govt. of India. 7 [Director's age, appointment, | Approval not necessary | Approval by department reappointment, remuneration and of company affairs, Govt. amenities. of India necessary. & [Director's eligibility and consent | Particulars need not be | Particulars mist be filed about purchase of stipulated filed with registrar of| with registrar of minimum number of shares. companies, Govt.of India. | companies, govt of India. 9 | Commencement of business ‘After obtaining certificate | After obtaining certificate of incorporation | for commencement of (registration) business, which is granted only after __ stipulated minimum number of, shares have been subscribed. 10 | Statutory report and statutory | Not legally binding Both legally binding meeting Ti | Managerial remuneration No restriction Must bot exceed 11% of net profit; in case of inadequate profit, to be decided by department of company affairs, G.O.1. 12 | Quorum Generally two members, | Generally five members, unless otherwise stipulated | unless otherwise stipulated in the articles in the Articles. 13 | Filing of profit and loss account with | Not essential Essential registrar of companies 2 Crested with @ nitro” professional download the free tral online a atropd.com/profesionalChoosing the form of Ownership The task to convert an innovatory idea into 2 commercial entity calls for certain fundamental decisions. These include selection of the suitable form of ownership for the proposed venture, For a business involving comparatively little investment and, to be run on a tiny scale, sole proprietorship or partnership should be the appropriate choice. In a proprietary concern, under normal conditions, the owner-operator does not have to put in extraordinary efforts for funds. In partnership, generally the partners themselves collectively bring together own resource and thereby facilitate availability of required capital. Additionally, borrowed capital may be available from extemal sources, though more often the cost of borrowing funds could be prohibitive. Where though more often capital requirement is neither too little nor too much and, in such a case an enterprise must essentially be on a small to moderate scale, it becomes necessary to make more people interested in the proposed project, that is to say invite others to invest. In proprietorship or partnership, investors cannot avoid the burden of unlimited liability; but such a problem does not arise in a limited liability set-up. The benefit of limited liability, apart from other advantages, is that it makes investment in company form of business more inviting to investors. Put simply, many people will be willing to make equity (ownership) investment in a limited liability company. In possession of the requisite resources Viz., men, money, materials, machinery as also technical managerial skills limited liability form of business holds immense scope to grow. Again, as competed with a public limited company, a private limited company is allowed a number of exemptions as regards regulatory measures. Further, in a private limited company the investors being few and closely connected by common interest stand the chance of controlling the management. Therefore, with regard to small business entrepreneurship and from the standpoint of both entrepreneurs and equity investors, ownership in the form of private limited company is the best adaptable. Nevertheless, in determining the right form of ownership, other than the size of business and capital requirement, the issues that require through consideration are quite few and varied. Notable among these are: 33 Created-w @ nitro” professional download the free tral online a atropd.com/profesional‘Nature of business; Minimum output to achieve economies of production; Minimum tumover to make business commercially visible; Specialized and skilled personnel needed; Capital requirement Return on investment Franchise The English word franchise has been derived from the French word ‘franchir’ meaning to free. Literally, franchise denotes special privilege or right, free from certain restrictions; granted to an individual or group. In recent times, the word franchise has come into familiar use to signify a privilege granted by a principal allowing its one or more agents to sell or provide its products or services and for that purpose use its name, trademark and sales promotional facilities. In short, franchise implies a contractual arrangement between a principal and its agent or agents for mutual benefits from a business established by the principal n exchange for certain payments. In franchise system, a principal (usually an individual or an enterprise) is commonly known as a franchiser or licensor and its agent (also an individual or an enterprise) as a franchisee or licensee. Scope Business under franchise scheme may cover virtually any commodity or service. Some of the notable examples, as one may find more often nowadays, are confectioneries and edible items, readymade garments, forswear; homeopathic and biochemic medicines; home appliances, radio, television, and other electronic devices; computers and accessories computer training programmes; general, technical or vocational education and training; selling or servicing of passenger or commercial vehicles; machinery and equipment or facilities for diagnosis or treatment, courier services and so on, Importance Features Extent of loan finance likely from external sources; Liability of investors Number of individuals interested in equity (ownership) investment; Facility of formation and registration, and related expenses; equity (ownership) * Tax burden and concessions; * Grants and subsidies from government; Control over management. Franchisor plays the role of entrepreneur, starts a new venture in the face of competition, undertakes business in lie with own innovatory idea and explores untapped market opportunity 34 Created with @ nitro” professional download the free tral online a atropd.com/profesional* Franchisor requires that every would-be franchisee must have a. The requisite funds for non-refundable license (entry) fee and refundable security deposit, both payable to Franchisor to start; with b. The capability to arrange for own use the necessary business accommodation, manpower, office equipment and furniture; and ¢. The will and determination to achieve high business turnover. © Franchisee is appointed for a specified location keeping in view the business possibility that can be developed in that area, Reputable Franchisor attracts customers because of the general belief that the quality of the products or services belonging to a well-known name would be as good as that of similar products or services bearing the same name marketed elsewhere and for which one does not have to travel to far away places, * Franchisor usually provides franchisee with necessary expertise, implements, materials as well as sales promotional supports. * Franchisee mobilizes resources for a. Payment of initial license entry fee and refundable security deposit; and b. Own business accommodation, staff, office furniture and equipment * Franchisee managers own affairs with full autonomy, selling or providing franchisor’s produce or services’ and assumes all risks generally associated with any business. * Franchisee pays from time to time a predetermined share of the profit, termed as royalty, to franchisor. © Franchisee’s success is very much dependent of franchisor’s business integrity and above all customers’ confidence in franchisor’s products or services. Advantages for Franchisee Participation in an already stable business established by franchisor. Net income may be more than that from a salaried job. Assistance from financial institutions is likely. Making the products or services attractive to customers is the responsibility of the franchisor. Independent operation with full autonomy. Opportunity to benefit from new products or services from same franchisor. Sales promotional measures and centralized publicity by franchisor. 35 Created with @ nitro” professional download the free tral online a atropd.com/profesionalLimitations Exceeding high initial payments on account of license (entry) fee and security deposit, Substantial block capital needed for own business accommodation, office decoration, furniture and equipment ete. Sizable amount of working capital required for staff and day-to-day operation, Sharing of cost of extravagant centralized publicity sponsored b franchisor. ‘Uncertainty of adequate return on investment in the long run, Success will depend on the reputation of franchisor and sustenance of quality of products or services. Considerable portion of the profit payable to franchisor. Franchisor imposes conditions demanding more favourable terms. Risk of dishonest franchisor taking over business of an unwatchful franchisee. Probability of being deceived by false promises of franchisor. Corporate Entrepreneurship The expression ‘Corporate Entrepreneurship” is a relatively new coinage. If refers to an intense entrepreneurial culture in corporate set-up or joint stock company where special emphasis is placed on systematic innovatory activities financed by the company and undertaken as a continuing process by several individuals specifically engaged for that purpose, In a corporate entrepreneurship, salaried employees, supported with organizational resources, carry out activities for achievement of innovations as an ongoing process. By contrast, in a sole proprietorship establishment, it is the proprietor or owner who uses own sklls and abilities, as also own or borrowed resources, in the management of innovatory affairs of his/her venture. According to the popular perception, the concept of entrepreneurship is broadly applicable to small businesses. But recent studies in the USA reveal, says author James RGolden, that smail firms with their flexibility and large companies with their large scale economies have been more innovative than medium-sized firms. Many suggest that the concept entrepreneurship is relevant more to large corporate organizations than small firms. In modern economy, marked by the dominance of capitalism, the nature of entrepreneurship is noticeably different from what has been described in Schumpeterian model that an individual who as the innovator and owner-operator undertakes new combination of the factors of production is the entrepreneur. In today’s business environment, as some people claim, individual entrepreneurial spirit, willpower and ability have become some what insignificant, rather less effectual. Joint stock companies spend huge amounts on research and development, invent new technologies and develop large-scale innovations for new products or services. Large corporate houses, employing persons having managerial specialization, recognize unmet market need and wants and act 36 Created with @ nitro” professional download the free tral online a atropd.com/profesionalquickly to exploit profit opportunities that escape the notice of individual entrepreneurs or small firs. Accordingly, the process of innovation and factors creation, which adds to the productive growth and competitive strength of an enterprise, has become a routine function is large businesses. This is because large companies better equipped with ample financial resources, managerial skills and creative talents, can take advantage of economies of large-scale production, apportionment of high research and development costs over larger volume of production; access to foreign technological know-how; joint collaboration; import of capital goods; component and basic raw materials; vast marketing and distributions network; and mass publicity campaign through print and electronic media. However, many others differ on the concept of corporate entrepreneurship. Critics claim that the word ‘entrepreneurship’ has not been clearly defined and that the functions of corporate employees engaged for set purposes cannot ever be sharply outlines. In their opinion, the fundamental elements of entrepreneurial action in the very real sense do not exist in routine research and development work conducted jointly by salaried employees with the backing of company resources. More precisely, there is no involvement of individual owner-operator and the entrepreneurial zeal characteristics of the entrepreneur, who would perceive market ‘opportunities, conceiving new ideas, draw up plans and strategies take initiative, arrange required resources and assume risks and personal responsibilities. Further, it is unlikely that talented persons, having the qualities of creative frame of mind and ability to master requisite resources, would continue to remind employed by someone for fixed remuneration. In large firms, persons of talent hardly ever get adequate rewards, recognition or encouragement to pursue own ideas. These people are reluctant to take any initiative on their own as more often they are required to execute the policy decisions and directives of top executives, who tend to be primarily concerned with maximizing profit and safeguarding the interest of investors. The employees do not face uncertainties in business, nor do they in any way risk their own money and fortune. In a large corporate business, keen proprietary interest or particularly the likeness of the role played by the owner-operator entrepreneur, who starts and manages own venture with utmost care, is noticeably absent. The salaried employees do not look after the interest of huge number of shareholders. The few who control the management supply a minor portion of the capital invested. By comparison, the vast majority of the small investors who obviously supply the maximum of there permanent capital don not and cannot take part in active management and thus have noting to do with the day-to-day business operation. But they bear the risks of their own money and fortune, through negligible and limited to the face value of the shares they own individually. The large number of small shareholders, known as owners through in paper only, are regarded more as ordinary investors than owners. In short, therefore, the small shareholders cannot be treated on par with entrepreneurs. 37 Crested with @ nitro” professional download the free tral online a atropd.com/profesionalAgain, these days, only a very small portion of corporate capital is raised through equity financing, while and impressively large portion of its comes from self-financing or ploughing back of profit, secured and unsecured loans, sale of debentures or bonds, public deposits and so ‘on. Companies consistently making good profits year after retain a large part of their earnings every year that they sue for internal financing, hence the absence of proprietor or shareholders’ roles and, more importantly, proprietary interest in corporate entrepreneurship. Intrapreneurship In a corporate set-up, since the continuing process of research and development is carried out jointly by several persons. It is often not possible to give credit to a single individual for the result achieved. The work for nay technological break through or innovation, therefore, in a large corporate house is attributable to a team comprising several talented peons. Thus, in essence the entreprencurial functions occurring in a large organizational set-up actually or potentially involve collective or joint (corporate) efforts and hence there term “Corporate Entrepreneurship”. Again, as their expression describes the process of entrepreneurial events taking place within (intra) an already well established organization, it is called “Intra-Corporate Entrepreneurship” or more briefly in a word “Intrapreneurship”. And the employee engaged specially in the task of successive innovatory activities in a large corporate set-up is described as the “Intrapreneurship”. ‘Nevertheless, some authors continue to suggest that the terms entrepreneurship and corporate entrepreneurship or Intrapreneurship are distinctly different conceptually and functionally. Intrapreneur The term intrapreneur refers to that particular person who as someone's employee performs that tasks of innovations within (intra) an existing organizational set-up. Simply said, a corporate manager playing the role or corporate entrepreneur is often called the intrapreneur. ‘Thus what is significantly common between an intrapreneur and an entrepreneur is that both act, as change agents and thereby contribute to material growth in socio-economic development. Large business houses very frequently employ persons having creative frame on mind to work specially for innovations and technological up gradation that help generate higher opportunities. Intrapreneur, like entrepreneurs, apply their intellectual abilities and powers to conceive new ideas. And large corporate organizations translate such ideas into new products, production methods, devices or services and thereby take advantage of the potential market demands. Individual entrepreneurs pursue the acts of creativity and innovation for the benefit of ‘own business interest. These are the people who perceive market needs, conceive new ideas, take initiatives, assume personal risks and responsibilities, mobilize resources and turn own dreams into profitable business enterprises exclusively for self-sustenance without dependence on 38 as @ nitro” professional download the free tral online a atropd.com/profesionalothers. In short, entrepreneurs pursue their cherished ideas, manager their businesses independently and personally risk their own fiancé and future. Contrarily, intrapreneurs continuously carry out routine tasks for successive innovations for the benefit of their employers. They work under the bureaucratic environment in line with the established practices or the policy guidelines as prescribed by their superiors. These individuals generally do not have the freedom to apply own discretion and are reluctant to pursue own thoughts independently. They do not take any initiative for implementation of any change as they are apprehensive of being rebuked or ridiculed for any oversight of fault, In short, intrapreneurs do not extent themselves as aggressively as entrepreneurs would do, nor do they take any personal stake in making their ideas succeed commercially. Obviously, being salaried employees, they do not bear any of the risks and responsibilities that are normally associated with any business. While many authors do recognize the difference between the terms intrapreneur and entrepreneur, some do not see these expressions as being different; they take the term entrepreneur in its widest sense. In their work entitled “Essentials of Management” (1998) , authors Harold Koontz and Heinz Weihrich write categorically that “the term ‘entrepreneur’ designates an enterprising person working either within or outside the organization. Intrapreneur Finally, few people having yet another line of thought tend to use the newly coined term intrapreneur to refer to the person who runs a new division, subsidiary or a new company entirely owned and controlled by a large company to produce and / or trade in newly innovated goods or services, The concept of corporate entrepreneurship is sought to be justified by the fact that several talented persons work jointly and concertedly not only to bring forth something, new but also to ensure commercial success of their innovations. Unless and until industrial inventions or innovations are adopted for commercial use, those will not have any economic significance. Large firms have much superior marketing tools to commercialize new things that their employees innovate in steady rapid succession as a response to changing market needs. S the result, business operations are expanded leading to the creation of new division or subsidiaries to facilitate production and / or marketing of new products or services. The units, thus, created are wholly financed and controlled by large companies. And the person engaged in leading and ‘managing organizational affairs of such a subsidiary unit or division is nowadays called as the Intrapreneur. 39 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalGovernment policy for small-scale enterprises Learning objectives ‘On completion of this chapter, you should be able to: % Discuss the government policy towards developing and promoting small-scale enterprises in the country. *% Give an account of the government support to small-scale enterprises during five year plans. ‘Small-scale enterprises have been given an important place in the framework of Indian planning for both ideological and economic reasons Development of small-scale enter-prizes has been imbued with a multiplicity of objectives. Important among these are: (i) the generation of immediate employment opportunities with relatively low investment, (ii) the promotion of more equitable distribution of national income, (iii) effective mobilization of untapped capital and human skills, and (iv) dispersal of manufacturing activities all over the country, leading to growth of villages, small towns and far-flung economically lagging regions.' Therefore, the Goverment of India has started various programmes for the development of small-sector in India. It is worth mentioning that over the last four decades, India has built has built up perhaps one of the world’s most elaborate programmes for small enterprise development for providing assistance to the entrepreneurs for setting up small-scale enterprises. The government's objectives and intentions towards industry including small-scale industry were announced through her Industrial Policy Resolutions (IPRs). These resolutions were announced in 1948, 1948, 1977, 1980, 1990 and 1991 In this chapter, we shall state what each of the IPRs had stated about growth and development of small-scale enterprises. An account of the government support to small-scale enterprises during Five Plans will also be given. Government Policy for Small Seale Enterprises Since Independence, India has several Industrial Policies to her credit. So much so that Lawrence A. Veit tempted to say that “if India has as much industry as it has industrial policy, it would be a far well-to-do nation. “With this background in view, in what follows is a review of India’s Industrial Policies for the development and promotion of small scale enterprises in the country. IPR 1948 ‘The IPR, 1948, for the first time, accepted the importance of small-scale industries in the overall industrial development of the country) It was well realized that small-scale industries are particularly suited for the utilization of local resources and for creation of employment opportunities. However, they have to face acute problems of raw materials, capital, skilled labour. Marketing, etc. since a long period of time. Therefore, emphasis was laid the IPR, 1948 that these problems of small-scale enterprises should be solved by the Central Government with 40 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalthe co-operation of the State Governments. In nutshell, the main thrust of IPR 1948, s far as small-scale enterprises were concemed, was ‘protection’. IPR, 1956 The IPR 1948 set in the nature and pattern of industrial development in the country. The post-IPR 1948 period was marked by significant developments taken place in the country. For example, planning has proceeded on an organised manner and the First Five Year Plan 1951-56 had been completed. Industries (Development and Regulation) Act, 1951 was also introduced to regulate and control industries in the country. The parliament has also accepted “the socialist pattern of society” as the basic aim of social and economic policy during this period. It was this background that the declaration of new industrial policy resolution seemed essential. This came in the form of IPR 1956. ‘The IPR 1956 provided that along with continuing policy support to the small sector, it also dimed at to ensure that Decentralised sector acquires sufficient vitality to self-supporting and its development is integrated with that of large scale industry. To mention, some 128 items were reserved for exclusive production in small sector. Thus, to the earlier emphasis of ‘protection’ was added development’. The IPR 1956 for small scale industries aimed at ”Protection plus Development”. In a way, the IPR 1956 initiated the modern SSI in India. IPR 1977 During the two decades after the IPR 1956, the economy witnessed lopsided industrial development skewed in favour of large and medium sector, on the one hand, and increase in unemployment, on the other. This situation led to a renewed emphasis on industrial policy. This gave emergence to IPR 1977."the policy statement categorically mentioned: The emphasis on industrial policy so far has been mainly on large industries, neglecting cottage industries completely, relegating small industries to a minor role. The main thrust of the new industrial policy will be one effective promotion of cottage and small-scale industries widely dispersed in rural areas and small towns. It is the policy of the government that whatever can be produced by small and cottage industries must only be so produced”. The IPR 1977 accordingly classified small sector into three categories: i. Cottage and household industries which provide self-employment on a large scale. ii, Tiny sector incorporating investment in industrial units in plant and machinery up to Rs. 1 lakh and situated in towns with a population of less than 50,000 according to 1971 Census. 4 Crested w @ nitro” professional download the free tral online a atropd.com/profesionaliii, Small-scale industries comprising of industrial units with an investment of up to Rs. 10 lakhs and in case of ancillary units with an investment up to Rs. 15 Lakhs, ‘The measures suggested for there promotion of small-scale sector, i, Reservation of 504 items for exclusive production in small-scale sector. ii, Proposal to set up in each district an ageney called ‘District Industry Centre’ (DIC) to serve as a focal point of development for small-scale and cottage industries. The scheme of DIC was introduced in May 1978. the main objective of setting up DICs ‘was to promote under a single roof all the services and support required by small and village entrepreneurs. What follows from above is that to the earlier thrust of protection (IRP 1948) and development (IPR 1956), the IPR 1977 added ‘promotion’. As per this resolution, the small sector was, thus, to be protected, developed and promoted. IPR 1980 The Government of India adopted a new industrial policy resolution (IPR) on july 23, 1980. the main objective of IPR 1980 was defined as facilitating an increase in industrial production through optimum utilization of installed capacity and expansion of industries. As to the small sector, the resolution envisaged. i. Increase in investment ceilings from Rs. 1 lakh to Rs. 2 lakhs in case of tiny units, from Rs. 10 lakhs to Rs. 20 lakhs in case of small-scale units and from Rs. 15 lakhs to Rs. 25 Lakhs in case of ancillaries. ii, Introduction of the concept of nucleus plant to replace the earlier scheme of the District Industry Centres in each industrially backward district to promote the maximum small-scale industries there. iii, Promotion of village and rural industries to generate economic viability in the villages well compatible with the environment. Thus, the IPR 1980 re-emphasized the spirit of the IPR 1956. the small scale sector still reminded the best sector for generating wage and self-employment based opportunities in the country. IPR 1990 The IPR 1990 was announced during June 1990. As to the small-scale sector, the resolution continued to give increasing importance to small-scale enterprises to serve the objective of employment generation. The important elements included in the resolution to boost the development of small-scale sector were as follows: a2 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionali, The investment ceiling in plant and machinery for small-scale industries (fixed in 1985) was raised from Rs. 35 lakhs to Rs. 60 lakhs and correspondingly, for ancillary units from Rs. 45 lakhs to RS. 75 lakhs. ii, Investment ceiling for tiny units had been increased from Rs. 2 lakhs to Rs. 5 lakhs provided the unit is located in an area having a population of 50, 000 as per 1981 Census. iii, As many as 836 items were reserved for exclusive manufacture in small-scale sector. iv. A new scheme of Central Investment Subsidy exclusively for small-scale sector in rural and backward areas capable of generating more employment at lower cost of capital had been mooted and implemented. v. With a view to improve the competitiveness of the products manufactured in the small-scale sector, programmes of technology up gradation will be implemented under the umbrella of an apex Technology Development Centre in Smal! Industries Development Organization (SIDO). vi. To ensure both adequate and timely flow of credit facilities for the small-scale industries, a new apex bank known as ‘Small Industries Development Bank of India (SIDBI’ was established in 1990. vii. Greater emphasis on training of women and youth under Entrepreneurship Development Programme (EDP) and to establish a special cell in SIDO for this purpose. viii, Implementation of delicensing of all new units with investment of Rs. 25 crores in fixed assets in non-backward areas and Rs. 75 crores in centrally notified backward areas. Similarly, delicensing shall be implemented in the case of 100% Export- Oriented Units (EOU) set up in Export Processing Zones (EPZ) up to an investment ceiling of Rs. 75 lakhs, New Small Enterprise Policy 1991 The government of India, for the first time, tabled the new small enterprise policy titled ‘Policy Measures of Promoting and Strengthening and Supplementing Small, Tiny and Village Enterprises’ in the Parliament of August 6, 1991. the main thrust of New Small Enterprises Policy is to impart more vitality and growth impetus to the sector to enable is to contribute its mite fully to the economy, particularly in terms of growth of output, employment and exports. The sector has been substantially delicensed. Concentrated efforts would be made to deregulate and debureaucratize the sector with a view to remove all fetters on its growth potential, on the ‘one hand, and reposing greater faith in small and new entrepreneurs, on the other. The salient features of this new small enterprise policy are as under: * Increase in the investment limit in plant and machinery of tiny enterprises from Rs. 2 lakhs to Rs. 5 lakhs, irrespective of the location of the enterprise. 43 Crested-w @ nitro” professional download the free tral online a atropd.com/profesional«Inclusion of industry-related services .and business enterprises, irrespective of their location, as small-scale industries. ‘© To introduce a limited Partnership act. This would limit the financial liability of the new entrepreneurs to the capital invested. ‘« Introduction of a scheme of integrated infrastructural development (including technological back-up services) for small-scale industries. : © Introduction of factoring services to help solve the problems of delayed payments to small sector. © Market promotion of small-scale industries products through co-operative / public sector institutions, other specialized professional / marketing agencies and the consortium approach. © To set up a technology development cell in the small industries development organization. To accord priority to small and tiny sector in the allocation of indigenous raw materials. Setting up of an export development centre in the small industries development organization (SIDO). © To widen the scope of the national equity fund, to enlarge the single window scheme and also to associate commercial banks with provision of composite loans. Before, we close this section, let us briefly reflect on some important observations on the new small enterprise policy. These are 1. The new policy is founded on proper understanding of the fundamental problems ot small-scale sector and the measures proposed by it are well directed to mitigate the various handicaps that faces this sector. 2. Change in the definition of tiny unity has two-fold features. First, having raised the investment ceiling from Rs. 2 lakhs to Rs. 5 lakhs and done way with the location requirement (limit of 50,000 population), all new units within the investment limit of the 5 lakhs and located in bigger towns (population of 50,000 and more) will become a part of the tiny sector. Second, perhaps more significant, while earlier an industry means mainly manufacturing the new policy has now widened the scope to include industry elated service and business enterprises. This is more realistic. Now like in ‘many other countries, we have a ‘small business policy’ and not a ‘small industry policy’. 3. the new policy provides for continuous support to the tiny sector like easier access to institutional finance, preference in government purchase and relaxation of certain labour laws. Since tiny sector is the nursery of the traditional skill, the proposed package of incentives for tiny sector will help it grow with more vitality. This is welcome. 4. one major policy change related to equity participation by another undertakings upto24 per cent in small unit. The other undertakings may be small or large, Indian or foreign. This 24% equity participation is based on two basic premises. Firstly, equity 44 Crested w @ nitro” professional download the free tral online a atropd.com/profesionalparticipation up to 24% by the outsides will not allow them to dominate in the small scale industry. Secondly, involvement of large and foreign firms in small units will bring about technology transfer from big units to small units. Thus, the new policy would prove mutually beneficial both to the large units and the small units. This ‘would further cement the economic bonds between the two sectors. However, there is another view about this 24% equity participation by other units irrespective of size of the units. Dhingra pines that ‘now big industry can float small units, legitimately hold 24 per cent share in them and get these units manufacture any of the reserved items. Does not it mean a sharp dilution in the government’s stated policy or reservation for small industry? The surreptitious approach leads one to suspect that if lacks courage of conviction. Ram K.Vepa also expresses his fears that a provision of 24 per cent equity participation by large units in small units may at a later stage facilitate the takeover of small sector by the large sector. 5. one important feature is the introduction of a new legal form of organization of business, namely, restricted or limited partnership. As per this form, the liability of at least one partner is unlimited and the liability of other partner is limited to their invested capitals. This can be considered as a welcome provision. It will atiract equity capital from friends and relatives who were earlier reluctant to advance their funds due to the limited liability of the partners. © vernment Support to Small-Scale Enterprises during Five Year Plans Steps for development of small scale and cottage industries were initiated immediately after independence. That the government has attached great importance to the development of small- scale sector in the successive five year plans can be had from glancing at the plan outlays for small sector. This is given in table . Table Plan Expenditure and Outlay on Village and Small-Scale Industries Plan Total Expenditure | (2) As Percentage of Total Expenditure (Rs. Crores) On Industry In Plan 1 2 3 4 First (1951-56) 48.00 478 2.1 Second (1956-61) | 187.00 18.7 41 Third (1961-66) __[ 248.00 12.2 2.8 Fourth (1969-73) _[ 242.00 77 15 Fifth (1974-78) | 592.00 62 15 Sixth (1980-85) 1945.00 113 18 Seventh (1985-90) [3249.00 10.7 15 Eighth (1992-97) | 6334.00 al 78 15 45 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalIt is seen from table that the plan expenditure on small sector has been continuously increasing. In the first five year plan, Rs. 48 crores (constituting 47.8% of total plan expenditure on industry) was spent in small-scale alone, By the end on the first plan, there were a total of size boards, i.e., All India Handloom Board, All India Handicrafts Board, All India Khadi and Village industries board, small-scale industries board, coir board and central silk board, established, thus, covering the entire field of small-scale and cottage industries. Following the recommendations of Karve Committee, the second five year plan focused on dispersal of industries. Accordingly, as many as 60 industrial were established for providing basic facilities like power, water, transport, etc., at one place. Certain itesm were reserved for exclusive production in small-scale industries. The total plan outlay of the second plan reached to Rs. 187 crores. The third plan especially stressed on the extension of the coverage of small-scale industries. As against a total plan outlay of Rs. 264 crores for the development of small-scale and cottage industries, only Rs. 240.76 crores were actually incurred in the third plan. The programmes adopted in the first three plans were extended in the fourth plan also. As a result of various development programmes, small scale witnessed significant diversification and expansion during the fourth plan period. On the eve of the fourth plan, for example, as many as 346 industrial estates had been completed and the small industrial units set up in these estates provided employment to about 82.700 persons. Their annul production was estimated at Rs. 99.25 crores. Like the third plan the fourth plan could use, only RS. 250 crores out of the total allocated outlay of RS. 293 crores. The fifth plan outlay was kept RS. 611 crores where as the actual expenditure amounted to Rs. $95 crores. The main thrust of the plan was develop small-scale industries to remove poverty and inequality stalking the land, On account of massive development programmes initiated for the development of promising small sector, the actual plan expenditure (Rs. 1945 crores) surpassed the plan outlay of Rs. 1780 crores in the sixth plan. Among the important programmes of the sixth plan were. Increase in the number of items reserved for exclusive production in small sector reaching to 836. ii, Reservation of 409 items for exclusive purchase from small-scale industries. iii, Provision of consultancy services in technical, managerial and marketing through sIDO. iv. Establishment of council for advancement or Rural Technology (CART) in October 1982 for providing necessary technical input to rural industries. By the end of the sixth plan, production from small and cottage industries increased to Rs. 65, 730 crores. Export touched to Rs. 4,557.4 crores and employment reached to 315 lakh Created witr @ nitro” professional download the free tral online a atropd.com/profesionalpersons by the end of the sixth plan 1984-85. This accounted for 80 per cent of the total industrial employment which comes after agriculture as the biggest purveyor of employment. The main thrust of the seventh plan was up gradation of technology to increase competitiveness of small sector. The new watch ward, therefore, was “competition” and “not reservation “. Like the sixth plan, the actual expenditure of Rs. 3,249 crores was well above the plan outlay of Rs. 2,752.74 crores in the seventh plan. On account of various development Programmes, the small sector witnessed significant development in all fronts. To quote, the number of small scale units increased from 16.56 lakh persons to 18.27 lakh persons during the English plan period. The value of production increased from RS. 57,100 crores to Rs. 91,681 crores during the same period. Employment also increased substantially from 96 lakh persons to 119.6 lakh persons during the seventh plan period. The main advocation of the English plan has been employment generation as the motive force for economic growth. In order to fulfill this objective, small and village industries have been assigned an extremely important role. The important plan proposals include: 1. The plan has reiterated that timely and adequate availability of crédit is of more importance than concessional credit. From this point of view, with the establishment of SIDBI, certain new initiatives like sanction of composite loans under ‘single window concept’ concessional loans of state corporations of infrastructure development and provision of factoring services have been introduced. 2. In order to up grade technology, the English plan proposes to establish appropriate tool rooms and training institutes. 3. The growth centre approach has been accepted as a suitable measure for industrial dispersal and is under implementation. During the English plan, establishment of 70 growth centres was completed. Establishment of functional industrial estates with substantial agricultural vegetables and horticultural products was also proposed. 4. Like growth centres, the English plan also envisaged to set up integrated infrastructure development centres for tiny units. For this, the centre, the state governments and industry associations were to be involved. Small Enterprises in International Business Learning Objectives On completion of this chapter, you should be able to; Highlight the role of small scale enterprises in the national economy. Delineate the export performance and pattem of small scale units over the years. Identify the major constraints faced by small enterprises in exporting their products. Explore the possibilities for increasing exports of small industry products. ‘Submit suggestions for increasing exports of the products manufactured by small sector. 47 Created-w @ nitro” professional download the free tral online a atropd.com/profesionalIntroduction India today operates the largest and oldest programme for the development of small scale enterprises in any developing country. The small enterprises have made an impressive and phenomenal growth in units, production, employment and exports over the years. The small sector has now emerged as a dynamic and vibrant sector of the Indian economy in the recent years. An idea of the overall growth of this sector sine 1977-78 can be obtained from table . Year Number of | Production | Employment | Exports (Rs. units (in lakhs) | (Rs. In crores) | _ (in lakhs) In crores) 1977-78 2.96 14300 34.0 345 1980-81 4.48 28060 71.0 1643, 1985-86 855 61228 96.0 2769 1987-88 10.48 87300 107.0 B73 1988-89 11.59 106400 113.0 3490 1989-90 16.58 132300 119.6 7626 1990-91 19.40 157500 126.2 9100 1991-92 20.00 160000 126.6 13883 1992-93 22.35 209300 134.1 17785 1993-94 23.84 241648 139.4 17785 ‘Overal growth | 705% 1589% 158% 2740% 1978-94 ‘A remarkable feature seen from table is fast increasing exports of small enterprises to the international market. The significant role of small enterprises in the Indian economy is that it accounts for 35% of the gross value of the output in the manufacturing sector, about 80% of the total industrial employment and about 40% of the total exports of the country. Export promotion is one of the top agenda items of the economic reforms in India. In view of above, the present chapter analyses the export trends is small enterprises with focus on the constraints and potential and lastly tries to offer some concrete suggestions to promote exports of small enterprises in the economy. Export Performance and trends of Small Enterprises Exports from small enterprises have been on increase registering an annual growth of about 171 per cent during 1978-94, one way to view at the impressive growth of exports from small enterprises is their increasing share year after year to the total exports from the country. The percentage share of small enterprise exports to the total from 1971-72 onwards is presented in Table . 48 Created-w @ nitro” professional download the free tral online a atropd.com/profesionalTable Increasing Exports from Small Enterprises Year Total Exports Exports from | Percentage 3 to 2 ‘Small Enterprises 1 2 3 4 1971-72 1608 135 96 1976-77, 3142 766 149 1981-82 7890 2071 26.5 1986-87 12567 3644 29.0 1991-92 “44040 13883 315 1992-93 53668 17785 33.1 1993-94 69547 24149(P) 345 It is interesting to note that the total exports of the country increased by about 43 times, while the exports from small enterprises increased by about 155 times. It is important to mention here that the information presented in table is with regard to the direct exports only. Small enterprises also make indirect exports through merchant exporters, trading houses, exports houses and large enterprises. These indirect export are estimated at around 10 per cent of the total exports. It is also expected to increase in future when the ongoing economic reforms in the country start giving results. Though the growth of exports from the small enterprises is, no doubt, impressive, it is also true that India’s share in world’s exports is very low, at about 0.5 per cent. India is now the member of the World Trade Organization (WTO). Hence, it has to improve its share in world’s exports to be a global player. Given the large industrial sector’s attention focused more on internal market than the international market, on the one hand, and decreasing exports of primary products and traditional items, on the other, we need to concentrate on small enterprises to increase our exports as it holds potential for it. In order to have an idea of the export potential of small enterprises, let us examine the item wise export performance of this sector. Item-Wise Exports from Small Enterprise Table gives information about the item-wise export performance of small enterprises in 1992-93. in view of the wide range of item produced by small enterprises, only a new items i.e, sports goods, ready-made garments, leather products, processed food, plastic goods, engineering goods, electrical and electronic goods, basic chemicals and pharmaceuticals, play dominant role in exports. The share of some items in exports is as high as 100 per cent in sports goods, 90 percent in ready-made garments, 98 per cent in lac, 86 per cent is cashew, 80 per cent is leather products, 65 per cent in processed goods and 55 per cent in chemicals and pharmaceuticals and cosmetics. One interesting point to note is that four items, namely, ready-made garments, leather 49 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalProducts, basic chemicals and engineering goods alone account for more than four-fifths (83.1 per cent) of the total exports from the country. These items, thus, hold good promise for increasing exports in future also. Exports of traditional products like cashew and lac is not less ¢ Products Total | Share of Small % of3to2 Exports Enterprises 1 2 3 4 T] Non-Traditional Rs Rs | products. Engineering goods | 6450.00 | 1950.00 30.23 including _ Electrical and electronics Basic chemicals, | 3623.20 | 1992.76 35.00 Pharmaceuticals and Cosmetics Chemicals and allied [ 4299.44 | 118.98 281 products Plastic products 389.55 | 175.40 45.02 Finished Teather & [3692.48 | 2953.98 30.00 leather products Marine products 1767.43 [560.81 28.67 Processed foods 1293.00 _ [840.45 65.00 Woolen Garments * | 594.65 | 208.12 35.00 Knitwear Sports goods 93.63 B63 100.00 Ready-made garments _| 8840.75 _ | 7956.67 90.00 Rayon& Synthetic [NA 15.73 NA lucts Tobacco, snuffand bidi [5.7.74 | 240.14 47230 31481.87_| 17052.67, 54.16 2 | Traditional Products Cashew “Kemel & | 749.23 | 642.46 85.75 Cashew Nut Shell Liquid Lac 52.63 31.49 97.85 Spices, spice oils, | 382.06] 38.20 10.00 oleoresins Total (E+I) 32665.79_| 1784.82 54,448 50 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalHowever, the export performance of small sector exhibits some disturbing features also. 1. About 83 percent of total exports from small sector accounted for by four items alone denotes the lack of diversification in export items of small sector. Even the items having good potential for export like leather products, account for only 3 to 4 per cent of global exports. 2. At present, most of our exports are channelised to the highly competitive markets of developed countries where our products find difficult to make their headway. Hence in order to boost the SSI exports, the new potential markets need to be explored an tapped. A visit made by team from the National Small Industry Corporation (NSIC), New Delhi to south Africa recently has revealed that there is enormous potential for the Indian engineering and machinery products in this country. Major Constraints Among about 24 lakhs registered and unregistered small scale units in the country, about 90 per cent units are tiny with an investment in plant and machinery up to Rs. 5 lakhs. Technology is the crux of quality and competitiveness but, many small scale units particularly tiny units find it difficult to go for modernization and technology up gradation because of low ceiling on investment in plant and machinery. According to the second. All India Census of Registered Small Scale Industrial Units, out of 5.83 lakh units working in 1987-88, the number of exporting units was 4554 only, i.e., only 0.7 per cent of the total units. The share of exports to the total value of production within the small scale sector is also low. In 1992-93, out of the total value of production at current prices, of Rs. 2,09,300 crores, the value of exports for the year was Rs. 17,785 crores, which is tin single digit about 8.5 per cent of the total production. ‘The major constraints encountered by the small scale units in exporting their products are as follows: Credit Policy The small-scale units have very weak-base of their own funds, on the one hand, and have no access to other sources of funds like capital market, on the other. Hence, they have to depend upon the State Financial Corporations (SFCs) and the commercial banks to meet their long-term and short-term capital requirements. However, as against the minimum norm of 20% prescribed by the Nayak Committee, the actual availability of credit from the financial institutions was very low at 8.1 per cent of their output. This underlines the need for a comprehensive credit scheme targeted at small industry exports. 51 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalInfrastructure Lack of infrastructure facilities like power supply, transportation and communication adversely affect the quantity and quality of production, its costs and delivery. These, in turn, tell upon the export performance of small units. The launching of a new scheme of integrated infrastructure development in rural and backward areas is a right step in right direction. Technology Technology is the crux of quality and competitiveness. However, the adoption of technology in small industries hampered due to lack of infrastructural facilities, on the one hand, and the present investment ceiling of the small scale industry, on other. Nevertheless, the Government has set up several tool rooms, production-cum-process development centres, regional testing centres and workshops, schemes of industrial parks and ISO — 9000 to break the prevailing inertia and promote exports from small scale units. The recent telecommunication revolution has offered hi-tech application for market research. which is more cost effective substitute for exploratory personal visits abroad. As a matter of fact, the conventional method of market explorations through trail and error and private contacts has been replaced by the electronic network exchanging business queries between the trading parties. Export Potential of Small Scale Units Given the weakness of small sector, one cannot conclude that small sector has no strong point which will help it emerge as a global player. The small units are inherently flexible to react to market signals and changing tastes. This makes the small enterprise more innovative and open to new ideas. Opportunities exist for small-scale sector to engage a strong player especially in the exports of the following products. Food Processing Industries ndia has been the second largest producer of a very wide variety of fruits and vegetables in the world. But, it processes less than one per cent of production. This figure of India is far behind the figures of 30 per cent of Philippines and 83 per cent of Malaysia. At the end of 1992, the number of processing units registered under Fruit Products Order was 4,057 of which 87 per cent belonged to small scale and cottage industries sector. However, India’s share in the world exports of fruit and vegetable and fish and fish’ products is just 0.3 per cent and 1.7 per cent respectively. The major reasons for country’s low share in the international markets, lack of 52 Created with @ nitro” professional download the free tral online a atropd.com/profesionalquality control, poor packaging, high cost of production, inadequacy of infrastructure like transport and power and non-availability of required inputs at right time and price. Considering the growing international demand for processed food, the items which hold good potential for exports from India are sea foods, spices, cashew nuts, fruits and vegetables, fruit pulp, juices, james, pickles canned fruit and vegetables, dehydrated vegetables and gaur gums. Leather Goods India has the largest cattle population and, thus, has a substantial raw material base for leather-based industries. At present, the country’s share in the world leather market is about 4 per cent and the target is to raise it by 10 per cent by 2000 because this sector holds potential for exports. However, this sector is plagued by certain weakness too. These are low volume of production units, poor quality, lac of standardization, poor delivery and absence of technological up gradation. These weaknesses need to be attended to expeditiously and adequately tap the export potential of leather goods in the country. Electronic Goods The electronic industry has registered a phenomenal compound growth rate of 35 per cent during the last decade 1981-90. the share of small sector, in 1993-94, was 40% of output and 30% of exports of electronic industry. Though the small scale industrial units have been expotting items from ordinary to hi-tech products, yet its share in the global market is very low just 0.15 per cent and that too 80% exports are form export processing zones alone. The electronic industry holds tremendous potential for exports in electronics shoftware and contract, manufacturing. This potential need to be tapped. India has the third largest technical manpower in the world. Recently, the technically qualified people have started assuming the role of exporters. Some of them have made an impressive headway in export within a short period. What is needed is to provide them support in terms of developed industrial sheds / plants and credit facility. Plastic Goods The plastic industry has made an impressive growth in recent years. At present, out of 18,500 unit manufacturing various industrial and consumer plastics, around 18,000 units are in small sector. The items of plastic exports include carriers bags garbage bags, shooping bags, woven sacks, plastic moulded household items like insulated thermoware, pens, spectacle frames, PVC hoses of these exports. There still exists enough scope to diversity the products and penetrate new markets. The main problems this industry is facing is shortage of plastic raw material, i., polymer. But, this has in tum helped the development of recycling of plastic waste industry, an eco-friendly measure, 53 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalThese are some of the illustrative items and not an exhaustive list of exportable items. It definitely shows the good potential of small scale industry sector to increase its exports in the coming years. Some Suggestions The Government of India had accorded high priority to the development of small scale industries in the country. Under the protective and promotional policies of the government, the small scale enterprises have made their presence felt nationally and internationally. The share of small scale enterprises in the country’s exports has risen from 11 per cent in 1970-71 to 35 per cent in 1993-94. realizing the good export potential of small sector, the board of trade and ministry of commerce have identified 8 sectors and 15 items respectively for boosting exports from the small scale sector. However, the bug bear of the sector has been the inadequacies of capital, technology and marketing. If the export potential of small scale enterprises is to be tapped to the full extent, then the issues like simplification procedures, easier access to the bank and institutional credit, improvement in infrastructure and marketing issues need to be attended to expeditiously to help the country achieve a target of at least 1.5 per cent share in the world export in the next 10-15 years. We wish our small enterprises a vibrant player in the intemational maker. 54 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalUNIT — 11 BUSINESS PLAN PREPARATION > Project identification & Classification > Project Formulation > Project Design & Network analysis > Project Appraisal Project Identification and Classification Meaning of Project Project classification Project identification Internal and external constraints Project objectives Desk Research and Techno-economic Survey Project Life Cycle Review Questions Meaning of Project In the precise sense, a project presupposes commitment to tasks to be performed with well defined objectives, schedules and budget. It can be defined as a scientifically evolved work plan devised to achieve a specific objective within a specified period of time. taken in this perspective, while projects can differ in size, nature, objectives and complexity, they must all partake of three basic attributes of being a course of action, of having specific objectives and of involving a definite time perspective. From the point of view of resource allocation, a project can be considered as a proposal involving capital investment for the purpose of developing facilities to provide goods or services. A project may involve the establishment of new plant for the manufacture of steel ingots, it may involve the provision of additional educational facilities to a particular age group in the community, or it may aim at developing infrastructure facilities for the marketing of agricultural products. Whatever the nature of the project, a project will involve allocation and consumption of resources on the one hand and generation of resources, goods or services on the other. Webster New 20" Century Dictionary refers to it as a scheme, design, a proposal of something intended or devised. ‘The Director of Management regards it as an investment project, carried out according to a plan in order to achieve a definite objective within a certain time and 55 Created with @ nitro” professional download the free tral online a atropd.com/profesionalwhich will cease when the objective is achieve. Similarly, a project according to the Encyclopedia of Management, is an organized unit dedicated to the attainment of a goal the successful completion of a development project on time, within budget, in conformance with pre-determined programme specifications. Another school of thought looks upon a project as a combination of interrelated activities to achieve a specific objective. For instance, a project according to Project Management Institute, USA, is a system involving the co-ordination of a number of separate department entities through the organization, and which must'be completed within prescribed schedules and time constraints. Project management scholars emphasis that a project a unique and non-repetitive activity aims at systematically coordinating inputs in the-direction of intended outputs. To quote Harrison, a project can be defined as a non-routine, non-repetitive, one-off undertaking normally with discrete time, financial and technical performance goals. There are still others whose primary emphasis is on appraising investment proposals from the economic and social profitability angles. For instance, according to Little and Mirrlees, a project refers to any scheme, or part of a scheme, for investing resources which can reasonably be analysed and evaluated as an important unit. The Manual on Economic Development Projects too defines a project as the compilation of data which will enable all appraisal to be made of the economic advantages and the disadvantages attendant upon the allocation of county’s resources to the production of specific goods and services. Thus, a project may be defined as a scientifically evolved work plan devised to achieve a specific objective within a specified period of time. The objective may be to create expand and/or develop certain facilities in order to increase the production of goods and/or services in the community. Project Classification Projects have been classified in various ways by different authorities. Little and Mirrelees divide the projects into two broad categories, viz., quantifiable projects and non- quantifiable projects. The Planning Commission has accepted the sectoral criteria for classification of projects. Projects can also be classified on the basis of techno-economic characteristics. All India financial institutions classify the projects on the basis of the nature of the project and its life cycle. ‘The project classifications are explained below. 1. Quantifiable and non-quantifiable projects Quantifiable projects are those in which a plausible quantitative assessment of benefits can be made, Non-quantifiable projects are those where such an assessment is not possible. 56 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalProject concemed with industrial development, power generation, mineral development are forming part of quantifiable projects. ‘The non-quantifiable projects category comprise health, education and defence. 2, Sectoral Projects According to the Indian Planning Commission, a project may fall in the following sectors : Agriculture and Allied Sector Irrigation and Power Sector Industry and Mining Sector Transport and Communication Sector Social Services Sector Miscellaneous Sector vVVVVVV The sector classification of projects is quite useful for resource allocation at macro levels. 3. Techno-Economic Projects Techno-economic projects classification includes factors intensity-oriented classification, causation-oriented classification and magnitude-oriented classification. These three groupings are narrated as under. (@) Factor intensity oriented classification : The factor intensity is used as base for classification of projects such as capita-intensive or labour-intensive which depends upon the large scale investments in plant and machinery or human resources. (b) Causation oricnted classification : The causation-oriented project are determined based, on is causes namely demand based or raw material-based projects. The non-available of certain goods or services and consequent demand for such goods of services or the availability of certain raw materials, skills of other inputs is the dominant reason for starting the project. (©) Magnitude oriented classification : the size of investments forms the basis for magnitude- oriented projects. Projects may thus be classified based on its investment such as large- scale, mediumOscale and small-scale projects. Techno-economic characteristics-based classification is useful in facilitating the process of feasibility appraisal. United Nations and its specialized agencies use the Intemational Standard Industrial Classification of all economic activities (ISIC) in collection and compilation of economic data. Since this classification covers the entire field of human economic endeavour, it forms a useful basis for classification of projects. Economic activities are under this classification grouped into ten divisions, which are sub-divided into ninety sub-divisions. The divisions are: 87 Crested-w @ nitro” professional download the free tral online a atropd.com/profesional- Agriculture, Forestry, Hunting and Fishing Division 1 + Mining and Quarrying Division 2 & 3 - Manufacturing Division 4 - Construction Division 5 - Electricity, Gas, Water and Sanitary Services Division 6 - Commerce Division 7 -' Transport Division 8 - Services Division 9 - Activities not adequately described Financial Institutions Classification All India and State Financial Institutions classify the projects according to their age and experience and the purpose for which the project is being taken up. “They are as follow: (New projects (i Expansion projects (ii) Modemisation projects (iv) __ Diversification projects : The projects listed above are generally profit-oriented and the services oriented projects are classified as under: (Welfare Projects * (ii) Service Projects ii) ‘Research and Development Projects (iv) Educational Projects Project Identification Project identification is concerned with the collection, compilation and analysis of economic data for the eventual purpose of locating possible opportunities for investment and with the development of the characteristics of such opportunities. Opportunities, according of Drucker are of three kinds additive, complementary and break-through. Additive opportunities are those opportunities which enable the decision-maker to better utilize the existing resources without in any involving a change in the character of business. Complementary opportunities involve the introduction of new ideas and as such do lead to a certain amount of change in the existing structure. Break —through opportunities, on the other hand, involve fundamental changes in both the'structure and character of business, Additive opportunities involve the least amount of disturbance to the existing state of affairs and hence the least amount of risk. ‘The element of risk is more in other two opportunities. When the element of risk increases, it becomes more important to precisely define the scope and nature of project idea, to develop alternative solutions for achieving the project objectives and to select the best possible approach So as to minimize both resource consumption and risks and to optimize the return or gains. Project identification can not be complete without identifying the characteristics of a project. Every project has three basic dimensions — inputs, outputs and social costs and benefits. The input characteristics define what the project will consume in terms of raw materials, energy, 58 Created with @ nitro” professional download the free tral online a atropd.com/profesionalmanpower, finance and organizational setup. The nature and magnitude of each of these inputs must be determined in order to make the input characteristics explicit. The output characteristics of a project define what the project will generate in the form of goods and services, employment, revenue, etc. The quantity and quality of all these outputs should be clearly specified. “In addition to inputs and outputs every project has an impact on the society. It inevitably affects the current equilibriums of the demand and supply in the economy. It is necessary to evaluate carefully the sacrifice which the society will be required to make and the benefits that will accrue to the society from a given project.] Projects do not emerge themselves. The inputs to set up a project can come from different sources such as Governmental agencies, credit and financial institutions, non- governmental organizations like chambers of commerce and industry, inter-institutional groups, technical-consultancy organizations and intemational collaborations. Once the venture ideas have been developed by entrepreneurs by following one or combination of sources explained, these have to be screened and evaluated in a preliminary fashion on the basis of internal and extemal constraints prior to being put to additional tests of pre-feasibility. This project identification comes to an end by laying down specific project objectives clearly and concisely and without any ambiguity so that these convey one and the same meaning to all concerned. Internal Constraints Intemnal constraints arise on account of the limitations of the management system, which will eventually be responsible for the implementation of a project. In India, the internal constraints for the entrepreneurs while venturing the projects comprise inputs, resources and outputs, These are narrated as under: () Entrepreneurs, while implementing the projects, rely more on outside consultants for preparation of feasibility reports in the formulation of their projects. ‘The limitation on the part of entrepreneurs to provide inbuilt project services in the form of preparing feasibility reports is an important intemal constraint in the early implementation of the project. (i) For early implementation of projects within the budgeted cost and time schedule, all the entrepreneurs cannot develop independent project managements systems, organization structure, network analysis and other elements. In such a situation, the entrepreneurs inherent internal constraints are developing well equipped project management strategies and tools while implementing them. 59 Created-w @ nitro” professional download the free tral online a atropd.com/profesional(iii) Project goals and objectives lay down the main purpose for which an organization exists, Practically, project management team is not much involved with the determination of project objectives. Certainly, this will be another internal constraint for the project team to achieve the unrealistic objective, which is decided by the top ‘management personnel of the business. (iv) _ The availability of the necessary internal project elements and resources are physical ‘and non-physical resources. ‘The physical resources include finance, personnel, inventories and faculties. The non-physical resources are patents, secret processes, unique experience and skills. Both physical and non-physical resources are the important constraints for the entrepreneurs to make available at a time when the project implementation is in progress. External Constraints ‘The external constraints are also another important constraint for the entrepreneurs who venture into project implementation. The important external constraints are the project environments comprising things, people and situations outside a project and also the size, nature, location and extent of the project constitute the environment of the project. The other tangible environment factors are namely social taboos, government policies and the state of capital markets. These are described as under: (@ The extemal environment factors like nature, size, location and the extent of project are the important limiting factors for the entrepreneurs when the project does not conform to the socio-economic objectives of the country. (ii) Government policies and regulations are another major hurdle for the entrepreneurs while implementing the projects. They are mainly in the form of delay in giving approval to the entrepreneurs in the medium of industrial licensing, foreign collaboration approval, CCI clearance, environmental clearance, foreign exchange permit, capital goods approval and import goods clearance. (iii) Financial institutions, banks are the important external financial source for the entrepreneurs while financing their projects. The financial institutions and commercial banks cumbersome producers and documentations system are important extemal constraints for the entrepreneurs in the form of delay in financing the projects. 60 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalProject Objectives Project objective is an important element in the project planning cycle, Project objectives are concemed with defining in a precise manner what the project is expected to achieve and to provide a measure of performance for the project as a whole, Objectives are the foundations on which the entire edifice of the project design is built, The essential requirements for project objectives are: (@) specific, not general; (b) not overly complex (©) measurable, tangible and verifiable (@) realistic and attainable (©) established within resource bounds (f) consistent with resources available or anticipated (g) consistent with organizational plans, policies and procedures. The project objectives are aimed to complete the project on time, completion of the project within contemplated costs and the completion of the project at a profit to the company. Project objectives are divided into two categories, namely, ‘retentive’ objectives and ‘acquisitive? objectives. Retentive objectives are concemed with the relation and preservation of resources like money, time, energy, equipment and skills. Acquisitive objectives, on the other hand, involve acquisition of resources or attaining states that the organization or its managers do not have. Project objectives are also economical and social in nature. The economical objectives of the project are ion the form of profit-oriented. The social project objectives are scrvice-oriented. The economical objectives are primarily concerned only with the primary financial costs and benefits of the project. It quantified the resources, which the project will consume in the shape of capital expenditure and maintenance expenditure, The social project objectives are inconformity with social cost benefit aspects of individual projects. The social project objective is the process of evaluating a project from the point of view of the total impact, which the project will have on the economy of the nation. Projects are to start with certain objectives to achieve specified results within the specified periods of time, Besides the specified results, which in effect are a generalized statement of Project objectives, projects achieve a number of other goals. The project formulation team should therefore try to locate as many consequences of the project activities as possible and thereafter take up the exercise of re-setting and re-defining the project objectives in unambiguous precise and as far as possible in quantitative terms, The process of project development involves a stage-by-stage development of the project idea info an investment proposition of the ensuring stage. ‘These conclusions also provide necessary 61 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalmaterial for re-checking of the initial premises from which a beginning was made. At the completion of each stage, the project team should, therefore, look not only forward but also backward. The backward look is necessary to recheck and if necessary modify the initial assumptions. ‘The project team has to be ready to revise its opinions and conclusions in the light of further evidence. In fact, the success of the tem will depend on its persistence and alertness on the one hand and on its intent to be as objective as possible on the other. Desk Research and Techno-Economic Survey Desk research and techno-economic survey are two important techniques of project identification. Desk research implies the collection and use of information from published sources like journals, magazines, reports, etc. Techno-economic survey is an investigation conducted by a team of experts for identifying the industrial development potential of an area. Central and State Government agencies often commission such surveys. Data and product identification may be obtained from the following sources: (Industrial potential surveys (ii) Lead bank survey reports (ii) New process/product development in research laboratories (iv) Literature on industries within the country and abroad (v) _Import/export statistics (vi) Profitability studies of selected industries (vii) Studies on price and shortage of certain commodities ‘A distinction should be made here between demand-based industries and resource-based industries. Demand-based industries are those whose products and services are required by the existing industries as raw materials and component parts. For example large projects like BHEL, Maruti Udyong, etc. require a large number of items. The fortunes of an ancillary unit are linked to that of the parent unit. Therefore, detailed analysis of the parent unit, experience of existing ancillary units, etc should be made before setting up an ancillary. For setting up a workshop or service unit also the market demand, local competition, availability of orders, etc. should be carefully judged. Central and State goverment have reserved several items for exclusive purchase from the small scale sector. Units for this purpose also come under the category of demand-based industries. In the selection of resource-based industries, the availability of the necessary inputs must be ensured. For example, a rice bran oil mill can be set up near rice mills a poultry feed unit near oil mills, and so on. This will ensure the availability of the necessary raw materials. ‘An entrepreneur can think of setting up an import substitution industry. The Government encourages such units. However, the Government’s import policy, present demand, landed price 62 Created with @ nitro” professional download the free tral online a atropd.com/profesionalOf the imported item, quality differences, etc. should be considered. The demand and supply estimates should include the licenses already granted and in the process of being established, capacity utilization of thie existing units could be taken as a broad ‘indicator of market for the Product. Import statistics available from Government publications should also be analyzed for the purpose. Similarly, export-oriented units are given preference by the Government. Export statistic, demand potential of foreign markets and other relevant issues must be considered before choosing an export-oriented unit. Project Life Cycle Like human beings, projects also have a life cycle. Project life cycle consists of three main stages: 1. The Pre-investment Phase : This is the first phase in the life of a project, Itis primarily concemed with objective formulation, demand forecasting, selection of optimal strategy, evaluation of input characteristics, projections of the financial profile, and if necessary cost benefit analysis and ultimately the pre- investment appraisal. The project idea is developed into an investment Proposition during this phase. 2 The Construction Phase : This phase begins after the investment decision is taken. Resources are invested during this phase in building the basic assets of the project, which can in due course be utilized to achieve the project objectives. The assets may be in the nature of land and buildings, plant and machinery, ancillary accommodation, communication services, control systems and marketing organization. In projects not involving the use of plant and machinery, the construction phase may merely consist of developing necessary manpower resources. Thus, the construction phase consists mainly of development the infrastructure for the project. It is a one time effort. a The Normalization phase : This phase starts after the trial run of the project framework developed during the construction phase. It involves routine procedures which are performed in a cycle order. The primary objective of this Phase is to produce the goods and services for which the project was established. For this purpose, a provision has to be made for raw materials and other consumables. These can be determined by analyzing the process cycle identifying the sequence of process operations. Projects which do not involve Production of goods do not require raw materials but only supplies or supporting goods needed to sustain the project process. Thus, the assets created during the construction phase are utilized during the normalization phase. 63 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalPyojeet Formvdation i ‘Need Faf rrojec. to: sautation ie The entrepreneur in a developing has to encounter a number of problems while establishing a “new project. These problems cause greater concem to many enthusiastic entreprencurs. However, they could be saved to a greater extend by undertaking a project formulation exercise at the appropriate time. 1, Selection of appropriate technology: The first problem faced by an entrepreneur is in the matter of selection of appropriate technology for his enterprise. Modem technology developed in the highly industrialized countries may not be suitable for adoption in the developing countries as the conditions prevalent differ from country to country. For example, the optional size of plants recommended for a highly industrialized country may be too big for acceptance in a developing country owing to the factors such as limited market for the products and limited availability of capital and skilled labour. Hence, the entrepreneur has to examine the project idea thoroughly as regards its design production, marketing, after sales services, etc. 2. Influence of External Economies: The second problem relates to the absence or non- availability of external economies. No project can function in isolation in any economy. It has to depend on other industries for the supply of raw materials, power, tools, spare parts, etc., or on ancillary enterprises which can provide technical, financial and managerial services or on a complex net-work of communication and transport facilities or an intricate system of business practices. The entrepreneur in developing countries is, therefore, to consider not only the basic costs of the project but also the ancillary costs which in industrially advanced countries would have been contributed by the external economies. 3. Dearth of Technically Qualified Personnel: The third problem is the non-availability of technically qualified and appropriate personnel. Modern technology calls for a certain minimum supply of various skills that are generally lacking in developing countries. 4, Resource mobilization: The fourth problem is resource mobilization. In the context of present day development of the magnitude and size of project it would be very difficult - for an entrepreneur to provide the entire development capital that a project may need. 5. Knowledge about Government Regulations: Besides these problems the entrepreneur has to comprehend a number of Government directives, import and export policies, price controls, etc. The difficult is to be familiar with all these regulations, for they are not available in a consolidated and detailed form in most of the developing countries. However, in India, a compendium entitled ‘Guidelines for Industries’ has been published 64 Created-w @ nitro” professional download the free tral online a atropd.com/profesionalby the Ministry of Industrial Development. It provides information regarding the industrial policy, licensing procedures, guidelines for foreign collaboration, import and export control orders and foreign exchange orders. It also has information regarding the present status of capacities and possibilities of future development in various industrial fields like metallurgical industries, electronics equipment industries, transportation industries and the like. These problems make the entrepreneur to undergo a lot of harassment, disappointment and despair. However, a project formulation exercise undertaken at the right time mitigates the severity as well as magnitude of these problems. Concept of Project Formulation Project formulation is the systematic development of a project idea for the eventual objective of arriving at an investment decision. It has the built-in mechanism of ringing the danger bell at the earliest possible stage of resource utilization. Project formulation involves a step-by-step investigation and development of project idea. And it provides a controlled mechanism for restricting expenditure can exercise his discretion of calling off the exercise if the facts so warrant. It enables him to take decisions in a scientific way providing a concrete set of facts. Project formulation is a process involving the joint efforts of a team of experts. Each member of the team should be familiar with the broad strategy, objectives and other ingredients of the project. Besides being an expert in his area of specialization, he should be able to play his role in the overall, scheme of things. The government official who deals with the project’s final clearance has to’. treated as forming part of the team. He should be well informed about the project. A well formulated feasibility report provides a medium which cuts across scientific, social and positional prejudices and provides a common meeting ground for all those who have a contribution to make in successful implementation of project. Project team should consist of experts in major substantive fields of the project. Depending on the situation any large project should comprise the following team memibers. (a) One industrial economist (b) One market a analyst (©) One or more technologist/engineer specializing in the appropriate industry (d) One mechanical and/or industrial engineer (©) One civil engineer, if needed (®) One management accounting expert. 65 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalSignificance of Project Formulation ‘A well-formulated project is the best passport for obtaining the required assistance from financial institutions When there is a situation of resource constraint and the ygilable resources are allocated to vanous projects based on their importance and viability 1 well formulated project formulation is the best way of selling a project idea to a financing agency. Project formulation will also be of great assistance for obtaining necessary Government sanctions have to be obtained and also provide an independent assessment of the feasibility of obtaining these sanctions based on the existing Government policies. The project report submitted by the entrepreneur will establish his bona fides in the eyes of the bureaucracy and obtain the due Government sanction without much difficulties. Elements of Project Formulation Project formulation is by itself an analytical management aid. ‘It enables the entrepreneur to arrive at the most effective project decision. Project formulation exercise normally includes such aspects as follows: Feasibility Analysis Techno-economic Analysis Project Design and Network Analysis, Input Analysis, Financial Analysis Social Cost-Benefit Analysis, and Project Appraisal. Nave eDe Feasibility Analysis Feasibility analysis is the process of evaluating the future of a project idea within the limitavons of the proiect implementing body and the constraints imposed on the project situation by the environment. The analysis is ufidertaken to determine the desirability of investing in further development. of project ideal; When a project is taken up for development three alternatives can arise. First, the projeef many appear to be positive and in such a case the project, assessing body can proceed to invest further resources in pre-investment studies and design development. Secondly, the project may tum out to be not feasible and, therefore, further inyestment in the project idea is ruled out. Thirdly, the data is not adequate for arriving at a decision about the feasibility of the project. In such a situation, additional information must be collected and the investment decision is deferred till the final decision Projects identified are normally analyzed in order to establish their viability from different angles such as technical, marketing, financial, etc. In other words, the various 66 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalalternatives in marketing, technology and other considerations ate studied and then findings, with the supporting data, are presented in a systematic form. Generally, the exercise in project feasibility analysis is carried out dividing it formally into three stages, viz, prefeasibility study, feasibility study and project repost. (h) Prefeasibility Study : The project idea must be elaborated in a more detailed study. However, formulation of a techno-economic feasibility study that enables 4 deunite decision to be made on the project is a costly and time-consuming task. Therefore, before assigning funds for such a study, a preliminary assessment of the project idea must be made in a pre-feasibility study. OF Support studies such as market surveys, laboratory ion is adequate to decide that the project is not either a “lable proposition or attractive enough for a particular investor or investor group. A reversibility study differs from a detailed feasibility study primarily with regard to the detail of jhe information obiained. Even at the pre-feasibility stage itis necessary to examine, perhaps broadly, the economic alternatives of: (a) Market and plant capacity; (©) Material input; (©) Location and site; (@) Project engineering; technologies and equipment and civil engineering works; (©) Overheads; factory, administration and sales; (®) Manpower; labour and staff; (8) Project implementation; () Financial analysis investment costs, project financing, production costs and commercial profitability. Ail) Feasibility Study : It is the most important part of project analysis, for it Provides answers to questions in detail on different aspects relating to a project. In Practice this means investigating the project form six different aspects economic, technical, managerial, organizational, commercial and financial The relative importance of these different aspects varies considerably according to the type of Project involved. For example, in the analysis of public sector projects more importance is usually given product together with alternative approsches to euch Production, Such a study should also provide a project of defined production capacity at a selected location using a particular technology or technology or technologies in 67 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalrelation to defined materials and inputs, at identified investment and production costs, and sales revenues yielding a defined return on investment. ‘The feasibility study is an iterative process covering all aspects of an investment project such as possible altemative solutions for production programmes, locations, technology, organizational setup, etc. If the resulting data show a non-vaible project, several parameters and the production programmes, material inputs or technology should be adjusted in an attempt to present a well defined viable project. The feasibility study should describe this optimization process, justify the assumptions made and the solutions selected and define the scope of the project as the integration of the selected partial alternatives. If however, the project is not viable despite all alterations reviewed, this should be stated and justified in the study. Most of feasibility studies have the same or similar coverage, though there may be considerable differences in orientation and emphasis depending on such factors as the nature of the industry, the magnitude and complexity of the production unit contemplated, investment and other costs involved. By and large, however, a satisfactory feasibility study must analyze all the basic components and implications of an industrial project and any shortfall in this regard will limit the utility of the study. 2. Techno-Economic Analysis fechno-economic analysis is primarily concerned with the identification of the project demtanc.potential and the selection of the optimal technology suitable for achieving the project objectives. (This analysis produces necessary information on which the project design can be based. !It also indicates whether the economy is in a position to absorb the output of the project. The size of the project and the technology used depend very much on the demand potential. Technology, in a border sense, includes methodology or process where the technical operations are not included. An optimal size and technology enable to achieve the economies of scale. The techno-economic analysis, therefore, consists of two parts. The first part is concerned with the determination of the maximum feasible project output and the second part with the selection of the optimal strategy to match this output. (i) Determination of Project Demand Potential : Estimation of demand potential is the starting point of techno-economic analysis. Demand forecasting helps to firm up the qualitative parameters of the project and also provides a basis for selecting the optimal strategy for the project. The forecasting may be for a short period extending up to a year i.e,, short-run forecast or ma cover only a particular industry i.e., industry forecast. Or it may new personal or specific be relating to the nature of product, viz., new or established product or the classification of product, viz., capital goods, consumer goods or services, etc., or the special features particular to the product, viz., market competition, risks associated with the product, etc. 68 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalDemand forecasting involves determination of market characteristics, quantitative market analysis and appraisal of project demand potential. The identification of market characteristics is essential to arrive at realistic demand estimates and also to undertake quantitative market analysis. On the basis of their structural features markets may be divided into several distinct groups such as monopoly, oligopoly, monopolistic competition, pure competition, monophony ete. The quantitative market analysis is made to estimate the industry demand of goods and services which a project may be expected to produce and to produce necessary information for developing project demand forecasts. The analysis is taken up in three stages: (@) Situation analysis, (b) Data collection and compilation, and (©) Interpretation and presentation. Situation analysis establishes the parameters of the quantitative analysis. It involves a study of the feasibility appraisal of the. project with a view to establishing the specific purpose of undertaking the market analysis and identifying the dimensions of the demand forecasts. It also helps in assessing and eventually determining the desired alternatives of the demand forecasts, Demand forecasting involves the collection, compilation and interpretation of a large variety of Statistical data. For projecting future trends, it is essential to know about past events, the situation at present and about the factors likely to affect the future course of events. Personal observation, desk research and market surveys are the commonly used ways for collecting data. Primary as well as secondary sources may be used for data collection, The data collected from various sources are first compiled, tested and tabulated in a form suitable for interpretation. It is then used for projection of future demand, (i) Selection of optimal project strategy : In any project situation, normally, an infinite series of strategies can theoretically be made available for achieving the project objectives. The difference in the payoff of several of these strategies will be generally so small that for the purpose of decision making, a group of these strategies can be represented by a single representative strategy. This, on the one hand, facilitates the process of identification of feasible strategies and on the other simplifies the decision problem. The search for altemative strategies will be both time and resource consuming. Two types of cost are involved in the search problem viz., cost of the search itself and cost of the error. The sample size, the sample design and the analysis of data are the controlled variables here. At the stage of selection of project strategy the project formulation team should have information about Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalthe project objectives, project feasibility parameters and the project demand potential. The feasibility parameter and demand potentials jointly determine the project feasibility horizon such as project size, capital investment, technology, etc. Project formulation, in order to be realistic, has to identify all feasible alternative courses of action so as to evolve the best strategy for a project. ‘A measure of performance is essential to develop a criterion of choice. Once it is developed, the benefits of various courses of action can be stated in terms of common measure of value and used for the selection of the optimal course of action. A project situation generally envisages the achievement of a number of secondary objectives such as creation of additional employment, removal of regional disparities, etc., in addition to the primary objective. Project formation is primarily concerned with the realization of these ultimate objectives. Since payofis for all the courses of action are of the same nature, these can all be expressed in terms of one scale of measurement. A particular course of action will be selected on the basis of effectiveness in the attainment of the end objectives. Optimal project strategy refers to that combination of controlled variables which will ensure the achievement of the project objectives with minimum expenditure of resources. Ordinarily, within the feasible spectrum of project objectives, an infinite number of project strategies is available, At the outset, the selection of optimal stratey may appear to be difficult. However, the project demand potential, the internal constraints and external constraints of the project help to reduce the number of possible strategies considerably. ‘The optimal strategy may be selected by comparing the representative strategies and identifying the optimal representative strategy which meets the project ends in hand. The techno-economic appraisal report contains the recommendations of the project formulation team regarding the strategy which should form the basis for further development of the project idea. Since the process of selection of project strategy is based on analytical considerations, the report also contains the details of the reasoning on which the recommendations are based, The contents of techno-economic analysis report will include preliminary status of the work at the beginning, project objectives, project demand potential, possible altemative course of action and optimal strategy and finally the techno-economic appraisal. 3. Project Design and Network Analysis Project design is the heart of a project. It defines the individual activities comprising a project and the interrelationship between these activities. It identifies the flow of events which must take place before a project can start yielding the desired results. The inter-relationship between various constituent activities of a project is generally depicted in the form of a network diagram. 0 Crested-w @ nitro” professional download the free tral online a atropd.com/profesional“Project design and network analysis are concerned primarily with the development of the detailed work plan of the project and its time profile. This plan is presented in the form of a network diagram. Network analysis is carried out to identify the optimal course of action, so as to execute the project within the minimum time keeping in view the available resources’ Thus, project design and network analysis paves the way for detailed identification and quanufication of the project inputs which is a essential for developing the financial and cost-benefit profile of a project, 4. Input Analysis After a project idea has withstood the tests of feasibility analysis, techno-economic analysis and network analysis, it become4s necessary to determine the resource requirements of the project. Input analysis is primarily concemed with the identification, quantification and evaluation of project inputs. The objective is first to identify the nature of the resources that a project will consume, secondly to estimate the magnitude of the required resources and thirdly to evaluate the possibility of un-interrupted supply of inputs. ° Resources are needed in all the three phases of a project. But the nafure and amount of resources required differ widely from one phase to another. During the preinvestment stage Tesources are needed for investigating various aspects of the project idea and for developing the project design. During the construction stage, non-recurring resources are needed to develop the project structure. During the normalization stage, the project requires raw materials and other consumables on recurring basis. The preinvestment stage generally consumes the least and the construction stage the maximum amount of resources. The best method of determining the inputs is to identify the resources required in the various activities involved in the project. Resources required for a project consist of both material and human resources. Input analysis uses the network plan for developing the input characteristics of the project. Both recurring and non-recurring resources must be considered. Input requirements constitute the basis of cost estimates of the project and are, therefore, essential for developing the financial profile and the cost benefit profile of the project. 5. Financi: Analysis, Financial characteristics of an investment proposition have a significant impact on the acceptability or otherwise of a project. ‘The purpose of financial analysis is to identify these characteristiés and to determine the financial feasibility of a project. Such analysis involves estimates about project costs and revenues and the funds required for the project It secks to find out whether the project will generate revenue to realize the ultimate objective for which it is undertaken. It reduces investment propositions to one common scale so as to permit comparison and eventual investment decision. Since investment proposition has a long time-horizon, due care and foresight must be used in financial analysis could be used for employing commercial profitability analysis. It could be made more effective by using break-even analysis and ratio n Created wit @ nitro” professional download the free tral online a atropd.com/profesionalanalysis. It generates data for computing different profitability criteria with a view to establish the project’s. 6. Cost Benefit Analysis Under this analysis, estimates of social costs and social benefits are made and presented for computation of social profitability of the project. While the costs and benefits under the financial analysis are estimated employing market prices based on financial objectives, this cost- benefit analysis considers them only at certain imputed prices based on social or national objectives. Generally, the purpose of this analysis would be to ascertain all social costs and secondary benefits with a view to find out the impact of the project on the society. The methods of estimating the shadow prices or imputed prices, social discount rate, etc., are to be explained and the calculations are to be presented in separate statements or tables. However, most of the data obtained from financial analysis could be objected to reflect the true social values and use. Similarly most of the decision criteria techniques of the profitability analysis could be used also in cost-benefit analysis. The information gathered would be used mostly for setting the social profitability criteria for public sector project appraisal and evaluation. Social cost benefit analysis is now an internationally recognized system of project appraisal even though no standard methodology is available for it. ‘The results of the feasibility analysis, the techno-economic analysis, the design and network analysis, the input analysis, the financial analysis and the cost benefit analysis are consolidated so as to give a final and formal shape to the project. It involves selection of the appraisal format, its contents and form of presentation. It is known as pre-investment appraisal and its purpose is to enable the concemed authorities to take an investment decision about the project. Feasibility Report The details gathered from feasibility studies and presented in various reports and statements are consolidated into one master report called project report or feasibility report. This report also contains some background submitting the report, The main purpose of the report is to provide information that is required for the project appraisal in the case of public sector projects this report would also enable the concerned authorities to take an objective decision on the project. In addition, this report would enable the financing agencies to purposefully evaluate the project before extending financial assistance. Project Formulation Vs. Detailed Project Report ‘The difference between project formulation and preparation of the detailed project report should be clearly understood. Project formulation is an investigating process which precedes investment decision. Its purpose is to present relevant facts before the decision makers to enable Crested w @ nitro” professional download the free tral online a atropd.com/profesionalthem to accept or reject the project. Therefore, the project idea is examined from the viewpoint of overall objectives, financial viability, technical feasibility and social impact. On the other hand, detailed project report preparation is a post-investment decision. It involves the preparation of detailed specifications and designs, engineering drawings, site investigation, foundations design and process design as well as time schedules for project implementation, Detailed project report (DPR) serves as the work plan for the implementation of a project whereas project formulation and pre investment report (PIR) is the basis on which the investment decision is taken. Thus, project formulation always precedes detailed project report. Project Selection Project ideas identified earlier are screened on the basis of their technical, economic and financial soundness. After screening the ideas are translated into project profiles. A project profile consists of the following broad items. Economic size Status of industry or scope Raw material availability Cost of production Capital cost Utility requirements Infrastructure facilities needed Profitability Government policy. SEN AVENE After gathering a large number of project profiles, the entrepreneur is faced with the problem of selecting the most appropriate project. The following criteria may be used for this purpose. @ Investment size : Investment size depends upon the entrepreneur’s capacity to raise resources and his attitude towards economic of scale, If the project is to be financed through all-India institutions with lesser promoter’s contribution, the project cost should be at least Rs. 3 to 5 crores. Gi) Location : A new entrepreneur should as far as possible locate his project in and around a state headquarters. Such a location helps to attract competent managers and facilitates 3 @ nitro” professional download the free tral online a atropd.com/profesional swithProject Design and Network Design Project Design Project design is the heart of the project entity. It defines the individual activities which {g0 into the corpus of the project and their interrelationship with each other. Project design enables to identify the flow of events, which must take place for the successful competitions of the project. The inter-relationship between various constituent activities of a project is most conveniently exposed in the form of a network diagram. Need For Network Analysis Project formulation and its implementation are the two essential functions in project management. While project formulation is essential for the scientific selection of a project, its proper implementation ensures an optional allocation of time and resources to the various project activities. Project design and Network Analjsis are important tools for the effective implementation of a project. Project design and Network Analysis are primarily concerned with the development of a detailed work plan of the project and its time profile, and the presentation of this pian in the form of a detailed Network Diagram. Project design defines the individual activities, which go into the corpus of the project and their inter-relationship with each other. It identified the flow of events, which must take place before a project can start yielding results for which it has been set up. Network analysis involves the consideration of the time and resources profile of the project activities so as to identify the optimal course of action involving the amount of time, keeping in view the available resource constraints. It provides the project formulation team a clear picture of the work elements of the project and also their sequential relationship. This presentation paves the way for a detailed identification and quantification of project inputs which is an essential step in the development of the financial and cost-benefit profile of the project study. Network Planning Techniques A project consists of a number of constituent activities. It is examined in detail and the details are utilized to compile the sequential narration of the constitution activities of a project. This compilation is known as the project logic. When it is represented in the form of a graphical portrayal, it is called the network. A nnetwork generally comprises a set of symbols connected with each other in a sequential relationship with each setup making the completion of an even. The network diagram and 4 Created with @ nitro” professional download the free tral online a atropd.com/profesionalscheduling computations enable the project formulation team to identify the longest series of activities through the project implementation phase, which determines the project duration. Classification of Network Techniques A number of network techniques have been developed and some of them are given below: CPM: The Critical Path Method is the logical mathematical model of the project based upon the optimal duration required for each activity and optimal use of available limited resources. It is a deterministic model. PERT: The programme Evaluation and Review Technique is primarily a scheduling technique. It shows any job or project as a set of processes of operation called ‘activities’ which must take place in a certain sequence. All activities have to be completed in order to accomplish the project. It is a probabilistic model and introduces uncertainties in project network. GERT: The Graphical Evaluation and Review Technique is a more recently used technique. This is superior to CPM and PERT. It allows for probabilistic events while all the events in CPM and PERT are deterministic. In the networks representing research and development project the process is repeated till the desired outcome is achieved. CPM and PERT cannot be used is such situations. In GERT network only simulation can be used. ine of Balance uses graphic techniques to show the progress achieved on the project with respect to key events. Los: Cash flow costs and benefits The Flow of Private Capital Quantitatively, foreign private capital has not been very significant since Independence. Between July 1948 and December 1961, some Rs 438 crores of non-banking investments from private sources flowed into India, 1 compared with slightly less than Rs 2,000 crores utilized from public sources, 2 a ratio of 1:4.6. These are gross flows. Allowing for repatriation of investments and repayments of principal, the net inflow amounted to about Rs 307 crores3 and Rs 1,800 crores4 respectively, a ratio of 1: 6. The flows are not fully comparable; public funds arise abroad in their entirety; private investments originate partly in India as reinvested profits. About Rs 176 crores, more than two-fifths of the gross private flow took this form, the remainder-the ‘fresh capital’ -dividing unevenly between investment in kind and in cash in the ratio of 3: 1. As can be expected from its narrow spread the private flow is heavily dependent on the fortunes of two or three industries. 5 @ nitro” professional download the free tral online a atropd.com/profesional swithThe course of petroleum investments alone offers an almost complete explanation of its behaviour, particularly since 1954; while invest-ments in a handful of other industries are enough to fill out the remaining discrepancies. This is shown in Table 17, p. 301. 1. An estimated Rs 188 crores up to December 1953, made up of Rs 33 crores in cash, Rs 85 crores in kind, and Rs 70 crores in retained earnings (RBI, Survey 1953, p. 84; ‘Recent Trends in Foreign Investment in India’, RBI Bulletin, September 1958, Table 2, p. 1010); and Rs 250 crores in 1954-61 inclusive (RBI, Survey 1961, Table VI, p. 34). The figures are adjusted ‘wherever possible’ for valuation changes. The total for 1948-53 is higher by Rs 8-13 crores than the Bank’s early estimate (as given in Survey 1953, loco cit.) but is based partly on its own later figures. Excess Capital Imports Evidence: Private imports were grossly over-licensed in t he initial stages of both the Second and Third Five- Year Plans and private investments rose well above projected levels. Neither could have occurred had foreign investment always complied with either the Government’s own scale of priorities or an efficient allocation of scarce resources and foreign exchange. Needless to say all foreign investments add to India’s liabilities abroad. Marginal spheres: There are a number of obvious sources of excess capital imports. Some projects-in soft drinks, ink, ball-point pens, tooth-paste and -brushes, and razor blades, for example are marginal by any standards. Other consumer products-from rayon filament to domestic refrigerators-are scarcely less marginal in a development context. Price mark-up: Secondly, the value of many investments is inflated by marking up the prices of goods or materials or services supplied as investment in kind. This is done for a number of reasons, two of which are particularly important: a foreign collaborator might wish to bump up the ‘necessary’ import content of a project in order to establish title to a controlling interest Altematively, as has long been the case in major sectors such as oil, tea, and many ‘manufacturing industries, the foreign investor might wish to mask his real level of profits by multiplying the forms and adjusting the levels of other payments. A number of such cases came to light in private conversation. They rest as much on the authorities” liberai interpretation of what is ‘necessary’ as on their declared policy of allowing foreign ownership to the limit of the foreign-exchange component of an investment. See above, pp. 226 If, Technology: Thirdly, there is the use of unsuitable foreign machinery. While there is an unanswerable case for a backward country to use the most productive techniques available in order to raise its capacity to save and invest, or because they are indispensable in the production of certain important end items or qualities, not all techniques are equally suitable. By importing a technology, lock, stock and barrel, a backward country might easily saddle itself with apparatus 76 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalthat requires too sophisticated a network of servicing and ancillary industries or that cannot be justified in terms of its wage levels. This is particularly wasteful in consumer industries. And so it is in India. In many cases, the paper industry for example, imported Westen techniques are inefficiently used in others, motor vehicles for example, they have imposed a wasteful pattern of fashion-induced changes utterly alien to Indian conditions. Personal obser-vation suggests large areas, particularly in packing and handling, in which machinery has displaced manual labour at great expense. The foreign investor is clearly not to blame for so widespread a phenomenon. Other factors include the lack of indigenous equip- ment, the scarcity of managers, the desire to employ the minimum of labour where retrenchment is inhibited, the rise in labour costs and the decline in skill differentials since the war, the overvaluation of the rupee, and the need to compete abroad and at home against units more endowed with capital resources. But the fact that the foreign investor normally has a direct interest in supplying equipment and knowhow; is almost universally in charge of the technical operation of a joint venture; is often chary of imparting skills or development information; is very often ignorant about Indian conditions; and might wish to keep out equipment that can be copied easily-mean that the natural tendency to over-import techniques receives power-ful reinforcement. Duplication... Of all reasons to import capital in excess of real needs, the most compelling perhaps is the fact that imported skills do not permeate the economy to any great extent. There are two factors here: the need to compete in a fundamentally xenophile market, and the reluctance of foreign collaborators to import a complete technology. The second aspect has been dealt with; the first is best illustrated with reference to a conerete example: a well-known Indian firm which favour a more ‘nationalist’ line hand most had very nearly completed arrangements to manufucture ball- and roller bearings independently of outside help. Machinery had been copied and trials completed. A decision had been taken to start production (but to wait until the product was fully proved before marketing) when the news of the Tata-SKF projects Associated Bearing Co. Ltd.-broke, Knowinghow difficult it would be to compete against an internationally known brand, it felt com-pelled to enter into an agreement for technical collaboration with another foreign firm-solely to acquire the use of its trademark The point of the story is not simply that the Indian firm was forced into purchasing superfluous rights; it lies more significantly in the fact that once imported, a technique is more likely to be duplicated within Indian industry through additional, competitive, and costly purchases abroad than through dissemination by the original importer. Government.. The Government is not blameless in this. It has shown great latitude in allowing investments in low priority spheres, or even banned ones, on receipt of promises to export a proportion of the product or to bring in a quantity of foreign exchange. As was admitted during a review of collaboration agreements in 1963, ‘the zest for licensing industries and for promoting collaborative ventures has at times resulted in a certain negligence in weighing the 7 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionaleconomic costs’. Its insistence on collaboration with foreign capital as a normal precondition for obtaining an industrial licence; its tolerance of restrictive provisions in the transfer of know-how; and its policy of encouraging, ostensibly in the interest of industrial democracy and regional development, a number of competing units where one or two will do, have done much to endorse it. The first two have been dealt with.! To illustrate the last, it is enough to mention that the Third Plan production targets of 60,000 trucks and 50,000 scooters are distributed between four units in the first case and seven in the second, each with its foreign collaborator and each committed to substantial payments (in foreign exchange) on imported capital and technology. Since high cost small units ultimately determine prices, over-licensing on these lines adds to the large firms’ profits and to their remittances abroad, and so enhances the real value of their investment locally. Nor is the Government blameless for the other forms of excess imports. Its own plants are normally very capital-intensive through-out and impose a comparable structure on private units in shared industries. Its preparedness to pay high fees seems unlimited.4 And it is notorious for inviting foreign experts when equally or more suitable local ones are available. In fertilizer plant production, for example, the excess foreign exchange costs incurred on equipment specified by foreign consultants has been estimated at Rs 500 per ton on nitrogen, i.e., 20 per cent of the total cost, and might well tun out to be more, say Rs 800-900 per ton-altogether some Rs 10 crores a year in foreign exchange. At the same time a proven local design team has been disbanded. Ii In the case of state coal mines, the Limitation of IRR Method The internal rate of return (IRR) is a capital budgeting metric used by firms to decide whether they should make investments. It is an indicator of the efficiency or quality of an investment, as opposed to net present value (NPV), which indicates value or magnitude. ‘The IRR is the annualized effective compounded return rate which can be earned on the invested capital, i.e., the yield on the investment. Put another way, the internal rate of return for an investment is the discount rate that makes the net present value of the investment's income stream total to zero. A project is a good investment proposition if its IRR is greater than the rate of return that could be eamed by alternate investments of equal risk (investing in other projects, buying bonds, even putting the money in a bank account). Thus, the IRR should be compared to any altemate costs of capital including an appropriate risk premium. In general, if the IRR is greater than the project's cost of capital, or hurdle rate, the project will add value for the company. In the context of savings and loans the IRR is also called effective interest rate. 8 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalConservative Forecast The existing practice under which the entire work relating to a project, including the preparation of project reports, working drawings, designs, etc. is done by the foreign collaborators, even though the [National Coal Development Corporation has the necessary technical know how to do it, has many drawbacks. In the case of steel plant design and construction, the Indian con-sultants originally assigned the fourth public plant at Bokaro had a constant battle to defend their appointment in face of the familiar argument that foreign credits were more or less conditional on foreign design and consultancy. In other cases foreign consultancy contracts have had to be prematurely terminated; with the French ACL (Ateliers et Chantiers de la Loire) after an Inquiry Committee had held it responsible for defects in ships constructed at Hindustan Shipyards; with the Swiss Oerlikon, technical consultants at Hindustan Machine Tools, where it was found that ‘so long as the factory was managed by foreign experts, it did not do anything good. But since the foreigners went away and some of our competent men took charge it is making amazing progress’ and with many others. The Cost of Servicing Quantities. Foreign private investment is expensive. At the very least profits run at 10 per cent per year after payment of taxes; 4 in all. A taste of the struggle, the first phase of which lasted until the United States withdrew from the project in the autumn of 1963, can be savored from the following report: “The Bokaro contract with M. N. Dastur and Co. Ltd., Con-sulting Engineers, was finalized last August; but just before Dastur left for [the] United States, the Secretary of the Steel Ministry asked him to extend his stay in New Delhi by two days for completing the signing of the agreement, Dastur waited but some last minute technicality came in the way and the contract was not “formally” signed. This is purely a matter of formality for in all Government documents, Dastur and Co. are still being referred to officially as the Consultants of Hindustan Steel on Bokaro, and they are continuing the preliminary work. This contract provides specifically that when aid has been negotiated, its terms may be varied. that is, the scope of the work to be done by M.N. Dastur and Co. may be altered-to suit the provisions of the aid agreement. But it has also been made gently known to the visiting AID negotiating team what the contract with the Indian firm of Consultants is, that it was stilt unsigned and. a hint has also been dropped that it will not stand in their way if the Americans do not want it, (NEW, 24 March 1962, p. 493.) Ironically, replacement of United States aid by Russian in 1964 has made M. N. Dastur and Coo’s future as consultants no more secure, since the Russians readily accepted official Indian suggestions that they build Bokaro on a ‘turn-key’ basis. The suggestions themselves appear to fit into a long-term drift towards building future steel plants in the private sector, or, if in the public sector, as ‘turn-key’ projects by Westemn- 9 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionallargely American-companies. ‘Dasturism’ v. ‘turnkeyism’, still very much in the balance as late as February 1965, is signi-ficant to the future of more in India than steel. Probability they are very much more. To this should be added the high cost of knowhow, licences, and such-like. By comparison, the average rate of between 2 and 3 per cent charged on foreign public capital, including grants, seems modest. b. Effect on the balance of payments... Foreign investments are ex-pensive in another sense too. In theory, all profits are payable in foreign currency, unlike interest payments on public loans, half of which are made in rupees. The same distinction holds with regard to the repatriation of capital or the amortization of principal. In practice, of course, not all profits are distributed abroad year by year, nor has private capital been repatriated, net, over any length of time. None the less, servicing the two forms of capital flow has put very different strains on India’s foreign currency resources, strains out of all proportion to the volume of funds received. Inflexible foreign exchange cost.. Three characteristics of the payments on private account will be noticed from the Table, p. 308. First, the instability of capital repatriations, due almost entirely to the behaviour of oil investments, as comparison with Table 20, p. 309, will show. Second, the rapid growth in payments for royalties, fees, etc., reflecting the increase in technologically-intensive manufacturing investments and, to an unknown extent, book-keeping transfers into this category. Finally, the relative stability of profits distributed abroad-about Rs 26 ‘crores a year. This last might seem unremark-able; however, if payments are compared with profits camed it becomes apparent that distribution abroad is normally the first charge on profits after tax, and retained earnings are more or less residual subject to most of the fluctuations in over-all ‘earnings. Plantations are noteworthy in this respect, but they are not alone. Comparison of Tables 17 and 20 shows that in petroleum in two out of the five years for which figures are available- 1958 and 1959-retentions out of profits were substantially higher than net invest-ments, the difference presumably going towards retiring the com-panies’ loans from their head offices abroad. In this way, some of the amount which appears as retained profits in Table 20 and repatriation of capital in Table 19 is no different in fact from the rest of profits distributed abroad. Figures for manufacturing are less explicit; Rs 1,396 crores of the Rs 2,666 crores of loans authorized during the first two Plans were repayable in rupees. About one third of the remainder-loans from the Eastern Bloc-are in practice rupee loans, although not listed as such by the Reserve Bank. Tea-planting companies have long been known for their solicitude for share-holders: an analysis of balance sheets for 1939-53 shows that retained profits were inadequate to ensure even the maintenance of fixed capital over the period (Report of the Plantation Enquiry Commission, 1956, Part I, pp. 50, 57, 262). Besides, its raped growth in importance within the foreign sector lends credence to the view that some tow-thirds of all real profit retentions should be attributed to it. Nonetheless, as 80 @ nitro” professional download the free tral online a atropd.com/profesional swithTablel9 suggests, the methods used by plantation and oil companies to transmute profit into capital and distribution into repatriation are open to many international firms and have been used by them, 4, Paucity of foreign exchange receipts: While current payments on private account are both growing and relatively inflexible, foreign investments offer little compensation in the way of foreign exchange receipts. Conforming to the almost universal reluctance to place risk capital in India, foreign operations are starved of convertible currencies: Black-Clawson, an American firm, is reported to have set up a Rs 2.5 crore plant without having added one dollar to India’s reserves by using rupee resources for machinery made locally or in. East European countries a Japanese consortium is said to have contributed their half of Hindustan-Kokoku Wire’s Rs 2 crores capital out of ‘retumed Japanese assets in India’. Needless to say, both suffer no abridgement in their right to receive eamings and repatriated capital in foreign currency at will. Not all investors are in a position to be as sparing in their use of foreign exchange, yet many run close behind. Given the manufacturing bias and technological intensity of new foreign investment, and the relative abundance of supporting capital, this is not a surprising attitude. It is, of course, immensely significant to India: during the fourteen years for which data exist, in which the foreign investment stake has more than doubled, foreign investors as a whole have taken out of the general currency reserve nearly three times as much as they contributed directly. Nor is their indirect contribution through saving imports and adding to exports any better. On the contrary, the shifts from traditional export-eamers like tea and jute, to import-users like petroleum and manufacturing that can neither find export markets easily nor are encouraged to do so by their foreign affiliates, has already tumed the foreign sector’s export surplus into deficit. Despite an increase in outstanding foreign business investments of Rs 325 crores between mid-1948 and the end of 1961, most of which might be attributed to manufacturing (including oil), the increase in new, manufactured exports has been small-from Rs 9 crores in 1950-1 to Rs 25 crores in 1959- 60; 2 and of this increase, as much as four-fifths perhaps-metal products, sewing-machines, electric fans -has been the product of purely Indian capital. At the same time, imports of raw and intermediate materials doubled during the decade. The point is best illustrated with reference to individual industries, rubber tyres, for example. Outlays on imported raw materials ranged between seven and seven and one-quarter crores of rupees a year between 1959-60 and 1961-2,3 to which should be added an annual remittance out of profits which are now considerably more than the Rs 3.60 crores a year noted by the Tariff Commission in the early 1950’s.4 There is nothing to report on the other side of the industry's payments balance beyond token sales at, presumably, heavy discount, since the Indian ex-factory price of the basic tyre size for commercial vehicles is higher by an eighth than the intemational export price, calf. The Government is not unaware of the problem. Tariff Commission reports are studded with recommendations to have the restrictive export provisions 81 Created wit @ nitro” professional download the free tral online a atropd.com/profesionalof many agreements revoked;6 the Government has repeatedly made clear its wish for free exports since the 1957-8 exchange crisis. More recently it has been ‘tying up, in many cases, new industrial undertakings coming up for industrial Establishment or Capital Goods licences, to an export performance’ But, as the Mudaliar Committee notes: ‘ “Promises” to export are sometimes lightly given by applicants seeking industriaV/import licences; or they may be accepted without detailed scrutiny of the real export potential and prospects of the projects in question or the applicants’ program in this behalf’s. In any case, there are limits to what the Government can do. The pull of the domestic market is strong; as well as being hampered by lack of knowledge, the Government lacks the resources to make exporting truly attractive; and foreign firms have the strongest possible incentives not to export. If necessary, they can-and do-replace formal agreements to limit exports with informal, but enforceable ones; sales networks abroad can be denied Indian products; and recalcitrant firms may rest assured in the knowledge that the Government will carry its feud with ‘business or an individual firm well short of the point at which production would have to cease. ‘No wonder that ‘quotas have remained conspicuously unfulfilled in industries without exposing the units concerned to any penalty’. ‘The Terms of Trade The effects of private capital imports go beyond the payments arithmetic outlined so far. ‘One aspect concerns the terms of trade commodity imports into India tend to be highly priced. There are a number of factors here, only some of which can be influenced by India. An important one is the pricing policy of ‘actual user’ importers (who account for some 55 per cent of total imports) and their foreign associates.4 Not unrelated is the Government's weak-ness vis-Clovis suppliers abroad.5 Together they form nearly one half of the terms of trade equation which moved steadily against India during the first two Plans. Concept of Project Appraisal It is frequently argued in support of private capital imports that they graft much needed managerial and technical skills onto Indian industry at little or no extra cost. The evidence, however, points the other way. Research and development are invariably conducted abroad; the fruits of development are imparted, if at all, at very high cost in royalties, fees, and other payments, and then not always in their entirety; through their production and staffing policies the major investing firms attempt to systematize a continuing control of know show; and much else in the same vein.| Since the Indian partner is normally assigned-and readily accepts-a narrowly specialized range of fumctions, the diffusion of skills that does take place is largely fortuitous. Indeed, since the typical modem investing firm owes its dominance and income largely to its technological mono-poly, a different outcome would be surprising, 82 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalThe consequences are appreciable. Because skills are embodied in machinery as well as in men, technological dependence is a factor in the import dependence dealt with earlier. Together they help sustain the flow of excess capital imports in all its forms, adding to the burden of servicing payments (in foreign currency). In all these ways they are a factor in India’s generally adverse terms of trade and, ultimately, in her deteriorating balance of payments. Payback period Probably the most portentous aspect of India’s technological dependence is the damping effect it has on the creation of new jobs. Foreign investments are themselves capital-intensive. In the com-petitive Indian milieu their effect is amplified through the adoption of similarly capital- intensive investment on the part of indigenous firms, mostly via further foreign collaboration. Since these invest-ments are to a great extent in the consumer goods industries, two contrary processes are set in motion: on the one hand, traditional producers, largely rural, are weakened, resulting in open payback period in some cases, but more generally in a further narrowing of the range of village occupations; hence in greater underemployment, greater downward pressure on rural wage rates; adding thus to the already massive body of factors preventing a rise in agricultural productivity. On the other hand, technologically intensive invest-ments in the modem industrial sector tend to push up skilled wage rates and so help generate a secondary round of pressures for capital intensive, labour-displacing investment. The resulting coincidence of relatively high wages for a small minority, increasing open un-employment in the towns, and unfulfilled expectations amongst the migrants from the country, constitutes a potentially explosive mixture. It would be too much to expect of Indian statistics to corroborate this sort of thesis in any detail. But the following facts seem relevant: the first two Plans created 12.5 million jobs directly or, assuming the Planning Commission’s estimates for the Second Plan period to hold for both, just under 19 million directly and indirectly.] The labour force increased by 475 million during the same period with the result that the backlog of unemployed, which planning was meant to eradicate, grew. There is no estimate of job destruction for the period. Method Given a collection of pairs (time, cash flow) involved in a project, the internal rate of Tetum follows from the net present value as a function of the rate of return. A rate of return for which this function is zero is an internal rate of return. Thus, in the case of cash flows at whole numbers of years, to find the intemal rate of return, find the value(s) of r that satisfies the following equation: Created with @ nitro” professional download the free tral online a atropd.com/profesionalNote that instead of converting to the present we can also convert to any other fixed time; the value obtained is zero if and only if the NPV is zero. In the case that the cash flows are random variables, such as in the case of a life annuity, the expected values are put into the formula. Calculate the internal rate of return for an investment of 100 value in the first year followed by returns over the following 4 years, as shown below: Year | Cash Flow 0 -100 1 40 2 59. 3 35 4 20e] Solution: We use an iterative solver to determine the value of r that solves the following equation: ‘The result from the numerical iteration is . Graph of NPV as a function of r for the example This graph shows the changing of NPV in relation to r (labelled ‘i in the graph) Problems with using internal rate of return (IRR) As an investment decision tool, the calculated IRR should not be used to rate mutually exclusive projects, but only to decide whether a single project is worth investing in. NPY vs discount rate comparison for two mutually exclusive projects. Project ‘A' has a higher NPV (for certain discount rates), even though its IRR (=x-axis intercept) is lower than for project 'B' (click to enlarge) In cases where one project has a higher initial investment than a second mutually exclusive project, the first project may have a lower IRR (expected return), but a higher NPV (increase in sharcholders' wealth) and should thus be accepted over the second project (assuming no capital constraints). IRR assumes reinvestment of positive cash flows during the project at the same calculated IRR. When positive cash flows cannot be reinvested back into the project, IRR Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalOverstates retums. IRR is best used for projects with singular positive cash flows at the end of the project period. ‘When the calculated IRR is higher than the true reinvestment rate for interim cash flows, the measure will overestimate — sometimes very significantly — the annual equivalent retum from the project. The formula assumes that the company has additional projects, with equally attractive prospects, in which to invest the interim cash flows. This makes IRR a suitable (and popular) choice for analyzing venture capital and other Private equity investments, as these strategies usually require several cash investments throughout the project, but only see one cash outflow at the end of the project (e.g. via IPO or Mé&a). Since IRR does not consider cost of capital, it should not be used to compare projects of different duration. Modified Intemal Rate of Return (MIRR) does consider cost of capital and provides a better indication of a project's efficiency in contributing to the firm's discounted cash flow. In the case of positive cash flows followed by negative ones (++ - - -) the IRR is a rate for lending/owing money, so the lowest IRR is best. This applies for example when a customer makes a deposit before a specific machine is built. In a series of cash flows like (-10, 21, -11), one initially invests money, so a high rate of return is best, but then receives more than one possesses, so then one owes money, so now a low rate of retum is best. In this case it is not even clear whether a high or a low IRR is better. There may even be multiple IRRs for a single project, like in the example 0% as well as 10%. Examples of this type of project are strip mines and nuclear power plants, where there is usually a large cash outflow at the end of the project. In general, the IRR can be calculated by solving a polynomial equation, Sturm's theorem can be used to determine if that equation has a unique real solution. In general the IRR equation cannot be solved analytically but only iteratively, A potential shortcoming of the IRR method is that it does not take into account that the intermediate positive cash flows possibly come at inconvenient moments. Their reinvestment may have a lower yield. In that case it may be more realistic to compute the IRR of the project including the reinvestments until e.g. the end date of the project. Accordingly, MIRR is used, which has an assumed reinvestment rate, usually equal to the project's cost of capital. Despite a strong academic preference for NPV, surveys indicate that executives prefer IRR over NPV. Apparently, managers find it easier to compare investments of different sizes in terms of percentage rates of retum than by dollars of NPV. However, NPV remains the "more 85 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalaccurate” reflection of value to the business. IRR, as a measure of investment efficiency may give better insights in capital constrained situations. However, when comparing mutually exclusive projects, NPV is the appropriate measure. Planning “By almost any iest’, wrote J. K. Galbraith midway during the second ‘big’ Plan, ‘the economy of India is less responsive to public guidance and direction than that of the United States, Indeed it is one of the world’s least controlled or “planned” economies”. In 1960-1, after a decade of planning, Government revenue at all levels and from all sources constituted about 11 per cent of national income (compared with about 41 per cent in Britain), and state plants accounted for 8.4 per cent of output from organized manufacturing industry. Nor is the picture changing at any speed, While the private sector has consistently over-fulfilled the targets set, public enterprise has lagged as consistently, with consequent changes in some very crucial ratios. Foreign investments contribute to the weakness of Indian plan-ning in a number of ways, two of which are important. No matter how large the Indian operations of foreign firmssometimes very large and very important indeed by Indian standards-these seldom form more than a small proportion of their global activities; on the other hand, no matter how small a firm’s operations in the country they are part of a single fabric made up of the activities of Government and intemational agencies as well as private lending, investing, and trade organizations. While each firm might therefore find it relatively easy to withdraw when faced with what it considers an unacceptable demand on the part of the Government-as some indeed have done - India would have to pay a very heavy price for misjudging the threshold of acceptance common to the forcizn sector as a whole. It is within this broad immunity that the price and profit adjustments, the erratic investment flows, the restraints on the diffusion of know-how, and the methods of control referred to in this and the preceding chapters flourish, Even more significant is the way in which foreign investments strengthen the private sector. Much of the dynamism of private industry can be traced directly to the increasing number of collaboration agreements concluded since 1957.3 These have provided knowhow, finance, foreign exchange, and moral support; they have been used to beat back taxation forays and to annex state projects for the private sector; they have drawn the teeth of the Government's threat to introduce foreign firms to break Indian monopolies. In a word, they have provided Indian industry with a toe-hold of extra-territoriality from which to confound the planners in every aspect of their work, The distortions go deep. Denied resources, public sector projects are seldom completed on time; private sector demand for their services outruns the levels of supply envisaged in the original Plans, let alone the actual levels attained. Corruption attends the shortages and a lethal drain of materials and men takes place, the latter driven as much by the frustrations of working in 86 Created with @ nitro” professional download the free tral online a atropd.com/profesionalthe public sector as they are lured by the positive attractions of private industry. The state comes to depend more and more on foreign aid for its resources-to per cent of expenditure during the First Plan, 24 per cent during the Second, and a planned, but grossly underestimated, 29 per cent during the Third! Pressure to permit private industry to break the bottlenecks becomes irresistible and with it the volume of foreign collaborations grows. Out of it all there evolves a foreign exchange fetishism some of whose illogic has to be seen to be believed. The growing dependence on foreign resources and, even more, the grow-ing resignation to such dependence, have affected the whole tenor of the Government’s approach to foreign private capital: if in the first decade of Independence the official attitude was governed by con-siderations of control and economic power, it has since been pro-gressively determined by narrow balance-of-payments considerations with rather selfdefeating consequences in further concessions to the private sector, to foreign investors, further dependence on aid, further delays in public sector projects, and so on. 87 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalUNIT IV LAUNCHING OF SMALL BUSINESS > Production & operation management > Marketing management > Human resource management > Accounting for small enterprises Introduction By now, you have learnt that it takes a lot of effort-monetary and no-monetary-to set up an enterprises. Having once stet up the enterprise, the future survival of enterprises whether small, medium or large, depends upon its profit eaming capacity. The profit earning capacity of any enterprise depends upon inter alia the right decisions takes by thee entrepreneur regarding investment location of the plant, product design, quality control, technology, etc. techniques or analyses are available to help the entrepreneurs take right decisions one these matters. The same forms the subject matter of this chapter. Investment Analysis Both launching a new product for the first time, and diversifying the product -line involve investments. And more often than not, capital would be scarce given the investment opportunities available particularly in the case of small scale enterprises. The basic objective of every investment is to maximize the profit. Hence, the scarce capital should be invested in those opportunities which could give the maximum retum on capital employed ice., profit. Investment analysis enables the entreprereneur to choose an investment out of a given set of altematives. As such, the subject also passes under the title of investment decisions’ or ‘economic feasibility’. In what follows, investment analysis of an enterprise need to be discussed. Tools of Investment Analysis Investment analysis primarily deals with the interpretation of the data incorporated in the Performa financial statement of a project and the presentation of data in form in which it can be utilized for the comparative appraisal of the projects. The technique of ratio analysis and capital budgeting have been used as the most important tools of investment analysis. These are discussed as follows: Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalRation Analysis A ratio establishes an arithmetical relationship between the two relevant figures. It is obvious that absolute figures do not convey much. For example, if we say that X Co-. eamed a profit of Rs. 50,00 and Y Co. is more profitable. But if we say their profits in relation to their respective capital employed, say, X. Co eamed profit of Rs. 50,000 against Rs. 5,00,000 employed as capital and Y CO. eamed Rs. 40,000 against RS. 2,0,000 as capital employed, we can conclude that Y CO. is more profitable since its net profit to capital employed, is 20% as against 10% of X CO. when this definition of ratio is expressed with reference to the items shown in financial statements, then it is called ‘accounting ratio’. With the help of ratios, we can reach to useful conclusions about profitability of investments made in the enterprise. Profitability rations are calculated relating profits either to sales or investments. They are usually expressed in percentages. It is important to not that profits is volume and profitability is a ratio. We now present some profitability ratios in relation to investments which have been in ‘common use for making investments decisions. Return on proprietor’s fund or net worth — this ratio expresses the ration of net profit after tax and interest to proprietor’s funds or net worth. As mentioned ealier, the major objective of any business is to earn the maximum profits and this ration indicates the extent to shich this objective is achieved. This ration also suggests that whether the invesetment would be worth making in terms of return as compared to the risk involved in the business which ultimately helps in taking business decisions for the future. This ration is calculated as follows Net profit after tad and interest —--- X 100 proprietor’s fund or net worth Return on Capital Employed This ration indicates the earning power of the capital employed in the business and pints out to the owner the progress or deterioration in the eaming capacity of the business. It is of great significance to the share holders or the owner as it shows the ratio of profit eamed on invested, capital. For example, if an enterprise has Rs. 5 lakhs aas equity capital and RS. 3 lakhs as loan, its total capital employed will be Rs. 8 lakhs. Now, suppose the enterprise eams a profit of Rs. 80,000 in a year before interest and taxation, then the rate of return on investment i.e., capital employed will be 10% . it will be calculated as follows. Net profit before interested and tax Capital employed 89 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalThus, the ratio of capital employed indicates how the management has made use of the funds supplied by the both ~ owners and creditors. Obviously, higher the ratio, the more efficient use of the funds the enterprise is making and vice versa. After comparing the taxies of the similar business and industry, the enterprise comes to know the relative the ratios of the similar business and industry, the enterprise come to know the relative operating efficiency of he business which helps take investment decision accordingly. The capital employed in a business may be either ‘Gross Capital Employment’ or ‘Net Capital Employed’. While the former consists of the total assets used in the business, the latter ‘comprises of total assets of the business less its current liabilities. Say, the capital employed include capital, capital reserves, revenue reserves and long-term debts such as debentures. So far as the evaluation of efficiently of the management is concemed gross or net capital employed concept is considered as the most appropriate measurement. It indicates whether the funds entrusted to the business have been property used or not. Return on Total Investments It is the ratio of net profit to total inivestment. This ratio indicates the overall profitability of the enterprises. It is calculated as follows: Net profit after interest and tax Total Assets Capital Budgeting Capital budgeting involves investment decision balancing the sources and uses of funds for acquiring sized capital assots like machinery and equipments. Investments plant and machinery implies the choice of a particular projects. The project selection is made on certain techniques known as ‘techniques of capital budgeting’. We now discuss some of the important techniques in detail. Payback of Payout Period As the name itself suggests, this technique answers an investors searching question as how long he / she has to wait before the invested capital is recovered. In fact, this is a very simple rule of thumb. As the cash flows start coming and accumulate, after a certain period of time, the accumulated cash inflows start coming and accumulate, after a certain period of time, the accumulated equal to the original investment made. Thus, that point of time the payback occurs and the time it has taken for recovery is called the payback or payout period. Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalLet us try to understand it with the help of an example, ‘Years Initial | Outstanding] Net cash | Balance | Payback investment | total inflow | yetto | period Rs investment recover Rs (at the end) Rs 7,00,000 7,00,000 7,00,000 1,00,000 8,00,000 | 2,00,000 | 6,00,000 - 6,00,000__| 1,50,000 | 4,50,00 50,000 5,00,000 | 2,50,000 | 2,50,000 = = 2,50,000 | 1,50,000 | 1,00,000_|5 Years 6 : = 1,00,000 | 2,00,000 _[ -1,00,000_| Months ajefafefs|— It is seen from the table that the balance of initial investment to revere at the beginning of the sixth year was Rs. 1,00,000. the total inflow during the year was of the order of Rs. 2,0,000. assuming that the total inflow of Rs. 2,00,000 was uniformly spread over the year, the time taken to recover Rs. 1,00,000, will be 1,00,000 x 12 o =6 months 2,00,000 figures are always welcome to depict financial position and this illustrative case can be shown in terms of figures also. Net Cash flow outlay Investment and net cash flow (all cumulative) o1 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalIn short what this method involves is choosing the project which repays the initial investment in the shortest period of time. Average Rate of Return ‘This also known as Accounting rate of return. In simple words, average rate of return (APR) is just the reverse of the payback method. While payback method. While payback method is based on cash flow, average rate of return is based upon the principles of accounting. This method does not consider the time period. The average rate of retum is calculated by dividing the average net income after tax by the average investments over the life of the project symbolically. Average rate of return or Accounting rate of return = Average net income after tax - aoe x00 ‘Average investment over the life of the project However, both the methods pay-back and average rate of return — suffer from the major drawback of ignoring time value of money. The value of Rs. 1,000 today may be less after 10 years, But, these methods ignore this fact. Plant Location Location, localization and planned location of industries are often felt to be synonymous. But, the distinction among these three terms is of immense importance. Entrepreneurs locate their enterprises where the cost of production comes the lowest at the time of establishing industries. This is known as ‘location of industries’. The concentration of a particular industry mainly in one area, as occurred with many industries in India, for example, textile industry in Bombay is known as ‘location of industries’. Planned location of industries is a term whereby the location of industries is planned to give cach industrial area a variety of industries so that large industries are dispersed and not localized. It was Alfred Weber to whom the credit of enunciating the theory industrial location wen when his magnum opus ‘The Theory of the location of industry, was published in German in 1909 and in English in 1929. The early theories of industrial location carried out the analysis on a simple framework where the locational and special diversification were simply determined by an adjustment between location and weight distance characteristics of inputs and output. The reason is that the then industrial structure was heavily dominated by the natural resource base and consumer oriented industries. But, over the period the very consideration for locating industries in particular region ha undergone a considerable change so the early theories resources in the 92 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalchoice of industrial location has declined and the industries are likely to be established even in those areas with part natural endowment. This holds especially true in the case of industries which are not heavily biased in favour of raw material source for their location. It is seen that such industries are gaining increasingly greater importance in the industrial map of India during the recent decades. It is not always possible to explain industrial location independently with the help of any one factor. In fact, several factor / consideration influence the entrepreneurs’ decision in selecting the location for industry. Collection of industrial location is a strategic decision. It is a one time decision and can not be retracted without bearing heavy penalty. Nonetheless, regardless of the type of business / enterprise, there are some general factors that influence the selection of the location of an enterprise, The most important factor that influence the selection of the location of an enterprise. The most important factors are : Availability of raw materials Market Infrastructural facilities Government policy Availability of manpower, i.e, labour Local laws and regulations Ecological and environmental factors Competition VV VV VVVV Let us discuss these in some details Availability of Raw Materials One of the most important considerations involved in selection of industrial location has been the availability of raw materials required. The biggest advantage of availability of raw material at the location of industry is that it involves less cost in terms of transportation cost. If raw materials are perishable and to be consumed as such, then the industries always tend to locate nearer to raw material source. Market Proximity to market also influences the selection of industrial location. If the products are fragile and highly susceptible to spoilage and if the transportation costs constitute a substantial portion of the total costs involved, the proximately to market condition assumes added importance in selecting the location of the enterprise. 93 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalInfrastructural Facilities Of course, the degree of dependency upon infrastructure facilities may vary from industry to industry, yet there is no denying of the fact that availability of infrastructural facilities plan a deciding roie in the location selecting of an industry. The infrastructural facilities include transport and communication, power, water, banking etc. just to give you an idea, availability of water may become deciding factor for the location selection of industries like leather, food processing, chemical and such alike industries. Similarly, location of jute industry on river Hoogly presents an example where transportation media becomes a dominant decisional factor for plant location. Government Policy In order to promote the balance regional development, the government also offers several incentives, tax holidays for number of years, cheaper power supply, factor shed etc, to attract the entrepreneurs to set up industries in backward areas. Then, other factors being comparative, these factors become the decision maker. Availability of Manpower Availability of required manpower skilled in specific trades may be yet another deciding factor for the location of skill-intensive industries. While one can get cheaper labour in industrially backward areas, higher cost of their training and fall in quality of production may not allow the entrepreneur to employ the cheap manpower. Local Laws and Regulations In some cases, local laws prohibit the setting up of polluting industries in particular areas which are environmentally sensitive. Air (Prevention an Control of Pollution) Act, 1981 of UP Pollution control board, Lucknow, is a classical example of such laws prohibiting putting up polluting industries in prone areas. Similarly, while taxation on a higher rate may discourage some industries from setting up in area, the same in terms of tax holidays for some years may become the dominant decisional factor for some other industries in other areas. Ecological and Environmental Factors In case of certain industries, the ecological and environmental factors like water and air pollution, may tum out to be negative factor in deciding enterprise location. Created wit @ nitro” professional download the free tral online a atropd.com/profesional‘Competition In case of some enterprises like retail stores where the revenue of a particular site depends on the degree of competition from other competitor’s location nearby plays a crucial role in selecting the location of an enterprises. It seems in the fitness of the context to present the locational considerations of the entrepreneurs of small-scale industries in backward economy. The most important consideration of the entrepreneurs for selecting the location of industries are given in table . ‘Entrepreneur Hills Piains icon ‘Considerations ‘Homeland 15 (6818) 11 (39.29) 026(52) Government 3 (13.65) 16.57) 48) incentive Availability of raw | - 1G.57) 1Q) material ‘Availability ‘of | 2 (9.09) - 2@) Jabour Availability of | 1 (4.54) 9 (32.14) 10 (20) market ‘Availability of | 1 (4.54) 6.57) 2(4) infrastructural facilities Plant Layout During the course of technical arrangement of various such as machinery equipment ete, it is very necessary to give considerable emphasis on proper plant layout to achieving their optimum utilization. Like industrial location, plant layout also is of great strategic importance. The reason is that once the plant and equipments are erected, it would by very difficult and costly to change layout. Therefore, one needs to keep in mind some importance aspects while deciding the plant layout. These are > Production technology and production mix. Efficiency, economic and uninterrupted flow of men and material Adequate space for maintenance work, Scope for future expansion and diversification of the project. Healthy conductive layout of the plant. Proper lighting and ventilation, Proper provision for effluent disposal, if necessary. Provision for proper storage, stocking space, etc where needed Vv VVVVY 95 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalBesides the design of the factory building should be in accordance to the requirements of plant layout. For this, it is necessary that the building should be constructed by the experienced and reputed architects and contractors. Needless to mention, if the plant layout envisages special provisions such as air conditioning, air cooling, dust control, humidity control, etc, the architect should be properly advised to take proper care in the construction design of the building. Provision for vertical and horizontal expansion in building in future, if required should also be kept in view. A proper plant layout ensures various advantages to the enterprise. The important ones are: > Increase in productivity. > Optimum utilization of floor space and other areas of operations like loading and unloading. Effective supervision and control over industrial activities. Improvement in working environment. Economy in material handling. Optimum investment in plant and building. vVVV Product Design ‘The backbone of any small enterprise is the products or services it offers. Therefore, what to produce and how to produce is the first step in the evolution of an operational system. In other words, product design is the key strategic decision an entrepreneur has to take at the very beginning. The experience suggests that the image of an enterprise and its profit earning capacity to a great extent, are influenced by the product design. This is because the product design once decided continues for a long time. Therefore, one needs to keep in view various factors like changes in environment technology and consumer tastes / requirements while finalizing project design. This also means that product launching should be dictated by market demands. But, product design is not an easy task that anyone can do on his/ her own. The fact remains that a right type of product design involves certain considerations / stages to be weighed. Standardization Reliability Maintainability Servicing Reproducibility Sustainability Product simplification Quality commensurating with cost Product value Consumer quality VV VVVVVVVY 96 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalConception pf business idea Product Specification Project Appraisal Market Product Design ¥v Technology Specification 1 Production Product Inspection You have undershoot scheduling ensures completion of production in time. Product inspection ensures the quality of product produced. For this, a separate department, namely quality control is established to oversee the product inspection. Through product inspection, management decides upon the location of inspection, when inspection should be done, the number of items to bbe inspected and the types of tools needed for inspection. Let us have cursory look at these various decisions. @ nitro” professional download the free tral online a atropd.com/profesional $ withLocation of Inspection ‘A centralized and decentralized inspection approach may be taken. Saving the time of highly trained inspectors on the one hand, and need for sophisticated techniques or tools, on the other are the important reasons to opt for centralized inspection method. Decentralized inspection is also called floor inspections. Under this approach, the floor inspector does his work on the production floor. ‘When to Inspect Practically, once inspection location is decided upon, when to inspect must be determined. The number of inspections should take into consideration the costs of inspecting versus the costs of not inspecting. Generally, firms provide for about 5 per cent of their labour costs for inspection. Some inspection should ‘also be done at three different stages in production processes — raw materials, goods in process and finished products. All raw materials first should be inspected for damage before they are accepted followed by a detailed inspection before they are stored or made ready for processing purpose. The product must be inspected at different stages of manufacturing i.e., goods in process. For example, it is common for production workers to make informal inspections of the product as. they work on it. Number of Items Inspected Inspection may be done on a 100 per cent basis or by inspecting only samples. The sampling approach is based on statically sampling theory. Sampling theory helps management decide on the number of samples needed and accuracy of the result. Inspection Tools Production inspection often requirements special tools. A few of the tools are thickness, colour, density, and tensile strength of products may be measured with electric eyes, X-rays, stroboscopes and reflectoscopes. However, these are highly technical and expensive tools. Quality Control Quality is a relative concept. It is related to certain predetermined characteristics such as shape, dimensions, compositions, finish, colour, weight, etc. in simple words, quality is the performance of the product as per the commitment made by the producer to the consumer. In practice, when we say any products as a quality product, it means the product satisfies certain criteria for its functioning, For a quality product, it is necessary that it should satisfy the laid down criteria not 98 @ nitro” professional download the free tral online a atropd.com/profesional witonly at the time of tits manufacture, but also over a reasonable length of time. In India, Bureau of Indian standards lay down certain criteria for a number of products both industrial and domestic. Quality control is also a strategic decision. It can be defined as the systematic control of those variables which are encountered in the manufacturing process and which adversely affect the excellence of the final product one way or other. Alfort and Beary defined quality control as. “Quality control is the mechanism by which products are made to measure up to the specifications determined from the customer's demands and transform into sales, engineering and manufacturing requirements. It is concerned with making things right rather than discovering and rejecting those made wrong. Quality control is a technical by means of which products of uniform acceptable quality are manufactured. Importance Quality control of products bears distinct advantages for all whether producers or consumers. Some of the important advantages to quality control are as follows: The brand product builds up goodwill or image which ultimately increases sales. It helps the manufacturers / entrepreneurs in fixing responsibility of workers in the production process. Quality control also helps in minimizing the costs by increasing efficiency, standardization, working conditions, etc. It also enables the entrepreneur to know the cost of his/ her product quite in advance which helps him in determining competitive prices of his product. Last but not the least, the entrepreneur can confirm whether the product manufactured by him is in accordance with the standard set by the Government. It further facilitates the entrepreneur to take necessary actions to comply with the standard set. vovvvv Methods or Tools of Quality Control Any variations in the quality of a product i.e., standards set are mainly caused by variations in raw material, men, machines, methods and procedures of production and inspection. In order to produce the quality products, these variations need to be checked and controlled. These are mainly two methods of quality control. These are; Inspection Inspection, in fact, is the common method used for quality control purposes not only in production but also in services. As regards inspection in production, there are three important aspects involved in it: Crested-w @ nitro” professional download the free tral online a atropd.com/profesional@ Product inspection ‘As the name itself suggests, the product inspection relates to the final product sent into the market. The main purpose of production inspection is to ensure that the products sent into the market comply with the set standard for quality. Gi) Process Inspection Process inspection precedes to product inspection. It is aimed at ensuring that the raw material and machines and equipments used in the production process are of prescribed quality and mark. Process inspection benefits the unit in two ways. Firstly, it ensures the manufacturing of a quality product. Secondly, it saves wastages of preventing process bottlenecks. (iiiInspection Analysis ‘This is a method based on the analyses of inspections made. The conclusions derived from the inspection analyses help entrepreneur locate the exact points in the manufacturing process where faults are. In other words, it enables the entrepreneur to identify the points at which deviation from standard set start. Quality control through Inspection Method is show in figure 23.4 [; Inputs |-__sf Conversation |_—_—_———-»| ‘Outputs Final Product Input Inspection Work-in-progress Inspect ea Inspection 100 Crested-w @ nitro” professional download the free tral online a atropd.com/profesional2, Statistical Quality Control it is an advanced method or technique used to control the quality of a product. This method is bade on statistical techniques to determine and control the quality. Sampling, probability and other statistical inferences are used in this method for controlling the quality of a product. It is widely used in process control in continuous process industries and in industries producing goods on a mass scale. Under this method, the entire lot is, firstly, sampled on the basis of its specific characteristics and then is divided into three parts, These are: > Analysis of samples > Use of control charts > Corrective measures Analysis of Samples ‘This based on sampling techniques. Firstly, the universe i.e., the population to be analyzed is identified. After this, following the sampling technique, the sample representing the whole population is selected and analyzed. It is important that we do not need to analyze all the units of the population, but only a few units called sample units are studied and analyzed. The results drawn from these sample units are then generalized as a whole. Use of Control Chart Realizing that figures / charts are always welcome to depict the facts of findings, the results obtained from analyses of samples are presented in chart. The method to draw chart is as follows. > Measure the quality characteristics of sample elected. > Find out the mean of the sample and also measure its range of dispersion > Then, data regarding mean and diversion are gathered > Take a graph paper and plot the gathered data on it. Thus, you have a control chart ready to guide you about the quality of your product. 101 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalThe shape of the control chart so plotted will be like: Upper Control Limit Central Line Lower Control Limit Corrective Measures Having drawn quality control chart, the entrepreneur can easily and clearly locate the points of deviations and causes of it. This enables him to evolve corrective measures to control the quality of the product accordingly. For example, if variation in quality is caused by inferior quality raw material, the quality of raw material will be increased. Similarly, in case of traditional machinery, new and modern machinery will be installed. Quality Control in Small-Scale Industries Although quality control is necessary for all units, yet it is more necessary for small-scale units. This is because of the greater use of manpower small-scale industries during the manufacturing processes. But, the application of quality control is difficult in them because of several limitations like financial, technical and managerial. Quality implementation is total organizational effort. The successful implementation of quality control largely depends upon the quality of raw materials, selection of machinery and equipment, designing, manufacturing processes, etc. In India, Bureau of Indian standards has been doing a yeoman job in determining the quality of a large number of products by laying down various criteria for them. The quality control in small scale industries is based on: 102 as @ nitro” professional download the free tral online a atropd.com/profesional> Indian standards specification > Quality marketing schemes > Company standards in case of ancillary units > Any other standard specification prescribed by the govemment or other purchasing agencies. The Indian standards specifications have been playing and importance role in persuading small- scale industries to adhere to the quality of their products, For controlling quality of products manufactured by small units, the following Indian standards have been published so far. > Methods of statistical quality control during the production period; > Manual on basic principles of lot sampling; and > Sampling inspection tables Several state governments have also been operating quality marketing schemes and standards for various products of small-scale industries. When the small units manufacture their products according to the standards set, the quality marketing centres of the government stamp the “Q” mark on their products, Quality Control of Export Products Implementation of quality control has been very useful in raising exports from an economy. A product can be sold in foreign markets only when it is not only cheaper but up to a certain quality also. Standardization of these products convinces the foreign customers better than any sales campaign, realizing this fact, the government o India has made the inspection of several products manufactured by small-scale industries compulsory before they are shipped abroad. This has proved very beneficial for the Indian exporters to sell their products in highly competitive foreign markets. Cost of Quality Control Lastly, let us also address to an important aspect of quality control, i.e., cost involved in ensuring quality products. In fact, it is difficult, if not impossible, to precisely define cost incurred in quality assurance due to so may imponderables involved. But, there is no denying of the fact that it should be a minor proportion of the total product cost incurred. How much minimum should be the proportion of quality cost to total cost depends upon various factors. Some of the ‘important ones are > Type the product, its use and hazards involved in its use. > The degree of quality awareness in the enterprise. > Lastly, additional costs to be incurred for ensuring higher quality standards. It must be kept in mind that there is no optimum value between quality and product cost. 103 Crested-w @ nitro” professional download the free tral online a atropd.com/profesional‘Small Business Technology Technology is also known as ‘technical known-how”. Technology implies the up-to-date practical knowledge required for doing things in an efficient and effective manner. Even changing technologies in the industrial sphere has made business increasingly competitive. Hence, the ability of an enterprise to face with market competition decides the success or otherwise of an enterprise. Research studies report that more than the economics, it is the technology dimension that gives small scale enterprises a unique position in the dynamics of development. In spite of its ‘uniqueness in both the extent and duration of its efforts to promote and protect small scale industries, India could not make any remarkable dent in this front. South Korea, on the other hand, initiated policies on smalt scale enterprises only in the late seventies could achieve a remarkable success in her small sector. The reason is south Korea policies and efforts combined technology development and credit, support remarkably well. In contrast, India has not given considerable attention to technology in its integrated efforts for the development of small scale enterprises in the country. Importantly, technology also needs to be appropriate one. The appropriate technology is. that technology that is best suited to the enterprise concem in view of its resources and requirements. Depending upon the varying resources and requirements of the enterprises, appropriate technology is bound to differ from enterprise to enterprise. Technology Up Gradation in SSEs Technology, say, up-date technical know-how enables the businessmen to cope with rapid improvement taking place in manufacturing by increasing production, improving quality and reducing cost. Given the present low level of technology and shortage of trained and experienced personnel, provision for technical service to small-scale industries is introduced to make it competitive. There are two types of arrangements of industries organization through its service to small units. First, the central small-scale the small entrepreneurs on technical on technical problems faced by them. Second, the small industries service institutes (SISI) and also the state government agencies have set up common facility workshops and prototype and for production centres for undertaking specific manufacturing processes of small-scale industries. Besides, some other organization, namely, Small Industry Development Organizations (SIDO), Industrial Finance Corporation of India (FCI) and National Small Industries Corporation (NSIC) have launched schemes to encourage modernization and up gradation of technology in small-scale enterprises. The NSIC provides machinery and equipment to assist small-scale enterprises for modernizing and up gradation technology. 104 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalMarketing Management You have seen in the previous chapter 23 that having decided various issues like the location of the plant, design of the product and its quality, the entrepreneur reaches to the stage when production has to start. You also know that production is meant for consumption. Successfull production is one that sells. But, before any product or service is offered for sale to market, several decisions need to be taken in regard to its marketing, For example, the price of the product has to be determined, the methods of. marketing has to be identified and the channels of distribution have to be worked out. The decisions to these matter require a sound and through assessment of the marketing in small businesses has to operate. Concept of Marketing Marketing is very much integral to market. Market is a place where the sellers anid buyers assemble to exchange their products for money and vice versa. Production precedes marketing, Production has ‘undergone changes from time to time with changing business environment. Accordingly, the concept of marketing has also altered form one point of time to another. These concepts are broadly classified into two categories. 1. Traditional concept 2, Modern concept ‘Traditional Concept This concept corresponds to the really production phase when there was a general scarcity of manufactured goods in the market. Then, the major function of marketing was to make the products widely available to the customers at an affordable price. The concept of marketing was held accordingly. Look at the following definitions to have the view points of the traditional concept of marketing, Converse, Huegy and Mitchell observe “Marketing includes activities involved in the flow of goods and services from production to consumption. According to American Accounting Association, “Marketing is the performance of those business activities is that direct the flow of goods and services from producer to consumer or user, Modern Concept With the passage of time, the industrial activity intensified in terms of quantity, quality and variety of the products. This made the customers more sharp sighted and chooser ones. Now, the 105 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalcustomers were not ready to buy whatever was offered to them by the producers. They started to any the goods or services that were offered to them by the producers. They started to buy goods ‘or services that were more beneficial to them in terms of quality, price, satisfaction, durability, look and son on. The benefits to the consumers may be tangible and intangible. Therefore, the producers were compelled to produce what the customers want. Thus, a new approach, of course more scientific, emerged. According to Stanton, “Marketing is a total system of interacting business activities designed to plan, price promote and distribute want satisfying, products and services to present the potential consumers. Kotler opines, “Marketing is a social and managerial process by which individuals and groups ‘obtain what they need and want through creating and exchanging products and values with others. Problems of Marketing Production is the servant of market. Production is meaningless without market. Therefore, the very purpose of an enterprise is to produce what the customer will buy. All industries whether small scale enterprises are more plagued by the marketing of their producers or services. But, small scale enterprises are more plagued by the marketing problems. In India, the utter failure of ‘small-scale enterprises on the front of marketing of their products is commonly noticed over time and clime, Notwithstanding there are two main reasons conditioning the marketing or products produced by small enterprises. First small enterprises cannot withstand the cut-throat competition in respect of quality, cost, standardization of the products with medium and large scale industries. In this regard, the observation made by the Ford Foundation” seems worth quoting “In spite of an extensive potential market, the Indian small entrepreneurs were most reluctant towards efficient marketing technique and consequently have met with utter failure on the front of marketing of their products. When it comes to the question of markets for which the products are produced, most of small entrepreneurs appear to be as much anchored to the past as they are in the methods manufacturering. Types and areas of consumption are shifting but only a few products try to follow them. The Japanese delegation on small scale industries in India also gave a similar view that the most knotty point in the operation of sthall-scale enterprises and cottage industries is that the industry is isolated from the market and unable to understand quickly and accurately the prevalent trend of the market. According to field study of 50 small scale enterprises in a notified backward region of Uttar Pradesh, there are three major problems of marketing of small industry products. These are: 106 Crested-w @ nitro” professional download the free tral online a atropd.com/profesional1. Competition with modern sector The market competition of the small enterprises with the modem sector has aggravated due to severil factors over the years. Although the traditional hallmarks of the small scale industries are slowly yet steadily changing, there is an implicit assumption of poor quality for goods manufacturer in small enterprises. This sector need to cater to wide diversity and changing tastes and preference of their clientele which they do fail. 2. Lack of Sales Promotion Advertisement of the products through the leaborate sales promotion methods such as cadres of trained salesmen, advertisement in cinema slides, poster, papers, magazines and so on has be come increasingly fashionable particularly in the case of medium and large scale industries, But, small scale industries lack in the required resources as well as knowledge to practice the methods of sales promotion. As a result, the former usually have patented nanus which facilitate the dealers in selling their products without making much efforts. It can also be postulated that in the case of the products of small scale industries, at least at their initial stage, persuasive capacity of the dealer plays an important role in influencing their sales. 3. Weak in Bargaining power In case of handicraft units such as copper smithy and carpet weaving units, the price realized is usually better when the sales are made at the place of production itself than when these products are marketed in the fairs. It looks that, very possibly the manufacturers are in a better bargaining Position at home than in other locations like fairs where they take their products for selling, Other studies also support this finding. Market Assessment Nou have understood marketing is to produce what the customers want. But it is not very easy {ask to determine what the customers actually want. Any market is composed of a large number of customers / consumers with varying backgrounds like education, income, preferences likes and son on. Further, these heterogeneous customers are spread over nearer and distant place of the enterprise. As a result, there is a wide variation in their wants. Itis difficult, if not impossible, for a small-scale enterprises to produce a variety of products to satisfy the varied wants of all customers. That is why as small-scale enterprise has to decide which group of customers, also called target segment will be of particular interest to the enterprise. Demand Forecasting or Market Demand Before, we discuss demand forecasting let us first understood what is meant by ‘demand’. 107 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalThe simplest and commonest definition of demand refers to the willingness and ability of customers to buy products or services, we say that there is a demand for the products or services. When we consider this definition for all the potential customers having both willingness and ability to buy a product, it is termed as ‘total market’. Considering that an enterprise has its own operational area, the definition of demand can be narrowed down accordingly. Based on it, have a look at the following widely accepted definition or ‘market demand’ given by Philip Kotler’. Survey Method The survey method is the widely used method for estimating future demand of a product. This method is based on collection of data / information from the potential customers, dealers and people with expert knowledge about the subject. Under the survey method, if the number of respondents i.e., customers or dealers or knowledgeable person is small, all are surveyed say information is sought from all. But, if the surveyed, say information is sought from all. But, if the number is very large and all cannot be surveyed, only the representative number is surveyed or interviewed to collect the relevant information. This latter method is called ‘sample survey method’. Stati al Method ‘There are some statistical methods also i.e., time series analysis’ and ‘regression analysis’ which are used for estimating the demand for the product. ‘time series analysis’ is used where historically data on demand of the product are available to forecast the future trend. The use of ‘regression analysis’ is resorted to when there is a definite relationship between the relevant variable affecting the income and demand is established. For example, if the relationship between the consumer’s income and demand for a product is well established, ‘regression analysis’ may be used to estimate the demand for the product at various levels of consumer incomes. Leading Indicator method This method is based on the fact that some indicators move up or down ahead of others. By observing their movement, the event which will follow them may be predicted. Cloud formation followed by rain may be an example of such movements. Similarly, the government permission to increase automobile production is a leading indicator of increase in demand for automobile accessories and diesel / petrol. Market Segmentation You have just read that total market demand is composed of a large number of customers having different characteristics. Their demand for products, preferences, and liking with respect to 108 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalPrices, promotional strategies etc, vary. Thus, in order to tap the potential in different groups of customers, different marketing approaches need to be developed. For this, the customers, with homogeneous characteristics from the heterogeneous market are identified. This exercise is termed as “market segmentation’. Thus, market segamentatation is an attempt to make the marketing strategies customer ~ oriented. Different people have defined market segmentation differently. Let us consider a few definitions given by different persons, In the option of R.S.Davar, “grouping of buyers or segmentation the market is described as market segmentation”, Philip Kotler opines. Market segmentation is the sub-dividing of a market into homogeneous subsets of customers where any subset may conceivably be selected on a market target to be reached with a distinct marketing mix. To put in the simple words, market segmentation can be defined as the act of dividing the market into distinctive and homogeneous groups of customers. Suppose, action shoe manufacturing company wants to identify its target group, i.e., customers. It specialsies in shoes meant for men only, thus, excluding women form its target group. The shoes manufactured are expensive meant for men belonging to higher income groups and living in urban/city areas Basic or Criteria of Market Segmentation ‘The market segmentation can be carried out on the basis of various definition variables, viz., age, sex, education, income, geographical location, etc. some commonly used bases / variables are: > Geographical variables > Demographic variables > Educational variables > Income variables > Psychological variables A word about each of these variables will help us understand the identification of target group, i.e., market segmentation. Geographical Variables Geographical variables is an important variable in identifying market segmentation. The characteristics of the customers vary across the geographical locations. Hence, a firm need to classify its customers by rural-urban origins. Because, the urban elite is generally highly educated and have high level income. On the contrary, the rural mass is generally illiterate and 109 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalits income level is woefully low. Similarly, some firm may target its efforts in one state some other in few states, yet others in the entire country and still others may spread their wings across different continents. In all these, cases, the geographical variables define the market segments. ‘Demographic Variables Demographic variables include population variables like age, sex, marital status, number of children, etc. it is well-known fact that demand for products widely vary with regard to population variables. An excellent example of demographic segmentation in the Indian society is provided by population within age-group four to ten years can be easily correlated to specific products like toys, comic books and toffees. Educational Variables It is confirmed that educational attainment and incomes are highly correlated. Education itself creates certain differences. For example, the reading habits of college students differs considerably from the high school students. On the whole, variation in the living styles of literate and illiterate people are quite visible. The proportion of literate population is quite small which varies across the states. Thus the educational attainment of the population, i.e., customers becomes a sensitive basis for market segmentation. Income Variables Income of the customers provides are important basis for market segmentation. It is the level income that influences the quantity and quality of products demanded. The levels of income vary considerably across place, occupations, educational attainment and son on. Further, the purchasing capacity of an individual depends upon the level of income. The customer's behavior have a correlation with the income levels of the customers. Psychological Variables Besides, the variables discussed above, there are some other variables also which relate to the psychology of the customers. These, are for example, personality, life style, tastes, interests etc., of the customers. These outstanding psychological variables also bear outstanding values in segmenting a market. The best examples of psychographics market segmentation are goods made exclusively for status seekers with a high price tag attached to them like brier-cases, pens, watches, cosmetics and so on. Marketing Mix There are a number of aspects involved in marketing a product. Some of them are controllable and others are uncontrollable aspects may be the features of the product, its price, its selling 110 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalthrough own salesmen or retailers, its advertisement through various means like television, news Papers and so on. In all these cases, there are a number of altematives available to choose. The According to Prof:Borden, the term ‘marketing mix’ consists of the following: > A list of the important elements or intergradients that make up the marketing programmes, and > A list of the forces that bear on the marketing operation of a firm and to which the marketing manager must adjust in his search for a mix or programme thet tan be successfll Product Promotion Enterprise : Place Price A word about each of these four variables will help us understand marketing mix. 11 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalProduct The product consists of the policies an procedures relating to the product times to be offered and services to be rendered. It also includes research and development programmes and the new product policy. Price This element of marketing mix consists of the policies and procedure relating to the price level, price specifications and the price policy. Place (Physical Distribution) This element includes policies and procedures relating to the channels to be used between the plant and the consumer, the degree of selectivity among whole sales and retailers and attempts to co-operation of trade, Price and place (physical distribution) are discussed in detail in the subsequent section of the chapter. Now, we exemplify the marketing mix of an imaginary enterprises ABC Company (Pvt) Ltd, manufacturer of a colour television, Marketing mix of ABC Company : High income households with status conscious living in urban areas. : Colour Television with latest indigenous technology. : High and competitive price but within the reach of people at the lower range of high income group. : Advertising through newspapers, magazines, radio and television. Place (Distribution) _: Through reputed retailers in the urban areas. Marketing mix is bound to be different across the companies selling with different products. Marketing mix may also vary between the two companies selling the same product categories. For example, the marketing mix chosen by RMP company may be substantially different from 112 Created with @ nitro” professional download the free tral online a atropd.com/profesionalthat of ABC company mentioned above. However, these differences in their marketing mix are not anomalies. Branding and Packaging ‘You have read certain aspects of a product, i.e, marketing mix. In fact, product presentation to the potential consumers is also an important aspect of product marketing, Branding and Packaging are two aspects relating to product presentation. In this section, we would discuss these two important, of course, extrinsic attributes of a product, ie., branding and packaging, Branding The word ‘branding’ has its origin to the word ‘brand’. A brand is a name, word, symbol or a mark used to identify a product and to differentiate it from the competitive products. According to American Marketing Association A brand is a name term, sign, symbol, or design, or a combination of them, in tended to identify the goods or services of one seller or group of sellers and to differentiate them from those cf competitors. Branding is a process of assigning a distinct name to the product so as to differentiate it from the Competitive products of similar nature. If the brand is given a name, it is called ‘brand name” Examples of brand names are Colgate toothpaste. Liril soap, godraj reftigerator etc. in order to have a unique identity amongst the competing, products each brand is assigned a mark called “brand mark’. Advantages Branding offers distinct advantages to the buyers, the sellers and the society. Let us discuss them in tum, Buyers The buyers derive the following advantages from branding: 1. A brand generally denotes uniform quality of the product. 2. It makes purchasing easier and reduces the time and effort involved therein, 3. Purchasing branded products gives psychological satisfaction ot the buyer. 113 Created with @ nitro” professional download the free tral online a atropd.com/profesionalSeller A seller also derives certain advantages from branding, 1, Branding helps in identifying the product. 2. Ithelps carving our a niche for the product through product differentiation. 3. Branding helps in reducing selling costs by easing dependence on middlemen. Society Branding benefits the society also: 1, Branding ensures quality of product. 2. Ithelps in better dissemination of product knowledge. Disadvantages ‘There is, however, an opposite view as well. Branding has certain disadvantages to the buyer, sellers and society as a whole. These are as follows Buyers: Branding bears the following disadvantages to the buyers: 1. Branded products become more costly to the buyers as brand developed involves costs. 2. Once the brand gains popularity, the manufacturer tends to reduce the quality of the product. Sellers Branding had the following disadvantages to the sellers: 1. Developing and promoting a brand name involves money to be spent. 2. Branding increases the cost of production leading to increase in prices. 3, Seller finds it difficult to sell its product in the market amongst its rival products. Society ‘The disadvantages of branding for a society are as follows: 1. Branding often leads to higher costs and, in tum, higher prices. This is not considered as g00d from the society point of view. * 2. The brands enjoying the loyalty of the customers prevent the new producer from plunging into the market. 114 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalPackaging Packaging is considered as an important element of product mix. Some marketers even consider iis & fifth P* along with product, price, promotion and physical distribution. Packaging has been variously defined. One of the most quoted definition is “packaging is the art, science and ‘echnology of preparing goods for transport and sale’. Thus, packaging has two salient aspects: 1. Ithelps in the physical distribution / transportation and sales of the products, 2. Itperforms the functions of selecting package design and packaging material. Packaging has emerged as an industry. It consists primarily of two distinct segments: 1. Firms which manufacture material for packages, viz, paper, polyster, plastic, tin, ete, and 2. Firms which convert the packaging materials into packages. In addition, there are some other firms engaged in printing levels to be used in the packages. Functions Packaging should perform the following five functions: 1. Production: Packaging should protect the product from damage in the process of transit, storage and use. 2. Appeal : Packaging should attract and appeal to the customers, An attractive and appealing packaging serves as a silent salesman, 3. Performance.: The package must perform the test for which itis primarily designed. If the package fails to do so, the product itself becomes useless./ 4. Convenience: This is the fourth function of packaging. The package should be convenient {0 use, ic, opening and closure of the package, the repetitive use valve, disposability, etc. 5. Cost-Effective: Finally, the packages must be cost-effective also. While deciding on package cost, costs incurred in storage and handing of the empty packages and filled Packages, transport cost for distribution filled packages along with their insurance cost for the transit period, losses due to breakage or spoilage of the product etc, should be taken in to consideration. Advantages Packaging offers the following advantages: > Itprotects the product from damage in the process of transit, storage and use. > A good packaging serves as a silent salesman and, thus, promotes sales. > Itteduces the sots of transportation and storage of the product, » Packaging helps in identifying the product and, thus, saves the customers from the use of duplications and spurious products, 15 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalCriticism Packaging is also subject to the following criticism: > The consumers often throw away the empty containers in public places which causes environmental problems. > The use of some plastic packaging and aerosol cans causes health hazards. > Something, packaging becomes deceptive when products of inferior quality are packed in attractive packages. Legal dimensions Like other industries, the government has laid down certain regulations in respect of packaging also. Principal among these is the product information given the package known as “leveling requirements’. Net weight of the package when packed. Date of manufacture. Date of expiry. ‘Maximum retail price including or excluding local taxes Directives of use. Directives for storage. Price policy vVVVVVY Once the production design is decided upon, the price of the product needs to be determined before selling in the market. The enterprise has to take decision like at what price product will be sold out, how the price will be determined etc. pricing policy help answers these questions. Meaning price Price, goes by various names — freight, fare, license fee, tuition fee, professional charge, rent, interest etc., but price in an enterprise / business system is seldom so simple. By definition, price is the money that customers must pay for a product or service. In other words, price is an offer to sell for a certain amount of currency. Here, the word, offer indicates that price is an offer to sell a certain amount of currency. Price is one of the key elements of marketing mix. The salient ingredients of pricing are: > Pricing covers all marketing aspects like the item — goods or services mode of payment, methods of distribution, currency used etc. > Pricing may carry with it certain benefits to the customers like guarantee, free delivery, installation, free after-sale servicing and so on > Pricing refers to different prices of a product for different customers and different prices for the same customer at different items. 116 Created wit @ nitro” professional download the free tral online a atropd.com/profesionalFactors Affecting Prices The prices that a firm can charge for its products are subject to many influences. The various factors economic and non-economic impinge upon the prices of the products. The important factors that may apply to all types of products are: Product characteristics Product cost Objectives of the firm Competitive situations Demand for the product Customers behavior Government regulations VV VV VVY Product Characteristics By product characteristics, we mean numerous factors, i.e., the product life cycle, the product perishability, the product substitution and demand postponability or the magnitude of the resistance. Product Cost The second factor, the most important in determining price, is the cost of the product itself. While making marketing strategy, the decision makes should attempt to optimize the cost. The cost optimization helps in determining reasonable prices which provide equitable return on the cost employed vis-i-vis suites the customers’ buying power. Objectives of the Firm ‘The objectives set by the firm also influence the prices of its products. For example, if the firm adopts skimming objectives, then the prices would generally be high. On the contrary, if the firm adopts the market penetration as its objective, the prices would normally be low. ‘Competitive Situation ‘The magnitude of competition in the market also affects prices. If the marketing manager fids that the magnitude of competition is high, prices would tend to be normally high. On the contrary, in the situation of low competition, the prices would to be higher due to favourable market environment 117 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalDemand for the Product The fact remains that among the various factors, the demand for the product concem is found exceptionally instrumental in guiding the pricing decision. As per the law of demand, if there is more demand for the product, price will be high and vice versa. Customer’s Behavior In making pricing decisions, the study of customers behavior bears relevance. Of late, the behavioral scientists have gravitated increasing attention on the behavioral science. They feel that an in-depth study of the customers’ behavior would help diagnose the reactions for the customers regarding a product. Government Regulations While decide pricing policy, the decision maker does no need to under estimate the government regulations imposed from time to time to control the business activity I the country. Therefore, due weightage should be assigned to such regulation like MRTP Act, Essential Commodities Act, Industries Development and Regulations Act and the Defense of India rules. Pricing Considerations Unquestionably, the major objectives of pricing is the earning of maximum profits, this may be done by a pricing policy that will attempt to achieve a high return. Whatever pricing policy is decided on, for maximum effectiveness certain considerations must be taken into account before prices can be set. Impact of price and output respectively on revenue and cost. The level of output that can yield the maximum contribution towards overheads and profits. Scope for price adjustments in accordance with changes n cost and demand conditions of the product. Investigating into future implications, if any, of price change. Recognition of rival’s pricing strategies as well as quick reactions. Element of elasticity of demand and revenue. Effects of changes __ in prices of the product on the entry of the new enterprises. vVVVV Vv vv Distribution Channels or Methods of Marketing Production is for consumption. Having produced the products, these need to be made available to the final users of the product, i.e., the consumers scattered in large geographical areas, Since, many a times it becomes extremely difficult, if not impossible, to reach the customers on its own, the firm needs the help of marketing intermediaries, like wholesalers and retailers, to reach their products to the ultimate / final consumers. According to the committee on definitions of the American Marketing Association (1960): “A channel of distribution or marketing channel is the structure of intra-company which commodity product or service is marketed. 118 @ nitro” professional download the free tral online a atropd.com/profesional swithIn fact, channels of distribution are like popelines which’ take the right quantities of the right Product to the right location where the target consumers want them at the right time. This section, therefore, deals with the process how products go through this channel from the producer to the final users. » Zero level channel: when the distribution of the product is direct from the producer to the consumer or user. This is also called direct selling. > One level channel: When the product is not sent direct from the producer to the consumer but the producer sells the product to the retailer who, in turn, sells to the consumer. This channel is also known as distribution through retailers, > Two level channel: When there are two levels of different kinds of intermediaries between the producer and the consumer. In other words, under this channel, the manufactures sells the product other wholesaler who sells to the retailer and who family. Producer 1. Direct Selling Producer 2. Through Retailer 3. Through Wholesalers and Retailers ug Created with @ nitro” professional download the free tral online a atropd.com/profesionalDirect Selling This methods is also referred to as producer to consumer channel. Under this channel, the producer of goods attempts to make a direct contact with the ultimate user of goods by several methods of selling including door-to-door sales-persons. Direct selling to the consumers has the following advantages to the producers. > Close relationship to the consumers makes the producer constantly aware of changes and other consumer needs. > Profit do not go to the middle-man. > Goods get to the consumer more quickly because they do not have the travel through intermediates or middlemen. Producer to Retailer to Consumer Channel ‘This is a kind of indirect selling. This channel avoids wholesaler. It is suitable when products are perishable and speed in distribution is extremely essential. The goods that are frequently sold is this channel are fashion merchandise, products requiring installations, value good, etc. Producer to Wholesaler to Retailer This channel is also known as the traditional channel. This is also the most common method of distribution under which the producer sells to the wholesaler, who in tums, sells, to the retailer, who finally sells to the consumer. In this system, the wholesaler is granted a certain portion of the total profit, in return for which he or she buys stores, sells, delivers and extends credits. > Who lack in financial resources; > Whose product line is narrow: and > Whose products are not subject to fashion changes any physical deterioration but are durable. y ‘How to select a suitable channel The success or failure of an enterprise inter alias depends upon, to a great extent, the selection of a suitable channel of distribution. There are a number of factors that must be considered when a channel of distributions is to be selected. In practice, many choices are available. So a careful study is required before a decision could be reached that will fit to the specific conditions of the enterprise to the best channel of distribution. > Study the channels that are available, more especially those used by the competitors. > Determine the channel that will best match the salient characteristics of the product to be marketed. 120 Created with @ nitro” professional download the free tral online a atropd.com/profesional> Estimate the probable demand for the product. > Consider the available financial resources. » Approximately the costs, sales and profits for each available channel. > Determine the size of the product line and amount of a typical order. Government and Departmental Purchase The success of an enterprise whether large or small greatly depends upon their ability and efficiency their products. It has been well relied that the small-scale enterprises face several problems in marketing their products. Marketing assistance to these small units is thought to overcome their marketing problems. Central Government Stores Purchase Programme In order to avail of this assistance, the interested small-scale enterprises are required to register themselves with the director general of supplies and disposals (DGSD). The stores purchase Programme of the central government administered through DGSD provide a marketing outlet for the products manufactured by small-scale enterprises. Free registration with DGSD. Free supply of tender forms Exemption from depositing security and paying eamest money. Price preference up to 15% over the lowest quotation received from a large scale enterprises for the same product. Reservation of certain items (at present 409 items) for exclusive purchase for small- scale industries. vovvvyv In lime with above policy the DGSD, has classified the items of purchases by the govemment departments into the following six groups. > Items which could be procured by large scale units and which have no concem to small scale units. > Items which can be manufactured by large scale units but also permit scope for purchase of parts and components from small scale units. » Items which could be produced by both large and small scale units. but, as. mentioned a little earlier, products of small-scale units for the same products. > tems which are reserved for exclusive purchase from small units. The details of which are given in the next section 24.10. tems for which purchases up to 75% are to be made exclusively from small-scale enterprises. v 121 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalReserved items for exclusive purchase from small scale enterprises Small scale industries suffers from marketing difficulties as their products are often unstandardised and of variable quality. Consequently, they suffer from a competitive disadvantage with their large counterparts. Recognizing the vital role of small-scale industries in India’s industrial and economic development the government has come forward to the rescue of small industries in a variety of aspects. The reservation of items for exclusively purchase from small scale industries is also one such measure initiated by the government to overcome to marketing problems of small scale industries. The number of reserved items for exclusively purchase from small scale industries has been continuously in increase. It has reached to 409 by 1987-878 from only 16 in 1956-57. the ‘year wise number of the reserved items is presented in table. Year Number of items 1 2 1956-57 16 1959-60 27 1961-62 46 1962-63 63 1963 - 64 70 1964-65 72 | 1965-66 84 1967 — 68 110 1968-69 122 1969-70 146 1970-71, 167 1972-73 192 1974-75 222 Human Resource Management Meaning of Manpower Planning We know when intelligent people start on a long trip, they always make plans. They decide for example, where they are going and how they plant to get there. Generally the longer the trop, the mote they plan. Small scale enterprises also need to draw plans to take various decision and perform multifarious activities. In simple words, plans are basic to any sort enterprises whether large, medium or small. 122 Created wit @ nitro” professional download the free tral online a atropd.com/profesionalWhat is kind of people do we need? Before we ask this question, we must first understand the types of jobs to be filled. For example, do these jobs require some one with training in typing or shorthand, or can they be done by an individual without any specialized training but who can lea our filing system quickly and who enjoys assignments requiring attention to small details? To answer such tricky question in a systematic manner, enterprises of ten do develop job descriptions. In simple words, job descriptions are written explanations of the duties of a job, together with a list of the minimum qualifications necessary to hold the job. The use of these guides makes the selection process, to a great extent, more effective. How many people do we need? In fact, the previous question deals with the quality of personnel. This question deals with the quantity of personnel enterprise needs. We must answers several questions to determine the number of people required for various positions throughout the enterprise. These questions include the following: > Isthe demand for certain skills and occupations growing constant or shrinking? > How much work can the average person do in a specified period of time? > What is the level of absenteeism? > What is the level of tumover? Now, manpower planning can be defined as the process by which an entrepreneur ensures that he has the right number of people and right kind of people with appropriate skills, at the right place and the right time to do work for which they are economically most suitable, Job Réquirements Before an enterprise makes the selection of employees, he needs to define job requirements of each task. The job requirement identification involves the following: > Condueting job analysis) This is an investigation into various aspects of a task in terms of skill, qualifications, duties and responsibilities. It covers job title, the department to which it relates, line of supervision relationship with other jobs, types of material and equipment used mental and manual destroy working conditions. 123 Crested-w @ nitro” professional download the free tral online a atropd.com/profesional> Job description Simply, stated, job description deals with what, why, when and hot tasks are to be performed. In other words, it is a written statement of work conditions, time involvement and job responsibilities. > Job specification Job specification is nothing but a description of the salient features of the person to be soe ated in the specific job. It is a standard against which the salient features of the tmployee are matched how far he matches with the job specifications. In other, words, it Internal sources > External sources Internal Sources Internal sources refer to recruitment from the present work force of the enterprise itself. If there ie a vacancy in the enterprise at any time, some one already working in the enterr™oy in promoted or transferred, as the case may be. Filling vacancies from own existing employees pros the morale of the employees because they look forward scope and avenues for their career advancement. Such hope for future often motivate the employees to put in their best performance. This manner or recruitment has other side also, One of the serious drawback of this pernner to mention, is that while the quality of level of employees remains limited to that of the txisting employees, on the one hand, the advantages of inducting fresh ‘blood are missed, on the other. 124 Created with @ nitro” professional download the free tral online a atropd.com/profesionalExternal Sources It will not be less than correct to state that external sources the limitations, just mentioned above, imposed by internal sources. The various external sources an enterprise can opt for recruiting his employees can broadly be classified into: > Employees referrals ‘Many a times, the existing employees of the enterprise and other sister organization can refer to suitable candidates. In this case, kinship, friendship and village ties of the existing employees expectedly play a major role in the recruitment process. Recommendations Sometimes the entrepreneurs receive recommendations from their friends and relatives to employ the persons known to them. The experience suggests that the entrepreneurs need to be cautions in considering such recommendations. Unsolicited applications This is one of the common manners exercised in recruiting employees in small enterprises. The enterprises receives applications and requests for jobs from several ‘sources. The applications are kept and as and when there is a need to recruit people, these applicants are contacted, if still available. Advertisements If the entrepreneurs have sufficient time at their disposal to process and interview the candidates, they advertise their vacancies in the newspapers and other medias like radio and television. This manner ensures better choice for entrepreneurs to recruit the employees. Research studies on recruitment sources n small scale industry iz Sources of recruitment Research study Caste and communal loyalty played a major part in recruitment. SBRangnekar: Social and economic aspects of small industries in Ludhiana, UNESCO Research centre publication, 1962 Occasional advertisements, gate hiring, kinship ties played a major role in recruitment Kinship, friendship and village ties played a ‘major part in the recruitment process. Shashi Bala: Management of small scale industries, Deep & Deep, New Delhi, 1984, 125 Crested-w @ nitro” professional download the free tral online a atropd.com/profesional[67 per cent of the employees through personal | M.C.Gupta: Entrepreneurship in small scale sources and 33 per cent through employment | industries, Anmol Publications, New Delhi, exchanges (Total Workers: 1236) 1984. Direct request from candidates, | Hein Streefkerk: Too Little to live on, too much intermediaries, advertisements played major | to die on, economic and political weekly, april art. 1981. Pre-employment acquaintances casual callers, |V.Surya Prakasa Rao: Human resource gate hiring factor in recruitment. management in small industry, discovery publishing house, New Delhi, 1991. Kinship, Friendship and Relatives Unsolicited Applications Gate Hiring Recruitment Referrals and Recommendations Advertisements Employment Exchanges Selection Selection process starts where recruitment ends. Selection means fitting a round peg in a round hole. This is done by comparing the requirements of a job with the find out right kind of people to fill the available positions, an orderly and systematic procedures is, therefore, always advisable, Past experience suggests that in most cases to select both over-qualified and under- qualified: people tums to be costlier to the employer / enterprises. While selection of overqualified people results frustration on the part of the employees, selecting under-qualified people invites indignation of he employer frequently. ‘Although, the selection procedure varies from place to place and enterprise to enterprise, we can discuss the more common methods uses. However, no all enterprises are bound to use all the steps and techniques of selection which we are discussing. Instead, the enterprise should relate selection method to job successes for certain of works. 126 Created with @ nitro” professional download the free tral online a atropd.com/profesionalPreliminary Interview If the recruitment programme is non-selective (not trying to appeal to a special group of applicants, such as college-trained personnel or experiencing carpenters), the preliminary, interview is short, often lasting for ten-fifteen minutes. The basic purpose of the preliminary interview is to determine an applicant's suitability for further consideration. Basic questions such as age, present occupation, and experienced are asked in this interview. Application Blank Application blank is commonly used in the selection process. Questions like work history, educational level, work experienced and the type of work applied for are asked in the question blank. Form a perusal of this record, the employer can from a broad idea about the applicant's potential. Application blanks contain questions related to the probability of job success, Psychological Test Most psychological tests administered in the enterprise are paper-and — pencil. The test taken is given a series of questions and a choice of two or more possible answers to each questions. He/she must then answer that he / she feels correct. Aptitude test: This is a test measuring intelligence of the applicant and his ability to leam certain skills, Performance : It isa test that measures one’s current knowledge of a specific subject. Personality test : Under this test, an applicant's personality traits such as dominance, sociability and conformity are measured. Interest test : As the name of the test itself denotes, this is a test that measures one’s interest in various fields of work. Physical Examination A physical examination is usually placed towards the end of the selection process. It gives the enterprise current information about the applicant's physical health at the time of selection or hiring. Placement Once a new employee has been selected, he / she is finally placed to perform the specific job. Here, the employers needs to consider a few points before expecting work form the new 127 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalemployee, It is well known to all of us, the first few days in a new position are usually the hardest. A new comer should be properly introduced to his fellow workers, shown the location of facilities available, informed of regulations, if any, and encouraged to ask any needed information. Orientation ‘The employees selected should be made familiar with their enterprises’ objectives and activities and acquainted with their jobs. Thus begins their orientation period to leam about their work environment. Henceforth starts the training and development of newly selected employees to which we tum our attention in the subsequent section. Training and Development Qualified employees can be provided into two ways within an enterprise. First, the enterprise can select the best employees available, as discussed in the previous section. Second, those already ‘working in the enterprise can be trained to make the use of their full potential. In reality, these oth approaches are the parts for the same process. The reason is that once an individual is selected for some work, he should undergo some training, regardless of these qualifications. ‘Training may be defined as any procedure, initiated by an enterprise, which intends to foster and enhance leaming among the employees working in the enterprise. So far as the training in small Scale units is concemed, the owner himself takes the responsibility for developing and Conducting the training programmes with an objective to enhance the employees job-related skills and knowledge. Objectives of training Like all other enterprises activities training function should also first have its objectives clearly spelled out. The objective of training and development is to alter the thinking and behaviour of the employees in the direction desired by the management of the enterprise. In fact, a training programme must be tailored to the needs of a specific company for its specific positions. To improve job performance by enhancing employees’ knowledge To prepare employees well competent to discharge the new responsi > skill > ; > To impart skill how to operate the new machinery and equipments. > > ies To reduce the wastages and accidents. To build a second line for more responsible positions at a larger stage. 128 Created with @ nitro” professional download the free tral online a atropd.com/profesionalCharacteristics of successful training programme The main characteristics of a training programme are: > Its objective and scope are clearly defined. > The training techniques are related directly to the needs and objectives of the organization. > Itemploys accepted principles of leaning. > As far as possible, it is conducted in the actual job environment. The enterprise should know, what training should be imparted to whom, by whom and where. We are giving illustrative answers to these questions, Category of Focus of training | Who should do the | _ Where to train employees training Unskilled workers | Improved methods | Immediate On the job of handling | supervisor machines. Semi-skilled ‘Adoption of| More efficient |In the workers workers mechanization and | workers, supervisors | department or in technical process training shops. Skilled workers [New skills and | Instructions Training centre techniques Sales persons Art of salesmanship, | Instructors and | Short course in handling customers, | professional professional | planning managers institution Methods of training We know turn to the methods of training available to employees in small-scale enterprises. These are On-the-job-Training (OJT) The oldest and most commonly used training technique in the small units is the on-the-job training. It consists of the employees receiving training from their supervisors or other departmental members while they perform their regular jobs. In this way, the employees are both producers and learners. Such training is considered essential on every job available the in the enterprise. 129 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalTraining programme of this kind consists of the following three stages. > Demonstration: The job is demonstrated to the employees and each step involved demonstration should be done slowly so that the employees / trainees could understand the procedure and could ask questions as and when they are in doubts during the demonstration period. > Performance: The trainees perform the task what they have learned in the step one. > Inspection: In the third and final step, the work performed by the employees, as ‘mentioned in the step two, is inspected and immediate feedback of the job performance to the employees. Apprenticeship Training Apprentice training combines both formal classroom learning and on-the-job experience. This kind of training programme is provided mainly in the technical carders. Plumbers, electricians and bakers are examples of such training. Job Rotation ‘This kind of training is particularly beneficial in the case of smali-scale industries where each employee has a through understanding of the different functions performed in th enterprises. In this training programme, employees are move from job to job a few hours a day, a few days or several weeks. Outside Training ‘The above types of training programmes are internal or inside training given in the enterprise itself. There are such types of training programmes also which are given outside the enterprise . ‘The outside training consists of the employees being trained at schools / institutes outside the enterprise. ‘Training in small-scale industries (an appraisal) Having gone through the various types of training programmes available to employees in small- scale industries, it seems pertinent to look into the actual state of affairs in this regard. However, contemporary research studies indicate that the training function is a grossly neglected one in small industry in India. 130 Crested w @ nitro” professional download the free tral online a atropd.com/profesionalAspects of / Shashi Bala | Munshi (1983) | Apparao | Suryaprakas Ra training (1984) Saurasthra (1985) (1991) Ludhiana Kurnool __| Vishakhapatnam Coverage and | Skilled and un- | Skilled and un- | Skilled and un-| Skilled and un- number of | skilled selected | skilled selected | skilled skilled (selective) people for | ones only. ones only. (selective) which training offered. Nature of/ On the job [On the job | On the job plus | On the job plus training minimal informal. apprenticeship, | apprenticeship, as minimal and | well as informal. information, Period of | Unspecified | Unspecified | 3 to 10 months | 2 to 6 months training Payment during | Low wages | Paid very little] Nominal wages | Low wage paid training period Outside training | Not offered | Trrelevant Not offered | Not offered. costly unnecessary The dismal situation of training in small enterprises is attributed to the business owners disinterested in the programmes. The studies have pointed out various grounds advance by the small business owners for not giving training to their employees. Some of the important ones are: ® The fear that the trained employees would demand for higher salaries, > Trained employees will quit the enterprise, > Employees’ training will dislocate their schedule and > Imparting training to employees involves sizable expenses. Remuneration and Benefits Employees’ remuneration expressed in terms of wages is of ctitical concem to personal relations in small-scale industry. Whereas, wages represent income to the employees, they represent costs {o the employer and potential taxes to the government. Practically speaking, wages constitute the largest part of the employees” purchasing power and, therefore, have an important bearing on the level of economic activity. Besides, wages constitute one of the important factors around which most of the laobour problems revolve. The wages in small enterprises are not fixed on well-established norms and principles of equal pay for equal work. In fact, wage fixation is usually done based on the bargaining strength of the employer and employee in which the former dominates the scene. 131 Created wit @ nitro” professional download the free tral online a atropd.com/profesionalEmployee Benefits and Services In addition to remuneration ie., wages to the employees for their work done, enterprises nowadays also pay for a wide variety of supplementary items often called ‘fringe benefits’. ‘These benefits re the indirect payments made to the employers in addition to their direct wages and salaries. He employers’ federation of India consider fringes as those benefit provided by the employer Premium, payments consisting of bonus Payments for overtime. Payments for not worked. Payments for employee welfare. > > > > Accounting for Small Enterprises Need for Accounting Running a business involves a large number of transactions to achieve its main objective i.e., to earn profit. In a business, various item are purchased and sold frequently. Payments are made and received every now and then. Amounts are to be received and paid to various parties time and again. An entrepreneur cannot remember the exact details of numerous transactions taken place during a period of time. Meaning of Accounting What is accounting? Different scholars institutes have defined accounting differently. The important among them are as follows. According to smith and Ashibume, “accounting is the science of recording and classifying business transactions and events, primarily of a financial character and the art of making significant summaries, analysis and interpretations of these transactions and events and communicating results to persons who must take decisions or form judgment. The committee on terminology appointed, by the American Institute of certified public accountants defined accounting as, “Accounting is the art of recording classifying and summarizing in a significant manner and in terms of money. Objectives of Accounting The following are the main objectives of accounting > To Maintain full and systematic records of business transactions: Accounting is the language of business transactions. Given the limitations of human memory, the main objective of accounting is to maintain a full and systematic record of all business transactions. 132 Created with @ nitro” professional download the free tral online a atropd.com/profesional® To ascertain profit or loss of the business: Business is run to eam profits. Whether the business eamed profit or incurred loss is ascertained by accounting by preparing profit & Loss account or income statement. » To depict financial position of the business: A businessman is also interested in ascertaining his financial position at the end of a given period. For this purpose, a Position stétement called balance sheet is prepared in which assets and liabilities are show ® To provide accounting information to the interested parties: Apart from owner of the business enterprise, there are various parties who are interested in accounting information. These are bankers, creditors, tax authorities, prospective investors, researchers etc, Accounting Process The accounting process consists of following four stages: > Recording the Transactions > Classifying the Transactions > Summarizing the Transactions > Anglicizing and interpreting the results Recording the transactions Accounting begins with recording, or writing of all business transactions in the book of original entry called Journal. This book may be further divided into various subsidiary books such as cash book, sales book, purchase book, etc. the number of subsidiary books to be maintained depends upon the size and nature of business and the type of transactions. Classifying the Transactions Classifying is the process of grouping of transactions of one nature at one place. This is done by opening accounts in a book called “Ledger. For example, all transactions related to cash like cash sales, cash purchase, cash expenses are posted to cash account. The transactions pertaining to different person are entered separately in the name of each person in ledge. ‘Summarizing the Transactions After classifying all transactions and balance, a statement called “Trial Balance’ is prepared to adjudge the arithmetic accuracy of the books of account. If the Trial Balance tallies, it means that the transactions have been correctly recorded and posted into ledger. 133 Created wit @ nitro” professional download the free tral online a atropd.com/profesionalThe last stage consists of analyzing and interpreting the results shown by the Profit and Loss Account and the balance sheet. For this, various ratios are calculated to analyze and interpret the results. These results are used to make future plans for the business and communicated to the interested parties like management, investors, bankers, creditors, ete. Journal Journal is a book of original entry. All day-to-day transactions of business are recorded first in it in a chronological order with the help of vouchers like cash receipts, cash memos, invoices, etc. journal is also called ‘Journalizing’ an the entries passed in this book are called ‘journal entries’/ Journal Date Particulars LF Dr. Amount _| Cr. Amount Rs. Rs. Trial Balance You have seen that for every transactions, on account is debited and some other account is credited with the same amount. In other words, for every debit, there is an equal and corresponding credit. This is the basic element of the principle of double entry system. This being precisely the case, it is but natural that the total of all the debit balances should agree with total of the credit balances. “Trial Balance’ if the total of debit balances agrees with the total of credit balances, it is called that the Trial Balance is tallied. It means that both the aspects of each transaction have been correctly recorded in the ledger. Remember that it is not a conclusive proof of accuracy but of arithmetic accuracy only. Methods of preparing the Trial Balance There are mainly two methods of preparing the Trial Balance. These are > Total methods, and > Balances method 134 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalTotal Methods Under this method, the total of each side of account is shown respectively in the debit and credit columns of the Trial Balance, These type of trail balance is known as the ‘Gross Trial Balance” Balance Method As the name-itself indicates, in this method, the balances of each account are shown in the trial balance, The debit balance is shown in debit column and credit balance is shown in credit column of amount. Let us prepare the trial balance from the ledger prepared accounts.. Trial Balances as at 31" January 1997 S.No | Name of account LF | Total method [Balances Method Dr. Cr Drea icr Rs Rs__|Rs__[Rs 1 Cash account 28,000 13,300 14,700 - 2 Capital account 7 20,000 - 20,000 3 Bank account 5,000 = 5,000 - 4 Purchase account 5,000 - 5,000 - S Fumiture account 7,000 - 7,000 - 6 — Chinmoy’s account - 5,000 - 5,000 7 Sales account : 10,000. - 10,000 8 Ashim Das’ account 2,000 - 2,000 - 9 Salaries account 800 3000 - 10__Drawing avcount 500 500 - I 48,300 _] 48,300 [35,000 | 35,000 Final accounts The final accounts are primarily prepared for ascertaining the operational result and the financial Position of the business. These are prepared with the help of Trial Balance. The final accounts consists of the following two accounts: > Profit and loss account, and > Balance sheet 135 Created wit @ nitro” professional download the free tral online a atropd.com/profesionalProfit and loss account ‘The profit and loss account is prepared for ascertaining whether the business earned profit or incurred loss during a particular period of time called accounting period. All nominal accounts are entered into profit and loss account, As a rule all expenses and losses are shown on the debit side and all incomes and gains are shown on the credit side of the profit and loss account. Taking our previous illustration I here against, let us study how the profit and loss account is prepared. Remember, the first p[art of the profit and loss account contains the trading account, which contains information on opening stock, purchases, direct expenses and sales. There is a common practice to prepare a combined trading and profit & loss account. ‘Trading and Profit & Loss Account (For the period ended on 31* January/ 1997) Particulars ceca | Particulars | Amount Rs Rs To purchases 7,000 By sales, 10,000 To salaries 300 | To net profit 2,200 (Transferred AC in | 10,000 10,000 the Balance Sheet) Balance Sheet Having ascertained the operational results, i.e., profit or loss by preparing the profit & los account, one final account still remains to be prepared is the balance sheet. The balance sheet is primarily prepared to know the financial position of the business. Hence the balance sheet is also called ‘position statement’. As already mentioned all nominal accounts i.e., accounts relating to expenses, losses, profits, incomes, gains etc. are shown in the profit and loss account. All remaining accounts representing personal and real accounts are shown in the balance sheet. The accounts showing debit balances represent assets and the accounts showing credit balance represent liabilities. 136 Created with @ nitro” professional download the free tral online a atropd.com/profesionalThe preparation of the balance sheet is illustrated with the help of our imaginary trial balance given earlier. Balance Sheet (As on 31* January/ 1997) Liabilities Rs Assets Rs Capital 20,000 Cash 14,700 ‘Add: Profit 2,200 Bank 5,000 22,200 Less: Drawing [500 [21,700 | Furniture 5,000 Chinmoy 5,000 ‘Ashim Des 2,000 26,700 26,700 137 Crested with @ nitro” professional download the free tral online a atropd.com/profesionalUNIT-V MANAGEMENT OF SMALL BUSINESS > Growth strategies in small business > Sickness in small business Objectives of Growth A busitiess enterprise in an outcome of business environment prevalent at a point of time. Business environment like social, economic and political environments, changes with change in time. In order to survive in the changed and changing business environment, a business enterprise needs to be strong enough to cope with the changes and challenges before it. The same underlines the need for growth of business enterprises. Strictly speaking, growth is a natural phenomenon and continuous process in the business. Business enterprises start small and grow to big with the change in time. Here, some pertinent questions that arise are: What is the need for growth of business enterprise? Or Why do business enterprises need to grow? Or what motivates business enterprises to grow? The precise answers to these questions are given as follows. > In simple terms, growth implies strength and stamina. Growth enables a business enterprises of face adversities, challenges , competitions, hardships, etc. thus, growth ensures the survival of the business even in adverse and hard times. > Increase in sales tumover and output, inter alias, have been the major symptoms of a growing business. These result in economies in production and marketing etc. these economies, in turn, reduce production cost per unit and increase profits earned per unit. ‘These advantages are popularly known as economies of scale. > The need for appropriate technology also changes with changes in business environment. The use of modem technology involves huge investments. Since, the big size of business facilitates the use of technology, business enterprises feel need for growth. > A big business enjoys more benefits in several maters than a small one. Big business enterprises are in a better position to complete cumbersome procedure make good rapport with the conceed agencies and avail of the facilities provided for setting up business enterprises particularly in backward areas so notified for this purpose. These benefits motivate a small enterprise to grow big. The fact remains that a small enterprise experiences a disadvantage position in these matters. > Last but no means the least, the entrepreneurs’ desire to do something specific in businesses also leads to growth in business. The lust for social and economic recognition motivates one to build the so-called business empire. Tata, Birala, Dalmia, etc, are the popular examples of such business empires in India. In nutshell, the personal factors of the entrepreneurs also lead to growth of business, 138 @ nitro” professional download the free tral online a atropd.com/profesional swithWhile one can add more factors to’'this list to explain the need for business growth, the above listed factors appear to be the major ones. Stages of growth Before we discuss growth strategies in small businesses, let us first know the stages of growth in the content of small enterprises. Just like human begins, business enterprises also pass through different stages in their lives. This is called Enterprise life cycle, Enterprise life cycle is broadly classified into five stages: Start up, Growth, Expansion, maturity and decline. Each stage has distinct characteristics. The strategies required to effectively cope with each stage also vary. This calls for a proper understanding of cach stage to enable entrepreneurs to adopt the right strategies for growth. A brief description of cach of the five stages is given here. Start up stage This refers to the birth or emergence of a business enterprise the economy. The production takes Place in limited scale. Scale is also limited to a small area, The enterprise is not faced with any ‘ype of competition during this stage. Profits may not be earned during the start up stage. Growth stage Start up stage is followed by the growth stage. During this stages, the enterprise is known to and accepted by the market. Production and sales increase yet supply falls short of demand for the product produced by the enterprise. Profits increase, the competitors being to enter the particular Product market. The enterprise at this stage tries to change its strategy from ‘buy my product to try my product”. Expansion Stage This is the stage in which business enterprise expands by way of opening its branches and introducing new product lines. Business activities at this stage are diversified to reap the best benefits from the available business opportunities. Maturity Stage During this stage, due to keen competition, sales increases but at a decreasing rate. As a result, profits tend to declining. In such situation, marginal enterprises start leaving the sense / market. Some enterprises adopt methods such as ‘trading in’ to survive for some more time in the market, 139 Created with @ nitro” professional download the free tral online a atropd.com/profesionalDecline Stage This is the final / last stage of business enterprises. At this stage, the enterprises find it difficult to survive either due to the gradual replacement of enterprise product or due to some new innovations or on account of change in customer behaviour. Sales drops abruptly. Enterprises start incurring losses at an increasing rate. In such situation enterprises prefer to close their shutters. If'we depict these stages of growth in a diagram, these follows. i Start Up Growth Expansion | Maturity | Decline bo It deserves mention here that the time period for which an enterprise remains in each of the stages varies widely from enterprise to enterprise. Some enterprises take years together to pass through the start up stage, while others may pass through or be accepted in a few weeks only. An enterprise like salt producing seems to remain in maturity stage for ever. In brief, the time taken for all enterprises to move from one stage to another is not the same but varies widely from enterprise to enterprise. ‘Types of Growth Strate; The term ‘strategy’ is commonly used in our day-to-day life. It is easy to understand but difficult to describe, In simple terms, strategy is a well-planned course of actions devised to achieve an objective. Accordingly, growth strategy means a well designed scheme meant to expand business operations. In other words, growth strategy means a plan to help the enterprise grow big in course in time. In practice, the types of growth strategies vary between the enterprise. Nonetheless, growth strategies are broadly classified into two types 140 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalInternal growth Strategy These imply that enterprises grow their own without joining hands with other enterprises. Expansion and diversification have been the popular forms of internal growth strategies. External Growth Strategy ‘What is not intemal growth strategy is extemal growth strategy. In case of extemal growth strategy, enterprises grow by joining hands with other enterprises. The forms of external growth strategy include joint ventures, mergers and sub-contracting. In this way the main strategies of growth can be listed as follows: > Expansion > Diversification > Joint Venture > Merger, and > Sub-Contracting Expansion Expansion is one of the forms of internal growth of business. It means enlargement or increase in the same line of activity. Expansion is a natural growth of business enterprise taking place in course of time. In case of expansion, the enterprise grows its own without joining hands with any other enterprise. There are three common forms of business expansion. These are Expansion through Market Penetration It means the enterprise increases the sales of its existing product by enlarging the existing market. In other words, market penetration means making deeper in roads in the existing market. ‘Various schemes are launched to penetrate into an existing market. The scheme of exchanging an old scooter for new one introduced by LML, for example, is a form of market penetration. Expansion through Market Development It implies exploring new markets for the existing product. In order to increase the sale of existing product, the enterprise makes searches for new customers. Expansion through Product Development and / or Modification It implies developing or modifying the existing product to meet the requirements of the customers introduction of plastic bottles for selling refined oil addition to its loose sales is an example of product development / modification. 141 @ nitro” professional download the free tral online a atropd.com/profesional withAdvantages Expansion provide the following benefits: > Growth through expansion is natural and gradual > Enterprise grows without making major changes in its organizational structure. > Expansion make possible the effective utilization of existing resources of an enterprise. > Gradual growth of enterprise becomes easily manageable by the enterprise. > Expansion results in economies of large-scale operations. Disadvantages However, expansion is not an unmixed blessing. It has some disadvantages also. There are. > Growth being gradual is time consuming. > Expansion in the same line of product delimits enterprise growth making enterprise unable to take advantages from new business opportunities, > The use of modem technology is limited due to the limited resources at the disposal of enterprise. It weakens the competitive strength of the enterprise. Diversification Diversification is another form of intemal growth of business. As stated earlier, expansion has its own limitations of business growth. Diversification is evolved to overcome the limitations of business growth through expansion.\A business cannot grow beyond a certain point by concentration on the existing product / market only. In other words, it is not always possible for a business to grow beyond a certain point through market penetration. This underlines the need for the adding the new products / markets to the existing one. Such an approach to growth by adding new products to the existing product line is called ‘diversification’. In simple terms, diversifications may be defined as a process of adding more products / markets / services to the existing one. This is necessary because, according to product life cycle concept’, every product has a definite life period. Like human beings product also dies / disappears from the market. Hence, the introduction of new products to the basic product line becomes necessary to keep the business on. ‘The use of diversification as a growth strategy has been continuously on increase both in the private and public sectors. In the private sectors, Kelvinator India Limited, which was originally a refrigerator manufacturer, diversified its product line into mopeds. Similarly, Larsen and Toubro, an engineering company, diversified into cement. LIC’s diversifications into mutual funds and $BI’s into merchant banking are the examples of diversification adopted by the public sector in India. 142 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalAdvantages Diversification offers the following advantages Diversification helps an enterprise make more effective use of its resources. Diversification also helps minimize risk involved in the business, Diversification adds to the competitive strength of the business. Diversification also enables an enterprise to tide over business fluctuations and, thus, ensures smooth running of the business. vvVV Disadvantages Allis not good with diversification. It also suffers from certain disadvantages. » Diversification involves business reorganization which requires additional resources, ‘Thus, diversification becomes a costly propositions. > It becomes difficult, is not impossible, to effectively manager and coordinate the diverse business. ‘Types of diversification There is no uniform type of diversification adopted by all enterprises. It varies from enterprise to enterprise. Usually, diversification is of four types: > Horizontal diversification; > Vertical diversification > Concentric diversification > Conglomerate diversification Horizontal Diversification In this type of diversification, the same type of product or market is added to the existing ones. Adding refrigerators to its original products of steel sages and locks by Godrej is an example or horizontal diversification. Vertical Diversification In this type of diversification, complementary products or services are added to the exiting Product service line of the enterprise. The new products or services serve either product or service line of enterprise. The new ATV manufacturer ma start producing picture tubes needed by it. Similarly, a sugar mill may develop a sugarcane farm to supply raw material or inputs for 143 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalit. Setting up of retail shops by companies like Delhi Cloth Mills to sell its fabrics is also vertical type of diversification. Concentric Diversification In case of concentric type of diversification, an enterprise enters into the business related to its present one in terms of technology, marketing or bogh. Nestle, originally a baby food producers, entered into related products like ‘Tomato Ketchup’ and ‘Maggi Noodles’. Similarly, a tea company like Lipton may diversify into coffee. Conglomerate Diversification This type of diversification is just contrary to concentric diversification. In other words, in this type of growth strategy, an enterprise diversifies into the business which is not related to its, existing business neither in terms of technology no marketing. JVG carrying on business in new paper and detergent cake and powder, Godrej manufacturing steel safes and shaving cream are examples of conglomerate diversification. Joint Venture Joint venture is a type of external growth strategy adopted by business firms. In simple, terms joint venture is a restricted or a temporary partnership between two or more firms to undertake jointly to complete a specific venture. The parties who enter into agreement are called co- ventures and joint venture agreement will come to an end on the completion of the work for which it was formed. The co-ventures participate in the equality and operations of the venture / business. The profits or losses are shared between the co-ventures in their agreed ration and in the absence of such agreement, the profits or losses are shared equally. In general, joint venture is formed for the purpose of consigning the goods from one place to another, undertaking contracts for construction works, underwriting of shares or debentures of joint stock companies etc Advantages ‘The main advantages the joint venture offers are as follows: Joint venture reduces risk involved in business. It helps increase competitive strength of the business. It makes possible the use of advanced technology and know how not available with a firm, Joint venture provides the benefits of scale of economy by reducing production and marketing costs, on the one hand, and by increasing sales volumes, on the other. vvv v 144 Created with @ nitro” professional download the free tral online a atropd.com/profesionalDisadvantages > In case of lack or proper understanding between the co-ventures, the functioning of the business is adversely affected. 3 Excessive legal restrictions on foreign investments limit joining hands with foreign firms, > Sometimes. More equality participation by one ore more co-ventures, creates conflicts between them. Merger Merger is yet another form of extemal growth strategy. Merger mean combination of two or combined ie Smtetprises into one. In other words, when two ot more existing enterprises are Combined into one, it is called ‘merger’. Merger may take place in tow ways. First an enterprise or enterprises may be acquired by another, usually a big one. It is called “absorption”. Second, When two or more existing enterprises merge into one to form a new enterprise. It is called amalgamation. Thus, while no new enterprise is formed in case of former, a new enterprise is formed in case of latter. Usually, mergers are classified into four types. > Horizontal Merger > Vertical merger > Concentric merger, and > Conglomerate merger All these four types are already discussed under ‘types of diversification’. Hence, these are not discussed here again to avoid repetition. Advantages Mergers provides the following advantages; ® Itprovides benefits of economies of scale in terms of production and sales > It facilitates better use of resources, > Itenables sick enterprises to merge into the healthy ones, % It also promotes diversification in product line to take advantages of opportunity available in the particular businesses, Disadvantages Merge? also suiiers from the following drawbacks > Larger scale operations often make co-ordination and control ineffective. This adversely affects business performance as a whole * Sometimes merger leads to monopoly in the particular business Monopoly is not welcome in the interest of the society. 145 Created with @ nitro” professional download the free tral online a atropd.com/profesionalSub-Contracting ‘What is sub-contracting system? Sub-contracting system is a mutually beneficial commercial relationship between the two ‘companies. This is known as Ancillarisation in Indian and more generally as sub-contracting. Sub-contracting can be defined as follows. ‘A sub-contracting relationship esists when a company (called a contractor) places on order with another company (called the sub-contracting) for the production of parts, components, sub- assembles or assemblies to be incorporated into a product sold b the contractor. Such orders may include the processing transformation, or finishing of materials or parts by the sub-contractors at the request of the contractor. In practice, large scale industries do not produce all goods on their own, instead they rely on small scale enterprises called sub-contractors for a great deal of production. When the work assigned to small enterprises involves manufacturing works, it is called industrial sub- contracting. In the other cases, it is known as commercial sub-contracting. It is not unusual for sub-contractors to work to more than one contractor. Historical Background of Sub- Contracting Before, we discuss the role of sub-contracting system in development of small-scale enterprises. It seems pertinent to first trace out the evaluation of sub-contracting system in the industrial world. Japan. is considered the birth place of modem sub-contracting system. In Japan, when military demand for machinery industry expanded enormously during 1930s, the large firm could not meet the ever huge orders. In 1938, Mitsubishi Heavy Industry could not meet orders equivalent to over its two years production capacity, for example. Increasing production capacity of heavy machinery industries had crucial importance in the Japanese economy. As per the need of the hours, small enterprises, a new their orders. In view or power technological knowledge of small enterprise, a new relationship known as sub-contracting system was introduced to make long-term and direct trade relations between small and large industries, instead of floating and short-term relations mediated by the brokers. Today, the key to so many small firms in Japan lies in this sub-contracting system only. As a matter of fact, sub-contracting has become basic to the character of the Japanese industries 56 per cent of the small manufacturing companies (having less than 300 employees) are producing under sub-contracting system in India, sub-contracting has emerged in the mane of Ancillarisation or ‘ancillary units”. Se have only mentioned the historical background of sub-contracting system in the industrial economy of Japan. The real role of sub-contracting can perhaps be clearly seen by juxtaposing of its advantages and disadvantages to small-scale enterprises. To this we tum in the following paras. 146 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalAdvantages: Sub-contracting system bears the following advantages It increases production in the fastest way without making much efforts. The contractor can produce products without investing in plant and machinery. Sub-contracting is particularly suitable to manufacture good temporarily It enables the contractor to make use of technical and managerial abilities of the sub- contracting. Despite leading to dependence, sub-contracting ensures existence of sub-contractors by providing them business. > Last but no means the least, sub-contracting makes the core firms more flexible in their production. vVvVY v Disadvantages However, sub-contracting is not an unmixed blessing. It has some disadvantages also. These are > It does not ensure the regular and uninterrupted supply of goods to the core firms, ie, contractors which adversely affect the functioning of the core firms. Goods produced under sub-contracting system are often qualitatively inferior, Sub-contracting also delimits the expansion and diversification of the core firms. Delays in payments, a common feature, by the contractor to the sub-contractor endangers the very survival of the latter. vv Sub-contracting or Ancillarisation in India In India, sub-contracting in the form of Ancillarisation of ancillary units has been receiving Government support since sixties. An ancillary unit is own which sells not less that 50% of its manufacturers to one or more industrial units, presumably large units. The government has been repeatedly advising public sector undertakings to ensure that a large number of items are farmed out for manufacture by small-scale units. In order to encourage sub- contracting system, an important development in this areas has been the establishments of sub- contracting exchanges at the small industries service institutes (SISI’s) all over the country. These exchanges maintain up to date information on the unutilized capacities of the small-scale ‘enterprises and then match these with the requirements of the large scale industries. Thus, these exchanges ensure orders for the small-scale enterprises from the large units. In China, the ancillary development is described as the Dragon Dance the head of the dragon symbolizing the Parent unit and tail representing the ancillary units. In India, commercial sub-contracting and inter-dependence between localized community of small enterprises is found in existence around specialized industries. The diamond polishing 147 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionaland garments industries are such examples. In both these industries, production is carried out in small firms or home-based putting-out systems, but the crucial functions such as supply of raw materials and selling the products are performed by the large units. There are also a large number of clusters of small enterprises engaged in specialized industries — woolen garments, bicycles and parts, sewing machines and parts in Ludhiana, sports goods in Jallandhar, locks in Aligarh, leather goods in Agra and Kanpur, cotton hosiery in Delhi and Calcutta, Sickness in Small Business Concept of industrial Sickness > Sickness is easy to understand but difficult to define. It is a relative term. In common parlance, a sick industry is one which is not healthy. A healthy units is one which eames a reasonable return on capital employed and which builds up reserves after providing reasonable depreciation. Different agencies have defined industrial sickness differently. Some important definitions of industrial sickness are reproduced as follows: According to the Reserve Bank of India, > A sick unit is one which incurs cash losses for one year and, in the judgment of the bank, it is likely to continue to incur cash losses for the current year as well as for the following year; . > The unit has an imbalance in its financial structure such as current ration of less than 1:1 and worsening debt-equity ratio, ie., the ratio to total outside liabilities to the net worth; and > When the cumulative losses exceed capital and reserve. Thus, the emphasis in the Reserve Bank of India’s definition of sickness is on profitability liquidity and solvency. The definition of sick small-scale industrial units under the Reserve Bank of India’s (RBI) instructions followed in September 1989 is as follows. A small scale industrial unit should be considered as sick, if it has, at the end of any accounting year, accumulated losses equal to or exceeding 50 per cent of its peak net worth in the immediately preceding five accounting years”, The same definition holds good for tiny sector also. The sick industrial companies (Special Provisions) act, (SICA), 1985 defines a sick industry as “an industrial company 9being a company registered for not less than seven years), which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth and has also suffered cash fosses in such financial year immediately preceding such financial year. The SICA also calls a company incipiently sick if it has eroded 50% or more of its peak net worth during any of the preceding five financial years, 148 Created wit @ nitro” professional download the free tral online a atropd.com/profesionalThe study team of the state bank of India (SBI). 1975 in its report on small-scale industry advances defined a sick units as “one which fails to generate as internal surplus on a containing basis and depends on its survival upon frequent infusion of external funds”. Its is evident from the above definitions that the criterion of cash loss, in one sense or another, - Tepresents the common elements underlying above all definitions of industrial sickness given by different agencies. The concept of industrial sickness is, thus, viewed from financial angel. The reason is not difficult to seek. The fact remains that the performance of a unit in terms of production, marketing, etc, are utilimately reflected on the financial performance of the unit, Besides this, the financial results of a unit are easily seen, understood and calculated also. Signals and symptoms of sickness It becomes clear from the definitions of industrial sickness that industrial sickness does not occur all of a sudden in the life history of an industrial unit. In fact, itis a gradual process with distinct stages taking from 5 to 7years to corrode the health of a unit beyond cure. It starts with downtum in the industry whose continuation leads to setting in’ of industrial sickness. The process of industrial sickness can be presented in different ways. For example, Bidani and Mitra’s put this process of industrial sickness in the following manner. Process of Industrial Sickness Nonmal units Functional areas viz, production, marketing, finance and personnel are normal and efficient. Generating profits, current ratio is more than one. ‘Tending toward sickness | Not worth is positive debi-equity ratio 1s satisfactory initial aberration in some of the functional areas mentioned above. Decline in profit during last year. Losses anticipated in current ar. Incipient sickness Deterioration in the above functional areas continues. Cash losses incurred in last year are expected in current year. Deterioration anticipated in current year. Although current ratio is more than one during last year. Sickness Deterioration anticipated in debt-equity ratio during current year. Unit’s functional areas have become inefficient, cash losses incurred in last year, expected in current and next year. Current ratio is less than one and worsening of debt equity ratio. 149 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalSrivastava and Yadav chalk out the above process of industrial sickness in their own manner. Incipient althy Unit oe 1 Cobh Profit + ‘Tdwards ceanaial Sidkness 2. Not Working 1. Chsh Profit - Capital 3. Net Worth + 2) 2. Nit Working 02 or More Cfpital + 3. Net Worth + Path to Industrial Sickness In conformity with these processes of industrial sickness, Gupta investigating into the typical path to the present cash loss situation of sick units also reported that in the early stages (.e. up to 6 years preceding the cash loss period), the profitability index showed a marginal decline, followed by sustained decline during the period of 03 years preceding the cash loss period. ‘Thereafter, it showed continuous and significant cash loss during the subsequent period. This is confirmed by Table . Signals of Industrial Sickness It has already mentioned that industries do not fall sick ovemight rather the process of failure can take number of years. This implies that the signs of sickness may be discernable quite early in the life of an industry. There warning signs in several functional areas are termed as ‘signals’. In fact, the timely identification of various signals makes the detection of sickness easier. Therefore, the various signals need to be identified and monitored at an early stage of sickness. One can produce a number of signals of industrial sickness. The important signals of sickness are: The time Gap Between First Appearance of Sickness and 100 Per cent Erosion of Net Worth 150 Created wit @ nitro” professional download the free tral online a atropd.com/profesionals. Name of Companies Yearof | Yearof | Yearof | Yearof No Neg Cash Loss | 50% 100% Working Erosion of | Erosion of Capital Net Worth | Net Worth 1 [Mysore Spinning and | 1964 1965 1971 1972 Manufacturing Co.Ltd. 2 |The Elphistone Spinning and | 1963 1967 1975 1976 Weaving Mills Ltd. 3 |The Ahmedabad Jupiter | 1963 1967 1970 1971 Spinning Weaving and ‘Manufacturing Co.Ltd. 4 |The Aurangabad Mills Ltd. | 1962 1963 1970 1971 5 |The Azam-Jahi Mills Ltd. | 1962 1963, 1968 1969 6 |The Himabai Manufacturing | 1962 1965 1967 1968 Co. Ltd. 7 |The Jahangir Vakil Mills Co. | 1961 1966 1969 1978 Ltd. A 8 [The Tata Mills Ltd. 1963 1968 1977 1980 9 |The indore Malwa United | 1963 1965 1968 1969 Mills Ltd. 10 | The Connanore Spinning and | 1964 1966 1969 1971 Weaving Mill Ltd. 11 |India Paper Pulp Co. Lid. [1968 1967 1970 1973 Adapter from S.S. Khanka : Industrial Sickness in India, Commonwealth Publishers, New Delhi, 1995, p.11. @ i) Gi) iv) ) wi) (ii) (viii) x) & Decline in capacity utilization; Shortages of liquid funds to meet short-term financial obligations; Inventories in excessive quantities; Non-submission of data to banks and financial institutions, Iregularity in maintaining bank accounts; Frequent breakdowns in plants and equipments; Decline in the quality of product manufactured or service rendered; Delay or default in the payment of statutory dues such as provided fund, sales tax, excise duty, employees, state insurance, etc; Decline in technical deficiency; and Frequent turnover of personnel in the industry. 151 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalSymptoms of Industrial Sickness The persistence of various signals over a long period of time becomes symptoms of sickness. ‘The various symptoms ultimately reflect on plant performance, capacity utilization, financial ratios share market price and practices in the diverse areas of finance, production, marketing and labour relations in the industry. Some of the important symptoms which characterize industrial sickness are given below: () _Persisting shortage of cash; ii) Deteriorating financial ratios; (ii ‘Widespread use of creative accounting ; (iv) Continuous tumble in the prices of the shares; (v) Frequent request the payment of statutory dues; (vi) Delay in the audit of annual accounts; and (vii) Morale depredation of employees and depredation among the tpop and middle management level. However, the financial ratios, in all cases, cannot be considered as true symptoms of industrial sickness mainly due to two reasons. First, the sickness prone units, in order to present a better and sound image do a lot of window dressing. Second, the financial data is available after a gap of one year. However, and early identification of signals and symptoms of industrial sickness makes the task of detecting sickness easier. Magnitude of Industrial Sickness The global experience indicates that in the process of economic and industrial development a certain level of industrial sickness is inevitable to exist as the inefficient units are bound to be dispiaced from the industrial scene by more efficient ones. For example, during the period 1972 to 1983, the number of bankruptcies per annum has increased from around 10,000 to more than 25,000 in the United States, from less than 7,000 to around 20,000 in Japan, from around 4,000 to more than 10,000 in West Germany and from 3,000 to more than 12,000 in the United Kingdom. But, sickness in the Indian industries has grown rapidly in the recent years and has assued alarming proportions, particularly in small-scale industries. During 1980-81, while non- SSI sick units experienced an increase of 67% only, SSI sick units recorded an increase of the order of 857%. In fact, sickness has become endemic and epidemic in small scale sector in India, Table 28.2 bears out data on the number of total small scale industries vis-d-vis number of sick small scale industries for the period 1977-91. A close look at the figures on total small scale units and sick small units during 1977-91 clearly reveals that the growth of sick small units for exceeds the growth of small scale units whether indicated by the ratio of sick units to total units, annual growth rates and compound growth rate, It is also noticed that the incidence of sickness in small scale units assumed alarming proportion 152 Crested-w @ nitro” professional download the free tral online a atropd.com/profesionalRs.1997.13 crores, ie., 71.53% of total Guistanding credit to all sick small scale units. Thus, almost 9 out of every 10 sick small units are found so ne non-viable and only 1 as viable. These yon-viable units cannot be cured. They are as good as deat Total Small Units Sick smail units Year Number % Increase {Number | _% Percentage Increase 1977 {2957207 16730_|- 5.66 1978 [333337 12.89 18950 [13.37 [5.68 1979 [391750 17.34 20975 10.69__[ 5.35 1980 | 447821 14.31 23149 110.36] 5.17 1981] 523185 16.83 25342 9.47 [4.84 1982 | 607049 16.03 58551] 131.04 | 9.64 1983, 687295 13.22 78363 33.84 11.40 19841757092 10.15 91450 116.70 [12.08 1985 | 854843 12.91 117789 [28.80 [13.78 1986 | 950334 1.17 145776 [23.76 | 15.34 1987 | 1048253 10.30 204259 [10.12 [19.48 1988 | 1158765 10.54 240573 |17.78 [20.76 1990 11940000 7.41 218828 [9.04 [11.28 1991 | 2000000 3.09. 221472 [121 11.07, Compound growth rage] 14.41% 21.86% [1977-91 * Provisional Sources: (i) State/Union Territory Directorates of Industries (i) Economic Survey of Respective Years, Government of India, Ministry of Finance (Economic Division) Viability Status of Sick Small Scale Units 153 Created with @ nitro” professional download the free tral online a atropd.com/profesionalSN Description June | December | March 1990 | March ° 1987 1988 gn 1991 i | Total number of sick smali | 204259 / 240573 218828 221472 units 2] No of units for which viability | 199318 | 237113 216543 219138 assessment has been made 3__[ No of units found viable 72484 | 13033 16451 16140 4 | No of units found non-viable | 186834 _| 224080 200092 202998 5 | Percentage of viable units to | 6.1 34 75 73 totalsick units Seal © | Outstanding bank credit for [359.50 | 471.92 390.50 83.10 units found viable (Rs. Crores) |______ | : 7 [Percentage of viable units in | 21.7 22.0 m3 248 total bank credit given to sick faniis tee @ [Units under nursing [8470 | 7788 12160 13224 | programme _ : eee 9 | Percentage of units under | 67.8 | 59.8 39 a nursing programmes to total viable units - “The growing incidence of sickness in industry has become all pervasive in terms of ownership (public and private sector), across scale (small, medium and large), across states and industries. “Therefore, it seems pertinent to study the spread of industrial sickness across and the industries ‘a3 well, The state wise distribution of industrial sickness is presented in Table . Four distinctly different points are noticed from Table First, the size of sickness, in absolute terms is larger in the industrially developed States. Second, the incidence of sickness, i.e, the pereentage of sick SSI units to the total SSI units and sick SSI units is higher in industrially backward States. Third, increase in both number of SSI units and sick SSI units is higher in industrially backward States than industrially developed States. The reason is not difficult to eek, Development of small-scale industries has been the major policy piank of the State Government, As a result, a large number of SSI units were established in these backward States during eighties. On the other hand, an increasing number of SSI units fell sick soon after their tstablishment due to lack of infrastructural facilities available in these backward States. Fourth, fn the whole, increase in sick SSI units was about three times higher than increase in the total number of SSI units during 1979-89. ‘The lowest incidence of sickness experienced by the two agriculturally developed States like Punjab and Haryana suggest that development of agriculture, tmong other things, seems necessary for the development of industries as to ensure input supply especially in the case of agro-based industries. 154 Created with @ nitro” professional download the free tral online a atropd.com/profesionalSickness is an industry phenomenon also, Four industry-groups viz., engineering and electricals, textiles, chemicals ad iron and steel accounted fer 27% and 48% of the total sick SSI units and (2) For the number of Sick SSI units — Report on Currency and Finance, Volume I, Economic, Review 1990-91, Reserve Bank of India, Government of India, New Delhi. Causes and consequences of industrial sickness Causes > > Extemal or exogenous causes, and Internal or endogenous causes External Causes following. > ‘hanges in the industrial Policies of the government from time to time. a > Inadequate and untimely availably of necessary inputs like raw materials powder, transport and the skilled labour. > Lack and shrinkage of demand for the product. > Reversionary trends hovering in the economy. 155 Crested-w @ nitro" professional download the free tral online a atropd.com/profesional> Frequent industrial strikes and labour unrest. 5 shortage of financial resources especially working capital. > Natural calamities like drought, floods, etc. Inview of the nature ofall these factors, these can broadly be classified into three categories; > Government policy > Environment, and > Natural calamities Internal Clauses Tntemal clauses or endogenous causes are those which are within the control of the unit. These see arise due to some internal deficiencies in various functional areas like finance, production, marketing and personnel. Many studies have brought out the fact that sickness is Formally caused by internal factors, in one way ot other, related with the mismanagement in various operational areas Causes wise distribution of new projects in default ‘S.No Causes No of projects | Yoofthe | Contribution projects of course default 1 [Lack of good management _| 36 16.1 219 2__| Poor implementation 56 15.1 21.70 3 “Marketing problems 29 13.1 15.81 4 [Non-availability of raw | 53 23.8 13.45 materials 3___| Shortfall of working capital_[ 03 ia 720 __| Labour trouble 12 34 5.74 7 [Technical / operational | 13 53 5.55 problems 3__| Other problems 2 94 836 Total [ 223 100.0 100.0, Majority of projects (53.8%) are found in default due to intemal causes like problems of poor management, poor implementation, shortage of working capital and operational and labour problems. sandesara has delineated sickness from the angle of stages in which it may be routed. Tn the planning and construction stage, the unit may be found to be located at an uneconomic location, 156 Crested w @ nitro”’ professional download the free tral online a atropd.com/profesional{0 have adopted an inefficient method of production or to be planning to produce an obsolete Product. In the second stage of sickness, the unit may have commits, some mistakes in recruitment and training of the workers, underestimates of various inputs such as powers, funds Sinz Which cannot be easily corrected later. The third and final stage of sickness may arise even When the unit isin full swing but the demand for product may have changed, new and advanced methods of production may have advised and mean while new competitors may also have emerged. instances are galore to note that small-scale units are mainly beset with extemal factors while large sick units are plagued by internal factors. Small in Indian is literally too small. According to economic survey 1992-93, about 90% of sick Units lies in small scale sector. A too small unit cannot withstand fluctuation set back frequent changes in government policies, market changes, etc. small units command small resources and expertise both in absolute and relative terms, Small is basically poor and unorganized set of the Consequences The main evil effects / conséquences of industrial sickness of an economy have been locking up the economy's financial resources, wastages of scarce capital assets, loss of production and Gewease in unemployment. An attempt has been in this section to disewe wre various Consequences of industrial sickness in more orderly manner. Huge Financial Losses to the Banks and the Financial Institutions ae banks and the financial institutions provide substantial funds to star tan industry. To quote, by march 1992, the amount of outstanding bank credit against the sick units have reached a Staggering figure of Rs. 11,533.30 crores. These huge funds are locked up in 1336 non-$SI sick units and 245575 small sick units and 813 weak units Obviously, the locking u of substantial funds in the sick industrial units impinges on the future ending capacity of the banks and the financial institutions. Further, recovery of overdue takes an unduly long period of time and in muy ease only a small portion of overdue amount is finally recovered. Thus, these bear an adverse effect on the financial health of the banks and the financial institutions Loss of Employment Opportunities One of the serious consequences of industrial sickness has been loss to employment and thereby, Sgeravating the most dangerous socio-economic problem of unemployment jw labor surplus economy like ours. According to an estimate, nearly 30 lakhs of workers are likely to be affected 157 Created with @ nitro” professional download the free tral online a atropd.com/profesionalby the closure of sick and the weak units. In relative items, about 6% of total employment in industrial sector is likely to be affected by the industrial sickness. Out of total 30 lakh workers likely to be affected by closure of sick units, even more than two- thirds (68%) of total will be rendered jobless in small sector alone. This presents a grim prospect in the employment scenario of the country. Emergence of Industrial Unrest ‘The closure of sick units causes not only unemployment, but leads to industrial unrest also. Whenever, the workers are retrenched and rendered out of jobs, the trade unions oppose it and resort to industrial environment. This result in set back to industrial production. Adverse Effect on Prospective Investors and Entrepreneurs Industrial sickness adversely affects the prospective investors and the entrepreneurs also. Due to sickness the share price of the unit tumbles down which, in turn, adversely affects the stock market of the country. In this way, industrial sickness creates a psychology of despair for investments amongst the prospective investors. Added to this, the failure and closure of a unit acts as an unhappy example of disincentive to the prospective entrepreneurs who are planning to plunge into the same lines of production. On the whole, the industrial climate becomes non- conductive for the industrial development of the economy. Wastages of searce Resources In an under developed economy like ours, the resources are already scarce. If these scarce resources are locked up in sick units, it hecomes the stage of scarce resources which otherwise invested would have yielded substantial returns to the economy. Loss of Revenue to the Government ‘The govemment raises a substantial portion of its revenue from industrial units by way of various taxes and duties levied on them. But, when a large number of industrial units becomes sick, the possibilities for raising substantial revenue from the sick units by way of various levies are greatly reduced. Thus, industrial sickness results in loss of revenue of the economy as a whole The planning commission commenting on consequences of sickness mentions: The phenomenon of industrial sickness not only tends to aggravate the problem of unemployment, but also renders in fructuous capital investment and generally creates and adverse climate for further industrial growth. While in advanced countries where there are 158 Created with @ nitro” professional download the free tral online a atropd.com/profesionaladequate social security benefits, this is accepted as a normal feature of industrial scene. But such sickness has much more serious economic consequences in a country. In nutshell, whatever may be causes, the consequence is always the same: Loss of employment and production to an economy already suffering fom chronic unemployment and shortage of Seods. Thus, industrial sickness is a bane on the Indian economy. Corrective Measures ‘The growing incidence of sickness by size, region and industry followed b its far reaching socio- economic evil effects lends a strong, realization of urgency to the solution of the sick industry problem in India. Therefore, this last section ofthe chapter deals with the remedial measures, detect the fast spreading disease of sickness in industries, > Industral sickness is not an overnight occurrence but itis a gradual process taking from 5 to 7 years corroding the health of a unit beyond care. Therefore, the identifications and yard sticks need to be evolved and developed. > In view of limited resources at the disposal, a large number of sick units may have to be Permitted to close / liquidate; a fewer number of sick units may be picked up for revival). rehabilitation and a large number of weak units may be combined together to prevent sickness. The time hard come to substitute the adage that ‘what cannot be cured hs o be endured’ by ‘what cannot be cured should be ended’. However, merger of a large number of sick units ‘closure is prevalent in the society. > At present, the attitudes of three different sets of a unit-management, financial institutions and labour do not converge as they view the problems of industrial sickness quite differently. For example, management seeks freedom to close the unit if feels it is no more viable. Financial institutions think that whatever can be salvaged should be salvaged. Labour view is that in the event of the closure of the unit, they will lose job, Provident fund and other benefits therefore, the unit should continue production, > Itis a happy augury that now sick small-scale also fall with in the purview of Board of Industrial and Financial Reconstruction (BIFR). It will be better to open a separate division BIFR to deal; with sickness in small scale industries because small-scale industries are characterized by different sets of problems and prospects as compared to medium and large scale industries. > Itis found that the rehabilitation programme for sick small units are often carried out in an adhoc and haphazard manner. The rehabilitation package provided to the sick units consists of only financial measures such as rescheduling of debts, sanction of additional term loans for installation of new machineries, enhancement working capital limit etc. 159 Created-w @ nitro” professional download the free tral online a atropd.com/profesional> Having taken a decision a rehabilitate a sick unit, the programme should be finalized quickly and implemented speedily. Instances are many to suggests that any delay in these two matters aggravates the position and revival becomes distant goal. At the same time, the rehabilitation programme need to be implemented in full as a piece-meal implementation of ten jeopardizes the efforts to rehabilitate the unit. > Last but not the least, past experiences indicate that many industrial units fall sick because of the improper opportunity scanning made by the entrepreneurs themselves. ‘They start an industrial unit mainly to avail of subsidies, concessions and incentives from the government. We know that a small scale industry entrepreneur is like a one-man band, He/she may posses on or two or three ingredients / requisites but not the all. To quote, an entrepreneur may have land, building, machinery ete., but had no experience in functional areas like production and marketing, Therefore, the necessity of the situation is to impart necessary knowledge to the entrepreneurs in various functional areas through the training programmes like entrepreneurship development programme (EDP). 160 Created with nitro” professional p download the free tral online a atropd.com/profesional