Top 6 Strategies for the Growth of Small-Scale Enterprise

Some of the top most strategies used for the growth of small-scale enterprise
are: 1. Expansion 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

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

Advantages:

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

(iv) Gradual growth of enterprise becomes easily manageable by the

enterprise.

(v) Expansion results in economies of large-scale operations.

Disadvantages:

However, against above advantages are disadvantages as well.

These are:

(i) Growth being gradual is time consuming.

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(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,

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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.

(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.

(i) Diversification involves business reorganization which requires additional

resources. Thus, diversification becomes a costly proposition.

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(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:

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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.

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

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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

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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.

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

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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:

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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.

(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:

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(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:

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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 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,

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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.

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(vi) To acquire a needed resource quickly.

(vii) To avail tax concessions and benefits.

(viii) To take advantage of synergy.

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

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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.

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(ii) Facilitate better use of resources.

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

(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:

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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.

The valuation of the business of the target firm is a detailed and

comprehensive process that should take into account a range of factors

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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

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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:

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

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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?

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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-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

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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.

To this we turn in the following paragraphs:

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.

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

Sub-contracting or Ancillarisation in India

In India, sub-contracting in the form of ancillarisation has been receiving

Government support since sixties. An ancillary unit is one which sells not less
than 50% of its manufactures 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 area has been the establishment 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 the match these with the requirement 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

communities of small enterprise is found in existence around specialized
industries. The diamond polishing 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.

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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, cotten hosiery in Delhi and Kolkata.

Thus, sub-contracting system makes possible to take advantage of flexibility in

production. At the same time, despite leading to dependence, it also ensures
existence of small enterprises. In the recent past, the concealed industrial sub-
contracting has also risen substantially in India. The pronounced rise in the
employment share but not income share of the unorganized sector is an
indicator of such phenomenon.

The new policy document for small enterprises titled ‘Policy Measures for
Strengthening Small, Tiny and Village Enterprises 199V also makes a special
mention of industrial sub-contracting and contains special measures to
promote it through equity participation by others, presumably large,
industrial units in small -scale enterprises not exceeding 24% of the
shareholding.

This measure is expected to boost ancillarisation. However, the product

reservation policy and continuous support to tiny enterprises would continue
to constrain ancillarisation process in the country. Yes, the extent to which the
reform regime in India is trying to create a competitive environment augurs
well for boosting sub-contracting system in the coming time in India.

6. Franchising:In a sense, franchising is very much akin to branching.

Franchising is a system for selectively distributing goods or services through
outlets owned by the retailer or dealer. Basically a franchise is a patent or
trademark license, entitling the holder to market particular products or
services under a brand name or trademark according to pre-determined terms
and conditions.

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David D. Settz has defined franchising as a “Form of business ownership
created by contract whereby a company grants a buyer the rights to engage in
selling or distributing its products or services under a prescribed business
format in exchange for royalties or shares of profits. The buyer is called the
‘Franchisee’ the company that sells rights to its business concept is called
‘Franchiser.’

Thus, franchising can simply be defined as a form of contractual arrangement

in which a retailer (franchisee) enters into an agreement with a producer
(franchisor) to sell the producer’s goods or services for a specified fee or
commission.

Difference between Franchising, Distributorship and Agency:

In common parlance, franchising, distributorship and agency mean the same

thing and are often loosely used. However, they mean different things.

The two terms – distributorship and agency – have the more traditional forms
of distributing goods or services. Under these, the principal is not allowed to
exert the real control over the distributor or agent.

Here, the franchising differs from the distributorship and the agency in the
sense that it allows the franchisor to exercise a higher degree of control over
the franchisee. As a matter of fact, the franchisor has a right to say in all
important matters like branding, methodology and mergers.

Types of Franchising:

Franchising arrangements broadly classified into three types:

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1. Product Franchising

2. Manufacturing Franchising

3. Business-Format Franchising

A brief description of these follows:

1. Product Franchising:

This is the earliest type of franchising. Under this, dealers were given the right
to distribute goods for a manufacturer. For this right, the dealer pays a fee for
the right to sell the trademarked goods of the producer. Product franchising
was used, perhaps for the first time, by the Singer Corporation during the
1800s to distribute its sewing machines. This practice subsequently became
popular in the petroleum and auto industries also.

2. Manufacturing Franchising:

Under this arrangement, the franchisor (manufacturer) gives the dealer

(bottler) the exclusive right t’ produce and distribute the product in a
particular area. This type of franchising is commonly used in the soft-drink
industry. Coca-Cola and Pepsi are the popular examples of such type of
franchising.

3. Business-format Franchising:

This is recent type of franchising and is the most popular one at present. This
is the type that most people today mean when they use the term franchising.

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In the United States, this form accounts for nearly three-fourth of all
franchised outlets.

Business-format franchising is an arrangement under which the franchisor

offers a wide range of services to the franchisee, including marketing,
advertising, strategic planning, training, production of operations manuals
and standards and quality- control guidance.

The International Franchise Association (IFA) of America has

defined business format franchising as follows:

“A franchise operation is a contractual relationship between the franchisor

and franchisee in which the franchisor offers or is obligated to maintain a
continuing interest in the business of the franchisee in such areas as knowhow
and training; wherein the franchisee operates under a common trade name,
format and / or procedure owned or controlled by the franchisor, and in which
the franchisee has or will make a substantial capital investment in his business
from his own resources.”

Advantages:

Franchising arrangement is symbiotic one for the franchisor and the

franchisee.

Following are, for example, the distinct advantages that

franchising provides to the franchisee:

(i) Franchising makes the task of getting started easier because the franchisee
gets a business format already market tested and founded to work. Hence,
buying a franchisee is so far safer than trying to start a business.

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(ii) It reduces chances for failure. Here, significant to mention is that fewer
than 10 percent of all franchise fail. In dramatic contrast with this is the fact
that two out of every five entrepreneurs who start on their own fall within
three years, and eight out of every ten fail within ten years.

(iii) A well-established franchisee brings with it the very important advantage

of recognition. Many new businesses experience lean months, or years, after
start-up. Obviously, the longer the period the business must experience it, the
greater the chances of failure. With the well-tested franchise, this period of
agony may reduce to only weeks, or perhaps just days.

(iv) Franchising may increase the franchisee’s purchasing power also. Because,
being part of a large and that too recognized organization means paying less
for variety of things such as supplies equipment, inventory services, insurance,
and so on. It also can mean getting better service from suppliers because of
the importance of the organization (franchisor) of you is part (franchisee).

(v) One gets the benefit of the franchisor’s research and development in
improving the product.

(vi) The franchisee has the protected or privileged rights to franchise within a
given area.

(vii) The prospects of obtaining loan facilities from the bank are also improved.
(viii) The backing of a known trading name (franchisor) becomes quite helpful
while negotiating for good sites with setting agents or building owners.

Disadvantages:

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Franchising is not an unmixed blessing. There are some disadvantages as well
associated with a franchise arrangement.

The main ones are listed as follows:

(i) Unlike entrepreneurs who start their own business, the franchisees find no
room or scope for enjoying their creativity. They have to work as per the given
format. One classic example of regimentation in franchising can be found in
the McDonald’s restaurant organization.

A McDonald’s franchise is given very little operational latitude; indeed, the

operations manual attends to such minor details as when to boil the bearings
on the potato slicer. The purpose of these restrictions is not to frustrate the
franchisee, but to ensure that each outlet is run in a uniform and correct
manner.

(ii) A number of restrictions are also imposed upon the franchisees.

Restrictions may relate to remain confined to product line or a particular
geographical location only.

(iii) Franchisees usually do not have the right to sell their business to the
highest bidder or to leave it to a member of their family without approval from
the franchisor.

(iv) Though the franchisee can build up goodwill for his or her business by his
or her efforts, goodwill still remains the property of the franchisor.

(v) The franchisee may become subject to fail with the failure of the franchisor.

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(vi) Another disadvantage facing franchisees is that franchisors generally
reserve the option to buy back an outlet upon termination of the contract.
Many franchisees become vulnerable to this option. As such, they operate
under the constant fear of non-renewal of the franchise arrangement.

Then, do these disadvantages mean that franchising is no longer a desirable

way to go into small business? Certainly not. Franchising is a proven and
complete business concept. In fact, what do they really mean is that the
security that some people associate with franchising is an illusion? Hard work,
realistic expectations, and very careful investigation are required if becoming
a franchisee is to be a successful, satisfying experience. This underlines the
need for evaluation of a franchising arrangement.
Business and organizational leaders often espouse different values and characteristics
depending on their leadership style. Identifying these leadership styles can be a useful
way to determine which leadership style you'd like to cultivate or hire for your
organization. For example, a leadership stye called entrepreneurial leadership
emphasizes ambition, flexibility and taking informed risks. In this article, we explain
entrepreneurial leadership and its benefits, with a list of 14 characteristics of
entrepreneurial leaders to help you succeed in your own career.

What is entrepreneurial leadership?

Entrepreneurial leadership is a mindset that emphasizes leadership through the
strategic management of risk and dynamic, changing systems. Entrepreneurial
leaders look for new opportunities and ways to innovate as individuals and as a team.
These qualities often contrast with traditional leadership methodologies that
emphasize following processes and procedures in an orderly, predictable way in
order to minimize risk.
14 characteristics of entrepreneurial leaders
If you are interested in developing entrepreneurial leadership skills, or looking for
these qualities when hiring leaders for your organization, it is important to
understand the qualities these leaders share. To help you achieve your own career
and organizational objectives, here are 14 common characteristics of
entrepreneurial leaders:

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1. Effective communication
Entrepreneurial leaders communicate effectively with other leaders and members of
their team. They use this skill to convey their own ideas as well as listen actively to
the ideas of others. Entrepreneurial leaders also usually work to foster productive
communication between other team members, departments and organizations.
2. Confidence
Effective entrepreneurial leaders are confident in their ability to make good
decisions and lead their organization in productive, growth-oriented activities. They
usually gain this confidence through leadership experience that includes successes as
well as learning opportunities. This confidence is often effectively paired with
humility and self-awareness of their abilities, skills and even current limitations.
3. Self-efficacy
In addition to confidence, entrepreneurial leaders also demonstrate self-efficacy or
the belief that they have the skills needed to manage situations when they arise.
Entrepreneurial leaders also motivate and empower members of their teams to
cultivate self-efficacy as well.

4. Collaboration
Good entrepreneurial leaders work together with others in leadership positions as
well as members of their team and even external stakeholders to achieve their
organizational goals. They share credit for successes with those who contributed to
them and own opportunities for growth and improvement. Entrepreneurial leaders
often take an active role in their company's operations. For instance, they might
circulate among team members' offices instead of working from their own office
exclusively.

5. Growth mindset
Growth mindset is the belief that any skill or ability can be learned with adequate
attention and effort. Entrepreneurial leaders often ascribe to a growth mindset and
encourage their team members to do so as well. This often helps them achieve
challenging organizational objectives.

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6. Trustworthiness
Entrepreneurial leaders can be trusted with any and all responsibility required of
them. They can also be trusted to behave and communicate with honesty, regardless
of the message they need to convey. This can be an important quality when
delivering feedback and completing high-level administrative tasks.

7. Determination
Strong entrepreneurial leaders persevere when faced with challenges in their careers
and for their organizations. They commit to achieving their objectives and foster a
sense of dedication and perseverance in their teams as well.

8. Optimism
Entrepreneurial leaders often choose to believe that any challenge can be solved or
overcome. They leverage this optimism into creative problem-solving, innovation
and determination. When paired with a sense of realism and the right tools and
resources, this can help entrepreneurial leaders achieve their organizational goals.

9. Curiosity
Effective entrepreneurial leaders often allow themselves to wonder about possible
solutions and alternative ways to achieve their goals. This helps establish them as
leaders who are comfortable with change and who can leverage dynamism into
productive strategies. Curiosity can also help entrepreneurial leaders see and take
advantage of new opportunities and ideas.

10. Risk awareness

A primary characteristic of entrepreneurial leadership is the ability and willingness to
evaluate and leverage risk as an opportunity for growth. This means entrepreneurial
leaders are aware of risk and can anticipate its possible implications.

11. Comfort with ambiguity

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Entrepreneurial leaders are comfortable with ambiguity. This means they can
navigate situations with multiple correct responses or perspectives with ease.
Entrepreneurial leaders also encourage their teams to develop a strong level of
comfort with uncertainty.

12. Ownership
Good entrepreneurial leaders instinctively take ownership of new ideas, projects and
products. They take initiative for visualizing a final product and guide the action
needed to achieve that vision. These leaders frequently also participate in the steps
they identify as necessary for achieving their goals for their organization.

13. Initiative
Entrepreneurial leaders take initiative to manage and address challenges and new
projects independently and as members of their teams. They independently take
action when faced with challenges and motivate their employees to do the same.

14. Persuasiveness
Most effective entrepreneurial leaders are highly persuasive. This can help them
motivate their team and convince other organizations to take action that supports
the leader's organization's best interests. Many strong entrepreneurial leaders are
talented salespeople who use their skills to support their leadership operations.

Benefits of entrepreneurial leadership

To decide if entrepreneurial leadership is right for you and your organization, here
are some benefits to consider:

 Entrepreneurial leaders can adapt quickly to dynamic circumstances. This can

be a valuable asset in industries that are likely to change often or during times of
general social or cultural change.
 Entrepreneurial leaders can drive industry change. Their ability to motivate and
often inspire sweeping changes can help industries and companies progress.

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 Entrepreneurial leaders innovate. The ability to think creatively and develop
innovative solutions to challenges can help companies and organizations stay
competitive. Innovation can benefit individual companies and entire industries
adapt to changing conditions.
 Entrepreneurial leaders can centralize responsibility. Many leaders of this type
prefer to personally make important decisions that shape their company's
success, which can help concentrate responsibility in that leadership role.
 Entrepreneurial leaders succeed in uncertain environments. Their strength with
ambiguity and risk management can provide a strong foundation for resilience in
their organizations. They also often encourage this ability in others on their
teams.
 Entrepreneurial leaders set ambitious goals. They usually do so for themselves,
their employees and their companies, which can help organizations achieve their
objectives.

What Is Risk Management?

Risk management is a process that includes identifying your business risks, evaluating them, and
deciding how to deal with them. Most businesses start out without performing market research and
this is needed to make sure that there is market demand for the product or service they are trying
to sell. It might sound that it is obvious you need to do some research beforehand but there are
many businesses that do not and that is why they end up failing.

The process of putting together a risk management plan should result in a creation of a plan that
your business will follow in order to have the least amount of risk as possible. This plan enables
your company to set up procedures that will help you avoid risks that are avoidable and minimize
the impact of risks that are not.

Risk management is never ending. Risk needs to be constantly reevaluated as your business
changes and grows.

How to Write a Risk Management Plan

There are three main steps that need to be taken to put together a solid risk management plan for
your small business which include identification, evaluation, and mitigation.

Identification
This part of the process asks business owners to put together a list of potential risks that can affect
their businesses as exhaustive as possible. The risks can be related to the business strategies you
have and how effective they are, risks related to your day-to-day business operations, regulatory
risks related to laws and compliance, reputational risks, financial risks, and more.

Evaluation

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Once you have identified your risks, it is time to analyze them. What is more important to take into
consideration during this phase is the likelihood these risks will occur and how severe the
consequences will be if they do occur. Knowing the possible impact of your risks helps you make
decision on how you can mitigate them.

Mitigation
At this stage you are recommending actions that need to be taken in relation to each risk that you
have identified.

Common Risk Management Tactics

Once you have identified your risks and analyzed their potential impact for your small business,
the mitigation part of the process requires you to make a decision on how to face and tackle each
of the risks that you have identified and evaluated.

Risk Avoidance
If you have evaluated a risk as being volatile and see a chance of doing financial damage to your
business if you take the risk and does not work out, then it is probably a risk that should be
avoided.

There are cases where at one point in the time an idea might be risky but another time it might not
be as risky, for example if your business is growing steadily and are seeing increases in annual
revenue.

Risk Reduction
Reduction means that you do everything you can to make a risk less risky. For example, if you are
not ready to experiment within your business with a new product or service, you can opt for
choosing something else that is not as risky.

Risk Acceptance
Acceptance is the best way to deal with risks that cannot cause you much damage, even in worst-
case scenarios.

Transference of Risk
Buying business insurance means risk transference. When your small business buys a policy from
an insurer, they are essentially paying to transfer risk to a third party. No matter the size of your
business, purchasing insurance to mitigate various business risks is unavoidable.

The Role of Insurance in Risk Management

Once you have identified and evaluated your risks you will also understand which risks should be
transferred to an insurer. Many small businesses start with buying a Business Owner’s Policy
(BOP) which includes three policies: general liability insurance, property insurance, and business
interruption insurance. They give businesses a good amount of coverage while paying less than
they would be if they wanted to buy those three policies separately.

The Benefits of Proper Risk Management

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The most obvious benefit of putting together a risk management plan is that it helps you to avoid
risks that can negatively impact your business. The following are additional benefits of risk
management:

 Better finances: you are more likely to get loan offers if you are managing and transferring
their risk.

 A stronger brand: a business that manages its risk properly is a successful, stable, and
prosperous one. When a small business is proactive about managing its risk, its sending a
clear message about the brand including employees, partners, and customers they deal with.

 Increased efficiency: risk management can uncover processes where you might be spending
money unnecessarily.

The Bottom Line

Performing risk analysis and putting together a risk management plan for your small business
helps you learn more about your business and getting to know yourself, partners, and customers a
lot better.

These benefits are important so that you manage the risks that can affect your business and
putting that plan into action as your business grows throughout the years.

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