Lecture 14

Entrepreneurship Development
HME732
Dr. Payal Sharma

School of Basic Sciences
Indian Institute of Information Technology Una
Himachal Pradesh
Sickness in Small Businesses
According to the criteria accepted by the
Reserve Bank of India, “a sick unit is one
which has reported cash loss for the year of its
operation and in the judgment of the financing
bank is likely to incur cash loss for the current
year as also in the following year.”
16-Nov-22 HME732: Entrepreneurship Development 2

Industrial Sickness – Special Provisions Act, 1985
• The government defined industrial sickness for the first time in the Sick Industrial
Companies (Special Provisions) Act, 1985.
• According to this Act, a medium or large (i.e. non-SSI) company was defined as
sick if:
(1) it was registered for at least 7 years (later reduced to 5 years)
(2) it incurred cash losses in the current year and the preceding year.
(3) its entire net worth (i.e. paid-up capital and reserves) was eroded.
• A company is regarded, as weak or incipiently sick on the erosion of 50% of its
peak net worth during any of the preceding five financial years.
• Industrial sickness has been redefined in the Companies (Second Amendment)
Act, 2002.
Causes of Industrial Sickness:
• The reasons for industrial sickness in India can be divided into two
categories:
• Internal causes – which includes
• Faults at the initial levels of planning and construction.
• Financial constraints.
• Labour and management problems.
• Defective, inefficient, and age-old machinery.
• Incompetence on the parts of entrepreneurs.
• Unskilled laborers to work with modern technology.

• External causes are those which are beyond the control of its management
and include –
• Sudden changes in government policies.
• Erratic supply of inputs.
• Non-availability of energy resources and raw materials.
• Increased competition.
• Power cuts.
• Demand and credit restraints.
• Delay on the part of the Government in sanctioning licenses, permits, etc.
• As suitable remedies for the sick industries, the government provides liberal
policies, financial assistance from banks and other institutes, tax exemption,
etc.
Revival and rehabilitation measures
• The government undertakes the following measures to revive and
rehabilitate the sick industrial units.
1. Financial Assistance
• As per the directions of the RBI, the commercial banks granted the
following concessions to sick industrial units:
• Rescheduling of loans and interest
• Grant of additional working capital
• Waiving off interest on loans
• Moratorium on payment of interest, etc.
2. Organizational measures
• The different organizational measures are given below:
• State-level inter-institutional committees: These are set up by the RBI
to ensure better coordination between the banks, state governments,
and other concerned financial institutions.
• Special Cell: It was set up by the Rehabilitation Finance Division of the
IDBI to assist the banks in reviving sick units.

3. Fiscal Concessions
• The government amended the Income Tax Act in 1977 to provide a
tax benefit to those units which take over the sick units for reviving
them.
• The government announced a scheme for the grant of excise loans to
sick/weak units.
• Under this scheme, selected sick units are eligible for excise loans not
exceeding 50% of the excise duty paid over the preceding 5 years.

Government Policy for Small Scale
Enterprises

Growth Strategies in Small Industry
• Every business, whether it’s big or small, goes through the 4 stages of
business growth:
• Startup
• Growth
• Maturity
• Renewal or decline

Stage 1: Startup Business
• In the startup phase, you’re spending most of your time and effort to bring
your business idea to life.
Stage 2: Business Growth
• Your business plan is paying off. Consumers know about your product or
service.
• Your revenue is increasing.
• Your business has less turnover. And your market share and customer base are
growing.
• After being in business for a few years, your company is going through rapid
growth.
Stage 3: Business Maturity
• For some business owners, the maturity stage may bring thoughts to
sell, merge or buy another company to expand.
Stage 4: Business Renewal or Decline
• When your business is in this stage of the life cycle, you have two
choices: sell or reinvest.
• If you decide to sell, you’ll want to work with the right people to make
sure you’re following state and federal finance laws.

• Reinvesting in your company can result in its renewal.
• Ideally, you want to start this process before your business is in a
decline.
• For example, if you notice there’s a change in the industry, modify
your strategy.
• If your business is already in a decline and you decide to reinvest,
you’ll want to quickly find out how you can address the new needs of
your target market.

Types of Growth Strategies
• 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.
a. Expansion through Market Penetration: The scheme for exchanging an old scooter
for new one introduced by LML, for example, is a form of market penetration.
b. Expansion through Market Development: It implies exploring new markets for the
existing product. In order to increase the sale of existing product, the enterprise
makes searches for new customers.
c. Expansion through Product Development and/or Modification: It implies developing
or modifying the existing product to meet the requirements of the customers.
• Introduction of plastic bottles for selling refined oil in addition to lose sales is an
example of product development /modification.

2. Diversification:
• 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.

• In the private sectors, Kelvinator India Limited which was originally a
refrigerator manufacturer diversified its product line into mopeds.
• Similarly, Larsen and Toubro (L&T), an engineering company,
diversified into cement.
• LIC’s diversification into mutual funds and SBI’s merchant banking are
the examples of diversification adopted by the public sector in India.

3. Joint venture:
• 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.

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

• If both organizations dissolve their identity to create a new
organization, it is called consolidation.
• The other terms used for M&A are absorption, amalgamation, and
integration.
• M&A are more popularly known as takeovers.
• For more than three decades after Independence, the normal route of
growth was through licensing and setting up new projects.

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

5.Sub-Contracting:
• 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.’
• 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.

6. Franchising:
• 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.

• Types of Franchising:
• Franchising arrangements broadly classified into three types:
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 to 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.
• 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.

Lecture 14

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Lecture 14

Uploaded by

Copyright:

Available Formats

Entrepreneurship Development

Dr. Payal Sharma

16-Nov-22 HME732: Entrepreneurship Development 2

16-Nov-22 HME732: Entrepreneurship Development 4

16-Nov-22 HME732: Entrepreneurship Development 7

16-Nov-22 HME732: Entrepreneurship Development 8

16-Nov-22 HME732: Entrepreneurship Development 9

16-Nov-22 HME732: Entrepreneurship Development 20

16-Nov-22 HME732: Entrepreneurship Development 22

16-Nov-22 HME732: Entrepreneurship Development 23

16-Nov-22 HME732: Entrepreneurship Development 24

16-Nov-22 HME732: Entrepreneurship Development 25

16-Nov-22 HME732: Entrepreneurship Development 26

16-Nov-22 HME732: Entrepreneurship Development 27

16-Nov-22 HME732: Entrepreneurship Development 28

16-Nov-22 HME732: Entrepreneurship Development 29

16-Nov-22 HME732: Entrepreneurship Development 30

16-Nov-22 HME732: Entrepreneurship Development 31

16-Nov-22 HME732: Entrepreneurship Development 32

16-Nov-22 HME732: Entrepreneurship Development 34

16-Nov-22 HME732: Entrepreneurship Development 35

16-Nov-22 HME732: Entrepreneurship Development 36

16-Nov-22 HME732: Entrepreneurship Development 37

16-Nov-22 HME732: Entrepreneurship Development 39

You might also like