Unit – II

Promotion of a Venture

Opportunity Analysis

What is a business opportunity?

There are a lot of opportunities available in the world of business, but they are not visible to
everybody. They are visible only to those who constantly remain in search of them. Opportunity
does not come to anyone by chance, but the entrepreneur has to struggle for it. The entrepreneur
has to collect necessary information from various sources in his search for business opportunity.
Business opportunity can be described as an economic idea which can be implemented to
create a business enterprise and earn profits. Before selecting an opportunity, the
entrepreneur has to ensure two things-

i. There is a good market for the product he is going to produce, and

ii. The rate of return on the investment is attractive to be accepted by him.

An entrepreneur is basically an opportunity seeker. He is supposed to identify, explore various

opportunities in the environment and then select a viable business opportunity. Business
opportunity is an attractive project in terms of adequate rate of return which motivates the
entrepreneur to accept that particular project for making investment decision. Entrepreneurs
generally evaluate different possibilities and select only highest reward paying possibility for
execution. Thus, a business possibility may take the shape of a business opportunity only when
that possibility is commercially feasible. In this context, two major criteria are important for
converting a possibility into a business opportunity. These are:

i. Favorable market demand or excess of demand over existing supply available in the
market, and
ii. Adequate rate of return on investment that is generally equal to normal rate of return and
risk premium attached to that particular business opportunity

By the use of opportunity analysis, the company can make the right decision, thereby advancing
in its goal of earning more profits.

Ms. Shikha Dabral

Assistant Professor (IITM)
An example of opportunity analysis is the “Stay healthy” frenzy which has gripped many
nations. More and more people are realizing that by staying healthy they can have a more
enjoyable life as compared to being obese or having the wrong habits. This resulted in the rise of
organic farming. Fast food chains like Subway and others came up just to give the customers
“Healthy food” like they want. Nike and Adidas focus exclusively on fitness. Fitness equipment
shops have opened up and there has been a boom in the business of Gymnasiums, Yoga, Zumba
etc.

Can all ideas be converted into opportunities?

A prospective entrepreneur may be able to generate several business ideas, but all may not be
converted into opportunities. A business idea based on customers’ needs and problems they are
facing and which is commercially feasible becomes an opportunity. Launching of a business on a
mere ‘idea’ and not ‘opportunity’ is not likely to be successful. Quite often, entrepreneurs
conceive of an idea for a product or service and attempt to convert it into reality by investing
financial and non-financial resources in the concerned venture. They do not attempt to identify
their customers, customers’ needs and their desire to buy the concerned product or service. Such
entrepreneurs are inward looking. They start a business merely to satisfy their personal ego
needs. The result is that they launch a product that has very few customers.

There are a lot of business ideas and a person has to identify them, study them, analyze them,
compare their merits and demerits and finally select a suitable one initiate appropriate action to
convert it into a successful economic venture. All ideas are not opportunities but all
opportunities are ideas. So a prospective entrepreneur has to develop various ideas and think of
some business opportunities. There are a lot of business opportunities in the world of business
but are not visible to many. They are visible to only those who constantly remain in search of
them. All the business opportunities visible to an individual may not be suitable for him. A
particular business opportunity may be suitable for a particular type of entrepreneur and not to
any type of entrepreneur.

Ms. Shikha Dabral

Assistant Professor (IITM)
Elements of a Business Opportunity

A business opportunity may be described as an attractive economic idea which could be

implemented to create a business, earn profits and ensure further growth. A business opportunity
has five elements which are as follows:

1. Assured market scope,

2. An attractive and acceptable rate of return on investment,
3. Practicability of the idea,
4. Competence of the entrepreneur to encash it,
5. Potential of future growth.

Exploring opportunities in the environment

Opportunities for launching new ventures exist in the environment. A prospective entrepreneur
has to find an opportunity which would be suitable for him in terms of customers to be served
and profits expected. An opportunity may be derived from the needs and problems of the society.
An entrepreneur may launch a venture to serve the needs of the society and solve their problems.

Thus, entrepreneurial opportunities exist in the environment and entrepreneurs sense them
through a dynamic process of receiving and harnessing ideas from different sources. Their vision
and creativity develop these ideas into viable and successful projects as shown in the figure
given below:

Sensing business opportunity in the environment

Ms. Shikha Dabral

Assistant Professor (IITM)
The enterprise process diagram shows the following stages:

i. Opportunity scouting by analyzing the needs and problems that exist in the environment,
ii. Evaluating the ideas received from different sources to find a creative solution,
iii. Identifying a product or service through innovation, and
iv. Setting up a project and nurturing it to success. Sensing entrepreneurial opportunities is
thus a process of converting an idea into an opportunity into an enterprise. The diagram
also shows that environment exerts its influence and impact at all stages.

Perceiving and sensing opportunities

As discussed above, opportunities for launching new enterprises exist in the environment. The
entrepreneurs perceive opportunities, synthesize the available information and analyze emerging
patterns that escape the attention of other people. They are people with a vision, capable of
persuading others such as customers, partners, employees and suppliers to see the opportunity,
share it and support it. For them the opportunity exists in the environment in the form of needs
and problems of people and society. After spotting an opportunity, they evolve a strategy to find
a creative solution to the problem or need.

Sensing entrepreneurial opportunities is a process of perceiving the needs and problems of

people and society and arriving at creative solutions as shown in the figure given below.
Nirma detergent powder was introduced to meet the demands of the lower income groups
who could not afford expensive detergents like Surf and Ariel.

Perceiving entrepreneurial opportunities

Ms. Shikha Dabral

Assistant Professor (IITM)
Apart from perceiving an opportunity that already exists in the environment, the entrepreneurs
may also create business opportunities. Many great inventions like the radio and the telephone
are examples of created opportunities. They are born out of fantasies of entrepreneurs about
products or services they would love to have in their lives.

Factors involved in sensing opportunities

To sense an entrepreneurial opportunity, an entrepreneur employs his sharpened skills of

observation, analysis and synthesis to identify an opening. The most important factors that are
involved in this process are:

i. Ability to perceive and preserve basic ideas which could be commercially.

ii. Ability to harness different sources of information.
iii. Vision and creativity.

Ability to Perceive and Preserve Basic Ideas

Spotting of an idea often triggers the process of sensing an opportunity However, every idea does
not create an opportunity. For the sake of clarity we can assume that the opportunity and idea
based on what consumers want. Basic ideas emerge from different sources as discussed below:

a) Problems. When an idea revolves around the problem faced by the people, the solution is
most often a business opportunity. The best example is the safety razor. It was problem
was men to shave with a sharp shaving knife quickly and without getting nicked. The
problem gave rise to an idea that resulted in the development of safety razor.
b) Change. Any change, be it social, legal, or technological can usher in new business
opportunities. The mushrooming cybercafés and computer institutes are good examples
of such opportunities.
c) Inventions. Inventions include creating new things of value as well as new and creative
processes that add value to existing products or services. Change over from audio to
video cassette players to CD players is an example of opportunities brought by
inventions.
d) Competition. In order to beat the competition, an entrepreneur should introduce new
ideas.

Ms. Shikha Dabral

Assistant Professor (IITM)
Basically an entrepreneur is open to receive ideas from different sources. This expects the
entrepreneur to be a good networker besides having the ability to recognize and nurture the
potential ideas into a venture. For example, Shiv Nadar, an entrepreneur behind the phenomenal
growth of HCL computers.

Shiv Nadar quit his senior position in DCM and started a company to manufacture calculators under
the brand name of HCL. He could foresee rapid growth in the field of information technology but
people in corporate world did not believe him. He worked undaunted and was able to develop India’s
first micro-processor-based commercial computer called HCL-BC within the next few years, armed
with greater expertise and keener market orientation, HCL grew from strength to strength. Shiv
Nadar’s enterprise exemplifies his ability to receive and nurture basic ideas and turn them into a
successful venture.

Ability to Harness Different Sources of Information

Harnessing information from different sources is an important aspect of sensing opportunities.

The information gathered from different sources has to be analyzed and utilized for the
identification of the right opportunity.

Vision and Creativity

One of the most striking behavioral characteristics of an entrepreneur is his creativity. He should
be able to develop creative ideas. The best example of a visionary and a creative genius is Henry
Ford who had vowed to build a motor car for the common man, so low in price that any person
of moderate means may own one. It was this vision and creative pursuit that gave to the world
the legendary car ‘Model T’. He fulfilled his vision through a creative team of engineers.
Creative people try to find solutions to problems.

Assessment of an opportunity

Each opportunity must be carefully screened and evaluated-this is the most critical element of the
entrepreneurial process.

The evaluation process involves looking at-

Ms. Shikha Dabral

Assistant Professor (IITM)
  The creation and length of the opportunity

 Its real and perceived value

 Its risks and return.

 Its fit with the skills and goals of the entrepreneur

 Its differential advantage in its competitive environment

 It is important to understand the cause of the opportunity, as the resulting opportunity

may have a different market size and time dimension.

The market size and the length of the window of opportunity are the primarily bases for
determining risks and rewards. The risks reflect the market, competition, technology, and amount
of capital involved. The amount of capital forms the basis for the return and rewards. The return
and reward of the present opportunity needs to be viewed in light of any possible subsequent
opportunities as well. The opportunity must fit the personal skills and goals of the entrepreneur.
The entrepreneur must be able to put forth the necessary time and effort required for the venture
to succeed. One must believe in the opportunity enough to make the necessary sacrifices.

Opportunity analysis, or an opportunity assessment plan, should focus on the opportunity

and provide the basis to make decisions, including:

 A description of the product or service

 An assessment of the opportunity

 Assessment of the entrepreneur and the team

 Specifications of all the activities and resources needed

 The source of capital to finance the initial venture

The most difficult aspect of opportunity analysis is the assessment of the opportunity.

Ms. Shikha Dabral

Assistant Professor (IITM)
Assessment of idea and opportunity

Before identifying the product or service to be launched, an enterprise, the entrepreneur must
assess the idea for its opportunity potential in the light of the prevailing socio-economic,
politico-legal, technological and international environment. It should be noted that an idea that
is not assessed for its opportunity potential may fail in business.

Screening of the product ideas is the first step in evaluation of product idea. Such criteria as
potential value of the product, time, money and equipment required, fitting of potential product
into the business’s long range sales plan and availability of qualified people to handle its
marketability need be thoroughly considered.

Each identified Product/Investment opportunity needs to be adequately evaluated. A pre-

feasibility study of the product market, technical and financial aspect is necessary at this stage to
have a clear picture of the associated cost and benefits. A pre-feasibility is a preliminary version
of a feasibility study. It is similar to a feasibility study except that it is less detailed. It is usually
carried out for large and complex product/project to determine whether to proceed to the more
elaborate feasibility study.

The steps involved in investigation or assessment of an idea to gauge its potential are as follows:

i. Product Identification:
An idea should lead the entrepreneur to a definite product or service which he can sell.
So, the first step is to obtain a concept of the product or service suggested by one idea. It
should be ascertained whether it is already available in the market. If it is, then the
entrepreneur should identify the reason for introducing the same product or service in
the market. If, on the other hand, the product or service is totally new, he should develop
strategies to popularize it among prospective consumers. The product should also be
examined in the light of possible substitutes, preferences of customers, etc.

ii. Uses of the Product: The product should be examined for its real life use and
application if it already exists in the market. In case of a new product, the possible uses
and application of the product from the buyer’s point of view should be examined.

Ms. Shikha Dabral

Assistant Professor (IITM)
 iii. Availability of Raw Materials: Easy availability of raw material generally encourages
the entrepreneur to adopt positive steps for establishment of industrial units.

iv. Average Cost of Production: The average cost or cost of production per unit will
depend upon the level of operation. When production is carried out on a small scale, per
unit cost of production is usually lower than when production is carried on large scale.
Cost of production is an important determinant of price of any product.

v. Level or Volume of Operation: An entrepreneur should try to assess the pattern of

demand of proposed product or industry in which he is planning to involve himself.
Demand of product or industry is generally governed by the level of national income,
per capita income and population etc. normally, higher the level of income, higher will
be the demand of product in the market. Depending upon the speculated demand of the
product or service, the entrepreneur can produce it in a cottage, small scale industry or a
large scale enterprise.

vi. Competition in the Market: The entrepreneur has to analyze the extent and intensity of
competition in the market. He should identify the product or service where competition
is low.

vii. Type of Technology Required: What type of technology is required to produce the
product? Whether training and application of such technology will be locally available
or will it have to be supported from other places? What would be the position of supply
of plant and machinery for such a technology? These are important issues that have to
be resolved.

viii. Annual Turnover and Profit Margin: Every business idea needs to be examined on
the basis of expected annual turnover (or sale) and profit margin. Annual turnover must
be sufficient to cover all the costs and achieve the break-even stage where there would
be ‘no profit, no loss’.

Ms. Shikha Dabral

Assistant Professor (IITM)
ix. Availability of Financial Resources: Generally, there are three phases of a business of
viable opportunity-promotion, expansion and diversification.
 Availability of viable opportunity and adequate rate of return motivate
entrepreneur to undertake entrepreneurial activate but again with the condition
that he has to have some seed capital of his own, personal connections etc.
 Existing entrepreneur is required to check his existing capability to mobilize
internal resources for expansion. If he does not have any additional internal
resources it may not be viable to increase the production capacity.
 Similarly, he has to examine as to what extent internal resources can be utilized
for future expansion programme, and if he is ready to utilize those resources he
will make sure that this diversion is not going to affect the level of present
operation.
 So it is necessary to give due consideration to internal resources before initiating
to give practical shape to a new business idea.

x. Degree of Risk: There are different types of risks generally involved in a particular
business. These risks are technical risks, economic risks, social risks and environmental
risks.
 Technical risks deal with the risk of not knowing enough about the technical
processes, materials etc.
 Economic risks are the risk of market fluctuations and changes in relation to
raw materials etc.
 Risk inherent in the development of new relationships is treated as social risk.
 Environmental risks are the risks which result from environmental changes in
the entrepreneurial work as an outcome of the new activity.

Thus, entrepreneur has to assess the implications of these risks at the time of
identification of business opportunities.

Ms. Shikha Dabral

Assistant Professor (IITM)
Sources of Information

Generation of project idea is the starting point in product development. For this, an entrepreneur
can refer to potential studies prepared by different organizations. there are a number of potential
studies conducted by several organizations like the National Council of Applied Economic
Research (NCAER), financial institutions and other promotional organizations s.uch as
Confederation of Indian Industries (CII), etc. These may include the following:

a) Area studies identify development potential of particular areas like a backward area or a
district.
b) Subsectoral studies which identify opportunities in specified subsectors (such as fppd
processing).
c) Resource-based studies which identify opportunities based on utilization of natural or
industrial resources such as forest-based industries, marine-based industries, industries
using rubber as the main raw material, etc.
d) Studies of the product consumption pattern of the country.
e) Surveys of existing industrial establishments.
f) Import and export possibilities.
g) Demand forecasts made by Industrial Chambers such as CII, FICCI, ASSOCHAM, etc.

Ms. Shikha Dabral

Assistant Professor (IITM)
 External Environmental Analysis

Environmental analysis is the process of monitoring the economic and non-economic

environment to determine the opportunities for and threats to an enterprise. Scanning of
environment is the first step in the process of sensing environmental opportunities.
Environmental scanning is a close examination of the environment to develop an understanding
of the socio-cultural, economic, political and other factors in order to ensure that the perceived
entrepreneurial opportunity is compatible with them. It helps in knowing trends, issues and
expectations from the environmental changes.

Environmental Factors (Elements of Environment)

Entrepreneurship environment refers to the various forces within which various small, medium
and large enterprises operate.

Entrepreneurship environment consists of internal and external environment.

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Assistant Professor (IITM)
Internal Environment:

Survival of a business depends upon its strengths and adaptability to the environment. The
internal strengths represent its internal environment. Internal environment consists of
controllable factors that can be modified according to needs of the external environment. It
consists of financial, physical, human and technological resources.

 Financial resources represent financial strength of the company. Funds are allocated to
various activities so as to maximize output at minimum cost, that is, optimum allocation
of financial resources.
 Physical resources represent physical assets such as plant, machinery, building etc. that
convert inputs into outputs.
 Human resources represent the manpower with specialized knowledge that performs the
business activities. The operative and managerial decisions are taken by the human
resources.
 Technological resources represent the technical know-how used to manufacture goods
and services.

External Environment:

The external environment consists of legal, political, socio-cultural, demographic factors etc.
These are uncontrollable factors and firms adapt to this environment. They adjust internal

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Assistant Professor (IITM)
environment with the external environment to take advantage of the environmental opportunities
and strive against environmental threats.

Business decisions are affected by both internal and external environment.

The external environment consists of the micro environment (task environment) and macro
environment (general environment).

i. Micro Environment: “The micro environment consists of factors in the company’s

immediate environment”. These factors affect the performance of a company and its
ability to serve the customers. Micro environment consists of customers, suppliers,
competitors, public and market intermediaries. A brief discussion of the firm’s micro
environment is as follows:

 Customers: Customers constitute important segment of the micro environment.

Business exists to serve its customers. Unless there are customers, business has no
meaning. A company can have different types of customers like, households,
producers, retailers, Government and foreign buyers.
 Suppliers: They supply inputs (money, raw material, fuel, power and other
factors of production) and help in smooth conduct of the business. Firms should
remain aware of the policies of suppliers as increase in prices of inputs will affect
their sales and profits. Shortage of supplies also affects the production schedules.
 Competitors: Competitors form important part of the micro environment. Firms
compete to capture big share of the market. They constantly watch competitors’
policies and adjust their policies to gain customer confidence.
 Public: “A public is any group that has an actual or potential interest in or impact
on an organization’s ability to achieve its interest”. Public can promote or demote
company’s efforts to serve the market. The term ‘public’ consists of financial
public (banks, financial institutions etc.), media public (newspapers, radio,
television etc.), Government public, customer organizations, internal public
(workers and managers), local public (neighbourhood or community residents)
and general public (buyers at large). Companies observe the behavior of these
groups to make functional policies.

Ms. Shikha Dabral

Assistant Professor (IITM)
  Market intermediaries: They are the links that help to promote, sell and
distribute the products to final consumers. They are the physical distribution firms
(transport firm), service agencies (media firms), financial intermediaries (banks,
insurance companies) etc. that help in producing, marketing and insuring the
goods against loss of theft, fire etc. Firms maintain good relations with them to
carry their activities smoothly.

ii. Macro Environment:

The macro environment consists of the economic and non- economic variables that
provide opportunities and threats to firms. This is largely uncontrollable and, therefore,
firms adjust their operations to these environmental factors.
The macro-environment consists of the following:
 Economic Environment: The economic environment consists of economic
forces that affect business activities. Industrial production, agriculture,
infrastructure, national income, per capita income, money supply, price level,
monetary and fiscal policies, population, business cycles, economic policies,
infrastructural facilities, financial facilities etc. constitute the economic
environment.
The economic environment influences the activities of business enterprises. In the
capitalist economies, firms have the freedom to choose the occupation. The
economic decisions to invest, produce and sell are guided by profit motives. The
factors of production are privately owned and production activities are initiated by
the private entrepreneurs.
In socialist economies, these decisions are taken by the public sector which is
guided more by social welfare than profit maximization. The economy is
controlled by the central master plan prepared by the State. In a mixed economy,
public and private sectors co-exist and singly or jointly own the factors of
production.
Scarce economic resources are allocated over various business activities.
Decisions regarding allocation of resources which respect to what to produce,
how to produce and for whom to produce; nature of technology and the

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Assistant Professor (IITM)
techniques of production, timing of production etc. differ in different economies.
This constitutes economic environment of the economy.
The economic environment affects business in the following ways:
 State controls the economy (or the business enterprises) through planning
and regulation. It enforces upon business enterprises the responsibility of
social responsiveness (responsibility towards society) by welfare-state
principles enacted through legislation that enforce minimum wages,
commodity control, fair trade practices etc. Legislative machinery
promotes economic growth, efficiency and equity. Social responsibility is
the outcome of business interaction with economic environment.
 Some business firms are positively affected by the Government policy
while others are negatively affected. A restrictive import policy, for
example, protects home industries but liberal import policy can harm the
domestic industries.
 The incentives and disincentives provided by the Government affect
business enterprises in many ways. To enjoy the economies of scale, firms
establish the business in large cities but the Government promotes them to
establish their units in backward areas by providing various tax incentives.
The economic environment of a country, thus, removes regional
disparities and promotes equitable growth of the economy.
 By providing incentives in the priority sector that produce essential goods
for the economy, the Government promotes industrial sector of the
economy.
 Modern economies are open systems. The economic environment of one
country affects the economic environment of another country.
Multinational corporations operate world-wide and provide a number of
benefits to host countries and home countries. This has developed science
and technology and unified the world economy.
 The economic system helps in answering questions like:
 Is it the right time to set up the business?
 Can new products be added to the product line?

Ms. Shikha Dabral

Assistant Professor (IITM)
  Is the market size large enough to provide desired rate of returns?
 Is the environment conducive in terms of availability of manpower,
infrastructure, raw material, finance, building, plant and machinery
etc.?
 Political-legal environment: It is the legislative, executive and judicial
environment of the country that shapes and controls business activities. The
legislature describes the laws and courses of action to be followed by firms, the
executive implements the decisions taken by the legislature (Parliament) and the
judiciary ensures that legislature and executive function in the interest of the
society. A stable political environment is conducive to business growth.
A business operates in the environment of Government regulations. Various laws
are made to regulate the functions of business enterprises. They relate to standards
of product, packaging of products, protection of environmental and ecological
balance, ban on advertisement of certain products (liquor), advertisement of
certain products with statutory warning (cigarette) etc.
There are laws to prevent restrictive trade practices and concentration of
economic power in few hands. Regulations promote entry of firms in backward
areas and products are reserved for small-scale sector. Liberalization policies have
allowed the Indian industries to operate in international markets and foreign
companies to operate in Indian markets. This allows growth and diversification of
markets and access to advanced science and technology for Indian entrepreneurs.
At the same time, it threatens the small Indian companies that cannot compete
with large foreign companies.
The political-legal environment provides a host of laws and regulations that affect
the business affairs. It provides opportunities, threats and challenges for the
business enterprises. The Government interacts with business enterprises at the
local level, State level and the Central level and regulates their functions through
various rulings.
Government interacts with the business in the following ways:
 As a regulator: It regulates the affairs of the business by promoting
activities in certain areas and restricting in others. These regulations

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Assistant Professor (IITM)
 prevent unhealthy competition amongst firms and protect consumers’
interests against false advertising and unfair trade practices.
 As a supplier: It supplies resources to business concerns.
 As a competitor: It competes with private entrepreneurs in areas like
telecommunication, electricity, construction etc.
 As a customer: It supports business houses by buying their products.

Firms should have healthy interaction with the Government. They should
indulge in activities that promote economic growth and know the legal
system.

Some of the laws that exist in the country for smooth operation of business
enterprises are as follows:

Economic Laws [Air (Prevention and Control of Pollution) Act, 1981;

Consumer Protection Act, 1986; Essential Commodities Act, 1955; Foreign
Exchange Management Act, 1999; Foreign Trade (Development &
Regulation) Act, 1992; Industries (Development & Regulation) Act, 1951;
Patents Act, 1970; Standards of Weights and Measures Act, 1976; Trade
Marks Act, 1999],

The political-legal system helps in answering questions like:

 Is the political climate stable in the country so that government

policies do not change time and again?
 Do the political organizations promote business activities, that is,
processing of paper work is done without much delay because of
bureaucracy and red tapism?
 Is the judiciary effective in decision-making to deal with business
conflicts and law suits?
 Are the government policies conducive to business growth in terms of
incentives, markets, taxation etc.
 Are the licensing procedures for entering into a new business lenient
or strict?

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Assistant Professor (IITM)
  How conducive are the export and import policies to promote the
imports and exports, etc.?
 Socio-cultural environment: It represents the values, culture, beliefs, norms and
ethics of the society in which business enterprises operate. People are important to
organizations both as human resource and customers. Their buying habits, buying
capacities, tastes, preferences and education affect business enterprises.
Firms change their production and marketing plans according to consumer
demand. The social environment consists of the social values; concern for social
problems like protection of environment against pollution, providing employment
opportunities, health care for the aged and old etc.; consumerism, that is,
indulging in fair trade practices to satisfy human wants.
The cultural environment represents values and beliefs of the society. These
beliefs mould the attitudes of people and help business enterprises determine their
need perception. The socio-cultural environment helps firms support the social
and cultural values of society by encouraging fine arts projects, sports,
communication media, donations to educational, religious and charitable
institutions, counseling centers, vocational and technical training centres etc.
The socio-cultural environment, thus, affects:
 Business objectives: Social objectives are framed along with economic
objectives as the society demands business organizations to look after their
interests.
 Organizational processes: Various organizational processes like
motivation, leadership, control policies etc. are framed within the
constraints of cultural system of the country. Workforce diversity is
promoted, participative decision-making is encouraged, democratic
leadership style is adopted to promote employees’ commitment towards
the organization.
 Goods and services to be produced: Though business houses produce
goods that earn them profits, it is equally important that these goods are
desired by the society. Socially acceptable goods promote both business
image and profits.

Ms. Shikha Dabral

Assistant Professor (IITM)
 The socio-cultural system helps in answering questions like:
 What are the expectations of society from the business?
 Can the business meet these expectations?
 Are social objectives a part of the overall objective framework of
the company?
 Do the business operations meet the ethical and value system of
the society and if not, is the change possible etc.?
 Technical environment: Technology refers to application of scientific and
organized knowledge to organizational tasks. It includes inventions and
innovations regarding techniques of production. Technology is changing at a fast
pace and technical environment is dramatically affecting the business
environment either because of easy import policies or because of technology
upgradation as a result of research and development within the country.
The technological advances have introduced products like robots,
telecommunication facilities, medicines, equipment’s etc. Business firms adapt to
the fast changing technical environment. Though technological changes can
produce harmful effects also for the enterprises, firms try to reduce these effects
and use technological changes in the best interest of firms and society. Not
adopting technological changes is not possible; technical threats have to be
converted into opportunities and gainfully employed in business operations.
 The technical environment helps in answering questions like:
 What type of technology is available in the environment and what
type of technology is needed by the firm?
 If the technology available is not suitable for the firm’s operations,
does it need to import the technology or upgrade the indigenous
technology?
 At what rate are changes taking place in technology and how fast
are they likely to result in technological obsolescence?
 What is the firm’s financial strength in keeping itself updated
regarding technological changes?, etc.

Ms. Shikha Dabral

Assistant Professor (IITM)
 Demographic environment: It consists of population in its varied forms, such as
gender, age, income, growth rate, language, religion, etc. Increasing population
increases the demand for business products and also provides labor at low rate. A
largely populated country can adopt labor-intensive technology to keep the labor
force employed.
The age composition helps to produce goods to meet the needs of that group.
Production is also affected by gender composition. More females will promote the
enterprises to produce goods used by females. Labor mobility (from rural to urban
areas and vice versa), their educational level, nationality, religion, etc. also affect
policies of the organizations.
 The demographic environment helps in answering questions like:
 What is the gender and age composition of the market?
 What is the income and education level of the consumers?
 How strongly do consumers believe in brand loyalty?
 How can the firm create patronage?, etc.
 Natural environment: The natural environment consists of the renewable and
non•renewable resources used in the production processes. The renewable
resources are air, water and solar energy which can be replenished and non-
renewable resources are oil, coal, wood etc. which cannot be replenished.
Though air, water and solar energy can be replenished, firms are harming these
resources by dumping industrial wastes in water and polluting the air and
affecting the ozone layer. Increasing industrialization is affecting the natural
environment by disposing off chemical wastes in land, air and water. It also
affects the food supply which can be harmful for consumption. “The environment
damage to water, earth and air caused by industrial activity of mankind is harmful
for future generations.”
Business enterprises should use these resources wisely and adopt methods to
restrict environmental pollution. Legislative measures are also enforced by the
Government (Pollution Control Board) to protect the natural environment. Even
the renewable resources should be used wisely so that rate of consumption does
not exceed the rate of replenishment.

Ms. Shikha Dabral

Assistant Professor (IITM)
  The natural environment helps in answering questions like:
 Are business activities conducive to natural environment?
 If not, are suitable measures taken to protect the environment?
 How far can the business follow the legislative measures in
protecting the natural environment, etc.?
 International environment: It represents the global environment characterized
by the “borderless world”. The Indian economy entered the global world in 1991
through its liberalization policies. There have been significant economic and
political changes and increasing role for the private sector to play since then.
The global business environment is significantly influenced by the principles and
agreements of World Trade Organization (WTO). WTO monitors and regulates
the business transacted in the international environment.
It has created significant impact in the following areas:
 Liberalization of imports.
 Opportunities for Indian firms to enter into foreign markets through
exports and investments.
 Seek foreign equity participation and foreign technology in Indian firms to
expand business and improve competitiveness.
 Facilitate global sourcing by Indian firms.
 Benefit from global sourcing by foreign firms.
 Improve efficiency and dynamism of the firms to survive in the global
competition. Inefficient firms have to leave the market.

Ms. Shikha Dabral

Assistant Professor (IITM)
PESTEL Analysis

PESTEL analysis includes Political, Economic, Social, Technological, Environmental and Legal
analysis. It is an external environment analysis for conducting a strategic analysis or carrying out
market research. It offers a certain overview of the various macro-environmental factors that the
company has to consider.

Ms. Shikha Dabral

Assistant Professor (IITM)
PESTEL

 Political factors analysis is related with how and to what extent a government interferes
in the economy. Specifically, political factors include tax policy, labor law,
environmental law, trade restrictions, tariffs, and political stability. Political factors may
also be related with goods and services which the government allows (merit goods) and
those that the government does not allow (demerit goods). The government can have a
great influence on the overall health, education, and infrastructure of a country.

 Economic factors contain factors such as economic growth, interest rates, exchange rates
and the inflation rate. These factors may have an influential effect on how the businesses
operate and make decisions. For example, interest rates can affect the firm’s cost of
capital and thereby influence business growth and expansion. Exchange rates can affect
the costs of export and the supply and price of imports.

 Social factors include issues such as health consciousness, population growth rate, age
distribution, career attitudes and emphasis on safety. Trends in social factors may affect
the demand for a company’s goods and how the company operates. For example, ageing
population leads to smaller and less-willing workforce (and increases the cost of labor).

 Technological factors include technological aspects, such as R&D activity, automation,

technology incentives and the rate of technological change. They can determine barriers
to entry, minimum efficient production level and influence outsourcing decisions.
Furthermore, technological shifts can affect costs, quality, and lead to innovation.

 Environmental factors are the conditions such as weather, climate, and climate change,
which may especially influence tourism, farming, and insurance sectors.

 Legal factors include laws pertaining to discrimination, consumer affairs, employment,

and health and safety. These factors can affect the operations, costs, and the demand for
the products. Legal factors can also influence the brand value and reputation of a
company.

Ms. Shikha Dabral

Assistant Professor (IITM)
 Competitive factors

Competitive Analysis of Market

Why is competitive analysis needed?

Competitive analysis is basically an insight into the status of the market for an entrepreneur’s
product or the service. It gives a real and pragmatic picture of the strength and marketability of
the product in comparison to the like in the market. It is a structured method of understanding the
market forces and how they are influencing the vulnerability of the products or services marketed
by a particular entrepreneur.

The entrepreneur needs competitive analysis to know:

 The various dimensions of the market

 The potential entrants into the market
 The direction of change in the consumption trend
 The potential buyers in the market
 The threat of substitutes or new products

Ms. Shikha Dabral

Assistant Professor (IITM)
Porter's Five Forces [also refer to chapter-7, Environmental Analysis (pg. no. 7.11, Topic-Five
Forces Analysis) of book Entrepreneurship Development by T.N. Chabbra, Second Edition]

Understanding Competitive Forces to Maximize Profitability

Porter's Five Forces is a simple but powerful tool for understanding the competitiveness of your
business environment, and for identifying your strategy's potential profitability.

This is useful, because, when you understand the forces in your environment or industry that can
affect your profitability, you'll be able to adjust your strategy accordingly. For example, you
could take fair advantage of a strong position or improve a weak one, and avoid taking wrong
steps in future.

Understanding Porter's Five Forces

The tool was created by Harvard Business School professor Michael Porter, to analyze an
industry's attractiveness and likely profitability. Since its publication in 1979, it has become one
of the most popular and highly regarded business strategy tools.

Porter recognized that organizations likely keep a close watch on their rivals, but he encouraged
them to look beyond the actions of their competitors and examine what other factors could
impact the business environment. He identified five forces that make up the competitive
environment, and which can erode your profitability. These are:

Ms. Shikha Dabral

Assistant Professor (IITM)
 Competitive Rivalry: This looks at the number and strength of your competitors.
How many rivals do you have? Who are they, and how does the quality of their
products and services compare with yours?
Where rivalry is intense, companies can attract customers with aggressive price
cuts and high-impact marketing campaigns. Also, in markets with lots of rivals,
your suppliers and buyers can go elsewhere if they feel that they're not getting a
good deal from you.
On the other hand, where competitive rivalry is minimal, and no one else is doing
what you do, then you'll likely have tremendous strength and healthy profits.
 Supplier Power. This is determined by how easy it is for your suppliers to
increase their prices. How many potential suppliers do you have? How unique is
the product or service that they provide, and how expensive would it be to switch
from one supplier to another?
The more you have to choose from, the easier it will be to switch to a cheaper
alternative. But the fewer suppliers there are, and the more you need their help,
the stronger their position and their ability to charge you more. That can impact
your profit.
 Buyer Power: Here, you ask yourself how easy it is for buyers to drive your
prices down. How many buyers are there, and how big are their orders? How
much would it cost them to switch from your products and services to those of a
rival? Are your buyers strong enough to dictate terms to you?
When you deal with only a few savvy customers, they have more power, but your
power increases if you have many customers.
 Threat of Substitution: This refers to the likelihood of your customers finding a
different way of doing what you do. For example, if you supply a unique software
product that automates an important process, people may substitute it by doing the
process manually or by outsourcing it. A substitution that is easy and cheap to
make can weaken your position and threaten your profitability.
 Threat of New Entry: Your position can be affected by people's ability to enter
your market. So, think about how easily this could be done. How easy is it to get a

Ms. Shikha Dabral

Assistant Professor (IITM)
foothold in your industry or market? How much would it cost, and how tightly is
your sector regulated?
If it takes little money and effort to enter the market and compete effectively, or if
you have little protection for your key technologies, then rivals can quickly enter
the market and weaken your position. If you have strong and durable barriers to
entry, then you can preserve a favorable position and take fair advantage of it.

Ms. Shikha Dabral

Assistant Professor (IITM)
 Legal requirement of establishment of a new unit and Raising of funds

Legal Requirements of Establishment of a New Unit

Ms. Shikha Dabral

Assistant Professor (IITM)
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Assistant Professor (IITM)
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Assistant Professor (IITM)
 Ms. Shikha Dabral
Assistant Professor (IITM)
 Venture capital Sources and Documentation required

Venture Capital

The term venture capital was originally coined in U.S.A. and has been developing world wide.
The move spread in India in 1973 when R.S. Bhatt Committee recommended the formation of
venture capital fund in the country.

 The concept of venture capital was evolved to help those persons who have good product
ideas, but lack the necessary funds to convert these ideas into production.
 It is a source of finance for the new and untried enterprises having new ideas and new
technologies with high risk, but with a potential for rapid growth.
 Venture capital is usually structured in the form of equity and debt capital. It is provided
by the wealthy investors, firms, institutions and companies for all stages of financing the
new venture.
 Some think that venture capital is the early-stage financing of new start-up ventures.
Others think that venture capital is the financing of high and new technology-based
enterprises. More accurately, venture capital is an alternative form of equity and
debt financing made available to new ventures who have technically qualified
entrepreneurs with inadequate funds, having high risk but good growth prospects.

A few definitions of Venture Capital are as follows:

International Finance Corporation, Washington (IFCW) defines venture capital as “equity

or equity featured capital seeking investment in new ideas, new companies, new products, new
processes or new services that offer the potential of high returns on investment.”

According to the Bank of England, “Venture capital is an activity by which investors support
entrepreneurial talent with finance and business skills to exploit capital gain.”

According to Pratt, Venture capital is thought of as, “the early stage financing of new and
young enterprises seeking to grow rapid Thus, venture capital is an alternative form of equity
financing made available to new ventures and technically qualified entrepreneurs with
inadequate funds, high risk and good growth prospects.

Ms. Shikha Dabral

Assistant Professor (IITM)
Entrepreneurial firms which are high risk units, high return ventures and which face the
difficulty of funds get their finances from venture capitalists, This type of capital is provided
only for new ventures.

Characteristics or Essentials of Venture Capital

The venture capital financing is different from traditional or conventional financing in that the
traditional financiers invest in proven technologies and low risk ventures, whereas
venture capitalists invest in new technologies and high risk ventures.

Some of the main distinguishing features of venture capital may be summarized as follows:

1. High Risk: Venture capitalists provide finance to high risk ‘high-reward ventures. These
risks involve technology risk, market risk, liquidity risk or any other type of risk.
2. Equity-Debt Financing: Venture capitalists manage for both equity and debt finances.
They invest in shares to get high returns. They earn capital gains by selling the shares
once the enterprise prove profitable. They provide debt financing in the form of
debentures.
3. Long-Term Investment: Venture financing is a long-term investment of funds. Funds
are provided for 5 to 10 years. Venture capital is not repayable on demand. The investor
has to wait for a long time to earn profit.
4. Participation in Management: As already explained venture capitalist not only invests
in the equity shareholding of the entrepreneurs company but also participates in the
management affairs and gives his advice from time to time. Venture Capitalist has an
active involvement in the business of the entrepreneur after making an investment. Thus
we can say that venture capitalists don’t just invest, rather they build companies.
5. Creative Capital: Venture Capital is termed as a creative capital as it propelled new
ideas to major commercial successes. It helps entrepreneurs to launch enterprise with a
specific promise.
6. Professional Entrepreneurs: Usually, the venture capital is provided to those
entrepreneurs who are professionally or technically qualified but lack adequate funds to
start a new venture. The entrepreneur should have the capability to make an intense effort

Ms. Shikha Dabral

Assistant Professor (IITM)
 to do the business. He should also have proper knowledge of his markets, along with risk
management quality.
7. New Technology: Venture capitalists provide finance usually to those entrepreneurs who
try or employ new technology which may produce uncertain results.

Sources of Venture Capital

The concept of venture capital was originated in the U.S.A. Now it has become a worldwide
concept in the field of risk financing of industrial projects. The development of venture capital in
India is still in infancy, being about a decade old. It is a growing capital market. In fact in India,
‘risk financing is still in an evolutionary state. The funds available to Indian venture capital
industry are small.
What is the need or relevance of venture capital in India when there are commercial banks and
financial institutions to provide funds to industrial enterprises, small or large?
In developed countries, where there is highly progressive industrial environment as well as
advanced entrepreneurial culture, it is common for entrepreneurs to set up companies to produce
new products by obtaining funds from venture capitalists. On the other hand, in India and also in
other developing countries, ‘risk’ financing of this type is yet in its infant stage. Of course, there
are a large number of commercial banks and financial institutions in India, which
provide ‘traditional’ (non-risk) financing mainly to those enterprises that use proven or
established technologies with minimum level of risk. Such financing is collateral-security
oriented and asset-based. It involves uniform repayment of fixed installment. It is
security oriented rather than risk-oriented. Traditional finance has a preference for foreign
technology firms, and do not trust the entrepreneurs who adopt new products or new technology
involving greater risk. In this background of weaknesses or drawbacks of traditional finance the
venture capital assumes an important role to play in providing risk finance to small and medium
size entrepreneurs.
Sources of Venture Capital in India may be divided into three categories:
I. All India Level Venture Capital Funds
II. State-Level Venture Capital Funds
III. Specific Venture Capital Funds

Ms. Shikha Dabral

Assistant Professor (IITM)
I. All India Level Venture Capital Funds
Many Venture Capital Funds are established at All India level to provide venture capital
in India. Some of the important venture capital funds are as follows:
a) IFCI Venture Capital Fund Limited: IFCI provided venture capital assistance
for the first time in 1975 after the establishment of risk capital foundation
(RCF). The financial capital assistance under IFCI’s risk foundation scheme has
been mainly for the traditional industries like textile, iron and steel and chemical.
It provides assistance basically for technologists and professionals. IFCI charges
no interest on loans but a nominal service charge is levied. Mode of repayment
was that, repayment will be out of dividends and the period of repayment is fixed
according to the facts of each case.
b) IDBI Venture Capital Fund: IDBI Venture Capital Fund (VCF) was started in
1986 with an initial capital of Rs.10 crore. This fund provides venture capital to
low and medium grade ventures. IDBI has started seed capital scheme for venture
capital finance.
c) ICICI Venture Management Company Ltd: The Government of India issued
Venture Capital Guidelines in November, 1988. These guidelines authorized all
India Financial Institutions, Commercial Banks and their subsidiaries to launch
venture capital companies. ICICI in 1988 formed Technology Development and
Investment Corporation of India. (TDICI). This corporation managed various
schemes of venture capital financing on commercial lines. This is also the largest
venture capital firm in India. It provides assistance to industries directly or
through venture funds which are managed by it for other institutions and venture
funds out of its own resources. TDICI accepts and evaluates the promotor’s
business plan by knowing his management team, nature of his product,
market conditions for his product, competition, his investment requirement etc.
TDICI goes through the entrepreneur’s business plan. If it finds the plan to be
good and the promotor is clear about his business, he gets assistance, otherwise
his project is dropped.
d) Canbank Venture Capital Fund Limited (CVCFL): Canbank Venture Capital
Fund Limited was established in 1989. At present Canbank has three subsidiary

Ms. Shikha Dabral

Assistant Professor (IITM)
 units which possess Rs. 164 crore, Rs. 10.5 crore and Rs. 30 crore respectively.
Up to 30th March 2003 Canbank has provided financial aid of Rs. 3424 crore to
51 institutions. Influenced by the success of these venture funds, Canbank is
going to establish a fourth venture fund subsidiary, which will be able to provide
assistance of venture capital of Rs. 100 crore.
II. State-Level Venture Capital Funds
In India various state level venture capital funds have been established by the State
Governments after realizing the significance and role of venture capital in industrial
development. These venture capital funds have been promoted by state government. A
few among them are:
a) Gujarat venture Finance Limited (GVFL): Under venture capital funds
sponsored by state level financial institutions is, GVFL promoted in July, 1990 to
provide venture capital for the commercialization of new technological
developments and innovative products. It shares risk of entrepreneurs by
providing financial assistance in the form of equity and quasi equity.
b) Punjab Infotech Venture Fund (PIVF): PIVF is dedicated to investing in
companies in the Information Technology Sector in the State of Punjab. The
Fund’s investments in companies will be through the route of equity and quasi
equity instruments. The Fund seeks to achieve its returns through dividends and
capital gains at the time of divestment through an initial public offering or a
negotiated sale of its holding. The Fund is being managed by Punjab Venture
Capital Limited, an asset management company, promoted by the PSIDC acting
as the nodal agency of the Government of Punjab.
III. Specific Venture Capital Funds
Despite of Commercial Banks, Private Sector Banks and Financial institutions are also
providing venture capital funds to entrepreneurs.
Some of these VCFs are:
 India Investment Fund which is established by Grindly Bank and afterwards it
was taken over by Standard Chartered Bank.
 Credit Capital Venture Fund established by Credit Capital Corporation.

Ms. Shikha Dabral

Assistant Professor (IITM)
  Technology Development and Information Co. Ltd. At present around 16 private
sector funds are registered with SEBI and this number is expected to grow faster.
Explain the Venture Capital Fund.
According to SEBI or Securities and Exchange Board of India, Venture Capital Fund is a Fund
registered in the form of a company or corporation or trust according to the guidelines of
SEBI and:
 Have a sufficient fund of capital;
 Collect the fund according to the prescribed rules of SEBI;
 Invest Funds according to the rules laid down by SEBI.
A venture capital fund can be constituted in the form of a trust or a company. Venture capital
fund appoints an asset management company to manage the portfolio of the fund. A venture
capital fund should have Rs. 5 crore (Rs. 50 million) before it can start venture capital activities.
Describe in brief the various documents required for venture capital
Venture capital process is different from normal project financing. Tyebjee and Bruno (1984)
have given a model of venture capital investment activity which, with some variations, is
commonly used at present. According to them the venture capital investment process is a
sequential process that involves five steps. Documents required at each stage are as follows:
1. Deal Orientation: At this stage, a letter of introduction is necessary from the referring
party sent to the Venture Capital Company. It should present details about the potential
venture, its technical viability and good image of the entrepreneur.
2. Screening: Screening of proposals is necessary to save the time and money cost. Only
proposals which clear screening test are considered for evaluation. At this stage the
Venture Capital Company may ask for technology and product profiles as well as venture
or investment profile depending on the criteria used in the screening process.
3. Evaluation or Due Diligence: Evaluation or due diligence means careful and proper
detailed analysis. The proposals that have successfully passed through the screening
process are then subjected to a detailed evaluation process called due diligence. Most of
the ventures coming to a venture capitalist are new ventures being set up by first-time
promoters, neither the ventures have any track record nor the entrepreneurs have any
operating experience. In such cases, the venture capital company uses a subjective but
comprehensive evaluation. At this stage the business plan is an important document

Ms. Shikha Dabral

Assistant Professor (IITM)
 upon which the evaluation is based. Most venture capitalists ask for a business plan to
make an assessment of the possible risk and return on the venture. Well prepared plan is
the best introduction of the entrepreneur who is going to set up a new venture. A detailed
and well-organized business plan is the only way to gain the attention of the venture
capitalist and to obtain the needed funds.
4. Deal Structuring: If the proposed venture and its business plan are found viable, then
venture capitalist and the entrepreneur negotiate the terms of the deal, such as: the
amount of money to be invested, the form of investment (equity or debt), the price of
investment, exit period, etc. This process is termed as deal structuring. At this stage, a
written agreement is prepared between the entrepreneur and the venture capitalist. This
contains all the terms and conditions agreed between them. This agreement is written on
a stamp paper, signed by both and is registered with the government agency. It is treated
as a valid evidence before a court of law in case of a dispute.

Ms. Shikha Dabral

Assistant Professor (IITM)
 Forms of Ownership [also refer to Chapter-9, Legal Forms of Organization of book
Entrepreneurship Development by T.N. Chabbra, Fifth Edition]

A key first step for any entrepreneur is setting up an organization that will be used to formally
embark on the business journey, but many new business owners struggle to identify the best way
to move forward. These are the most common ways to organize a business, from the simplest to
the most complex.

Sole Proprietorship

A sole proprietorship is the most basic form of business ownership, where there is one sole
owner who is responsible for the business. It is not a legal entity that separates the owner from
the business, meaning that the owner is responsible for all the debts and obligations of the
business on a personal level. In exchange for that liability, the owner keeps all the profits gained
from the business. This form of business ownership is easy and inexpensive to create and has
few government regulations, making it a more flexible type of ownership with complete control
at the discretion of the owner. In addition, profits are taxed once, and there are some tax breaks
available if the business is struggling. Sole proprietorships often are limited to the resources the
owner can bring to the business. For these reasons, sole proprietorships are often most
appropriate during the early stages of a business where the owner has little capital/resources to
work with but also has few debts to pay.

Partnership

Partnerships are a form of business ownership where two or more people act as co-owners. There
are two forms of partnerships, which are General Partnerships and Limited partnerships,
differentiated primarily by the liability coverage by the owners. In a general partnership, all
owners of the business have an unlimited liability in the business (the same as a Sole
Proprietorship). For a limited partnership, at least one of the partners has a limited liability,
meaning they are not personally responsible for the debts of the business. Regardless of the type
of partnership, they are relatively easy and cheap to create, have few government regulations and
are only taxed once, like a sole proprietorship. The added benefit of a partnership is the
combination of knowledge and resources that are brought to the table thanks to the additional
owners. Profits do have to be shared between owners and there is always the potential for

Ms. Shikha Dabral

Assistant Professor (IITM)
conflicts to arise between partners over business decisions. This type of ownership is often useful
in the early stages of the business where multiple people are involved. Due to the sharing of
profits and additional resources, this type of ownership is often expected to yield higher growth
rates then a sole proprietorship.

Corporations

Walmart is currently the world’s largest corporation by revenue.

Unlike the previous two examples, Corporations are a form of ownership that is a legal entity
separate from its owners. This creates a limited liability for all owners, but results in a double
taxation on profits (first as a corporate income tax, then as a personal income tax when the
owners take their profits). Corporations tend to have an easier time raising capital than sole
proprietors or partners due to greater sources of funding made available to them, such as selling
stock. However, this results in greater government regulations for corporations, such as
requirements for more extensive record keeping. In addition, setting up a corporation is much
more difficult, requiring more resources and capital to cover expenses and create legal
documentation. This ownership form is best suited for fast growing or mature organizations that
have owners looking for limited liability.

Limited Liability Company

A form of business ownership that is taxed like a partnership but enjoys the benefits of a limited
liability like a corporation is a “limited liability company”. In comparison to a corporation, it is
simpler to organize and does not receive double taxation. This form of ownership is usually
adopted by a group of professionals such as accountants, doctors and lawyers.

Ms. Shikha Dabral

Assistant Professor (IITM)
Franchising

Franchising is a form of ownership far different from the ones previously mentioned. This form
of ownership allows a franchisee to borrow the franchisor’s business model and brand for a
specified period. It comes with a list of advantages including: training on how to operate your
franchise, systems and technologies for day-to-day operations, guidance on marketing,
advertising and other business needs, and a network of franchise owners to share experiences
with.

The main disadvantages to this ownership structure are franchising fees, royalties on sales or
profits, and tight restrictions to maintain ownership. Franchise owners also have limited control
over their suppliers they can purchase from, are forced to contribute to a marketing fund they
have little control over. If a franchisee wants to sell their business, the franchisor must approve
the new buyer.

Co-operatives

Cooperatives are organizations that are owned and controlled by an association of members. This
form of ownership allows for a more democratic approach to control where each share is worth
the same amount of votes, similar to a corporation with common stock. It also offers limited
liability to its owners and equal profit distribution based on ownership percentage. But, the
democratic approach to decision making results in delay in the decision-making process as
participation from all association members is required. Conflicts between members can also arise
that can have an adverse impact on the efficiency of the business. Co-operatives are often used
when individuals or businesses decide to pool resources to achieve a common goal or satisfy a
common need, such as employment needs or a delivery service.

Ms. Shikha Dabral

Assistant Professor (IITM)