ENTREPRENEURIAL DEVELOPMENT

UNIT V: SUPPORT TO ENTREPRENEURS Sickness in small Business – Concept,

Magnitude, Causes and Consequences, Corrective Measures – Business Incubators –
Government Policy for Small Scale Enterprises – Growth Strategies in small industry –
Expansion, Diversification, Joint Venture, Merger and Sub Contracting

Industrial sickness is an term applied to various things associated with industry that make people
ill and cause them to miss work. The solutions will have to be tailored to the specific industry,
and only in that way can any real effect be made on improving the health and productivity of the
industrial workforce.

The different types of industrial sickness in Small Scale Industry (SSI) fall under two important
categories. They are as follows:
Internal causes for sickness
We can say pertaining to the factors which are within the control of management. This sickness
arises due to internal disorder in the areas justified as following:
a) Lack of Finance: This including weak equity base, poor utilization of assets,
inefficient working capital management, absence of costing & pricing, absence of planning and
budgeting and inappropriate utilization or diversion of funds.
b) Bad Production Policies : Another very important reason for sickness is wrong selection of
site which is related to production, inappropriate plant & machinery, bad maintenance of Plant &
Machinery, lack of quality control, lack of standard research & development and so on.
c) Marketing and Sickness : This is another part which always affects the health of any sector as
well as SSI. This including wrong demand forecasting, selection of inappropriate product mix,
absence of product planning, wrong market research methods, and bad sales promotions.
d) Inappropriate Personnel Management: Another internal reason for the sickness of SSIs is
inappropriate personnel management policies which includes bad wages and salary
administration, bad labour relations, lack of behavioural approach causes dissatisfaction among
the employees and workers.
e) Ineffective Corporate Management: Another reason for the sickness of SSIs is ineffective or
bad corporate management which includes improper corporate planning, lack of integrity in top
management, lack of coordination and control etc.
External causes for sickness

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a) Personnel Constraint: The first for most important reason for the sickness of small scale
industries are non availability of skilled labour or manpower wages disparity in similar industry
and general labour invested in the area.
b) Marketing Constraints: The second cause for the sickness is related to marketing. The sickness
arrives due to liberal licensing policies, restrain of purchase by bulk purchasers, changes in
global marketing scenario, excessive tax policies by govt. and market recession.
c) Production Constraints: This is another reason for the sickness which comes under external
cause of sickness. This arises due to shortage of raw material, shortage of power, fuel and high
prices, import-export restrictions.
d) Finance Constraints: Another external cause for the sickness of SSIs is lack of finance. This
arises due to credit restrains policy, delay in disbursement of loan by govt., unfavorable
investments, fear of nationalization.
e) credit squeeze initiated by the government policies.

REMEDIAL MEASURES TO OVERCOME SICKNESS

Some of the remedial measures to curb and overcome sickness in industrial undertakings are as
follows:

1. IDENTIFYING SICKNESS AT INITIAL STAGE

Sickness in Small Scale Industries are not a sudden phenomenon but it is a gradual process
taking 5 to 7 years eroding the health of a unit beyond cure. Therefore, the identification and
detection of the sickness at incipient stage is the first and foremost measure to detect and reduce
industrial sickness. Sickness must be identified at initial stage.

2. FINANCIAL ASSISTANCE
Lending agencies need to relax their lengthy process and other norms for extending credit to the
SSIs. To combat the incidence of sickness financial institutions should grant credit without delay
to SSI sector.

A number of initiatives can be undertaken to overcome credit problems such as:.

1.Increasing Working capital limit.

2.Enhancing the powers of bank managers of specialized bank branches in offering credit
to SSI.
3. Strengthening the mechanism for discounting bills.
4. Reduced rate of interest.
These measures would improve the flow of credit and keep a check on the incidence of sickness.

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3. IMPROVING INFRASTRUCTURE
Infrastructure facilities can be improved by setting up industrial estates. Common testing centres
etc., infrastructural problems can be solved by improving the roadways, waterways, establishing
telecommunication systems.
4. TECHNOLOGY UP-GRADATION
Funds may be provided by the financial institutions for adoption of advanced technology.
Similarly, some sort of training may be provided for use of the latest technology to overcome
technological problems. Technological up-gradation can help to overcome technological
obsolescence.

5. MARKETING ASSISTANCE
Marketing assistance may be provided to entrepreneurs for marketing the goods produced by
them. Government must help to market the goods. Government and Non Government
Organizations (N.G.Os) can come forward for marketing the goods produced by the SSI sector.
The problem of poor marketing of the products can be solved by coordinated efforts of
entrepreneurs and promotional agencies.
6. LIQUIDATION
It is better to wind up the business when there is no possibility to revive the unit.

7. GOVERNMENT INTERVENTIONS
Interventions must be made by the government to prevent sickness. Periodic review of financial
statements can help to identify and prevent sickness at initial stage.

BUSINESS INCUBATORS

Meaning of Business Incubators:

A business incubator is a company that helps new and startup companies to develop by providing
services such as management training or office space. This is also Facility established to nurture
young (startup) firms during their early months or years. It usually provides affordable space,
shared offices and services, hand-on management training, marketing support and, often, access
to some form of financing. Business incubators differ from research and technology parks in
their dedication to startup and early-stage companies.

Following are the most common incubator services:

(i) They help with business basics
They provide Networking activities
(iii)  They provide Marketing assistance
(iv) Incubators help in Market Research
(v)  They provide High-speed Internet access

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Incubators Help with accounting/financial management
(vii) They help in providing Access to bank loans, loan funds and guarantee programs
(viii) Incubators help with presentation skills
(ix) They link to higher education resources
Incubators Help with accounting/financial management
(vii) They help in providing Access to bank loans, loan funds and guarantee programs
(viii) Incubators help with presentation skills
(ix) They link to higher education resources

Three Stages of Business Incubation Development:

(i) Physical facility support – Business incubation provided within physical facility
(ii) Support service – Business incubation as business support service
(iii) Networking facilities -Business incubators provide networking facilities to the members.

5. Types of Incubators:
There are a number of business incubators that have focused on particular industries or on a
particular business model, earning them their own name.

(i) Virtual Business Incubators:

These are also known as online business incubators.
Business incubators began in the 1950s and took off in the late 1990s as support for startup
companies who need advice and venture capital to get their ideas off the ground. As the dot-com
bubble burst, many high-tech business incubators did so too. Now the model of a business
incubator is changing.

(ii) Medical Incubator:

This is a business incubator focused on medical devices & biomaterials. For encouraging
innovation and entrepreneurship in medical technologies, through technology, business
incubation support is given to innovators, start-ups and industry.

(iii)  Kitchen Incubator:

It is a business incubator focused on the food industry. Specialty foods are typically high-value
and, at least in the beginning, low production. Starting a commercial kitchen from scratch can
cost a huge amount of investment. The average food entrepreneur has to spend plenty before
even making their first batch of food item.

This need for low-cost kitchen space has led to the development of shared commercial kitchens
that can be rented for hourly or monthly rates. But finding a place to make specialty food

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products is only the first step. Entrepreneurs who want to make a profit have to successfully
package, market, and sell their products, too and the food incubators provide help with all this.

(iv) Public/Social Incubator:
This is a business incubator focused on the public good. Social incubators aim to provide social
entrepreneurs with the tools to expand their business. The challenging economic environment is
changing the landscape of how we do business. At one end, some businesses avoid their social
responsibility and, at the other, charities have to find ways to be more business savvy to survive.
India has embraced the concept, with a twist, creating the idea of “social business”.

GOVERNMENT POLICY

This can broadly be classified into three categories. A) Policy initiative B) Institutional support
C) Credit dispersion.

A) Policy Initiative

1. Small industry policies and incentives: Central government announces its industrial policy
resolutions. In all the industrial policy resolutions announced by central government starting
form 1948 onwards, gave a thrust for promotion of small units. Central government announces
financial, fiscal and infrastructure related initiatives for SSIs for its growth. Along with central
government, state governments also announce suitable policy initiative. Some of the items are
kept reserved solely to be manufactured by small scale units. A preferential purchase policy is
also given in vogue. The director general of supplies and disposal (DGS&D) purchases goods /
items from small scale units.

2. Liberalization and SSIs: India adopted policy of liberalization since 1991. Along with other
sectors, this move has also facilitated the growth of SSIs. Under liberalization, foreign direct
investment in SSIs sector allowed up to 24 persons. Such a policy improves the financial strength
and leads to up gradation of technology.

3. Infrastructural facilities: Industrial estates programme, integrated infrastructure development

scheme and growth center schemes are some of the schemes initiated by central government for
the development of appropriate infrastructure conducive to SSIs. All state governments also
implement such schemes in their states.

4. Small industry clusters: Clusters here means an area where similar kinds of industries are
located. Such clusters gain advantage of obtaining different materials and services at lower cost
from different suppliers. Government helps in development of clusters. e.g. Brass part unit in
Jamnagar of Gujarat.

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5. Marketing support: For any production organization, the main emphasis is on marketing of
their products. This becomes very crucial for SSIs as marketing involves huge costs. To help
SSIs in this competitive world, government does adopt suitable measures. Government has
established National small Industries Corporation (NSIC) to promote the marketing of SSIs
products to government department under the preferential purchase policy. Government also
organizes specific training programmes related to marketing and export. It also organizes
exhibitions and international trade fair for SSIs and reimburses expenses for foreign visit for
marketing purpose by SSIs delegates.

B) Institutional support

Large number of institutions have been established by central government, state government, and
industry associations as shown in Table number 14.2 which provides institutional support.

Credit support

Several financial institutions/banks etc have been established specifically to cater to the needs of
SSIs. e.g. Small Industries Development bank of India etc.

Committee recommendations

The major recommendations of the Committee are as follows.

1. Abolition of reserved items.

2. Hiking the investment limit for SSIs.

3. Scrapping the foreign investment of 24 percent.

4. New law to cover business practices.

5. Special incentives to clusters of units.

6. Inclusion of service sector under SSIs.

7. National Research Institutions for SSIs.

8. Sanctioning of composite loans and credit rating of SSIs.

9. Liberalizing excise benefits for manufacturing brand name items.

Some of the top most strategies used for the growth of small-scale enterprise are:

1. Expansion

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2. Diversification

3. Joint Venture

4. Mergers and Acquisitions

5. Sub-Contracting and

6. Franchising.

1. 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:
a. 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 for exchanging
an old scooter for new one introduced by LML, for example, is a form of market penetration.

b. 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.

c. 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 in addition to lose sales is an
example of product development /modification.

Expansion provides the following advantages:

(i) Growth through expansion is natural and gradual.

(ii) Enterprise grows without making major changes in its organizational structure.

(iii) Expansion makes possible the effective utilization of existing resources of an enterprise.

Disadvantages:

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However, against above advantages are disadvantages as well.

These are:
(i) Growth being gradual is time consuming.

(ii) Expansion in the same line of product delimits enterprise growth making enterprise unable to
take advantages from new business opportunities.

(iii) 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.

2. Diversification:
Diversification is the most common form of internal growth of business. As mentioned above,
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 concentrating 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, diversification may be defined as a process of adding more

products/markets/services to the existing one. This is necessary because, according to product
‘lifecycle 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 (L&T), an engineering company, diversified into cement. LIC’s
diversification into mutual funds and SBI’s merchant banking are the examples of diversification
adopted by the public sector in India.

Advantage:
Diversification offers the following advantages:
(i) Diversification helps an enterprise make more effective use of its resources.

(ii) Diversification also helps minimize risk involved in the business.

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(iii) Diversification adds to the competitive strength of the business.

(iv) Diversification also enables an enterprise to tide over business fluctuations and, thus, ensures
smooth running of the business.

Disadvantages:
All is not good with diversification. It also suffers from certain disadvantages.

 Diversification involves business reorganization which requires additional resources. Thus,

diversification becomes a costly proposition.

(ii) It becomes difficult, is not impossible, to effectively manage 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:

a. Horizontal Diversification

b. Vertical Diversification

c. Concentric Diversification, and

d. Conglomerate Diversification

A brief description of these follows:

a. Horizontal Diversification:
In this type of diversification, the same type of product or market added to the existing ones.
Adding refrigerators to its original products of steel safes and locks by Godrej is an example of
Horizontal Diversification.

b. Vertical Diversification:
In this type of diversification, complementary products or services are added to the existing
product or service line of the enterprise. The new products or services serve either as inputs or a
customer for the firm’s own product. A T.V. manufacturer may start producing picture tubes
needed by it.

Similarly, a sugar mill may develop a sugarcane farm to supply raw material or inputs for it.
Setting up of retail shops by companies like Delhi Cloth Mills to sell its fabrics is also vertical
type of diversification.

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c. 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 both. 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.

d. Conglomerate Diversification:
This type of diversification is just contrary to concentric diversification. In this type of growth
strategy, an enterprise diversifies into the business that is not related to its existing business
neither in terms of technology nor marketing. JVG carrying on business in newspaper and
detergent cake and powder, Godrej manufacturing steel safes and shaving cream are examples of
conglomerate diversification.

3. Joint venture:
Joint venture is a type of external growth strategy adopted by business firms. A joint venture
could be considered as an entity resulting from a long-term contractual agreement between two
or more parties, to undertake mutually beneficial economic activities, exercise joint control and
contribute equity and share in the profits or losses of the company.

The Reserve Bank of India (RBI) has defined joint venture in the technical sense as: “a foreign
concern formed, registered or incorporated in accordance with the laws and regulations of the
host country in which the India party makes a direct investment, whether such investment
amounts to a majority or minority shareholding.”

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 which enter into agreement
are called co-ventures and this 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 ratio and in the absence of such
agreement; the profits or losses are shared equally by the parties. 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.

Conditions for Joint Venture:

Joint venture may be useful to gain or access new business under some conditions, but not
confined to the following only:
(i) When an activity is uneconomical for an organization to do alone.

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(ii) When the risk of business has to be shared and, therefore, is reduced for the participating
firm.

(iii) When the distinctive competency of two or more organizations can be brought together.

(iv) When setting up of an organization requires surmounting hurdles such as import quotas,
tariffs, nationalistic-political interests and cultural roadblocks.

It is seen from above mentioned conditions that joint ventures are effective business growth
strategy when the development costs have to be shared, business risk spread out and different
expertise’s combined to make effective use of available resources and create synergy for
outcomes.

Based on past experiences in the field of joint ventures, following five triggers have been
identified to make joint ventures effective and successful:

i. Technology:
The foreign partner involved in joint venture can bring with it high-level technology, on the one
hand, and the Indian counter partner provides good knowledge about the (local) market, on the
other. The recent joint ventures taken place in the field of telecom and automobiles are such
examples.

ii. Geography:
When India has to compete in the larger and global market and a foreign player is already in a
very commanding presence in the global market, this becomes a good trigger for joining a joint
venture. One such example is insurance players such as Prudential and Standard Life having
global presence. Thus, it becomes a good opportunity for the Indian partner to join such global
partner in the joint venture.

iii. Regulation:
Regulation becomes a trigger especially when a sector which was highly restricted and closed
sector for foreign partner for long period is now opened up. Here again, insurance sector in India
is one such example which was recently opened for foreign players. It is due to this regulatory
change the Indian partners like Bajaj and Indian Credit and Investment Corporation of India
(ICICI) joined foreign players in joint ventures in the insurance sector.

iv. Sharing of Risk and Capital:

This includes capital-intensive sectors like heavy-engineering requiring highly sophisticated
technological expertise. In such cases, both the partners involved in joint venture share risks and
capital equally to effectively run the venture.

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v. Intellectual Exchange:
Legal business could be such sector where both the partners gain intellectual advantage
irrespective of law on the entry of foreign law firms in one country.

Types of Joint Ventures:

Experience suggests that joint venture is especially useful for entering international markets. As
such, an Indian organization can enter a foreign market in a joint venture with a foreign
organization. Similarly, a foreign firm can also enter into a joint venture with an Indian
organization.

From the point of view of Indian organizations, the following five types of joint ventures
are possible to form:
a. Between two Indian organizations in one industry:
Example is a joint venture between National Thermal Power Corporation Ltd. (NTPC) and the
Indian railways for setting up a Rs. 5,352 crore thermal power plant at Nabinagar in Bihar to
meet the requirements of the rail network across the country.

b. Between two Indian organizations across different industries:

Example is a joint venture between Action Aid India (AAI) and Tata Institute of Social Sciences
(TISS) to offer degree courses for rural communities in India.

c. Between an Indian organization and a foreign organization in India:

Example is joint venture with 50:50 between DLF Ltd. and Nakheel, a large property developer
of the United Arab Emirates (UAE) for developing two integrated townships in India.

d. Between an Indian organization and a foreign organization in a third foreign country:

Example is a joint venture between Kirloskar Brothers Ltd. and SPP Pumps Ltd., United
Kingdom (UK) for catering to the European Union (EU) market.

e. Between an Indian organization and a foreign organization in a third country:

Example is a joint venture between Apollo Tyres of India and Continental AG of Germany for
setting up a tyre manufacturing joint venture in Malaysia.

Advantages:
The main Advantages the joint venture offers are as follows:
(i) Joint venture reduces risk involved in business.

(ii) It helps increase competitive strength of the business.

(iii) It makes possible the use of advanced technology and knowhow not available within a firm.

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(iv) Joint venture provides the benefits of economy of scale by reducing production and
marketing costs, on the one hand, and by increasing sales volumes, on the other.

Disadvantages:
Joint ventures suffer from the following disadvantages also:
(i) In case of lack of proper understanding between the co-ventures, the functioning of the
business is adversely affected.

(ii) Excessive legal restrictions on foreign investments limit joining hands with foreign firms.

(iii) Sometimes, more equity participation by one or more co-ventures creates conflicts between
them.

Reasons for Failure of Joint Ventures:

History of joint ventures reveals that there is a high probability of the joint ventures not working
to the advantage of India. Therefore, this is suggestive that Indian organizations need to be on
guard to save themselves from the disadvantages of joint venture arrangements.

Research studies report that the following reasons more often than not lead joint ventures
to failure:
i. Change of Strategy:
India could cease to be interest of foreign organization for business alliance. For example, this
has already happened with some foreign organizations like Bell Canada where Asia was
considered as a market of no strategic significance.

ii. Regulatory Changes:

This is because of business laws in practice in the countries. For example, if the limit of Foreign
Direct Investment (FDI) is kept at a low level and has not been raised. To quote, the FDI limit
fixed at 26% for some time now made foreign partners hesitant to form alliance in the Indian
insurance sector.

iii. Success of Joint Venture:

Evidences are available to believe that if the joint venture is doing well, one of the alliance
partners demands for increasing its share/holding in the joint venture. If not agreed by the other
partner, joint venture arrangement comes to disband.

iv. Lack of Transparency:

In case one of the partners hides some facts or gives falsified facts, it causes confrontation and
conflicts between the parties. If the conflict is not resolved, it may lead to break-up of business

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alliance. For example, the break-up of the Hutchison-Essar joint venture is one where the lack of
transparency has been one of the key reasons.

4.Mergers and Acquisitions (M&A)

Merger and acquisition are yet other forms of external growth strategy. Merger means a
combination of two or more existing enterprises into one. For the enterprise which acquires
another, it is called ‘acquisition.’ For the enterprise which is acquired, it is called ‘merger.’ Thus,
merger and acquisition are the two sides of the same coin.

If both organizations dissolve their identity to create a new organization, it is called

consolidation. The other terms used for M&A are absorption, amalgamation, and integration.
M&A are more popularly known as takeovers. For more than three decades after Independence,
the normal route of growth was through licensing and setting up new projects.

But the post- liberalization, since 1991, has witnessed an increasing use of takeover strategies as
the means or rapid growth. Mahindra & Mahindra’s takeover of a German company
Schoneweiss, Tata’s takeover of Corus, and PricewaterhouseCoopers’s takeover of Mumbai-
based taxation company RSM Ambit are illustrative examples of mergers & acquisitions.

Reasons for Mergers and Acquisitions:

For a merger to take place, two enterprises or organizations have to act. One is the buyer
enterprise and the other is the seller. Both these t5^es of enterprises have a set of reasons on the
basis of which they merge.

Following are the illustrative ones:

Reasons for Buyer to Merge:
(i) To increase the value of the enterprise’s stock.

(ii) To increase the growth rate and make a good investment.

(iii) To improve the stability of its earnings and sales.

(iv) To balance, compete or diversify its product line.

(v) To reduce competition.

(vi) To acquire a needed resource quickly.

(vii) To avail tax concessions and benefits.

(viii) To take advantage of synergy.

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Reasons for Seller to Merge:
(i) To increase the value of the owner’s stock and investment.

(ii) To increase the growth rate.

(iii) To acquire resources to stabilize resources.

(iv) To benefit from the tax legislation.

(v) To deal with top management succession problem.

Types of Mergers and Acquisitions:

Mergers and acquisitions can be classified into the following types:
a. Horizontal M&A:
Horizontal M&A take place when there is a combination of two or more organizations in the
same business, or organizations engaged in certain aspects of the production or marketing
processes. A footwear company combining with another footwear company is one such example
of horizontal M&A.

b. Vertical M&A:
In vertical M&A, two or more organizations, not necessarily in the same business, come together
to create complementarities either in terms of supply of materials (say material) or marketing of
goods and services (say outputs). For example, pharmaceutical company combines with retail
medical store.

c. Concentric M&A:
This refers to two or more organizations related to each other either in terms of customer
functions or alternative technologies combine together. For example, a footwear company
combines with a hosiery firm making socks.

d. Conglomerate M&A:
This is just opposite of concentric M&A. In this case, two or more organizations not related to
each other either in terms of customer functions or alternative technologies. Combination
between a pharmaceutical company and footwear company is one such example.

Advantage:
Mergers and acquisitions provide the following advantages:
(i) Provide benefits of economies of scale in terms of production and sales.

(ii) Facilitate better use of resources.

(iii) Enable sick enterprises to merger into the healthy ones.

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(iv) Promote diversification in product line to take advantages of opportunities available in the
particular business.

Disadvantages:
Mergers and acquisitions are not unmixed blessings.

These also suffer from the following drawbacks:

(i) Larger scale operations often make co-ordination and control ineffective. This adversely
affects business performance as a whole.

(ii) Sometimes mergers and acquisitions lead to monopoly in the particular business. Monopoly
is not welcome in the interest of the society.

Important Issues Involved in Mergers and Acquisitions

Mergers and acquisitions are as much important are not so simple. Meaningful mergers and
acquisitions involve expertise in special areas such as accounting, finance and legal matters and
negotiations.

Following are some of the important strategic, financial, managerial, and legal issues
involved in mergers and acquisitions:
a. Strategic Issues:
These issues relate to the commonality of strategic interests between the buyer and seller firms.
The main objective of M&A is to create synergetic effects for the enterprises. Therefore, the
strategic advantages and distinctive competencies due to M&A for the merging enterprises have
to be duly examined and analysed.

It is also important to note that there has to be a fine match between the objectives of the firms
involved in M&A. For example, a merger should ideally lead to the generation of sufficient
strengths that would help the enterprise during the post-merger duration to achieve its objectives
in an effective and better manner.

b. Financial Issues:
There are three major financial issues involved in M&A.

These are:
(i) Valuation of the business and shares of the target firm;

(ii) Sources of financing for mergers; and

(iii) Taxation matters after M&A.

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The valuation of the business of the target firm is a detailed and comprehensive process that
should take into account a range of factors including the tangible and intangible assets, the
industry profile of the firm and its prospects and the future earnings and prospects of the target
firm.

Similarly, the valuation of the shares in an M&A is equally complicated process involving issues
such as the stock exchange price of the shares of the target firm, dividends paid, growth
prospects of the firm, value of its assets, quality and integrity of the top management,
competitive conditions, opportunity costs in terms of investments and market sentiments.

The second financial issue is of the sources of financing required for enterprises involved in
M&A. Several sources of funds available range from the acquiring companies’ own funds or
borrowed funds, raised through the issue of debentures, bonds, deposits, external commercial
borrowings, global depositary receipts, loans from Central or State financial institutions or
rehabilitation finance provide to sick industrial companies.

The third issue is of the taxation matters that are dealt with under the relevant provisions of the
Income Tax Act, 1961, and which are related to various technical aspects such as the carrying
forward or set-off of losses and unabsorbed depreciation, capital gains, tax and amortization of
expenses.

c.. Managerial Issues:

These issues relate to the umpteen problems of managing enterprises after the M&A has taken
place. It is important to note that the perception of how the management will take place after
M&A also matters and affects the process involved in it. The usual experience is that the post
M&A is characterized by changes in staff, specially chief executives and top managers.

If there is an assurance that the merger will lead to a status quo, or that ‘professional
management’ would be adopted, then the M&A process may take place smoothly. On the
contrary, if the M&A is perceived as threatening, it results in resistance and opposition by the
various groups.

This happens because the post-merger period poses uncertainty to the managers of the merging
organizations. The reason is that they feel insecure about their job, status within the organization,
and their earnings and promotional prospects.

The consequence of feeling threatened by the impending changes due to M&A, the existing
managers oppose change which, in turn, leads to low morale and productivity and often resulting
in mass exodus of managers from the organization.

d. Legal Issues:

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These issues relate to the provisions made in law for the purpose of M&A. In India, the
provisions relating to M&A and other schemes are contained in Chapter V of the Companies
Act, 1956 and specifically, in Sections 391 to 395 of the Companies Act, 1956 and in the rules
67 to 87 of the Companies (Court) Rules, 1959.
The implementation of the strategies of M&A requires a thorough understanding of relevant
provisions. It is interesting to mention that the term ‘merger’ is not used in the Companies Act;
only the term ‘amalgamation’ is used in Section 394 of the Act. The only section that deals with
the transfer of shares (or takeover bids) is Section 385.

Apart from the Companies Act and the MRTP Act, Section 72 A (I) of the Income Tax Act, 1961
is also relevant for taxation purposes of amalgamated companies and provides for carrying
forward accumulated losses and unabsorbed depreciation of the amalgamating company, i.e.
M&A organizations.

How Mergers and Acquisitions take place?

M&A can take place in various ways. There is no specific and standard procedure available for
M&A to take place. However, based on experiences relating to M&A, it is realized that
following certain guidelines can be useful for M& As to take place systematically.

The major steps include but are not limited to the following only:
a. Spell out the objective

b. Indicate how the objective would be achieved

c. Assess managerial quality

d. Check the compatibility of business styles

e. Anticipate and solve problems early

f. Treat people with dignity and concern

5.Sub-Contracting:

What is Sub-Contracting System?

Sub-contracting system is a mutually beneficial commercial relationship between the two
companies. This is known as Ancilliarization in India and more generally as ‘sub-contracting.’

Sub-contracting can be defined as follows:

A sub-contracting relationship exists when a company (called a contractor) places an order with
another company (called the sub-contractee) for the production of parts, components, sub-

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assemblies or assemblies to be incorporated into a product sold by the contractor. Such orders
may include the processing transformation, or finishing of material or part by the sub-contractor
at the request of the contractor.

In practice, large-scale industries also 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 for 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 evolution of subcontracting system in the industrial world.
Japan is considered the birth place of modem sub-contracting system. In Japan, when military
demand for machinery industry expended 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 economies.

As per the need of the hour, small enterprises and cottage industries shifted their production to
support the large machinery firms to meet their orders. In view of poor technological knowledge
of small enterprises, 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, Subcontracting has emerged in the name of ancillarsation
or ‘ancillary units’.

We 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.

Advantages:
Sub-contracting system bears the following advantages.

(i) It increases production in the fastest way without making many efforts,

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(ii) The contractor can produce products without investing in plant and machinery.

(iii) Sub-contracting is particularly suitable to manufacture goods temporarily.

(iv) It enables the contractor to make use of technical and managerial abilities of sub-contractors.

(v) Despite leading to dependence, sub-contracting ensures existence of Subcontractors by

providing them business.

(vi) Last but no means the least; sub-contracting makes the core firms more flexible in their
production.

Disadvantages:
However, sub-contracting has some disadvantages also.

These are:
(i) It does not ensure the regular and uninterrupted supply of goods to the core firms, i.e.
contractors which adversely affect the functioning of the core firms.

(ii) Goods produced under Sub-contracting system are often qualitatively inferior.

(iii) Sub-contracting also delimits the expansion and diversification of the core firms.

(iv) A delay in payments, a common feature, by the contractor to the subcontractors endangers
the very survival of the latter.

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