Entrepreneurship Management Book

Entrepreneurship Management

Chapter - 1Entrepreneur

Introduction, Concept of entrepreneur, Definitions of entrepreneur , Features and characteristics of entrepreneur, Qualities of an entrepreneur, Functions of an entrepreneur. Traits of a good entrepreneur .

INTRODUCTION:

Generally speaking, entrepreneurship refers to person who establish his own business or industrial undertaking with a view to take profit. Entrepreneurship is the willingness to take risks and develop, organize and manage a business venture in a competitive global marketplace that is constantly evolving. An entrepreneurial spirit of innovation and ambition is essential to the process. Entrepreneurs are pioneers, leaders, innovators and inventors. They are dreamers and most importantly- doers.

The word entrepreneur has come from the France word “entreprendra” which means to undertake, to pursue opportunities to fulfil needs and wants through innovation to undertake business.

CONCEPT OF ENTREPRENEUR

As said above entrepreneur is used in various ways and various views. These views are broadly classified into three groups, namely risk bearer, organizer and innovator.

Entrepreneur as risk bearer: Richard Cantilon defined entrepreneur as an agent who buys factors as production at certain prices in order to combine them into a product with a view to selling it at uncertain prices in future. He illustrated a former who pays contractual incomes, which are certain to land owners and labourers, and sells at prices that are ‘uncertain’.

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P.H. Knight described entrepreneur to be a specialized group of persons who bear uncertainty. Uncertainty is defined as risk, which cannot be insured against and is in- calculable. He made distinction between certainty and risk. A risk can be reduced through the insurance principle, where the distribution of outcome in a group of instance is known, whereas uncertainty cannot be calculated.

Entrepreneur as an organizer: According to J Baptist Say “an entrepreneur is one who combines the land of one, the labour of another and capital of yet another, and thus produces a product. By selling the product in the market, he pays interest on capital, rent on land and wages to labourers and what remains is his/her profit”. Say made distinction between the role of capitalist as a financer and the entrepreneur as an organizer. This concept of entrepreneur is associated with the functions of coordination, organisation and supervision.

Entrepreneur as an innovator: Joseph A Schumpeter in 1934 assigned a crucial role of ‘innovation’ to the entrepreneur. He considered economic development as a dynamic change brought by entrepreneur by instituting new combinations of factors of production, i.e. innovations. The introduction of new combination according to him may occur in any of the following forms. (a) Introduction of new product in the market. (b) Use of new method of production, which is not yet tested. (c) Opening of new market. (d) Discovery of new source of raw materials. (e) Bringing out of new form of organisation.

Schumpeter also made distinction between inventor and innovator. An inventor is one who discovers new methods and new materials. An innovator utilizes inventions and discovers in order to make new combinations. Hence the concept of entrepreneur is associated with three elements risk- bearing, organizing and innovating. Hence an entrepreneur can be defined as a person who tries to create something new, organizes production and undertakes risks and handles economic uncertainty involved in enterprise.

DEFINITIONS OF ENTREPRENEUR:

Some more important definitions of entrepreneur

1. According to F.A.Walker: “Entrepreneur is one who is endowed with more than average capacities in the task of organizing and coordinating the factors of production, i.e. land, labour capital and enterprises”.

2. According to Gilbraith: “An entrepreneur must accept the challenge and should be willing hard to achieve something”.3. Peter F. Drucker defines an entrepreneur as one who always searches for change, responds to it and exploits it as an opportunity. Innovation is the basic tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or service.

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3. According to Max Weber: “Entrepreneurs are a product of particular social condition in which they are brought up and it is the society which shapes individuals as entrepreneurs”.

4. The dictionary of social science has defined entrepreneur from functional viewpoint. According to it “entrepreneur is a person 1) who exercise the function or 2) initiating coordinating controlling or institute major change in a business enterprise and or 3) bearing those risk of operation which arise from the dynamic nature of society and imperfect knowledge of the future which can cast through transfer calculation or elimination

5. Richard cotillion says “Entrepreneur is the agent who purchased the means of production for combination into marketable product”.

So we can say that entrepreneur a person who takes risk for establishing a new venture or business in order to create utility for the welfare of human being as well as for him of herself. She or he is always a person who seeks out opportunities and takes on challenges.

6. International Labour Organization (ILO) defines entrepreneurs as those people who have the ability to see and evaluate business opportunities, together with the necessary resources to take advantage of them and to initiate appropriate action toensure success.

FEATURES/CHARACTERISTICS OF AN ENTREPRENEUR:

An entrepreneur is a person who initiates a business venture. there are some essential feature of an entrepreneur which are describe below.

Risk taking capability: every business has risk of time money etc .so an entrepreneur must have the risk taking capability.

Creativity and innovation: an entrepreneur has an initiator possesses creativity and innovative power.

Need for achievement: the entrepreneur has strong desire to achieve the goal of business. he is always driven by the needs for achievement.

Need for autonomy: an entrepreneur does not like to be under anybody. it is the need for autonomy which drives a person to be an entrepreneur.

Internal locus of control: an entrepreneur believes in him his work. External locus of control: he also believes in fate for ultimate result. Self confident: an entrepreneur has confidence in him. Leadership capability: an entrepreneur must have leadership capability to lead

works under him Industriousness: a successful entrepreneur must have leadership capability to lead

workers working under him. Decision making capability: the entrepreneur has capability to take quick decision Adaptability: he has the capacity to adapt with any kind of situation that arise in the

enterprise

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Foresightness: The entrepreneurs have a good foresight to know about future business environment.

Others; the other feature are dynamism, ambition, education and training, long term involvement, future orientation.

QUALITIES OF SUCCESSFUL ENTREPRENEUR:

To become a successful as an entrepreneur in its business life, a businessman should possess a quite a number of essential qualities. Those are noted below:

Moderate risk taking: an entrepreneur always takes calculated risk to operate the organization

Hard work: an entrepreneur is very much hard worker, he or she always busy with various types work.

Accountability: a successful entrepreneur is accountable well as his associates always accountable to him.

Educated in real sense: successful entrepreneur is educated In real sense .he tries to implement his organizational objectives through his education.

Analytical mind: a successful entrepreneur is analytical minded. he scrutinizes every activity on the organization.

Dynamic leadership: a successful entrepreneur is always dynamic to operate the organization

Presence of mind: a successful entrepreneur is always at present of mind he is always aware of activities that to happening in the organization and around him

Accommodative: a good entrepreneur has the capacity to make his own place at every sector

Courageous and tactful: Corsages and techniques is very much essential for a successful entrepreneur

Maker of right decision: A successful entrepreneur makes right decision in right time in right place

Foresighted: a successful entrepreneur foresights the future and take decision accordingly

Right perception of things: A successful entrepreneur things in a right way Enjoy simple life: A successful entrepreneur always deals a simple life a general

people of the society Strong desired to success: A successful entrepreneur have a strong desire to success.

he is driven by the desire to success Innovation: innovation is the process of making new something. A successful

entrepreneur is innovative Self confidence: A successful entrepreneur is self confidence. does not really on other

for decision or fate Goal setting: a successful entrepreneur set the goal Keen observation: A successful entrepreneur always observes the origination Sociable: A successful entrepreneur is sociable person

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Team builder: A successful entrepreneur builds a suitable team Clean understanding: A successful entrepreneur clearly understands every things Ability to conceptualize: A successful entrepreneur is able to conceptualize the

reality Other: the other qualities are patience, optimistic ,strategist, etc

FUNCTIONS OF AN ENTREPRENEUR

An Entrepreneur has to perform a number of functions right from the generation of Idea up to the establishment of an enterprise. He also has to perform functions for successful running of his enterprise. Entrepreneur has to perceive business opportunities and mobilize resources like man, money, machines, materials and methods. The following are the main functions of an Entrepreneur.

1. Idea generation: The first and the most important function of an Entrepreneur is idea generation. Idea generation implies product selection and project identification. Idea generation is possible through vision, insight, keen observation, education, experience and exposure. This needs scanning ofbusiness environment and market survey.

2. Determination of business objectives: Entrepreneur has to state and lay down the business objectives. Objectives should be spelt out in clear terms. The Entrepreneur must be clear about the nature and type of business, i.e. whether manufacturing concern or service oriented unit or a trading business so that he can very well carry on the venture in accordance with the objectives determined by him.

3. Rising of funds: All the activities of the business depend upon the finance and hence fund rising is an important function of an Entrepreneur. An Entrepreneur can raise the fund from internal source as well as external source. He should be aware of different sources of funds. He should also have complete knowledge of government sponsored schemes such as PMRY,

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SASY,REAP etc. in which he can get government assistance in the form of seed capital, fixed and working capital for his business.

4. Procurement of machines and materials: Another important function of an Entrepreneur is to procure raw materials and machines. Entrepreneur has to identify cheap and regular sources of raw materials which will help him to educe the cost of production and face competition boldly. While procuring machineries he should specify the technical details and the capacity. He should consider the warranty, after sales service facilities etc before procuring machineries.

5. Market research: Market research is the systematic collection of data regarding the product which the Entrepreneur wants to manufacture. Entrepreneur has to undertake market research persistently to know the details of the intending product, i.e. the demand for the product, size of the arket/customers, the supply of the product, competition, the price of the product etc.

6. Determining form of enterprise: Entrepreneur has to determine form of enterprise depending upon the nature of the product, volume of investment etc. The forms of ownership are sole proprietorship, partnership, Joint Stock Company, co-operative society etc. Determination of ownership right is essential on the part of the entrepreneur to acquire legal title to assets.

7. Recruitment of manpower: To carry out this function an Entrepreneur has to perform the following activities.

(a) Estimating man power requirement for short term and long term.(b) Laying down the selection procedure.(c) Designing scheme of compensation.(d) Laying down the service rules.(e) Designing mechanism for training and development.

8. Implementation of the project: Entrepreneur has to develop schedule and action plan for the implementation of the project. The project must be implemented in a time bound manner. All the activities from the conception stage to the commissioning stage are to be accomplished by him in accordance with the implementation schedule to avoid cost and time overrun. He has to organize various resources and coordinate various activities. This implementation of the project is an important function of the Entrepreneur.

TRIATS OF A GOOD ENTREPRENEUR

The term ‘competence’ implies a person’s underlying characteristics leading to his/ her superior performance. It is good combination of various qualities and traits required to perform the job effectively. Entrepreneurs who possess the necessary competencies succeeds while those deficient in these competencies fail in their ventures.

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Some people believe that entrepreneurs are born not made. In other words, business family background is essential to success for entrepreneurs. Other people believe that entrepreneurs are not made born. According to some people, person which proper knowledge and skills acquired through education and experience can become successful entrepreneur. In other words resolve the controversy on what successful entrepreneurs, the Entrepreneurship development Institute of India (EDI). Following are the traits or good qualities of the entrepreneur:-

Initiation: given the demand of the situation, entrepreneur takes initiation to start an industry .

Watching for opportunity and take necessary action. Persistence: - he should go for extreme efforts to get rid of the problem. Information seeker:- ready to learn from his experience Quality conscious: - Always put effort to excel better than the existing standard of

performance. Commitment to work: - Accord upmost priority to accomplish the work. Efficiency lover: - tries to do things at the faster pace incurring minimum cost. Proper planning: - frames realistic business plans and follow them effectively. Self confidence: - A strong believer in his strengths and weakness. Assertiveness: - able to assert his issues. Persuasion:- succeeds in persuading other to do what he wants Efficient monitoring: - personally supervises the work to ensure that the work is

accomplished. Concern of employees and take proper action to improve the welfare of employees

working in his enterprises.Several other research studies have tried to identify the qualities and traits of successful entrepreneurs. In the study of entrepreneurial development in Madras city of India, J. Berna has stressed the following qualities of a good entrepreneur.

a. He is an enterprising individual. He is energetic, hardworking, resourceful, very alert to new opportunities, able enough to adopt to the changing condition.

b. He is also interested in expanding the scale of his operation by way of ploughing back his profit.

c. He welcome advanced technology.d. He well visualize the likely changes and ready to adapt them

According to McClelland the successful entrepreneurs are characterized by the 3 qualities:a. He is endowed with an unusual creativeness.b. He is enriched by high propensity.c. He has a strong need for achievement.

QUESTIONS:

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1. Define entrepreneur. Explain the feature and characteristics of an entrepreneur.2. Explain the different traits of a good entrepreneur.3. Explain the different functions of an entrepreneur.4. Write short notes:

a. Different Concepts of entrepreneurb. Qualities of a good entrepreneur.

Chapter – 2Entrepreneurship

Introduction, definitions of entrepreneurship, Nature and characteristics of

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entrepreneurship, Difference between entrepreneur and entrepreneurship, Advantages of entrepreneurship – to nation, to individual, Factors influencing entrepreneurship, Entrepreneur’s background and charectrastics.

INTRODUCTION

Entrepreneurship can be described as a process of action an entrepreneur undertakes to establish his enterprise. Entrepreneurship is a creative activity. It is the ability to create and build something from practically nothing. It is a knack of sensing opportunity where others see chaos, contradiction and confusion. Entrepreneurship is the attitude of mind to seek opportunities, take calculated risks and derive benefits by setting up a venture. It comprises of numerous activities involved in conception, creation and running an enterprise.

One of the qualities of entrepreneurship is the ability to discover an investment opportunity and to organise an enterprise, thereby contributing to real economic growth. It involves taking risk and making necessary investments under conditions of uncertainty and innovating, planning and taking decision so as to increase production in agriculture, business industry etc..

Entrepreneurship is the process of creating something different with value by devoting the necessary time and effort, assuming the accompanying financial, psychic, social risks and receiving the resulting rewards of monetary and personal satisfaction and independence. Word “Entrepreneur” stems from French Verb Entreprendre – means between; taker or go between .

DEFINITIONS OF ENTREPRENEURSHIP:

According to Peter Drucker Entrepreneurship is defined as ‘a systematic innovation, which consists in the purposeful and organized search for changes, and it is the systematic analysis of the opportunities such changes might offer for economic and social innovation.

According to B C Tandon, “Entrepreneurship means the function of creating something new , organising and co-ordinating and undertaking risk and handling economic uncertainty.

According to Frank Knight , Entrepreneurs attempt to predict and act upon change within markets. Knight emphasize the entrepreneur's role in bearing the uncertainty of market dynamics. Entrepreneurs are required to perform such fundamental managerial functions as direction and control.

According to Harvey Leibenstein, the entrepreneur fills market deficiencies through input-completing activities. Entrepreneurship involves "activities necessary to create or carry on an enterprise where not all markets are well established or clearly defined and/or in which relevant parts of the production function are not completely known.

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According to Israel Kirzner , the entrepreneur recognizes and acts upon market opportunities. The entrepreneur is essentially an arbitrageur. In contrast to Schumpeter's viewpoint, the entrepreneur moves the market toward equilibrium.

The Entrepreneurship Center at Miami University of Ohio has an interesting definition of entrepreneurship: "Entrepreneurship is the process of identifying, developing, and bringing a vision to life. The vision may be an innovative idea, an opportunity, or simply a better way to do something. The end result of this process is the creation of a new venture, formed under conditions of risk and considerable uncertainty."

NATURE & CHARACTERISTICS OF ENTREPRENEURSHIP:

(1) Innovation: A businessman, who simply behaves in traditional ways, cannot be an entrepreneur. Innovation involves problem solving and the entrepreneur is a problem solver. According to Schumpeter entrepreneurship is a creative activity. An entrepreneur is basically an innovator who introduces something new in the economy.

(2) High Achievement: People having high need for achievement are more likely to succeed as entrepreneurs. The achievement motive is, by assumption a relatively stable enduring characteristic of an individual. Achievement motive can be increased by deliberate efforts. Various studies on psychological roots of entrepreneurship reveal the presence of high achievement among successful entrepreneurs.

(3) Managerial Skill and Leadership: According to B.F. Hoselitz, managerial skills and leadership are the most important facets of entrepreneurship. Financial skills are only of secondary importance. A person who is to become an industrial entrepreneur must have more than the drive to earn profit. He must have the ability to lead and manage.

(4) Group Level Pattern: Entrepreneurial characteristics are found in clusters which may qualify themselves as entrepreneurial groups. Entrepreneurial activity is generated by the particular family background, experience as a member of certain groups and as a reflection of general values.

(5) Organisation Building: According to Harbison entrepreneurship implies the skill to build an organisation. Organisation building ability is the most critical skill required for industrial development. This skill means the ability to ‘multiply oneself’ by effectively delegating responsibility to others.

(6) Gap Filling Function: The most significant feature of entrepreneurship is gap filling. It is the job of the entrepreneur to fill the gap or to makeup the deficiencies which always exist in the knowledge above the production function. Some inputs like motivation and leadership are vague and their output is indeterminate. An entrepreneur has to Marshall all the inputs to realise the final product.

(7) Status Withdrawal: According to Hagen ‘creative innovation’ or change is the fundamental feature of economic growth. An entrepreneur is a creative problem solver interested in things in practical and technological realm. He feels a sense of increased

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pleasure when facing a problem and tolerates disorder without discomfort. In traditional societies, position of authority was granted on the basis of status, rather than individual ability. Hagen visualized an “innovative personality” in contrast to such authoritarian personality.

(8) A Function of Social, Political and Economic Structure: Entrepreneurs are not equally distributed in the population. Minorities have provided most of the entrepreneurial talent but all the minorities are not important sources of entrepreneurship. Entrepreneurial supply depends upon the four structure viz. limitation structure, Demand structure, opportunity structure and labour structure. However entrepreneurship depends on rather specific combinations of circumstances which are difficult to create and easy to destroy.

DIFFERENCE BETWEEN ENTREPRENEUR AND ENTREPRENEURSHIP

Though both the terms entrepreneur and entrepreneurship are almost similar they possess several differentiating terms with them. The differences between the entrepreneurs and entrepreneurship are as follows:-

Entrepreneur Entrepreneurship

An entrepreneur one who undertakes and operates a new enterprise and assumes some accountability for the inherent risks.

Entrepreneurship is the practice of starting new organizations, particularly new businesses generally in responses to identified opportunities.

Entrepreneur is often synonymous with founder.

Entrepreneurship ranges in scale from solo projects to major undertakings creating many job opportunities.

The person who starts and operates a business enterprise is an entrepreneur.

The process in which an entrepreneur starts and operates his business enterprise is entrepreneurship.

The entrepreneur is a coordinator as he coordinates all the three elements of production i.e. land, labor and capital.

Entrepreneurship is the coordination maintained by an entrepreneur.

The person who innovates something new is an entrepreneur.

The innovation of something new or the process of innovation is entrepreneurship.

He who leads an enterprise towards its vision thorough leadership, motivation is an entrepreneur.

The way in which an entrepreneur leads his manpower, motivates them for the achievement of the firms goal is entrepreneurship.

He who bears risk of the firm for the sake of making a reasonable profit is an entrepreneur.

The risk bearing practice that is done by an entrepreneur is entrepreneurship.

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From the above table we can easily distinguish between these two terms entrepreneur and entrepreneurship as they are far different from each other.

Advantages of Entrepreneurship - To an Individual

(a) Provides Self Employment for the entrepreneur (b) Entrepreneurship often provides an employment and livelihood for next generations as well. (c) Freedom to use own ideas – Innovation and creativity (d) Unlimited income / higher retained income – Bill Gates has risen to become richest in the world in a single life time through entrepreneurship (e) Independence (f) Satisfaction

Advantages - To the nation

(a) Provides larger employment (b) Results in wider distribution of (c) Mobilizes local resources, skills and savings (d) Accelerates the pace of economic (e) Stimulates innovation & efficiency

FACTORES INFLUENCING ENTREPRENEURSHIP

Entrepreneurship is a function of several factors. Four sets of factors that primarily influence entrepreneurship are as follows:

1. Economic Factors Capital, labour, raw materials and market are the main economic factors.

(a) Capital: Capital is one of the most important prerequisites to establish an enterprise. Availability of capital helps an entrepreneur to bring together the land of one, machine of another and raw material of yet another to combine them to produce goods. Therefore, capital is regarded as lubricant to the production process. Basically, capital is the life blood of any activity. If capital is available, people who have innovative ideas would like to put them into reality. Without having any obstacles, if capital is available, it will act as a lifeline to entrepreneurs. So, if capital is available, entrepreneurial activities will increase.

(b) Labour: The quality and quantity of labour is another factor which influences the emergence of entrepreneurship. Availability of labour makes entrepreneurship attractive. More than abundantly available labour, the presence of skilled labour force is very important because such a workforce is generally less mobile than other resources. If entrepreneurial activities are initiated near areas where labour is available, then it is easy to carry out the business more comfortably and profitably at low cost. This is why one finds textile units and machine tools manufacturing industries concentrated in certain cities like Coimbatore,

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Tiruppur, Ludhiana, Rajkot, Baroda, etc. just because of availability of skilled labour force required for such units.

(c) Raw Materials: Raw materials are required for establishing any industrial activity and therefore has an influence in the emergence of entrepreneurship. In the absence of raw materials, neither any enterprise can be established nor an entrepreneur can emerge. In some cases technological innovations can compensate for raw material inadequacies. The supply of raw materials is not influenced by themselves but becomes influential depending upon other opportunity conditions. The more favourable these conditions are, the more likely is the raw material to have its influence on entrepreneurial emergence.

(d) Market :It is not only the availability of capital, labour and raw materials but a readily available market that attracts entrepreneurial activities. Ultimately, it is the market that fetches revenue for any business. If sufficient market is not there, people will naturally hesitate to do business in a sector where there is no market. In addition to market opportunities, it is equally important to ensure future market opportunities for the emergence of entrepreneurial activities.

2. Social Factors :Development of entrepreneurship in a society may take place not just because of better economic factors but because of the presence of positive social factors. The following social factors influence the development of entrepreneurship in a society.

(a) Social norms and values: A society sets certain norms and values for the behaviour of people who are part of that society. If people violate or overstep these norms and values, certain restrictions are likely to be imposed on them. As a result, many people are forced to accept certain types of jobs and tasks that reflect the social environment. If the society has an open and flexible approach towards various types of jobs and works, then people will feel free to do whatever they like and even go in for innovation and creativity. When there is more openness and flexibility, entrepreneurship will not only emerge but also thrive.

(b) Role models: Societies that celebrate entrepreneurship and felicitate successful entrepreneurs in a way encourage many future generations to take up entrepreneurial activities. This is because successful businessmen prove to be role models for the society at large. For instance, states like Gujarat, Maharashtra and to some extent Tamil Nadu and Haryana have experienced better industrial development as a result of higher concentration of entrepreneurs compared to lesser industrialized states such as Orissa, Chhattisgarh, Madhya Pradesh and other Northeastern states.

(c) Social pressure: At times, entrepreneurship can emerge in a society due to social restriction too. If a society is orthodox, close and imposes a lot of restrictions, then it is likely to backfire. People who are at the receiving end are likely to react strongly and go in for change. In other words, because of negative pressure, more number of people would like to become entrepreneurs as a means of improving their status. It has been noticed that where people were marginalised, they became entrepreneurs just to prove their abilities and establish an identity in the society.

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(d) Respect and Status: If societies accord recognition and respect to people who dare to do something different and creative, it proves to be an encouragement for others to do something enterprising. Therein lies the emergence of entrepreneurship. In the traditional societies, people were looked down upon rather than encouraged for deviating from the set norms or regular occupation. This means there was no respect for change. Thus, societies where there is respect and recognition for people to do something different are more likely to see the development of entrepreneurial activities.

(e) Security: The view regarding role of social security in encouraging entrepreneurship development is rather divided. One school of thought is of the view that people are more prone to take entrepreneurial risks in secure social environments. On the other hand, there are others who argue that entrepreneurship will more likely emerge if there are turbulent conditions. In both cases, there is scope for entrepreneurship development.

3. Psychological Factors

(a) Need Achievement: According to David McClelland’s theory of need achievement, a constellation of personality characteristics which are indicative of high need achievement is the major determinant of entrepreneurship development. Therefore, if the average level of need achievement in a society is relatively high, one would expect a relatively high amount of entrepreneurship development in that society. McClelland gives the psychological concept of achievement motivation to account for the differences in response to similar conditions. Referring to the encouraging impact of achievement motivation training programmes organised by the Small Industries Extension Training Institute (SIET), Hyderabad McClelland argues that the need achievement can be developed through the intensive training programmes.

(b) Withdrawal of Status Respect: E.E. Hagen attributed the withdrawal of status respect of a group to the genesis of entrepreneurship. Giving a brief sketch of history of Japan, he concludes that she developed sooner than other non-Western society except Russia due to two historical differences. First, Japan had been free from ‘colonial disruption’ and secondly, the repeated long continued withdrawal of expected status from important groups (Samurai) in her society drove them to retreatism which caused them to emerge alienated from traditional values with increased creativity. This very fact led them to the technological progress entrepreneurial roles.

Hagen believes that the initial condition leading to eventual entrepreneurial behaviour is the loss Of status by a group. He postulates four types of events can produce status withdrawal

(a) The group may be displaced by force;

(b) It may have its value symbols integrated;

(c) It may drift into a situation of status inconsistency; and

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(d) It may not be accepted the expected status on migration in a new society.

He further postulates that withdrawal of status respect would give rise to four possible reactions and create four different personality types

(a) Retreatist: He who continues to work in a society but remains different to his work and position.

(b) Ritualist: He who adopts a kind of defensive behaviour and acts in the way accepted and approved in his society but no hopes of improving his position.

(c) Reformist: He is a person who forements a rebellion and attempts to establish a new society; and’

(d) Innovator: He is a creative individual and is likely to be an entrepreneur.

Hagen maintains that once status withdrawal has occured, the sequence of change in personality formation is set in motion. He refers that status withdrawal takes a long period of time – as much as five or more generations to result in the emergence of entrepreneurship.

4. Government Actions

The government by its actions or failure to act also does influence both the economic and non-economic factors for entrepreneurship. Any interested Government in economic development can help, through its clearly expressed industrial policy, promote entrepreneurship in one way or other. By creating basic facilities, services and utilities and by providing incentives and concessions, the Government can provide the prospective entrepreneurs a facilitative socio-economic setting. Such conducive setting minimises the risks which the entrepreneurs are to face. Thus, the supportive actions of the Government appear as the most conducive to the entrepreneurial growth. This is true of the Indian entrepreneurs also.

ENTREPRENEUR’S BACKGROUND & CHARACTERISTICS

1. Family Environment – In most cases, people follow the footstep of father. A businessman’s son takes up business and a salaried person’s son tries to find a job. So, if a family has had a tradition of entrepreneurship, later generations also follow the step of their ancestors, like the Gujaraties and Marwaries. Conversely, if a family has had a bad experience with entrepreneurship, it is unlikely that next generation will be very entrepreneurial.

2. Education – Education has no correlation with entrepreneurial spirit. If at all there is one, it seems to be inverse. Most of the entrepreneurs come from low education background. Educated people who get decent job rarely prefer comfort of salaried job. It is only those who are unable to find a living for themselves eventually try their hands at new business. For long long years, due to problems of licence, quota and inspector raj, most educated people

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preferred govt job, for it symbolized power, comfort, social status and for the people with low scruples, money too. However, trend is slowly changing. With business environment becoming easier and govt officials’ powers being on the wane, many educated people are also beginning to venture into entrepreneurship

3. Age – There are people who start as early as probably 10 and some others after their retirement. Harland David Sanders , better known as Colonel Sanders (not a Army Colonel but an honorary one) started his famous Kentucky Fried Chicken business quite late in his varied career. But commonly, men are often in the age group of 25 – 35 and women in the age group of 30– 45.

4. Physical Attributes – Have absolutely no correlation with entrepreneurial spirit.

5. Marital Status – No direct correlation but going by the age group, most entrepreneurs are married.

6. Working History – Entrepreneurs quite often have some working experience as a salaried employee in the field of their venture. It always helps to learn a little about business before putting your money in. Sindhi community follows this practice assiduously.

7. Family Contacts – Family contacts in business world reduce the risks and help the entrepreneur.

8. Professional Contacts – Professional contacts again help. IIT and IIM graduates venturing into entrepreneurship often get help from their peer and seniors.

9. Personal values

10. Lifestyle – Most entrepreneurs are fond of good things in life but are willing to wait till they strike rich. In the interim they are willing to rough it out.

QUESTIONS:

1. Define Entrepreneurship. Explain the nature and characteristics of entrepreneurship.2. Explain the factors influencing entrepreneurship.3. Explain the difference between entrepreneur and entrepreneurship.4. What are the different entrepreneurial background and their charectrastics?

Chapter – 3Concept of Intrapreneur

Introduction, Definition, Characteristics of intrapreneul environment, difference between entrepreneurship and intrapreneurship, Advantages and disadvantages between entrepreneurship and intrapreneurship ,

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A new breed of corporate have come together in large organisations driven by high technology, increasingly global competitive pressures, New market and need for Innovation, , timely action in rapid changing environment. The subject of numerous books and countless articles theses newly idealised paragons are individuals who achieve entraprenual success within large organisation, often against all odds because of ingrained system of control and analysis and they are increasingly called Intrapreneurs

An intrapreneur is someone who works within a company to develop an idea into a workable product. Intrapreneurs are given a high level of autonomy for their projects by the companies they work for and they are often said to be acting essentially like entrepreneurs without the risks associated with being an entrepreneur. The concept of intrapreneurship dates to the mid 20th century, when several American companies started to encourage the development of small working groups within the company to work on projects and develop new ideas.

Like an entrepreneur, an intrapreneur is driven, motive, creative, and able to think outside of the box. He or she must be able to examine an idea, identify its merits, and work on developing the idea into something workable in the real world. Intrapreneurs learn from their experiences as they develop new projects and they take lessons from both successes and failures. They typically also have a small support team taken from co workers at the organization they work for, with the intrapreneur assembling a team which will be most suited to a particular project.

Unlike entrepreneurs, intrapreneurs are far less exposed to the risk of failure. They have the substantial finances of the company back their efforts, and they can also take advantage of connections, experience, and skills available to the company. This can make intrapreneurial projects far more likely to succeed and it means that people can afford to sink substantial resources into a project to push it as far as possible.

DEFINITION AND MEANING:

Intrapreneur is defined as ‘any of the dreamers who do ‘. They are responsible for creating innovation of any kind within in the organisation.

The intrapreneur may be a creator or inventor but he is always a dreamer who finds out to turn an idea into a profitable reality. Without them innovation remains merely a potential for the future.

CHARECTERISTCS OF INTRAPRENEUL ENVIRONMENT

IN order to establish a successful Intapreneural environment, the organisation must have the following features:

1. Innovative Ideas: The organisation should encourage innovative ideas and operate on the frontier of technology.

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2. Encourage: The new ideas must be encouraged, supported and experimented in corporate organisation on an ongoing basis.

3. Initial Opportunity Parameters: The organisation should make sure that there are no initial opportunity parameters inhabiting free creative problem solving.

4. Availability Of Resources: Money and Human resources must be available on an ongoing basis. Resources should be easily accessible to the intrapreneur.

5. Encourage Team Work: For the success of intrapreneul activities in the organisation a multi-discipline team work approach need to encourage.

6. Evaluation: The Company should set a long time horizon for evaluating the success of intrapreneurial activities.

7. No force: The spirit of intrapreneurship cannot be forced on individuals but they should originate.

8. Reward: The organisation should have a system of rewarding the intrapreneur so that he is motivated further to contribute to the growth of the company.

9. Alteration: The intrapreneur should be free to alter plans in order to achieve successes as he sees it . He should not be forced to reach the corporate goals by any means.

10. Support of top management: The top management must wholeheartedly support and encourage the intrapreneul activity. Without their support a successful intrapreneul environment cannot be created in an enterprise.

INTRAPRENEURAL QUALITIES

(1) Innovator: The intrapreneur should possess qualities of innovation. He should be creative and understand the internal and external environment.(2) Visionary: An Intrapreneur should be a visionary leader. He should be a dreamer and a seeker. He has to work against all odds to achieve his vision.(3) Knowledgeable: In order to analyse the environment an intrapreneur should be knowledgeable.(4) Flexibility: Intrapreneur should be flexible and create management options.(5) Encourage Team Work: In order to achieve good results an intrapreneur must encourage team work. He cannot work in isolation.(6) Diplomatic: He should be a good diplomat. He should not cut or kill but safeguarding the interest of all he should find an amicable solution.(7) Open to Discussion and Idea: Intrapreneur should encourage open discussion. The success will depend on the degree of openers of the intrapreneur.(8) Motivator: He should be a motivator and build a coalition of supporters.

SIMILARITIES AND DIFFERENCES BETWEEN ENTREPRENEURSHIP AND INTRAPRENEURSHIP

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Unlike the entrepreneur, the intrapreneur acts within an existing organization. The intrapreneur is the revolutionary inside the organization, who fights for change and renewal from within the system. This may give rise to conflicts within the organization, so respect is the necessary key in order to channel these conflicts and transform them into positive aspects for the organization. Even though intrapreneurs benefit from using the resources of the organization for the implementation of the emerging opportunities, there are several motives why innovation is more difficult to implement in an existing organization, such as

The size: the bigger the organization the more difficult it is to have an overview of the actions of every employee

Lack of communication: Specialization and separation, help in concentrating on the areas of interest, but hinder communication.

Internal competition: Internal competition amplifies the problem because instead of sharing the knowledge with others it borders the knowledge sharing. Everyone wants to keep the information for themselves.

Feedback received in case of success/mistake: Costs in case of failure are too great and the reward for a successful outcome too small. Intrapreneurs must be allowed to commit mistakes, because such Mistake inevitable part in the entrepreneurial process. The recognition of success is also very rare. No company provides payment in advance for what an entrepreneur might accomplish, but a lot of them like to talk about the concept of intrapreneurship and expected their employees to get involved and assume their risk. But finally, when motivated employees get involves and has success their only reward is a small bonus.

Dullness: Many companies are slow and reluctant to change. Intrapreneurs bump many times into the well known sentence “We always did it this way”, which leaves little or no space to creativity. The willingness to try new things appears only when the company's short comings become apparent, but even so they don’t give room to an innovative leadership.

Hierarchies: Organizational hierarchies compel employees to ask permission for actions that fall outside their daily duties. The more complex the hierarchy the more difficult it is to impose change. Hierarchies have also tended to create a short term thinking have also tended to create a short-term thinking. Employees on lower hierarchical levels have a “Victim-Mentality” due to a reduced area of action and reduced responsibilities.

ENTREPRENEURSHIP AND INTRAPRENEURSHIP: ADVANTAGES AND DISADVANTAGES

ENTREPRENEURSHIPADVANTAGES DISADVANTAGES•You are your own boss - independency• The income increases• You have the chance to be original

• Money pressure – giving up on thesecurity of a regular pay check• Less benefits as the business is new

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• You have part of excitement and adventure• There are a lot of possibilities• Salary potential – you decide upon yourown salary

• Long working hours• Mistakes are magnified• All decisions must be made alone

INTRAPRENEURSHIPADVANTAGES DISADVANTAGES• Ability to stay in a friendly, well knownenvironment• Practicing your skills within an organization – lower risk• Using companies resources, good name, knowledge• Access to customers, infrastructure

• Reward may not be up to expectation• Innovation may not be appreciatedaccordingly• You can be innovative but to a certainlimit – you are not your own boss

CHARACTRASTICS OF INTRAPRENEUR

Self Motivated: Intrapreneurs are not only self motivated and goal oriented but also responds to corporate recognition and rewards.

Self-confident and courageous: Many intrapreneurs are pessimistic about the system, but optimistic about their ability to outwit as they are bold, self-confident and courageous.

Freedom: Intrapreneurs do not consider traditional status symbol seriously but treasures freedom.

Education: He is highly educated in technical skills. Systems: The intrapreneur dislikes systems but learns to manipulate it. He works out

the problem within the system or bypass it without learning.He is basically customer oriented.He is patient and willing to compromise changes.

COMPARISON BETWEEN TRADITIONAL/ENTRAPRENEUR AND INTRAPRENEUR

FACTOR TRADITIONAL MANAGER

ENTREPRENEUR INTRAPRENEUR

Primary motive Promotion and traditional corporate rewards

Independence the chance to be creative, and the opportunity to make money

Independence the chance to be creative, and the opportunity to move towards organisational and

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personnel successTime Focus Short term(to meet

budgets)Survival and long term (Five plus years growth)

In-between traditional managers and entrepreneurs (depending on need to meet deadlines)

Activity amount to risk

Delegation, conservative, concerned about status

Do it ones self. Not concerned about status. Extreme

Do it ones self. Not concerned about status. Moderate

Failure and mistake decisions

Tries to avoid mistakes and supervises

Deals with mistakes and decisions

Attempts to hide the risk unless it is ready

Risk Careful Moderate risk-taker Moderate risk-takerRelationship with others

Hierarchy as basic relation

Transactions and deal making as a basic relationship

Transactions within hierarchy.

QUESTIONS:

1. Define Intrapreneur . Explain the characteristics of intrapreneur.

2. Explain the difference and similarities of Intrapreneurship and entrepreneurship .

3. Explain the different intrapreneul qualities.

4. Short notes:

a. Characteristics of Intrapreneul environmentb. Advantages and disadvantages of entrepreneurship & intrapreneurship c. Difference between entrepreneur/ intrapreneur

Chapter – 4Classification and Types of Entrepreneurs

Introduction, Types of entrepreneurs, Socio-economic origin of entrepreneurship

Introduction

Entrepreneurs are found in every economic system and in every form of economic activity as well as in other social and cultural activities. In the initial stages of economic

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development, entrepreneurs tend to be shy and humble but as the development process picks up speed, they tend to become more enthusiastic and confident. They help make the business environment healthy and development oriented. Highly enthusiastic and innovative entrepreneurs exist only in developed countries as level of their -economic and technological development has reached a certain level whereas in developing and under-developed countries, imitative entrepreneurs are more successful.

However, the various types or entrepreneur are classified as under :

(I) According to the Types of Business

Entrepreneurs are found in various types of business occupations of varying size. We may broadly classify them as follows:

(i) Business Entrepreneurs: Business entrepreneurs are individuals who conceive an idea for a new product or service and then create a business to materialise their idea into reality. They tap both production and marketing resources in their search to develop a new business opportunity. They may set up a big establishment or a small business unit. They are called small business entrepreneurs when found in small business units such as printing press, textile processing house, advertising agency, ready-made garments, or confectionery. In a majority of cases, entrepreneurs are found in small trading and manufacturing business and entrepreneurship flourishes when the size of the business is small.

(ii) Trading Entrepreneur: Trading Entrepreneur is one who undertakes trading activities and is not concerned with the manufacturing work. He identifies potential markets, stimulates demand for his product line and creates a desire and interest among buyers to go in for his product. He is engaged in both domestic and overseas trade. Britain, due to geographical limitations, has demonstrated their ability in pushing many ideas ahead which promoted their business.

(iii) Industrial Entrepreneur: Industrial Entrepreneur is essentially a manufacturer who identifies the potential needs of customers and tailors product or service to meet the marketing needs. He is product-oriented man who starts in an industrial unit because of the possibility of making some new product. The entrepreneur has the ability to convert economic resources and technology into a considerably profitable venture. He is found in any industrial unit such as the electronic industry, textile units, machine tools or video cassette type plant and the like.

(iv) Corporate Entrepreneur: Corporate Entrepreneur is a person who demonstrates his innovative skill in organizing and managing a corporate undertaking. A corporate undertaking is a form of business organization which is registered under some statute of Act which gives it a separate legal entity. A trust registered under the Must Act, or a company registered under the Companies Act are examples of corporate undertakings. A corporate Entrepreneur is thus an individual who plans, develops and manages a corporate body.

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(v) Agricultural Entrepreneur: Agricultural Entrepreneurs are those entrepreneurs who undertakes such agricultural activities as raising and marketing of crops, fertilizers and other inputs of agriculture. They are motivated to raise the productivity of agriculture through mechanization, irrigation and application of technologies for dry land agriculture. They cover a broad spectrum of the agricultural sector and include agriculture and allied occupations.

(II) According to the Use of Technology

The application of new technology in various sectors of the national economy is essential for the future growth of business. We may broadly classify these entrepreneurs on the basis of the use of technology as follows:

(i) Technical Entrepreneur: A technical entrepreneur is essentially an entrepreneur of “craftsman type.” He develops new and improved quality of goods because of his craftsmanship. He concentrates more on production than marketing. He does not care much to generate sales by applying various sales promotional techniques. He demonstrates his innovative capabilities in matters of production of goods and rendering services. The greatest strength which the technical entrepreneur has is his skill in production techniques.

(ii) Non-Technical Entrepreneur: Non-technical entrepreneurs are those who are not concerned with the technical aspects of the product in which they deal. They are concerned only with developing alternative marketing and distribution strategies to promote their business.

(iii) Professional Entrepreneur: Professional entrepreneur is a person who is interested in establishing a business but does not have interest in managing or operating it once it is established. A professional entrepreneur sells out the running business and starts another venture with the sales proceeds. Such an entrepreneur is dynamic and he conceives new ideas to develop alternative projects.

(III) According to Motivation

Motivation is the force that influences the efforts of the entrepreneur to achieve his objectives. An entrepreneur is motivated to achieve or prove his excellence in job performance. He is also motivated to influence others by demonstrating his power thus satisfying his ego.

(i) Pure Entrepreneur: A pure entrepreneur is an individual who is motivated by psychological and economic rewards. He undertakes an entrepreneurial activity for his personal satisfaction in work, ego or status.

(ii) Induced Entrepreneur: Induced entrepreneur is one who is induced to take up an entrepreneurial task due to the policy measures of the government that provides assistance, incentives, concessions and necessary overhead facilities to start a venture. Most of the entrepreneurs are induced entrepreneurs who enter business due to financial, technical and

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several other facilities provided to them by the state agencies to promote entrepreneurship. A person with a sound project is provided package assistance to his project. Today, import restrictions, and allocation of production quotas to small units have induced many people to start a small-scale industry.

(iii) Motivated Entrepreneur: New entrepreneurs are motivated by the desire for self-fulfillment. They come into being because of the possibility of making and marketing some new product for the use of consumers. If the product is developed to a saleable stage, the entrepreneur is further motivated by reward in terms of profit.

(iv) Spontaneous Entrepreneur: These entrepreneurs start their business out of their natural talents. They are persons with initiative, boldness and confidence in their ability which motivate them to undertake entrepreneurial activity. Such entrepreneurs have a strong conviction and confidence in their ability.

(IV) According to Growth

The development of a new venture has a greater chance of success. The entrepreneur enters a new and open field of business. The customer approval to the new product gives them psychological satisfaction and enormous profit. The industrial units are identified as high growth, medium growth and low growth industries and as such we have “Growth Entrepreneur: and “Super Growth Entrepreneur.”

(i) Growth Entrepreneur: Growth entrepreneurs are those who necessarily take up a high growth industry. These entrepreneurs choose an industry which has sustained growth prospects.

(ii) Super-Growth Entrepreneur: Super-Growth entrepreneurs are those who have shown enormous growth of performance in their venture. The growth performance is identified by the liquidity of funds, profitability and gearing,

(V) According to Stage of Development

Entrepreneurs may also be classified as the first generation entrepreneur, modern entrepreneur and classical entrepreneur, depending upon the stage of development.

(i) First-Generation Entrepreneur: A first-generation entrepreneur is one who starts an industrial unit by means of an innovative skill. He is essentially an innovator, combining different technologies to produce a marketable product or service.

(ii) Modern Entrepreneur: A modern entrepreneur is one who undertakes those venture which go well along with the changing demand in the market. They undertake those ventures which suit the current marketing needs.

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(iii) Classical Entrepreneur: A classical entrepreneur is one who is concerned with the customers and marketing needs through the development of a self-supporting ventures. He is a stereotype entrepreneur whose aim is to maximise his economic returns at a level consistent with the survival of the firm with or without an element of growth.

(5) Classification Given by Danhof :

(i) Innovating entrepreneur : Innovative entrepreneurs are generally aggressive and possess the art of cleverly putting the attractive possibilities into practice. An innovating entrepreneur is one who introduces new goods, inaugurates new methods of production, discovers new market and re-organises the enterprise. He arranges money, launches an enterprise, assembles the various factors, chooses the competent managers and sets his enterprise go.

Schumpeter's entrepreneur is of this type. His entrepreneur belongs to that nation which has wide industrial base, modern banking facilities, rich infrastructure, up to date technology and the like. Innovative entrepreneurs do not exist in developing economies where lack of capital, technological know-how block the path of innovativeness.

In developed countries, people are highly developed and consistently look forward for change. They want to consume such products which do not commonly exist in the world. They want progress as they have achieved high level of development. Innovating entrepreneur played a key role in the rise of modern capitalism, through their enterprising spirit, hope of making money, and ability to recognise and exploit opportunities.

(ii) Imitative entrepreneurs : Imitative entrepreneurs are characterised by readiness to adopt successful innovations inaugurated by successful innovating entrepreneurs. Imitative entrepreneurs do not imitate the changes themselves, they only imitate techniques and technologies innovated by others. Such entrepreneurs are significant for under-developed economies because they put such economies on high rate of economic development. Entrepreneurs prefer to imitate the technology already existing somewhere in the world.

However, the talent of imitative entrepreneurs should not be under-estimated. Even imitative entrepreneurs are revolutionary and agents of change. They have ability to do things which have not been done before even though, unknown to them, the problem may have been solved in the same way by others. Innovative entrepreneur is creative, while imitative entrepreneur is adoptive.

(iii) Fabian entrepreneur: Fabian entrepreneurs are cautious and sceptical in experimenting change in their enterprises. Such entrepreneurs are shy, lazy and lethargic. They are imitative by nature but are not determined and also lack power. They imitate only when it becomes perfectly clear that failure to do so would result in a loss of the relative position of the enterprise.

(iv) Drone entrepreneur: Drone entrepreneurs are characterised by a refusal to adopt opportunities to make changes in production formulae even at the cost of severely reduced returns. They can suffer loss but are not ready to make changes in their existing production

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methods. When competition increases, they are pushed out of the market as it becomes uneconomical for them to exist and operate in a competitive market.

(6) According to Capital Ownership :

(i) Private entrepreneur : When an individual or a group of individuals set up an enterprise, arrange finance, bear the risk and adopt the latest techniques in the business with the intention to earn profits, he or the group is called us private entrepreneur/entrepreneurs.

(ii) State entrepreneur : As the name indicates, state entrepreneur means the trading or industrial venture undertaken by the state or the government itself.

(iii) Joint entrepreneur : Joint entrepreneur means the combination of private entrepreneur and state entrepreneur who join hands.

(7) According to Gender and Age : (8) According to Area :

(i) Man entrepreneur (i) Urban entrepreneur (ii) Woman entrepreneur (ii) Rural entrepreneur(iii) Young entrepreneur(iv) Old entrepreneur(v) Middle-aged entrepreneur

(9) According to Scale :(i) Large scale industry entrepreneur(ii) Medium scale industry entrepreneur(i) Small scale industry entrepreneur(ii) Tiny industry entrepreneur.

SOCIO – ECONOMIC ORIGIN Of ENTREPRENEURSHIP

Entrepreneurial environment constitutes both internal and external factors. Environment refers to all external factors which has an impact on the working of the firm. It refers to those aspect of the surrounding of the business enterprises and circumstances of business unit which affect or influence its activities and operations and decide its effectiveness.

A) ECONOMIC ORIGIN

Economic environment influences the entrepreneurship to a great extent. The business sectors has economic relation with the govt, capital market, household and with global sector. The success of any enterprises are decided by the economic environment. The important external factors that affect the economic environment of the business are as follow:

Economic Conditions: the general economic conditions prevailing in the country .i.e. national income, per capita income, economic resources, distribution of income and assets etc. are important determinants of the entrepreneurship environment. Business

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cycles and economic growth of the economy are important factors of economic development.

Economic System: the economic system of a country may be capitalistic , socialistic, communist or mixed. Government regulation of economic activities depends upon on the nature of the economic system

Economic Planning: economic planning deals with systematic and co-ordinated efforts on the part of the political authority to improve the effectiveness of the economy.

Economic infrastructure: economic infrasturture consist of the provision of roads and railways, hydroelectric works, etc, some attempts have been made to involve the private sector is some areas of the infrastructures power generation , roads constructions, building highways, and telecommunication but responsibility of infrastructure is with government sector. .

Availability of capital facilities: capital requirement is one of thye basic factor for any business . increase in capital investment leads higher output.

Labour: division of labour is very important factor for the development of the any business.

Per capita income: with help of more private entrepreneurs there can be higher level of per capita income.

B) SOCIO ORIGIN

Social environment is very comprehensive because it may include the total social factors with in which an business enterprises operates. Social environment includes people attitude, family background, religion, education etc. The factors are

Rural society: about 70% of the Indian people live in villages and Indian villages continue to be under developed even backward. Urban – rural gap is a reality of our society. The ruraliti4sfeels that though agriculture accounts for the major part’s of India’s national income.

Poverty: poverty of the masses ia an important features of the Indian social system. Despite the fact of having made considerable progress in the fields of agriculture and industrialization. A large number of population lives below poverty line.

Illiteracy and ignorance: illiterates constitute a major part of the Indian social system. Nearly 64% of the population continues to be illiterate. The faculty system of education has compounded the evil of illiteracy. The need is for more determined governmental action and strong social support in this respect.

Linguistic diversity: on the basis of language, Indian society stands divided into linguistic groups. The constitution of India recognize as many as 15 languages.

Caste and casteism: Communalism: the presence of communal tension and the periodic outbreak of

communal riots have been the bone of the Indian social system. Occupational Background.

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Regionalism. Traditions Problems of social communication.

QUESTIONS:

1. Classify the entrepreneurs based on their types.2. Write Short notes

a. Classify entrepreneurs based by Danhof b. Economic origin of entrepreneurshipc. Socio origin of entrepreneurship

Chapter – 5Women Entrepreneurship

Introduction, push – pull factors are women in business, Role of women as entrepreneurs, Five functions of women entrepreneurs, Leadership qualities, psychological barriers, problems of women entrepreneurs in India, How to develop women entrepreneurs, Schemes available for women entrepreneurs

Introduction

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Women Entrepreneurs may be defined as the women or a group of women who initiate, organize and operate a business enterprise. Government of India has defined women entrepreneurs as an enterprise owned and controlled by a women having a minimum financial interest of 51% of the capital and giving at least 51% of employment generated in the enterprise to women. Like a male entrepreneurs a women entrepreneur has many functions. They should explore the prospects of starting new enterprise; undertake risks, introduction of new innovations, coordination administration and control of business and providing effective leadership in all aspects of business.

Push-Pull factors and Women in business

Women in business are a recent phenomenon in India. By and large they had confide themselves to petty business and tiny cottage industries. Women entrepreneurs engaged in business due to push and pull factors. Which encourage women to have an independent occupation and stands on their on legs. A sense towards independent decision-making on their life and career is the motivational factor behind this urge. Saddled with household chores and domestic responsibilities women want to get independence Under the influence of these factors the women entrepreneurs choose a profession as a challenge and as an urge to do some thing new. Such situation is described as pull factors. While in push factors women engaged in business activities due to family compulsion and the responsibility is thrust upon them.

Till the turn of the century, man has enjoyed a dominant position. But change in position technological innovation and modern way of thinking can reduce the disparity between man and women, and bring about equality and equity between them, the need of the hour in women empowerment both through provision of employment and enterprise creation. Typologically, the former leader to endogenous empowerment and the latter give rise to exogenous empowerment.

Women entreprenurer’s have been making a significant impact in all segments of the economy in Canada, Great Britain, Germany Australia and US.

The areas chosen by women are retail trade, restaurants, hotels, education, cultural, cleaning insurance and manufacturing.

It is the group of women or single women running an enterprise or company in order to earn profit. Now days because of women empowerment women are stepping-stone into the industries and are taking the place of men. Now a day’s women’s are running several business like beauty parlours, switching shops, boutiques, etc.

Women entrepreneurs may be defined as a woman or a group of women who initiate, organize and run a business enterprise. In terms of Schumpeterian concept of innovative entrepreneurs, women who innovate, initiate or adopt a business activity are called business entrepreneur.

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The Government of India has defined women entrepreneurs based on women participation in equity and employment of a business enterprise. Accordingly, a woman entrepreneur is defined as an enterprise owned and controlled by a woman having a minimum financial interest of 51% of the capital and giving at least 51% of the employment generated in the enterprise to a woman.

They have made their marks in business because of the following reasons:

They want to improve their mettle in innovation and competitive jobs. They want the change to control the balance between their families and responsibility

and their business levels.

They want new challenges and opportunities for self fulfillment.

Role of women as an Entrepreneur’s:

1) Imaginative: It refers to the imaginative approach or original ideas with competitive market. Well-planned approach is needed to examine the existing situation and to identify the entrepreneurial opportunities. It further implies that women entrepreneur’s have association with knowledgeable people and contracting the right organization offering support and services.

2) Attribute to work hard: Enterprising women have further ability to work hard. The imaginative ideas have to come to a fair play. Hard work is needed to build up an enterprise..

3) Persistence: Women entrepreneurs must have an intention to fulfill their dreams. They have to make a dream transferred into an idea enterprise; Studies show that successful women work hard.

4) Ability and desire to take risk the desire refers to the willingness to take risk and ability to the proficiency in planning making forecast estimates and calculations.

5) Profit earning capacity: she should have a capacity to get maximum return out of invested capital.

A Woman entrepreneur has also to perform all the functions involved in establishing an enterprise.These include idea generation, and screening, determination of objectives, project preparation, product analysis, determination of forms of business organization, completion of formal activities, raising funds, procuring men machine materials and operations of business.

FREDRICK HARBISCON, HAS ENUMERATED THE FOLLOWING FIVE FUNCTIONS OF A WOMEN ENTREPRENEUR’S :

Exploration of the prospects of starting a new business enterprise. Undertaking a risk and handling of economic uncertainties involved in business.

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Introduction of innovations, imitations of innovations.

Co ordination, administration and control.

Supervision and leadership.

In nutshell, women entrepreneur are those women who think of a business enterprise, initiate it organize and combine the factors of production, operate the enterprise, undertake risk and handle economic uncertainties involved in running a business enterprise.

With education and training, the women have gained confidence to do all work, which was the prerogative of man and do it excellently, rather better than men. Over the years, the educated women have become ambitious, acquired experience and basic skills of competency and self-assurance.

Leadership Qualities

Some of the outstanding qualities of women entrepreneurs are as follows:• Accept challenges• Ambitious• Drive• Enthusiastic• Hard work• Patience• Industrious• Motivator• Skillful• Unquenchable optimism.• Adventurous• Conscious• Educated• Determination to excel• Keenness to learn and imbibe new ideas• Experienced• Intelligent• Perseverance• Studious

Psychosocial Barriers

Although some women entrepreneurs have excelled in their enterprise, the fear of success haunts women in general. Some psycho-social factors impeding the growth of woman entrepreneurship are as follows:

1. Poor self-image of women2. Inadequate motivation

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3. Discriminating treatment4. Faulty socialization5. Role conflict6. Cultural values7. Lack of courage and self-confidence8. Inadequate encouragement9. Lack of social acceptance]10. Unjust social-economic and cultural system11. Lack of freedom of expression12. Afraid of failures and criticism13. Susceptible to negative attitudes14. Non-persistent attitude15. Low dignity of labour16. Lacking in leadership qualities, Le., planning, organising, controlling, coordinating and directing.

The New Thrust

Earlier researches conducted indicate that several women are now willing to become entrepreneurs due to various factors. These factors can be broadly classified under two headings, namely, “Pull factors” and “Push factors.” Under the first category, the women “‘entrepreneurs choose a profession as a challenge and adventure with an urge to do something new, liking for business and to have an independent occupation. The other category of women takes up business enterprises to get over financial difficulties and responsibility is thrust on them due to family circumstances. However, the latter category forms a negligible percentage of the total women entrepreneurs. The new thrust given to the process of economic development of the country by the new dynamic leadership has created an allround enthusiasm and the new slogan of “March towards the twenty-first century” had gained popularity. But in this new enthusiasm a very vital sector of the society, which can contribute substantially towards the economic development of the country, is not given enough attention – women entrepreneurs. In fact the Harvard School experts feel that the basic quality of efficient management is futuristic outlook and a capacity to nurture and plan for the future or unknown. This comes naturally to women.

Therefore they feel that successful managers will be those who combine this feminist attribute of nurturing and futuristic planning with male – aggressiveness. But this inherent management talent of woman and her entrepreneurial skill go unrecognized and unaccounted, as it does not show profit or loss in monetary terms.

With the spread of education and new approaches/awareness, women entrepre-neurs are achieving higher level of 3Es, namely, engineering, electronics and energy, though the number of such units is not as large as it should be. But the very fact that women are putting up units to manufacture solar cookers as in Gujarat, small foundries in Maharashtra and T.V. capacitors in the industrially backward area of Orissa show that women if trained and given opportunities can venture in non-traditional industries. Even the so-called socially tabooed

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industrial activity of winemaking and selling is being done by women entrepreneurs in Mumbai. So today no field is unapproachable to the trained and determined modem Indian women.

Problems of Women Entrepreneurs in India

Women in India are faced many problems to get ahead their life in business. A few problems cane be detailed as;

1. The greatest deterrent to women entrepreneurs is that they are women. A kind of patriarchal – male dominant social order is the building block to them in their way towards business success. Male members think it a big risk financing the ventures run by women.

2. The financial institutions are sceptical about the entrepreneurial abilities of women. The bankers consider women loonies as higher risk than men loonies. The bankers put unrealistic and unreasonable securities to get loan to women entrepreneurs. According to a report by the United Nations Industrial Development Organization (UNIDO), “despite evidence that women’s loan repayment rates are higher than men’s, women still face more difficulties in obtaining credit,” often due to discriminatory attitudes of banks and informal lending groups (UNIDO, 1995b).

3. Entrepreneurs usually require financial assistance of some kind to launch their ventures – be it a formal bank loan or money from a savings account. Women in developing nations have little access to funds, due to the fact that they are concentrated in poor rural communities with few opportunities to borrow money (Starcher, 1996; UNIDO, 1995a). The women entrepreneurs are suffering from inadequate financial resources and working capital. The women entrepreneurs lack access to external funds due to their inability to provide tangible security. Very few women have the tangible property in hand.

4. Women’s family obligations also bar them from becoming successful entrepreneurs in both developed and developing nations. “Having primary responsibility for children, home and older dependent family members, few women can devote all their time and energies to their business” (Starcher, 1996, p. .The financial institutions discourage women entrepreneurs on the belief that they can at any time leave their business and become housewives again. The result is that they are forced to rely on their own savings, and loan from relatives and family friends.

5. Indian women give more emphasis to family ties and relationships. Married women have to make a fine balance between business and home. More over the business success is depends on the support the family members extended to women in the business process and management. The interest of the family members is a determinant factor in the realization of women folk business aspirations.

6. Another argument is that women entrepreneurs have low-level management skills. They have to depend on office staffs and intermediaries, to get things done,

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especially, the marketing and sales side of business. Here there is more probability for business fallacies like the intermediaries take major part of the surplus or profit. Marketing means mobility and confidence in dealing with the external world, both of which women have been discouraged from developing by social conditioning. Even when they are otherwise in control of an enterprise, they often depend on males of the family in this area.

7. The male – female competition is another factor, which develop hurdles to women entrepreneurs in the business management process. Despite the fact that women entrepreneurs are good in keeping their service prompt and delivery in time, due to lack of organisational skills compared to male entrepreneurs women have to face constraints from competition. The confidence to travel across day and night and even different regions and states are less found in women compared to male entrepreneurs. This shows the low level freedom of expression and freedom of mobility of the women entrepreneurs.

8. Knowledge of alternative source of raw materials availability and high negotiation skills are the basic requirement to run a business. Getting the raw materials from different souse with discount prices is the factor that determines the profit margin. Lack of knowledge of availability of the raw materials and low-level negotiation and bargaining skills are the factors, which affect women entrepreneur’s business adventures.

9. Knowledge of latest technological changes, know how, and education level of the person are significant factor that affect business. The literacy rate of women in India is found at low level compared to male population. Many women in developing nations lack the education needed to spur successful entrepreneurship. They are ignorant of new technologies or unskilled in their use, and often unable to do research and gain the necessary training (UNIDO, 1995b, p.1). Although great advances are being made in technology, many women’s illiteracy, structural difficulties, and lack of access to technical training prevent the technology from being beneficial or even available to females (“Women Entrepreneurs in Poorest Countries,” 2001). According to The Economist, this lack of knowledge and the continuing treatment of women as second-class citizens keeps them in a pervasive cycle of poverty (“The Female Poverty Trap,” 2001). The studies indicates that uneducated women donot have the knowledge of measurement and basic accounting.

10. Low-level risk taking attitude is another factor affecting women folk decision to get into business. Low-level education provides low-level self-confidence and self-reliance to the women folk to engage in business, which is continuous risk taking and strategic cession making profession. Investing money, maintaining the operations and ploughing back money for surplus generation requires high risk taking attitude, courage and confidence. Though the risk tolerance ability of the women folk in day-to-day life is high compared to male members, while in business it is found opposite to that.

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11. Achievement motivation of the women folk found less compared to male members. The low level of education and confidence leads to low level achievement and advancement motivation among women folk to engage in business operations and running a business concern.

12. Finally high production cost of some business operations adversely affects the development of women entrepreneurs. The installation of new machineries during expansion of the productive capacity and like similar factors dissuades the women entrepreneurs from venturing into new areas.

How to Develop Women Entrepreneurs?

Right efforts on from all areas are required in the development of women entrepreneurs and their greater participation in the entrepreneurial activities. Following efforts can be taken into account for effective development of women entrepreneurs.

1. Consider women as specific target group for all developmental programmes.2. Better educational facilities and schemes should be extended to women folk from

government part.

3. Adequate training programme on management skills to be provided to women community.

4. Encourage women’s participation in decision-making.

5. Vocational training to be extended to women community that enables them to understand the production process and production management.

6. Skill development to be done in women’s polytechnics and industrial training institutes. Skills are put to work in training-cum-production workshops.

7. Training on professional competence and leadership skill to be extended to women entrepreneurs.

8. Training and counselling on a large scale of existing women entrepreneurs to remove psychological causes like lack of self-confidence and fear of success.

9. Counselling through the aid of committed NGOs, psychologists, managerial experts and technical personnel should be provided to existing and emerging women entrepreneurs.

10. Continuous monitoring and improvement of training programmes.

11. Activities in which women are trained should focus on their marketability and profitability.

12. Making provision of marketing and sales assistance from government part.

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13. To encourage more passive women entrepreneurs the Women training programme should be organised that taught to recognize her own psychological needs and express them.

14. State finance corporations and financing institutions should permit by statute to extend purely trade related finance to women entrepreneurs.

15. Women’s development corporations have to gain access to open-ended financing.

16. The financial institutions should provide more working capital assistance both for small scale venture and large scale ventures.

17. Making provision of micro credit system and enterprise credit system to the women entrepreneurs at local level.

18. Repeated gender sensitization programmes should be held to train financiers to treat women with dignity and respect as persons in their own right.

19. Infrastructure, in the form of industrial plots and sheds, to set up industries is to be provided by state run agencies.

20. Industrial estates could also provide marketing outlets for the display and sale of products made by women.

21. A Women Entrepreneur’s Guidance Cell set up to handle the various problems of women entrepreneurs all over the state.

22. District Industries Centres and Single Window Agencies should make use of assisting women in their trade and business guidance.

23. Programmes for encouraging entrepreneurship among women are to be extended at local level.

24. Training in entrepreneurial attitudes should start at the high school level through well-designed courses, which build confidence through behavioral games.

25. More governmental schemes to motivate women entrepreneurs to engage in small scale and large-scale business ventures.

26. Involvement of Non Governmental Organisations in women entrepreneurial training programmes and counselling.

SPECIAL SCHEMES FOR WOMEN ENTREPRENEURS

With a view that Women entrepreneurs should come forward in industrial field and become self-sufficient, government and financial institutions have announced many schemes providing financial assistance.

1. Seed Capital Scheme:

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In order to start own business this scheme is undertaken by the government. Government provides funds at 10% to unemployed youths and women.

Funds for unemployed youth and women aged 18 – 35 years, with minimum qualification - std VIIth pass @ 10%

Maximum seed capital available is Rs. 5 Lakhs Assistance percentage is 10% to 15% of total fixed capital, 22.5% for

backward classes. Repayment period is seven years.

2. Prime Minister Employee Guarantee Scheme

Maximum age of 35 years, with a qualification of Xth pass Assistance by way of loans up to 95% of project cost 15% subsidy is made available Subsidy up to 15% or Rs. 7,500, whichever is lesser Provided by government of India Parents of the candidates cannot have income annual income exceeding Rs. 24,000/-

3. National Equity Fund

Scheme is implemented by National Bank or State Finance Corporation No condition for age or qualification Loan is granted for service as well as industry oriented purpose Candidate should contribute around 10% of the total cost of the project

4. Women Industries Fund Scheme

Women entrepreneurs get 15% seed capital of the total cost of the project The cost of the project should not exceed not more than Rs. 10lac. Women entrepreneurs should contribute at least 10% of total cost of

the project In case of partnership/ public limited, then the contribution of the women should be 51%

5. Single Window Scheme

To facilitate women entrepreneurs in getting term loans and working capital from one and same institution

Applicable for both male and female entrepreneurs This scheme is applicable to the project where total expense are upto 20lacs

(excluding working capital and marginal money) Loan has to be repaid within the period of ten years

6. District Industries centre scheme (DIC)

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The main object is to start industries in rural areas where the population is less than 1 Lac.

Investment in machinery up to Rs. 2 Lakh is allowed 20% of this investment is granted as seed capital For backward classes the seed capital is up to 30% The interest rate is 4% Remaining capital needs to be financed by banks or financial institutions

QUESTIONS:

1. Define women entrepreneurs. Explain the role of women as entrepreneurs.2. Explain the problems faced by women entrepreneurs in India.3. Explain the special schemes for women entrepreneurs.4. What are the different ways in developing women entrepreneurs in India?5. Short Notes

a) Push – pull factors and women entrepreneursb) Write a note on psychological characteristics

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Chapter – 6Motivation and Entrepreneurship

Introduction, meaning of motivation, factors of motivation, entraprenual ambition, Achievement motivation theory, Kakinada experiment, establishment of entraprenual systems

Introduction Entrepreneurial behaviour is the result of entrepreneurial motivation. Motivation refers to the inner urge that ignites and sustain behaviour to satisfy need. Motivation has been derived from the word ‘motive’ which implies the inner state of mind that activates provokes and direct our behaviour toward the goal. According to McFarland “Motivation refer to the way in which urges, drives, desires, striving, aspiration or needs direct control or explain the behaviour of human being.” Thus motivation may be defined as the process that motivate a person into action and induces him to follow the course of action till the goals are finally achieved. Motivation includes motives, behaviour and goal.

MEANING OF MOTIVATIONMotivation implies an inner state that cause a person to act toward the attainment of goals. It is an inspirational process of steering an individual’s inner drive and action toward goals. It causes a chain reaction. Motivation can be both positive and negative. Positive occurs when a person is inspired to act for earning some rewards and benefits. On the other hand negative motivation arises from fear or failure or frustration. It causes a person to seek protection.

FACTORS OF MOTIVATION

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GOALS MOTIVES BEHAVIOUR


Several studies have been undertaken to identify the factor that motivate people to sart their enterprises. P.N .Sharma has identified nine motivating factors which are as under.

1. Internal Factors Educational Background Occupational Experience Desire to work. Desire to branch out manufacturing. Family background.

2. External Factors Assistance from government. Assistance from financial institution. Availability of technology/ raw material Other factors demand of a particular product, utilization of excess money

earned from contractual estate business, started manufacturing to facilitate trading distribution system, government policies and many other factors.

The Internal factors constitute the personality of the entrepreneur and there by generate an inclination to adopt entrepreneurial activity. The presence of these factors is essential for the entrepreneurial activity to take place. The presence of internal factors is necessary condition for the entrepreneurial activity to take place. But the entrepreneurial idea cannot fructify or take real shape without a proper or conducive environment which provides support in terms of financial assistance, technology and raw material and infrastructural facilities. Among the internal motivation , the desire to do something creative was important. According to the study of P.N.Sharma revealed occupational experience as the most significant internal motivating factor. This experience was accumulated by the entrepreneurs either as a business executive in industrial concern or as a trader, consultant in the related field.

Technically and professionally qualified entrepreneur had establish an enterprises in the field of their specialization which amply proves that they were prompted by their qualification or specialization to initiate industrial activity.

Among the external factors, assistance from the financial and other governmental institutions was rated, the strongest motivator. Other factors includes availability of surplus funds, sick unit available at a cheap price, success stories of first generation entreprenures, support of friends and relatives. Prof R.A.Sharma has classified the factors which prompted entrepreneurs

A. Factors internal to the entrepreneur.

Strong desire to do something independent in life Technical knowledge and/ or manufacturing experience. Business experience in the same line.

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B. Factors external to the entrepreneur

Accommodation in industrial estates. Financial assistance. Machinery on hire purchase. Attitude of the government to help new units. Financial assistance from non government sources. Encouragement from big business Heavy demand Profit margin. Unsounded unit at a cheap prices

ENTREPRENEURIAL AMBITION

Another study on entrepreneurial motivation by M Chandra sekhar and M Gandhara Rao have classified the factors behind entrepreneurial growth into 3 categories. And Ambition of Entrepreneur is one of them

Main Ambitions of Entrepreneur are

To make money: to earn as much profit they can. To continue family business. To secure self employment/ independent living. To fulfill desire of self/wife/parents. To gain social prestige. Making of decent living. Self employment of children. Provide employment to other. Raise the level of economic development. Make use of idle time.

ACHIEVEMENT MOTIVATION THEORY

David c McClelland's motivational needs theory

American David Clarence McClelland (1917-98) achieved his doctorate in psychology at Yale in 1941 and became professor at Wesleyan University. He then taught and lectured, including a spell at Harvard from 1956, where with colleagues for twenty years he studied particularly motivation and the achievement need. He began his McBer consultancy in 1963, helping industry assess and train staff, and later taught at Boston University, from 1987 until his death. McClelland is chiefly known for his work on achievement motivation, but his research interests extended to personality and consciousness. David McClelland pioneered workplace motivational thinking, developing achievement-based motivational theory and

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models, and promoted improvements in employee assessment methods, advocating competency-based assessments and tests, arguing them to be better than traditional IQ and personality-based tests. His ideas have since been widely adopted in many organisations, and relate closely to the theory of Frederick Herzberg.

David McClelland is most noted for describing three types of motivational need, which he identified in his 1961 book, The Achieving Society:

achievement motivation (n-ach) authority/power motivation (n-pow) affiliation motivation (n-affil)

David McClelland's needs-based motivational model

These needs are found to varying degrees in all workers and managers, and this mix of motivational needs characterises a person's or manager's style and behaviour, both in terms of being motivated, and in the management and motivation others.

The need for achievement (n-ach)

The n-ach person is 'achievement motivated' and therefore seeks achievement, attainment of realistic but challenging goals, and advancement in the job. There is a strong need for feedback as to achievement and progress, and a need for a sense of accomplishment.

The need for authority and power (n-pow)

The n-pow person is 'authority motivated'. This driver produces a need to be influential, effective and to make an impact. There is a strong need to lead and for their ideas to prevail. There is also motivation and need towards increasing personal status and prestige.

The need for affiliation (n-affil)

The n-affil person is 'affiliation motivated', and has a need for friendly relationships and is motivated towards interaction with other people. The affiliation driver produces motivation and need to be liked and held in popular regard. These people are team players.

McClelland said that most people possess and exhibit a combination of these characteristics. Some people exhibit a strong bias to a particular motivational need, and this motivational or needs 'mix' consequently affects their behaviour and working/managing style. Mcclelland suggested that a strong n-affil 'affiliation-motivation' undermines a manager's objectivity, because of their need to be liked, and that this affects a manager's decision-making capability. A strong n-pow 'authority-motivation' will produce a determined work ethic and commitment to the organisation, and while n-pow people are attracted to the leadership role, they may not possess the required flexibility and people-centred skills. McClelland argues that n-ach people with strong 'achievement motivation' make the best leaders, although there can be a

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tendency to demand too much of their staff in the belief that they are all similarly and highly achievement-focused and results driven, which of course most people are not.

McClelland's particular fascination was for achievement motivation, and this laboratory experiment illustrates one aspect of his theory about the affect of achievement on people's motivation. McClelland asserted via this experiment that while most people do not possess a strong achievement-based motivation, those who do, display a consistent behaviour in setting goals:

Volunteers were asked to throw rings over pegs rather like the fairground game; no distance was stipulated, and most people seemed to throw from arbitrary, random distances, sometimes close, sometimes farther away. However a small group of volunteers, whom McClelland suggested were strongly achievement-motivated, took some care to measure and test distances to produce an ideal challenge - not too easy, and not impossible. Interestingly a parallel exists in biology, known as the 'overload principle', which is commonly applied to fitness and exercising, ie., in order to develop fitness and/or strength the exercise must be sufficiently demanding to increase existing levels, but not so demanding as to cause damage or strain. McClelland identified the same need for a 'balanced challenge' in the approach of achievement-motivated people.

McClelland contrasted achievement-motivated people with gamblers, and dispelled a common pre-conception that n-ach 'achievement-motivated' people are big risk takers. On the contrary - typically, achievement-motivated individuals set goals which they can influence with their effort and ability, and as such the goal is considered to be achievable. This determined results-driven approach is almost invariably present in the character make-up of all successful business people and entrepreneurs.

McClelland suggested other characteristics and attitudes of achievement-motivated people:

achievement is more important than material or financial reward. achieving the aim or task gives greater personal satisfaction than receiving praise or

recognition. financial reward is regarded as a measurement of success, not an end in itself. security is not prime motivator, nor is status. feedback is essential, because it enables measurement of success, not for reasons of

praise or recognition (the implication here is that feedback must be reliable, quantifiable and factual).

achievement-motivated people constantly seek improvements and ways of doing things better.

achievement-motivated people will logically favour jobs and responsibilities that naturally satisfy their needs, ie offer flexibility and opportunity to set and achieve goals, eg., sales and business management, and entrepreneurial roles.

McClelland firmly believed that achievement-motivated people are generally the ones who make things happen and get results, and that this extends to getting results through the organisation of other people and resources, although as stated earlier, they often demand too much of their staff because they prioritise achieving the goal above the many varied interests and needs of their people.

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KAKINADA EXPERIMENT

McClelland conducted Kakinada experiment in Kakinada town of Andhra Pradesh. 52 persons from business and industrial community from the Kakinada town were selected. They participated in an orientation programme conducted by the Small Industry Extension Training Institute (SIETI), Hyderabad. The experiment was design to stimulate the imagination and encourage introspection into personal motivation and community goals. The achievement development programme consisted of the following steps:

a) The individual strived to attain concrete and frequent feedback.b) The participation sought model of achievement i.e watched those who have performed

well and try to emulate them.c) The participants imagined themselves in need of success and challenge. They set

carefully planned and realistic goals.d) The trainees were asked to control day dreaming by thinking and taking to themselves

in a positive term.After 2 years the trainees were observed. It was observed that they performed better than those who did not attend the programme. McClelland concluded that the participant displayed the more active business behavior and worked for the longer hours. McClelland explain that the people with low achievement motivation are prepared to work hard for money or other such incentives but the people with higher achievement motivation work for status. He argue that people with high need for achievement possess the following attributes:

Prefer personal responsibility for decision. Are moderate risk taker. Possess interest in concrete knowledge of the result of decisions.

ESTABLISHMENT OF ENTREPRENEURIAL SYSTEMS

An entrepreneur, after making appraisal of the resources at his command, perceives a business opportunity for producing and marketing a product or services. After establishing an enterprises an entrepreneur is required to look after the operation of this enterprises over a period of time. An entrepreneur is expected to undertaken the following steps in his pursuit of setting up an enterprise

1) Searching for prospective business ideas or opportunities.2) Processing of these ideas and selecting the best idea.3) Collecting the required resources and setting up the enterprises.

1) Searching for prospective business ideas or opportunities: Promotional activities commence with search for prospective business idea and opportunities. The promoter is required to employ his imagination and foresight in preparing list of business ideas.

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Business idea may come to his mind at his own or he may depend on various sources like success stories of other entrepreneurs, excess demand for any product, producing import substitute product, study of project reports assistance from governmental agencies, visit to trade fair. Idea should be sound and practicable may relate to starting a new business or takeover of an existing enterprise. The idea must be viable and should ensure adequate return on investment. The business idea may originate from the following sources:

Market Observation: relevant knowledge, about various products, can be obtained with the help of market surveys. Based on the information collected, an assessment can be made about the Demand – Supply position of different products. Expert advice of salesmen, dealer, advertising agencies and commercial consultant may be considered while anticipating demand for the product.

Consumer Survey: the success or failure of any venture depends upon prospective consumers. Through surveys detailed information regarding taste, fashion, liking, disliking, when they will buy, where they will buy, where they will buy, from, at what prices they will buy etc is collected. Thus a product can be devised in such a manner so that it fits exactly into the requirement of the prospective buyer.

Keeping Track of the development: A prospective entrepreneur must keep his eyes and ear open. He should keep in touch with whatever is happening around especially concerning business idea, new products, changes in technology etc. in order to successful he must acquire whatever best that is available from anywhere. Sometime useful business ideas can be discovered by keeping in touch with the developments taking place in developed countries.

Assessing the market trends in terms of demand. Providing plate form for the meeting of large number of buyers. Assessing the attitude of competitor in a particular product Comparing the quality and prices of competing products. Establishing personal contact with the dealer. Promoting new ideas for increasing sales.

Scrutinizing Project Profiles: Various agencies, both government and private provide profiles of various project and industries. Through these profiles an entrepreneur can assess the technical, financial, managerial and market requirement of various projects

2) Processing of these ideas and selecting the best idea: under this head detailed investigation of the potential idea is carried on. This investigation can cover technical and commercial facilities.

Technical Feasibility: it is ascertained as to what extent it is possible to technically produce the product, conceived through the idea. Technical

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feasibility cover detail study with regard to the availability of the requisite technology and other input requirement

Commercial Feasibility: detailed study is carried on to know about the profitability of different ideas. This investigation includes projections about the probable idea about the demand, sales volume, cost of production, breakeven point and profitability expected under different business proposition. The idea selection for the product may be influenced by the following consideration:

Demand supply gap or the extent up to which demand exceeds supply. Product where profitability is more. Product where entrepreneur possesses marketing or manufacturing

experience. Product are to be used by the parent company for the assembly of final

product Product whose imports are discouraged by the government. Product which have got more export potential. Product enjoying various types of concession in the shape of subsidies

and incentives 3) Collecting the required resources and setting up the enterprises: an entrepreneur in

order to be successful is required to remain in touch with what is happening around. He is required to develop a sound and efficient system of collecting, recording and analyzing of market information. This system ensures availability of a right information at a right time to a right person. Entrepreneur as a decision maker is required to perform the following function:

The determination of objective of the enterprise. The development of organization. Secure adequate financial resources. The requisition of efficient technology. The development of the market for the product and devising of a new product. The maintenance of good relations with public authorities and with society at

large.All the above stated function is important but the function regarding finance, manpower and marketing, demands more attention of entrepreneur.

Questions:

1. Define motivation. Explain the factors of motivation.2. Explain David McClelland theory of motivation in detail.3. Write a note on Kakinada experiment.4. How can entraprenual systems be established

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Chapter – 7Theories of Entrepreneurship

Introduction, most common theories of entrepreneurship, Schumpeter theory, Max Weber theory and McClelland achievement theory, factors affecting entraprenual growth , Myths in entrepreneurship

Introduction The concept and the theories of entrepreneurship evolved more than two centuries have undergone major change. Yet the concept of entrepreneurship is not clear. With the advancement of science and technology it has undergone metamorphis change and emerged as critical in socio-economic development. Various writers have developed various theories on entrepreneurship. Joseph Schumpeter argued that the rate of growth in the economy depends to a greater extent on the activities of the entrepreneur and has probably put together emphasis on entrepreneur function than any other economist.

There are three schools of thought :1. The Economics School of Thought2. The Psychology School of Thought3. The Socio-Cultural School Of Thought

1. The Economics School of Thought.This school of thought may be conveniently divided into classical and neoclassical economists.

MOST COMMON THEORIES OF ENTREPRENEURSHIP

John Adair's Action-Centred Leadership model: Achievement-motivated managers are firmly focused on the Task, often to the detriment of the Individual and the Team. Affiliation-motivation people are Team and Individual centred. (Note that John Adair's Action-Centred leadership model is ©John Adair.)

Katherine Benziger's Thinking Styles model: Achievement-motivation is a double-frontal brain mode style; affiliation-motivation is right basal (rear); authority-motivation is arguably left basal (rear).

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DISC (Inscape, Thomas International, etc) system: Achievement-motivated people are 'D' profiles - results-driven, decisive, dominant, etc. Affiliation-motivated people are I (proactive) and S (reactive) profiles. Authority-motivated people are S and C profiles.

Hersey/Blanchard's Situational Leadership® model: Achievement-motivated people tend to favour the styles of the first and second modes ('telling' and 'selling'); affiliation-motivated people tend to favour the third mode ('participating'); and the authority-motivated people tend to favour the style of mode four ('delegating'). Please note that Situational Leadership® is protected intellectual property: Situational Leadership® is a trademark of the Centre for Leadership Studies. Situational Leadership II® is a trademark of The Ken Blanchard Companies. Use of material relating to Situational Leadership® and/or Situational Leadership II® requires licence and agreement from the respective companies.

McGregor XY Theory: Achievement-motivated people tend towards X-Theory style, due to their high task focus; there are plenty of exceptions however, and training definitely helps the n-ach manager to see the value of employing Theory Y style. n-pow managers are definitely Theory X. n-affil are typically Theory Y and if not can relatively easily be trained to be so.

Herzberg motivators and hygiene factors: n-ach people are more responsive to the Herzberg motivators (especially achievement obviously) than n-affil and n-pow people.

Classical Economists.

Adam Smith (1723-90), the celebrated Scotsman and classical economist, distinguished between the "undertaker" (a translation of the French "entrepreneur") who manages his own capital and receives profit and the "inactive capitalist" who receives interest

Richard Cantillon: 17th century

Defined entrepreneur as a agent who buys means of production at certain prices in order to combine them into a product that he will sell at prices that are uncertain at the moment at which he commits himself to his costs. Cantillon explain his concept of entrepreneurship in likeness to a farmer who takes risks of paying daily wages to labourers and fix his amount to the landlord and later selling his produce at an unknown future price. For that matter, the element of Risk is inherent due to price fluctuations in the market.

J B Say : Defined an entrepreneur as a creative problem solver interested in things more in practical and in technological area. He viewed an entrepreneur as an economic agent who unites all all means of production.. Labour, capital, land and who finds in value of products resulting from employment, reconstitution of entire capital that he utilizes , and the value of wages, interest and rent which he pays as well as profits belonging to him.

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Joseph Alois Schumpeter 1883-1950).

The school was spearheaded by Joseph Alois Schumpeter . To Schumpeter an entrepreneur is an innovator, one who carries out new combinations, introduces new products and production functions, opens new markets, conquers new sources of material etc. Thus anybody engaged in routine type of activities is no entrepreneur.

Joseph Schumpeter, an eminent economist, described entrepreneur as “one who seeks to reform or revolutionize the pattern of production by exploiting an innovation or more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of material or a new outlet of products”.

Thus, Schumpeter’s theory sees the potential profitable opportunities and exploits them. He is of the view that an entrepreneur doest not only desire to raise his consumption standard by earning handsome profits but aspires to find a private dynasty also. Therefore, according to Schumpeter, an entrepreneur is one who innovates, raises money, collects inputs, organizes talent, provides leadership and sets the organization.

Schumpeter, for the first time in 1943, assigned an important role of innovation to the entrepreneur. He did not equate entrepreneur with an inventor. An inventor creates a new product while Schumpeter’s entrepreneur exists if the factors of production are combined for the first time also. A distinction between an inventor and innovator has also been made by Schumpeter. Innovator utilizes discoveries in order to make new combinations.

According to Schumpeter, innovation leads to the introduction of a new product, in the market institutes new production technology which is not yet tested, new quality of product can be brought in, expanding the market by entering into new markets into which the specific product has not entered so far, discovering new source of supply of raw materials and helps in carrying out a new form of organization of a business venture.

Schumpeter’s theory is based on the following assumptions:

1. Existence of sufficient availability of capital.

2. Existence of developed banking system to avoid scarcity of capital.

3. Existence of high level developed technology.

4. Existence of private initiative, and broad based entrepreneurial process.

Considering the above assumptions, it can be inferred that applicability of Schumpeter’s theory is more in a developed economy and it may not be suitable for the underdeveloped economy. It is because in underdeveloped economies, the path of innovativeness is blocked by scarcity of capital and other facilities.

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Joseph Schumpeter’s innovation theory of entrepreneurship (1949) holds an entrepreneur as one having three major characteristics: innovation, foresight, and creativity. Entrepreneurship takes place when the entrepreneur

creates a new product

introduces a new way to make a product

discovers a new market for a product

finds a new source of raw material

finds new way of making things or organization

Schumpeter’s innovation theory however ignores the entrepreneur’s risk taking ability and organizational skills, and place undue importance on innovation. This theory applies to large-scale businesses, but economic conditions force small entrepreneurs to imitate rather than innovate.

Other economists have added a dimension to imitating and adapting to innovation. This entails successful imitation by adapting a product to a niche in a better way than the original product innovators innovation

Max Weber’s view on entrepreneurship

The sociological theory entrepreneurship holds social cultures as the driving force of entrepreneurship. The entrepreneur becomes a role performer in conformity with the role expectations of the society, and such role expectations base on religious beliefs, taboos, and customs.

Max Weber (1864-1920) held religion as the major driver of entrepreneurship, and stressed on the spirit of capitalism, which highlights economic freedom and private enterprise. Capitalism thrives under the protestant work ethic that harps on these values. The right combination of discipline and an adventurous free-spirit define the successful entrepreneur.

Weber's essay The Protestant Ethic and the Spirit of Capitalism is his most famous work. It is argued that this work should not be viewed as a detailed study of Protestantism, but rather as an introduction into Weber's later works, especially his studies of interaction between various religious ideas and economic behavior. In The Protestant Ethic and the Spirit of Capitalism, Weber puts forward the thesis that the Puritan ethic and ideas influenced the development of capitalism. Religious devotion has usually been accompanied by rejection of mundane affairs, including economic pursuit. Why was that not the case with Protestantism? Weber addresses that paradox in his essay.

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He defines "the spirit of capitalism" as the ideas and habits that favor the rational pursuit of economic gain . Weber points out that such a spirit is not limited to Western culture, when considered as the attitude of individuals, but that such individuals – heroic entrepreneurs, as he calls them – could not by themselves establish a new economic order, which was capitalism (Weber 3). Among the tendencies identified by Weber were the greed for profit with minimum effort, the idea that work was a curse and a burden to be avoided, especially when it exceeded what was enough for modest life. Weber writes, "In order that a manner of life well adapted to the peculiarities of capitalism could come to dominate others, it had to originate somewhere, and not in isolated individuals alone, but as a way of life common to whole groups of man .

According to Weber the Protestant ethic provides this mental attitude while Hinduism lacks such an attitude . The colonial rulers wanted to encourage European entrepreneurship in India before Weber’s theory suited them.

But in India researcher’s criticised it on some invalid assumptions , they are

1. There is a single system of Hindu value2. The Indian community have imbibed these values and have great response for them

and even practice them3. Even though with external pressures these values have not changed

McClelland’s Theory of Achievement Motivation

McClelland’s Theory of Achievement Motivation hold that people have three motives for accomplishing things: the need for achievement, need for affiliation, and need for power. Need for achievement and need for power drive entrepreneurship.

David McClelland (1917-1988) considers entrepreneurs as people who do things in a better way and makes decisions in times of uncertainty. The dream to achieve big things overpowers monetary or other external incentives.

McClelland’s experiment reveled that traditional beliefs do not inhibit an entrepreneur, and that it is possible to internalize the motivation required for achievement orientation through training.

David McClelland was an American who wrote that an entrepreneur is an individual who takes risks and brings innovation. McClelland also suggests that an entrepreneur is not characterized by routine tasks which are managed by usual managers , and situations of high risks such as gambling or betting. The entrepreneur takes personal responsibility for decisions preference of risk and interest in concrete knowledge of

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business and possible outcomes. According to McClelland , the driving force of an entrepreneur was the sole need to achieve. ( Need achievement school of thought)

18th -19th century 20th century

No separation of entrepreneur from capitalistFocus on market forces and “invisible hand”Driving force for entrepreneur viewed as profit maximization

Specific recognition of entrepreneur as entrepreneur

Chicago school (Knight)

Schumpeterian school (Schumpeter)

Austrian school (Kirzner)

1920s 1930s 1970s

Focus: entrepreneur as risk taker and capitalistDriving force: profit

Focus: entrepreneur as innovator and disrupter of equilibriumDriving force: n-arch

Focus: entrepreneur as discoverer and stabilizer of equilibriumDriving force: curiosity

FACTORS AFFECTING ENTREPRENEURIAL GROWTH

1. ECONOMIC FACTORS

a) Lack of adequate overhead facilities: Profitable innovations require basic facilities like transportation, communication power supply etc. They reduce cost of production and increase profit.

b) Non availability of capital: Inventions are capital oriented. In less developed countries most capital equipment have to be imported which involves foreign exchange which acts as a difficult problem.

c) Great risk : Risk is high in case of less developed countries as there is lack of reliable information, markets for good and services is small etc.

d) Non availability of labour and skills : Though there is abundant labour supply there is generally scarcity of skills at all levels.’

2. SOCIAL FACTORS

A society that is rational in decision making would be favorable for decision making. Education, research and training is given less importance in less developed countries therefore there is very little vertical mobility of labour.

3. CULTURAL FACTORS

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If the culture is economically or monetarily oriented entrepreneurship would be applauded and praised. In less developed countries people are not economically motivated. People have ample opportunities of attaining social distinction by non economic pursuits.

4. PERSONALITY FACTORS

In less developed countries the entrepreneur is looked upon with suspicion. Publicopinion in the less developed nations sees in the entrepreneur only a profit maker and exploited.

IMPORTANCE OF ENTREPRENEURSHIP IN DEVELOPED ECONOMY

The nature of a developing economy is quite different from a developed economy. The developing economy can be an agricultural country moving towards the industrialization or it may be the one where in the industry may be in its infancy lacking advance technology.

The modern era is an era of changes. The whole world is becoming a village due to the industrial revolution and fast developing communication technology. The globalization of industry and commerce is bringing a vast change in various aspects of life.

Economic development of a country is the outcome of purposeful human activity. The modern era is an era of changes. The whole world is becoming a village due to

the industrial revolution and fast developing communication technology. The globalization of industry and commerce is bringing a vast change in various aspects of life.

Economic development of a country is the outcome of purposeful human activity. Economic development is a highly dynamic process characterized by the pattern of demand shifts, new products are needed, appear for the production of goods within a country.

A developing country needs entrepreneurs who are competent to perceive new opportunities and are willing to incur the necessary risk in exploiting them. A developing economy is required to be brought out of the vicious circle of low income and poverty.

Entrepreneur can break this vicious circle. Entrepreneurs and helping government can change a developing economy in

developed economy.

THE TEN MYTHS ASSOCIATED WITH ENTREPRENEURSHIP

(1) Entrepreneurs are doers, not thinkers.

They are often very methodical people who plan their moves carefully. Today the emphasis is on the creation of clear, complete business plans.

(2) Entrepreneurs are born, not made.53


The recognition of entrepreneurship as a discipline has helped to dispel this myth. Like all disciplines, entrepreneurship has models, processes, and case studies that allow the topic to be studied and the traits acquired.

(3) Entrepreneurs are either inventors or innovators.

There are numerous entrepreneurs who encompass all sorts of profit-seeking activity. For example, Ray Kroc did not invent the fast-food franchise, but his innovative ideas made McDonald’s the largest fast-food enterprise in the world.

(4) Entrepreneurs are academic and social misfits.

Today the entrepreneur is considered a herosocially, economically, and academically. No longer a misfit, the entrepreneur is now viewed as a professional.

(5) Entrepreneurs must fit the “profile.”

Many books and articles have presented checklists of characteristics of the successful entrepreneur. These lists were neither validated nor complete. Today we realize that a standard entrepreneurial profile is hard to compile. The environment, the venture itself, and the entrepreneur have interactive effects, which result in many different types of profiles.

(6) All you need is money to be an entrepreneur.

Having money is not the only bulwark against failure. Failure due to a lack of proper financing often is an indicator of other problems.

(7) All you need is luck to be an entrepreneur.

“Luck happens when preparation meets opportunity” is an equally appropriate adage. Prepared entrepreneurs who seize the opportunity when it arises often appear to be “lucky.”

(8) Ignorance is bliss for an entrepreneur.

Identifying the strengths and weaknesses of a venture, setting up clear timetables with contingencies for handling problems and minimizing these problems through careful strategy formulation are all key factors in successful entrepreneurship.

(9) Entrepreneurs seek success but experience high failure rates.

Many entrepreneurs suffer a number of failures before they are successful. They follow the adage “If at first you don’t succeed, try, try, again.” In fact, failure can teach many lessons to those willing to learn and often leads to future successes.

(10) Entrepreneurs are extreme risk takers (gamblers).

The concept of risk is a major element in the entrepreneurship process. However, the public’s perception of the risk assumed by most entrepreneurs is distorted. While it

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may appear that an entrepreneur is “gambling” on a wild chance, the fact is that the entrepreneur is usually working on a moderate or “calculated” risk.

Questions:

1. Explain the different theories of entrepreneurship.

2. Explain David McClelland theory of Achievement motivation.

3. Explain Joseph Schumpeter’s Economist theory of entrepreneurship.

4. Explain Max Weber’s theory of entrepreneurship.

5. Write Short notes

a) Factors affecting entraprenual growthb) Different myths associated with entrepreneurshipc) Entrepreneurship in developing economyd) Ten myths in entrepreneurship .

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Chapter - 8PROJECT IDENTIFICATION AND CLASSIFICATION

Meaning of project, Environmental scanning - importance of environmental scanning, purpose , PEST & SWOT analysis ,Project - classification, identification , selection. Project report, contents of project report , formulation of project report,

MEANING OF PROJECT

An entrepreneur takes numerous decisions to convert his business idea into a running concern. is/Her decision making process starts with project/product selection. The project selection is the first corner tone to be laid down in setting up an enterprise. The success or failure of an enterprise largely depends upon the project. The popular English proverb “well began is half done” applies to project selection also indicates the significant of good beginning. The dictionary meaning of project is that is a scheme, design a proposal of something intended or devised to be achieved. Newman and his associates define that “a project has typically has a distinct mission that it is designed to achieve and clear terminationpoint, the achievement of the mission. Gillinger defines project “as a whole complex of activities involved in using resources to gain benefits”. According to Encyclopedia of management, “a project is an organized unit dedicated to the attainment of goal—the successful completion of a development project on time, within budget, in conformance with predetermined programme specifications.” Now, a project can be defined as a scientifically evolved work plan devised to achieve a specific objective within a specified period of time.

Project can differ in their size, nature of objectives, time duration and complexity. However projects partake of the following three basic attributes:(i) A course of action(ii) Specific objectives and(iii) Definite time perspectives.Every project has starting point, an end point with specific objectives.

ENVIRONMENTAL SCANNING

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The process of collecting , analyzing and distributing information for tactical strategic purposes inside the organization is called as environmental scanning.

Environmental analysis will help the firm to understand what is happening both inside and outside the organization and to increase the probability that the organisational strategies developed will appropriately reflect the organizational environment.

Environmental scanning is necessary because there are rapid changes taking place in the environment that has a great impact on the working of the business firm. Analysis of business environment helps to identify strength weakness, opportunities and threats. SWOT analysis is necessary for the survival and growth of every business enterprise.

The following is the need and importance of environmental scanning:

1. Identification of strength:

Strength of the business firm means capacity of the firm to gain advantage over its competitors. Analysis of internal business environment helps to identify strength of the firm. After identifying the strength, the firm must try to consolidate or maximise its strength by further improvement in its existing plans, policies and resources.

2. Identification of weakness:

Weakness of the firm means limitations of the firm. Monitoring internal environment helps to identify not only the strength but also the weakness of the firm. A firm may be strong in certain areas but may be weak in some other areas. For further growth and expansion, the weakness should be identified so as to correct them as soon as possible.

3. Identification of opportunities:

Environmental analyses helps to identify the opportunities in the market. The firm should make every possible effort to grab the opportunities as and when they come.

4. Identification of threat:

Business is subject to threat from competitors and various factors. Environmental analyses help them to identify threat from the external environment. Early identification of threat is always beneficial as it helps to diffuse off some threat.

5. Optimum use of resources:

Proper environmental assessment helps to make optimum utilisation of scare human, natural and capital resources. Systematic analyses of business environment helps the firm to reduce wastage and make optimum use of available resources, without understanding the internal and external environment resources cannot be used in an effective manner.

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6. Survival and growth:

Systematic analyses of business environment help the firm to maximise their strength, minimise the weakness, grab the opportunities and diffuse threats. This enables the firm to survive and grow in the competitive business world.

7. To plan long-term business strategy:

A business organisation has short term and long-term objectives. Proper analyses of environmental factors help the business firm to frame plans and policies that could help in easy accomplishment of those organisational objectives. Without undertaking environmental scanning, the firm cannot develop a strategy for business success.

8. Environmental scanning aids decision-making:

Decision-making is a process of selecting the best alternative from among various available alternatives. An environmental analysis is an extremely important tool in understanding and decision making in all situation of the business. Success of the firm depends upon the precise decision making ability. Study of environmental analyses enables the firm to select the best option for the success and growth of the firm.

PURPOSE OF ENVIRONMENTAL SCANNING

1. To provide strategic intelligence by evaluating potentially significant environmental changes

Conveys both current environmental status and how it is changing in trends.

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Alerts planners to trends that are converging, diverging, interacting, accelerating or decelerating

Allows for adaptive planning before these trends occur or fully develop

2. Often refers only to the environment external to the organization ( External environment)3. Good strategic planning requires information on internal organizational factors , so whenever possible include these also

PEST ANALYSIS

PEST analysis is concerned with the key external environmental influences on a business.

The acronym stands for the Political, Economic, Social and Technological issues that could affect the strategic development of a business.

Identifying PEST influences is a useful way of summarizing the external environment in which a business operates. However, it must be followed up by consideration of how a business should respond to these influences.

The table below lists some possible factors that could indicate important environmental influences for a business under the PEST headings:

Political / Legal Economic Social Technological

Environmental regulation and protection

Economic growth (overall; by industry sector)

Income distribution (change in distribution of disposable income;

Government spending on research

Taxation (corporate; consumer)

Monetary policy (interest rates)

Demographics (age structure of the population; gender; family size and composition; changing nature of occupations)

Government and industry focus on technological effort

International trade regulation

Government spending (overall level; specific spending priorities)

Labour / social mobility

New discoveries and development

Consumer protection

Policy towards unemployment (minimum wage,

Lifestyle changes (e.g. Home working, single households)

Speed of technology transfer

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unemployment benefits, grants)

Employment law Taxation (impact on consumer disposable income, incentives to invest in capital equipment, corporation tax rates)

Attitudes to work and leisure

Rates of technological obsolescence

Government organisation / attitude

Exchange rates (effects on demand by overseas customers; effect on cost of imported components)

Education Energy use and costs

Competition regulation

Inflation (effect on costs and selling prices)

Fashions and fads Changes in material sciences

Stage of the business cycle (effect on short-term business performance)

Health & welfare Impact of changes in Information technology

Economic "mood" - consumer confidence

Living conditions (housing, amenities, pollution)

SWOT ANALYSIS

SWOT analysis is a method for analysing a business, its resources, and its environment.

SWOT is commonly used as part of strategic planning and looks at:

Internal strengths Internal weaknesses

Opportunities in the external environment

Threats in the external environment

SWOT can help management in a business discover:

What the business does better than the competition What competitors do better than the business

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Whether the business is making the most of the opportunities available

How a business should respond to changes in its external environment

The result of the analysis is a matrix of positive and negative factors for management to address:

Positive factors Negative factors

Internal factors Strengths Weaknesses

External factors Opportunities Threats

The key point to remember about SWOT is that:

Strengths and weaknesses

Are internal to the business Relate to the present situation

Opportunities and threats

Are external to the business Relate to changes in the environment which will impact the business

PROJECT CLASSIFICATION

Project classification helps in expressing and highlighting the essential features of project. Different authorities have classified projects differently. The following are some of the important classification of projects.

(1) Quantifiable and Non-Quantifiable Projects

Quantifiable projects are those in which possible quantitative assessment of benefits can be made. Non-quantifiable projects are those where such assessment is not possible. Projects concerned with industrial development, power generation, mineral development fall in the first category while projects involving health, education and defense fall in the second category.

(2) Sectional ProjectsHere the classification is based on various sectors like● Agriculture and allied sector● Irrigation and power sector

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● Industry and mining sector● Transport and communication sector● Information technology sector● MiscellaneousThis system of classification has been found useful in resource allocation at macro level.

(3) Techno-Economic ProjectsClassification of projects based on techno-economic characteristic fall in this category. This type of classification includes factors intensity-oriented classification, causation oriented classification as discussed below.(a) Factor intensity-oriented classification: Based on this projects may be classified as capital intensive or labor intensive if large investment is made in plant and machinery the project will be termed as capital intensive. On the other hand project involving large number of human resources will be termed as “laborintensive”.(b) Causation-oriented classification: On the basis of causation, projects can be classified as demand based and raw material based projects. The availability of certain raw materials, skills or other inputs makes the project raw-material based and the very existence of demand for certain goods or services make the project demand-based.(c) Magnitude-oriented classification: This is based on the size of investment involved in the projects, accordingly project are classified into large scale, medium-scale or small-scale projects. The selection of a project consists of two main steps: Project identification and project selection.

PROJECT IDENTIFICATION

Often indenting entrepreneurs always are in search of project having a good market but how without knowing the product coat they determine market whose market they find out without knowing the item i.e. product? Idea generation about a few projects provides a way to come out of the above tangle.

IDEA GENERATION

The process of project selection starts with idea generation. In order to select most promising and profitable project, the entrepreneur has to generate large number of ideas about the possible projects he can take. The project ideas can be discovered from various internal and external sources. These may include:

Knowledge of potential customer needs. Personal observation of emerging trends in demand for certain products. Scope for producing substitute product. Trade and professional magazines which provide a very fertile source of project ideas. Departmental publications of various departments of the government. Success stories of known entrepreneurs or friends or relatives.

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A new product introduced by the competitor. Ideas given by knowledgeable persons.

All these sources putting together may give few ideas about the possible projects to be examined among which the project must be selected. After going through these sources if an entrepreneur has been able to get six project ideas, one project idea will be finally selected going through the following selection process.

PROJECT SELECTION

Project selection starts once the entrepreneur has generated few ideas of project. After having some ideas, these project ideas are analyzed in the light of existing economic conditions, market conditions, and the government policy and so on. For this purpose a tool is generated used what is called SWOT analysis. The intending entrepreneur analyses his strengths and weaknesses as well as opportunities/competitive advantages and threats/challenges offered by each of the project ideas. In addition the entrepreneur needs to analyze other related aspects also like raw material, potential market, labor, capital, location and forms of ownerships etc. Each of these aspects has to be evaluated independently and in relation to each of these aspects. This forms a continuous and back and forth process as shown in fig 8.1. On the basis of this analysis, the most suitable idea is finally selected to convert it into an enterprise. The process involved in selecting a project out of few projects is also termed as “Zeroing in Process”.

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CRITERIA FOR SELECTING A PARTICULAR PROJECT

An entrepreneur should consider the following criteria for selecting a particular project after gathering a large number of project profiles.

A. Investment Size

-If entrepreneur wants to open the medium or large units of business then investment size is more. It may be nearly 3-5 crore.

-For starting small business, the invest size is small nearly 10-50 lakhs.

-In India some entrepreneur starts small business through which they earn large profit.

B. Location:

-Location is most important to start the business. Location can be decided on the basis of availability of electricity in particular area or zone, government facilities like SEZ, low income tax, etc., transportation facility, availability of water in case of production plant, facilities provided by State Industrial Development Corporation.

C. Technology:

-In a competitive world it is necessary to use new technologies in the business. Foreign technical collaboration helps to grow in the business.

D. Equipment:

-After taking advice of experienced technical consultants, the entrepreneur should select the best equipment.

-For e.g. in India China made equipments available at low cost but quality is not high so many businessmen prefer to buy high quality equipments from other countries or they look for Indian companies to buy the high quality equipments.

E. Marketing:

-Marketing is most important criteria in any business to increase sell of the products or services and generate the profit.

-Many companies prefer direct selling at the beginning. Now a day’s company can also sell their products through ecommerce which requires less cost and it is easy method to reach more number of customers within a less period of time.

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Steps in Project Management

Project Management approach basically consists of the following five steps:

1. To form a group which works simultaneously to complete the task or project and all contribute to the same goal(s) and can be bound by definite time, cost and performance target.

2. Appointing a project manager is very essential which has responsibility of coordinating, directing, and controlling the project.

3. Supporting and servicing the project internally within the organization by matrixing or through total projectisation, and externally through vendors and contracts.

4. Making schedules to develop the project and complete that work within a time. Negotiation is most important during purchasing the raw materials which can minimize the overall project cost.

5. Achieved the goals through continuous monitoring and control using schedule, budgets and contracts as the basis.

-Project management is a particular task or complex project which is to be completed with the help of available resources, manpower within a specific period of time under the guidance of Project manager of that project. The project manager is coordinating and communicating across the departments and profession to complete the project.

MEANING AND SIGNIFICANCE OF PROJECT REPORT

As is discussed in the previous section, Webster new 20th century dictionary defines as a scheme, design a proposal something intended or devised. A project report or a business plan is a written statement of what an entrepreneur proposes to take up. It is a kind of guide frost or course at action what the entrepreneur hopes to achieve in his business Preparation of Project and how is he going to achieve it. A project report serves like a kind of big road map to reach the destination determined by entrepreneur. Hence a project report can be defined as a well evolved course of action devised to achieve the specified objectives within a specified period of time. It is like an operating document.

The preparation of project report is of great significance for an entrepreneur. The project report serves two essential purposes. The first is the project report is like a road map it describes the direction the enterprise is going in, what its goals are, where it wants to be, and how it is going to get there. In addition it enables the entrepreneur to know that he is proceeding in the right direction. Dan Steinhoff and John F. Burgess hold the view that without well spelled out goals and operational methods, most businesses flounder on the rocks of hard times.

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The second purpose of the project report is to attract lenders and investors. The preparation of project report is beneficial for those small scale enterprises which apply for financial assistance from the financial institutions and commercial banks. On the basis of this project report the financial institutes make appraisal and decide whether financial assistance should be given or not. If yes how much. Other organizations which provide various assistance like work shed/land, raw material etc, also make decision on the basis of this project report.

CONTENTS OF A PROJECT REPORT

The significance of project report as discussed above makes it clear that there is no substitution for business plan or project report and there are no shortcuts to prepare it. The more concrete and complete project report not only serves as road map but also earns the respect of outsiders who support in making and running an enterprise. Hence project report should be prepared with great care and consideration. A good project report should contain the following.

General information: Information on product profile and product details. Promoter: His/her educational qualification, work experience, project related

experience. Location: exact location of the project, lease or freehold, location advantages. Land and building: land area, construction area, type of construction, cost of

construction, detailed plan and estimate along with plant layout. Plant and machinery: Details of machinery required, capacity, suppliers, cost,

various alternatives available, cost of miscellaneous assets. Production process: Description of production process, process chart, technical know

how, technology alternatives available, production programme. Utilities: Water, power, steam, compressed air requirements, cost estimates sources

of utilities. Transport and communication: Mode, possibility of getting costs. Raw material: List of raw material required by quality and quantity, sources of

procurement, cost of raw material, tie-up arrangements, if any for procurement of raw material, alternative raw material, if any.

Man power: Man power requirement by skilled and semi-skilled, sources of manpower supply, cost of procurement, requirement for training and its cost.

Products: Product mix, estimated sales distribution channels, competitions and their capacities, product standard, input-output ratio, product substitute.

Market: End-users of product, distribution of market as local, national, international, trade practices, sales promotion devices, proposed market research.

Requirement of working capital: Working capital required, sources of working capital, need for collateral security, nature and extent of credit facilities offered and available.

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Requirement of funds: Break-up project cost in terms of costs of land, building machinery, miscellaneous assets, preliminary expenses, contingencies and margin money for working capital, arrangements for meeting the cost of setting up of the project.

Cost of production and profitability of first ten years. Break-even analysis. Schedule of implementation.

FORMULATION OF PROJECT REPORT

A project report is like a road map. It is an operating document. What information and how much information it contain depends upon the size of the enterprise, as well as nature of production. For example small-scale enterprises do not include technology which is used for preparing project reports of large-scale enterprises. Within small-scale enterprises too, all information may not be homogeneous for all units. Vinod Gupta has given a general set of information in his study “Formation of a project report.”According to Gupta, project formulation divides the process of project development intoeight distinct and sequential stages as below:

(1) General information(2) Project description(3) Market potential(4) Capital costs and sources of finance(5) Assessment of working capital requirements (6) Project implementation

The nature of formation to be collected and furnished under each of these stages has been given below.

(1) General InformationThe information of general nature given in the project report includes the following:

Bio-data of promoter: Name and address, qualifications, experience and other capabilities of the entrepreneur. Similar information of each partner if any.

Industry profile: A reference analysis of industry to which the project belongs, e.g., past performance; present status, its organization, its problems etc.

Constitution and organization: The constitution and organization structure of the enterprise; in case of partnership firm its registration with registrar of firms, certification from the directorate of industries /district industry centre.

Product details: Product utility, product range, product design, advantage to be offered by the product over its substitutes if any.

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(2) Project Description

A brief description of the project covering the following aspects should be made in the project report.

Site: Location of the unit; owned, rented or leasehold land; industrial area; no objection certificate from municipal authorities if the enterprise location falls in the residential area.Physical Infrastructure: Availability of the following items of infrastructure should be mentioned in the project report.

(a) Raw material: Requirement of raw material, whether inland or imported, sources of raw material supply.(b) Skilled labour: Availability of skilled labour in the area i.e., arrangements for training labourers in various skills.(c) Utilities: These include:(d) Power: Requirement of power, load sanctioned, availability of power(e) Fuel: Requirement of fuel items such as coal, coke, oil or gas, state of their availability and supply position.(f) Water: The sources of water, quality and quantity available.(g) Pollution control: The aspects like scope of dumps, sewage system, sewage treatment plant, infiltration facility etc., should be mentioned.(h) Communication and transportation facility: The availability of communication facilities, e.g., telephone, fax, telex, internet etc., should be indicated. Requirements for transport, mode of transport, potential means of transport, approximate distance to be covered, bottlenecks etc., should be stated in the business plan.(i) Production process: A mention should be made for process involved in production and period of conversion from raw material into finished goods.(j) Machinery and equipment: A complete list of machines and equipments required indicating their size, type, cost and sources of their supply should be enclosed with the project report.(k) Capacity of the plant: The installed licensed capacity of the plant along with the shifts should also be mentioned in the project report.(l) Technology selected: The selection of technology, arrangements made for acquiring it should be mentioned in the business plan. (m) Research and development: A mention should be made in the project report regarding proposed research and development activities to be undertaken in future.

(3) Market Potential

While preparing a project report, the following aspects relating to market potential of the product of the product should be stated in the report.

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(a) Demand and supply position: State the total expected demand for the product and present supply position, what is the gap between demand and supply and how much gap will fill up by the proposed unit.(b) Expected price: Expected price of the product to be realized should also be mentioned.(c) Marketing strategy: Arrangements made for selling the product should be clearly stated in the project report.(d) After sales service: Depending upon the nature of the product, provisions made for after- sales should normally be stated in the project report.

(4) Capital Costs and Sources of FinanceAn estimate of the various components of capital items like land and buildings, plant and machinery, installation costs, preliminary expenses, margin of working capital should be given in the project report. The sources should indicate the owners funds together with funds raised from financial institutions and banks.

(5) Assessment of Working CapitalThe requirement for working capital and its sources of supply should clearly be mentioned. It is preferred to prepare working capital requirements in the prescribed formats designed by limits of requirement. It will reduce the objections from banker’s side

(6) Project ImplementationEvery entrepreneur should draw an implementation scheme or a time-table for his project to the timely completion of all activities involved in setting up an enterprise. If there is delay in implementation project cost overrun. Delay in project implementation jeopardizes the financial viability of the project, on one hand, and props up the entrepreneur to drop the idea to set up an enterprise, on the other. Hence there is need to draw up an implementation schedule for the project and then to adhere to it.

COMMON MISTAKES BY ENTREPRENEURS IN PROJECT FORMULATION

Entrepreneurs do make mistakes while selecting and formulating their projects and evolving business plans. Some of the common errors found in project formulation are:

(1) Selection of project area: Entrepreneurs select wrong area of product or service by studying wrong or exaggerated data of particular industries. This happens particularly when entrepreneur gets data from the presentations and projections made by experts in the field or exhibitions or from trend analysis. The selection of a product without detailed study of product market, demand patterns, competition in the industry, change of customer taste and perceptions or mistaken overview of the demand pattern. Usually an entrepreneur selects a product which he knows best or where he has worked for long years.Example: A marketing man in textile is likely to choose textile as his product.

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(2) Market study and analysis: Market research, study and analysis is a critical aspect for an entrepreneur in selection of a product and market segment. Any decision based on scanty, wrong or un-organized data will give a distorted demand picture leading to wrong choices. An entrepreneur should also choose products’ based on the objective studies and not go by his previous experience, avoiding likes and dislikes in his personal capacity.

(3) Selection of technology: An appropriate technology is necessary for any new enterprise for its survival and growth. A wrong selection of technology leads to problems of costs, profit margins and feasibility issues of the entire project.

(4) Optimistic estimates: Over optimistic estimates by the entrepreneurs in the area of productivity, capacity utilization, prevailing marketing conditions, under estimation of competitors and pricing give wrong selection of products. Any business plan made by an entrepreneur based on wrong data, financial jugglery will give problems in selection and implementation of the project.

(5) Ownership form: A suitable ownership form be evolved for the project to avoid stoppages and disputes.

(6) Selection of location: An entrepreneur should not be tempted select locations that are not viable. A location is almost permanent to any project and as such plays an important role in cost competitiveness and viability of the organization throughout its life. An entrepreneur is tempted usually on three counts, first the cheapness on and second love of the native place of the entrepreneur and third the incentives offered by the government agencies for location ofindustries. It could be seen that all the three alternative give a broad idea of the costs whereas the selection be made only on the basis of techno-economic analysis and overall benefits to the proposed projects. In order to process investment proposals and arrive at investment decisions, of the Planning

Questions:

1. Define environmental scanning. Explain the importance of environmental scanning.2. Explain SWOT analysis with examples.3. Explain the different stages of project formulation in detail.4. Explain the common mistakes done by entrepreneurs during project formulation.5. Write Short notes:

a) PEST Analysisb) SWOT Analysisc) Project reportd) Steps in project management.

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Chapter – 9Project Appraisal and feasibility study

Meaning of project appraisal, Different project appraisals, Identification of opportunity , methods of project appraisal , Feasibility study, types of feasibility

PROJECT APPRAISAL: MEANING AND DEFINITION

Project appraisal is an exercise where by, a lending financial institution makes an independent and objective assessment of various aspects of an investment proposition to arrive at the financial decision. Project appraisal means the assessment of project in terms of its economic, social and financial viability. It is a complete scanning of the project. Usually banks and financial institutions conduct a critical appraisal of projects, which are submitted to them by the entrepreneur for getting loans. They have been traditionally accepting the data provided by the entrepreneur as valid while assessing the project. In fact the emphasis has largely been on the cash flow and financial viability of a project in assessing their suitability for extending the loans.

Project appraisal can be defined as the promoter taking a second look critically and carefully at a project as presented by the promoter person who is no way involved in or connected with its preparation and who is as such able to take an independent dispassionate and objective view of the project in its totality as also in respect of its various components. The person who carries out appraisal of project is usually a team of institutional officials.

The appraisal of different proposed project includes the following analysis:

(1) Economic analysis: An economic analysis looks at the project from the viewpoint of the whole economy, asking whether the latter will show benefit

Financial analysis: The purpose of the appraisal of the financial aspects of a project is generally to ensure its initiation of financial conditions for the sound implementation and efficient operation.

(3) Market analysis: Financial institutions examine the project to ensure economic justification of investment details. They study the marketing scope of the project and also its worth to the national economy by analyzing the consumption pattern and the potential demand for the project.

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Market analysis covers the following:● Anticipated market for the product● Analysis of market opportunity and specifying marketing objectives● Planning the process of marketing the product● Organization for the marketing process● Life cycle of the product

(4) Technical analysis: Technical appraisal of a project broadly involves a critical study of the following:

(i) Location and site: There are a number of aspects that influence industrial location because it may significantly influence the cost of production and distribution efficiency, the operating environment etc. The important factors that influence industrial location are raw material, proximity to market, availability of water, power, transportation facilities, man power, labor laws, taxes, incentives, subsidies etc. The factors to be considered for selection of site are load bearing capacity, access to water, effluent discharge etc.

(ii) Size of the plant/scale of operation: The size of the plant determines the economic and financial liability of a project. An important aspect of size is the available process technology. Equipment is often standardized at specific capacities in production sectors. Operative capacities in such sectors are therefore available only in certain multiples.

(iii) Technical Feasibility: The appraisal of the technical aspects involves scrutiny of such aspects of the project as

● Technology selected● Technical collaboration arrangements made● Capacity/Size of the project● Selection of plant, machinery and equipment● Plant layout and factory building● Technical and engineering services

(5) Organizational analysis: As a lender and development institution, the banks and other financial institutions place particular stress on the need and efficient organization and responsible management for the execution of the project. During project appraisal, these two aspects of a project are examined. If both aspects are not carried out properly, short term remedial steps are recommended to the entrepreneur. The objective of this aspect of appraisal is to make sure that the project is adequately carried out. The various organizational aspects are organization, structure, recruitment, training and development and so on.

(6) Managerial aspects: If the management is incompetent, even a good project may fail. It is rightly pointed out that if the project is week, it can be improved upon but if the promoters

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are week and lack in business acumen, it is difficult to reverse the situation. To safeguard from this problem, the financial institutions can exercise control over the assisted units. There is a provision for appointment by the financial institutions of nominee directors on the boardsof all MRTP companies assisted by them. The companies act, the industries act (Development and Regulation), empower government to exercise powers of control over the management, including the takeover of management of industrial undertakings. All these indicate the importance given to proper managerial strategies to prevent mismanagement. If the proper appraisal of the managerial aspects is made in the beginning itself, future problems in this area can be avoided to a very large extent.

IDENTIFICATION OF OPPORTUNITY

The reason for anyone to think of establishing an SSI unit can be summarized in single word—opportunity. The opportunity to be your own boss, to implement your own ideas, to earn for himself or herself is reason to think of starting an SSI unit. Starting an SSI needs a lot of courage. To be successful, to stay in the business an entrepreneur needs combination of hard work, skill and perseverance.

Entrepreneur who starts their own business can be grouped into two broad categories. The first category consists of people who know exactly what they want to do and are merely looking for the opportunity or resources to do it. These people may Preparation already developed many of skills necessary to succeed in their chosen field and are also likely to be familiar with industry customs and practices, which can help during the start-up phase of a new business.

The second group consists of people who want to start their own business, but do not have definite ideas about what may would like to do. They may have developed skills during their education or in the course of their previous employment, but many have not be interested in opening a business in the same field of endeavour.

Project identification is concerned with the collection complication and analysis of data for the eventual purpose of locating possible opportunities for investment and with the development of the characteristics of such opportunities. Opportunities, according to

Drucker, are of three kinds: additive, complimentary and break-through. Adaptive opportunities are those opportunities which enable the decision maker to better utilize the existing resources without in any way involving a change in the character of business. Complementary opportunities involve the introduction of new ideas and as such do lead to certain amount of change in the existing structure. Breakthrough opportunities on the other hand, involve fundamental changes in both the structure and character of business. Additive opportunities involve the least amount of disturbance to the existing state of affairs and hence the least amount of risk. The element of risk is more in other two opportunities.

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Project identification cannot be complete without identifying the characteristics of the project. Every project has three elements—inputs, outputs and social costs and benefits. The input characteristics define what the project will consume in terms of raw material, energy, manpower, finance and organizational setup. The native and magnitude of these input must be determined in order to make the input characteristics explicit. The output characteristics of a project define what the project will generate in the form of goods and services, employment revenue etc. The quantity and quality of all these output should be clearly specified. In addition every project will have impact on society. It inevitably affects the current equilibriums of demand and supply in the economy. It is necessary to evaluate carefully the sacrifice which the society will be required to make and the benefits will not accrue to the society from a given project.

METHODS OF PROJECT APPRAISAL

Net Present Value

A project's net present value is determined by summing the net annual cash flow, discounted at the project's cost of capital and deducting the initial outlay. Decision criteria is to accept a project with a positive net present value. Advantages of this method are that it reflects the time value of money and maximizes shareholder's wealth. Its weakness is that its rankings depend on the cost of capital; present value will decline as the discount rate increases.

Payback Method

A company chooses the expected number of years required to recover an original investment. Projects will only be selected if initial outlay can be recovered within a predetermined period. This method is relatively easy since the cash flow doesn't need to be discounted. Its major weakness is that it ignores the cash inflows after the payback period, and does not consider the timing of cash flows.

Internal Rate of Return

This method equates the net present value of the project to zero. The project is evaluated by comparing the calculated Internal rate of return to the predetermined required rate of return. Projects with Internal rate of return that exceed the predetermined rate are accepted. The major weakness is that when evaluating mutually exclusive projects, use of Internal rate of return may lead to selecting a project that does not maximize the shareholders' wealth.

Profitability Index

This is the ratio of the present value of project cash inflow to the present value of initial cost. Projects with a Profitability Index of greater than 1.0 are acceptable. The major disadvantage in this method is that it requires cost of capital to calculate and it cannot be used when there are unequal cash flows. The advantage of this method is that it considers all cash flows of the project.

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PROJECT FEASIBILITY STUDY

During the process of project appraisal a feasibility study may be undertaken to establish the justification of the identified project in all of its relevant dimensions, including its technical design, economic and financial viability, environmental compliance and social acceptability; as well as its conformity with the national development objectives and priorities and the relevant policy, legal and regulatory framework. The aim of a feasibility study is to initially identify the following aspects:

i. Development objectives against which the project proposed conformsii. Policy framework and detailed project objectivesiii. Technical soundness of the projectiv. Administrative feasibility of the projectv. The economic and financial viability of the project proposalvi. The status of demand for the project beneficiariesvii. Considerations of customs and traditions of project benefactors, issues of

compatibilityviii.Other important policy and cross cutting issues

Project feasibility analysis is carried out to ensure viability of project. The important project feasibility study is

1. Market feasibility2. Technical feasibility3. Financial feasibility4. Economic feasibility5. Ecological feasibility

Market feasibilityMarket feasibility is concerned with two aspects the aggregate demand for the proposed product/service, the market share of the project under consideration. For this market analysis requires variety of information and appropriate forecasting methods. The kind of information required is

● Consumption trends in the past and the present consumption level● Past and present supply position● Production possibilities and constraints● Imports and exports● Structure of competition● Cost structure● Elasticity of demand● Consumer behavior, intentions, motivations, attitudes, preferences and requirements● Distribution channels● Administrative, technical and legal constraints

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Technical Analysis

Technical analysis seeks to determine whether prerequisites for successful commissioning of the project have been considered and reasonably good choices have been made with respect to location, size, and so on. The important questions raised in technical analysis are:

● Has the availability if raw material, power, and other inputs been established?● Is the selected scale of operation optimal?● Is the production process chosen suitable?● Are the equipment and machines chosen appropriate?● Have the auxiliary equipment and supplementary engineering works been provided for?● Has provision been made for treatment of effluents?● Is the proposed layout of the site, buildings and plant sound?● Have work schedules been drawn up realistically?● Is the technology proposed to be employed appropriate from the social point of view?

Financial AnalysisFinancial analysis is necessary as ascertain whether the propose project is financially viable in the sense of being able to meet the burden of servicing dept and whether the propose project will satisfy the return expectations of those who provide the capital. The aspects to be looked into while conducting financial appraisal are as follows.

● Investment outlay and cost of project● Means of financing.● Project profitability● Break-even point● Cash shows of the project● Investment worthiness judged in terms of various criteria of merit● Project financial position● Level of risk

Economic/Social Cost-benefit AnalysisThis is concerned with judging a project from the larger social point of view, where in the focus if on social costs and benefits of a project, which may often be different from its monitory costs and benefits. The questions to be answered in social cost-benefit analysis are as follows.

● What are the direct economic benefits and costs of the project measured in terms of shadow (efficiency) prices and not in terms of market prices?● What would be the impact of the project on the distribution of income in the society?● What would be the impact of the project on the level of savings and investment in the society?● What would be the contribution of the project towards the fulfilment of certain like self-

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sufficiency, employment and social order?

Ecological AnalysisToday, environmental concerns assured a great deal of significance and hence ecological analysis should be done, particulars for project which have significant ecological implications like power plants and irrigation schemes and for environmental polluting industries like chemicals, leather processing etc. The key questions to be answered in ecological analysis are as follows.

● What is the likely damage caused by the project to the environment?● What is the cost of restoration measures required to ensure that the damage to the environment is contained within acceptable?

Feasibility Report:

A feasibility report is a document that is written after an analysis is carried out. The feasibility analysis is done before a project is embarked on to determine whether or not it will be successful. The report provides details of the study and the conclusion that is drawn about the analysis.

Checklist for Feasibility Report1. Identify government and public policy with respect to industry2. Give the specifications of the outputs and different techniques of the production3. Identify different locations4. Estimate the sales revenue, capital costs and operating costs 5. Analyze the profitability for different alternatives6. Marketing analysis which is related to finding out the demand of the proposed product/service in future7. Define the specification of the product and Product prices8. Check the availability of raw materials from different suppliers9. Estimation of the materials used during the project, prices of the inputs10. Make the list of the required equipments according to type, size, and cost11. List the different sources of the suppliers12. Site completion investigation13. Define the structure of the organization, warehouse facility by size, type and cost14. Check the transportation services, water supply and power supply facility in a location where project is to be formulated15. Estimate the cost of the skilled labour16. Estimate the total capital required17. Phasing of activities and expenditure during construction18. Analysis of profitability19. Determination of measures of combating environmental problems20. State the preparedness to implement the project rapidly

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Questions:1. Define project appraisal. Explain the different ways of appraising the projects.2. Explain the different methods of project appraisal. 3. Explain feasibility study. Explain the different forms of feasibility study.4. Write short notes:

a) Project identificationb) Feasibility reportc) Checklist for feasibility report

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Chapter – 10Legal considerations for opening a new unit

Introduction, Agreements – Classification, Contract – Essentials , offer & Acceptance, Types of contract, Discharge of contract , Ways of discharge of contract, contract of indemnity, Contract of guarantee

Introduction

The law of contract is that branch of law which determines the circumstances in which promise made by the parties to a contract shall be legally binding on them. All of us enter into a number of contracts everyday knowingly or unknowingly. Each contract creates some right and duties upon the contracting parties. Indian contract deals with the enforcement of these rights and duties upon the parties. Indian Contract Act, 1872 came into effect from 1 st

September, 1872. It extends to the whole of India except the state of Jammu and Kashmir.

AGREEMENT

A concord of understanding and intention, between two or more parties, with respect to the effect upon their relative rights and duties, of certain past or future facts or performances. The act of two or more persons, who unite in expressing a mutual and common purpose, with the view of altering their rights and obligations.

A coming together of parties in opinion or determination; the union of two or more minds in a thing done or to be done; a mutual assent to do a thing. Com. Dig.

“Agreement,” A 1. The consent of two or more persons concurring, the one in parting with, the other in receiving, some property, right, or benefit. Bac. Abr.

A promise, or undertaking. This is a loose and incorrect sense of the word. Wain v. Warlters. 5 East. 11.

The writing or instrument which is evidence of an agreement.

CLASSIFICATION OF AGREEMENTS:

Agreements are of the following several descriptions, viz.:

Conditional agreements, the operation and effect of which depend upon the existence of a supposed state of facts, or the performance of a condition, or the happening of a contingency.

Executed agreements, which have reference to past events, or which are at once closed and where nothing further remains to be done by the parties.

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http://thelawdictionary.org/performance/

http://thelawdictionary.org/state-of-facts/

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http://thelawdictionary.org/instrument/

http://thelawdictionary.org/undertaking/

http://thelawdictionary.org/mutual-assent/

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http://thelawdictionary.org/relative-rights/

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Executory agreements are such as are to be performed in the future. They are commonly preliminary to other more formal or important contracts or deeds, and are usually evidenced by memoranda, parol promises, etc.

Express agreements are those in which the terms and stipulations are specifically declared and avowed by the parties at the time of making the agreement

CONTRACT:

It is a legal enforceable agreement entered into by two or more different persons with legal capacity. The parties should have serious intention to create legally binding obligations. Their agreement needs to be within parities’ contractual capacity. Furthermore, parties should communicate such intention without vagueness each to the other and being of the same mind to the subject matter.

Essentials of a contract

a) it should be lawfulb) possible of performancec) within contractual capacityd) with the serious intention to contracte) union of minds of parties – consensus ad idemf) it should not be vagueg) intention of both parties should be communicated

- A contract does not necessarily have to be in writing unless there is a specific statutory requirement that it be in writing.

- A verbal contract is as equally valid as a written one, provided that the party alleging the contract can prove agreement on certain terms.

- Writing is only important for evidence purposes although its not a requirement.

- The presence of an agreement is determined by there being an offer and an acceptance. This is only a general rule and does not follow that every contract has to be constituted by a clear offer and acceptance.

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OFFER AND ACCEPTANCE

Offer

DefinitionA statement by a person, called the offeror, indicating his willingness to contract which statement is made in the awareness that it shall become binding an acceptance by the other person called the offeree.

Case lawGreen Acres Farm (Pvt) Ltd v Haddon Motors (Pvt) 1983(1) ZLR 17 (SC)In this case the defendant sent a truck to the plaintiff with a note requesting the plaintiff to check over the truck. The plaintiff did the checks over the truck and proceeded to effect repairs. Upon presentation of the invoice the Defendant refused to pay arguing that they had not requested the plaintiff to effect any repairs. The plaintiff took the matter to the courts. The Court held that there is no offer made by the plaintiff to repair the truck.

AN OFFER MUST MEET/HAVE THE FOLLOWING REQUIREMENTS

1. It must be consistent with all the essentials of the contract, otherwise it is void. 2 .It must clearly define all the terms in which an agreement is sought. Therefore it must

not be vague, Levenstein v Levenstein 1955 (3) SA 615 (SR)3 It must be communicated to the offeree. The offeree must have knowledge of the offer if his

acceptance is to constitute a valid contract.

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Case lawBloom v American Swiss Watch Company 1914 AD 100. It was held that there was no offer made to the plaintiff when he volunteered the information and did not know that there was an offer of reward money. See also Lee v American Swiss Watch Company 1914 AD 121.

4 It must be made with intention of being accepted. This means serious intention to create legal relations. This embraces the following:

- it must not be mere social arrangement or offers made in gest which lacks the animus contrahendi. See Balfour v Balfour [1919] KB(2) 571.

- It must not be binding in honour or gentlemen’s agreements i.e. excluding the jurisdiction of the courts. (where the offer) it cannot constitute a legally binding contract. (Rose and Frank Company v Crompton and Brothers Ltd (1922) (2) KB 261.

- It must not be an offer to negotiate or treat i.e. it must be an offer to enter into a binding contract and not merely an invitation to do business or receives offers (i.e. tenders). See Crawley v Rex 1909 TS 1105.

- It may be to one definite person, or to the world. If the offer is made to a definite person or to a number of definite persons, acceptance should be by that person or those persons only. If it is made to the public anyone else may accept. See Carlill v Carbolic Smoke Ball Company 1893 (1) QB 256.

5 The offer must not have been revoked or lapsed.

An offer is revoked if it is withdrawn by the offeror.

The following should be noted:

- Revokation is not effective until the offeree is aware of it.- An offer can be revoked to any stage before it is accepted- The offeror must take reasonable steps to find and inform the offeree of

the revocation Bryne and Co v Lean van Tienhoven and Co 1880 KB.

6 Where an offer was accompanied by an option, the latter must not have expired. An option is a separate contract to keep the contract open for a specific period. The offer must be accepted within the stipulated period Boyd v Nel 1922 AD 414.

7 The offer may be verbal written or implied. Thus if a person boards a bus, the owner of a bus impliedly makes an offer to the person to ride in the bus and the passenger accepts the offer by taking bus seat and tending his fare.

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TYPES OF CONTRACTS

Contracts under Seal

Traditionally, a contract was an enforceable legal document only if it was stamped with a seal. The seal represented that the parties intended the agreement to entail legal consequences. No legal benefit or detriment to any party was required, as the seal was a symbol of the solemn acceptance of the legal effect and consequences of the agreement. In the past, all contracts were required to be under seal in order to be valid, but the seal has lost some or all of its effect by statute in many jurisdictions. Recognition by the courts of informal contracts, such as implied contracts, has also diminished the importance and employment of formal contracts under seal.

Express Contracts

In an express contract, the parties state the terms, either orally or in writing, at the time of its formation. There is a definite written or oral offer that is accepted by the offeree (i.e., the person to whom the offer is made) in a manner that explicitly demonstrates consent to its terms.

Implied Contracts

Although contracts that are implied in fact and contracts implied in law are both called implied contracts, a true implied contract consists of obligations arising from a mutual agreement and intent to promise, which have not been expressed in words. It is misleading to label as an implied contract one that is implied in law because a contract implied in law lacks the requisites of a true contract. The term quasi-contract is a more accurate designation of contracts implied in law. Implied contracts are as binding as express contracts. An implied contract depends on substance for its existence; therefore, for an implied contract to arise, there must be some act or conduct of a party, in order for them to be bound.

A contract implied in fact is not expressed by the parties but, rather, suggested from facts and circumstances that indicate a mutual intention to contract. Circumstances exist that, according to the ordinary course of dealing and common understanding, demonstrate such an intent that is sufficient to support a finding of an implied contract. Contracts implied in fact do not arise contrary to either the law or the express declaration of the parties. Contracts implied in law (quasi-contracts) are distinguishable in that they are not predicated on the assent of the parties, but, rather, exist regardless of assent.

The implication of a mutual agreement must be a reasonable deduction from all of the circumstances and relations that contemplate parties when they enter into the contract or which are necessary to effectuate their intention. No implied promise will exist where the relations between the parties prevent the inference of a contract.

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A contract will not be implied where it would result in inequity or harm. Where doubt and divergence exist in the minds of the parties, the court may not infer a contractual relation-ship. If, after an agreement expires, the parties continue to perform according to its terms, an implication arises that they have mutually assented to a new contract that contains the same provisions as the old agreement.

A contract implied in fact, which is inferred from the circumstances, is a true contract, whereas a contract implied in law is actually an obligation imposed by law and treated as a contract only for the purposes of a remedy. With respect to contracts implied in fact, the contract defines the duty; in the case of quasi-contracts, the duty defines and imposes the agreement upon the parties.

Executed and Executory Contracts

An executed contract is one in which nothing remains to be done by either party. The phrase is, to a certain extent, a misnomer because the completion of performances by the parties signifies that a contract no longer exists. An executory contract is one in which some future act or obligation remains to be performed according to its terms.

Bilateral and Unilateral Contracts

The exchange of mutual, reciprocal promises between entities that entails the performance of an act, or forbearance from the performance of an act, with respect to each party, is a Bilateral Contract. A bilateral contract is sometimes called a two-sided contract because of the two promises that constitute it. The promise that one party makes constitutes sufficient consideration (see discussion below) for the promise made by the other.

A unilateral contract involves a promise that is made by only one party. The offeror (i.e., a person who makes a proposal) promises to do a certain thing if the offeree performs a requested act that he or she knows is the basis of a legally enforceable contract. The performance constitutes an acceptance of the offer, and the contract then becomes executed. Acceptance of the offer may be revoked, however, until the performance has been completed. This is a one-sided type of contract because only the offeror, who makes the promise, will be legally bound. The offeree may act as requested, or may refrain from acting, but may not be sued for failing to perform, or even for abandoning performance once it has begun, because he or she did not make any promises.

Unconscionable Contracts

An Unconscionable contract is one that is unjust or unduly one-sided in favor of the party who has the superior bargaining power. The adjective unconscionable implies an affront to fairness and decency. An unconscionable contract is one that no mentally competent person would accept and that no fair and honest person would enter into. Courts find that unconscionable contracts usually result from the exploitation of consumers who are poorly

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educated, impoverished, and unable to shop around for the best price available in the competitive marketplace.

The majority of unconscionable contracts occur in consumer transactions. Contractual provisions that indicate gross one-sidedness in favor of the seller include limiting damages or the rights of the purchaser to seek court relief against the seller, or disclaiming a Warranty (i.e., a statement of fact concerning the nature or caliber of goods sold the seller, given in order to induce the sale, and relied upon by the purchaser).

Unconscionability is ascertained by examining the circumstances of the parties when the contract was made. This doctrine is applied only where it would be an affront to the integrity of the judicial system to enforce such a contract.

Adhesion Contracts

Adhesion contracts are those that are drafted by the party who has the greater bargaining advantage, providing the weaker party with only the opportunity to adhere to (i.e., to accept) the contract or to reject it. (These types of contract are often described by the saying "Take it or leave it.") They are frequently employed because most businesses could not transact business if it were necessary to negotiate all of the terms of every contract. Not all adhesion contracts are unconscionable, as the terms of such contracts do not necessarily exploit the party who assents to the contract. Courts, however, often refuse to enforce contracts of adhesion on the grounds that a true meeting of the minds never existed, or that there was no acceptance of the offer because the purchaser actually had no choice in the bargain.

Aleatory Contracts

An aleatory contract is a mutual agreement the effects of which are triggered by the occurrence of an uncertain event. In this type of contract, one or both parties assume risk. A fire insurance policy is a form of aleatory contract, as an insured will not receive the proceeds of the policy unless a fire occurs, an event that is uncertain to occur.

Void and Voidable Contracts:

Contracts can be either void or Voidable. A void contract imposes no legal rights or obligations upon the parties and is not enforceable by a court. It is, in effect, no contract at all.

A voidable contract is a legally enforceable agreement, but it may be treated as never having been binding on a party who was suffering from some legal disability or who was a victim of fraud at the time of its execution. The contract is not void unless or until the party chooses to treat it as such by opposing its enforcement. A voidable contract may be ratified either expressly or impliedly by the party who has the right to avoid it. An express ratification occurs when that party who has become legally competent to act declares that he or she accepts the terms and obligations of the contract. An implied ratification occurs when the

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party, by his or her conduct, manifests an intent to ratify a contract, such as by performing according to its terms. Ratification of a contract entails the same elements as formation of a new contract. There must be intent and complete knowledge of all material facts and circumstances. Oral Acknowledgment of a contract and a promise to perform constitute sufficient ratification. The party who was legally competent at the time that a voidable contract was signed may not, however, assert its voidable nature to escape the enforcement of its terms.

Proper offer and proper acceptance with intention to create legal relationship.

Cases;- A and B agree to go to a movie on coming Sunday. A does not turn in resulting in loss of B’s time B cannot claim any damages from B since the agreement to watch a movie is a domestic agreement which does not result in a contract. In case of social agreement there is no intention to create legal relationship and there the is no contract (Balfour v. Balfour)

In case of commercial agreements, the law presume that the parties had the intention to create legal relations. [an agreement of a purely domestic or social nature is not a contract ]

An offer must meet/have the following requirements

1. It must be consistent with all the essentials of the contract, otherwise it is void.

2. Lawful consideration :- consideration must not be unlawful, immoral or opposed to the public policy.

3. Capacity:- The parties to a contract must have capacity (legal ability) to make valid contract. Section 11:- of the Indian contract Act specify that every person is competent to contract provided.

(i) Is of the age of majority according to the Law which he is subject, and (ii) Who is of sound mind and (iii) Is not disqualified from contracting by any law to which he is subject.

Person of unsound mind can enter into a contract during his lucid interval. An alien enemy, foreign sovereigns and accredited representative of a foreign state. Insolvents and convicts are not competent to contract.

4. Free consent :- consent of the parties must be genuine consent means agreed upon samething in the same sense i.e. there should be consensus – ad – idem. A consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake.

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5. Lawful object The object of agreement should be lawful and legal. Two persons cannot enter into an agreement to do a criminal act. Consideration or object of an agreement is unlawful if it

(a) is forbidden by law; or (b) is of such nature that, if permitted, would defeat the provisions of any law; or (c) is fraudulent; or (d) Involves or implies, injury to person or property of another; or (e) Court regards it as immoral, or opposed to public policy.

6. Possibility of performance: The terms of the agreement should be capable of performance. An agreements to do act, impossible in itself cannot be enforced.

Example : A agrees to B to discover treasure by magic. The agreement is void because the act in itself is impossible to be performed from the very beginning.

7. The terms of the agreements are certain or are capable of being made certain [29] Example : A agreed to pay Rs.5 lakh to B for ultra-modern decoration of his drawing room. The agreement is void because the meaning of the term “ ultra – modern” is not certain. 8. Not declared Void The agreement should be such that it should be capable or being enforced by law. Certain agreements have been expressly declared illegal or void by the law.

9. Necessary legal formalities A contract may be oral or in writing. Where a particular type of contract is required by law to be in writing and registered, it must comply with necessary formalities as to writing, registration and attestation. If legal formalities are not carried out then the contract is not enforceable by law.

Example : A promise to pay a time. Barred debt must be in writing.

Agreement is a wider term than contract where as all contracts are agreements. All agreements are not contracts.

Conclusion: Thus we see that an agreement may be or may not be enforceable by law, and so all agreement are not contract. Only those agreements are contracts, which are enforceable by law.

DISCHARGE OF CONTRACT:

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Discharge of a contract means termination of contractual relation between the parties to a contract in other words a contract is discharged when the rights and obligations created by it are extinguished (i.e. comes to an end).

DISCHARGE BY PERFORMANCE

Fulfilment of obligations by a party to the contract within the time and in the manner prescribed in the contract.

(a) Actual performance – no party remains liable under the contract. Both the parties performed.

(b) Attempted performance or tender.:- Promisor offers to perform his obligation under the contract but the promise refuses to accept the performance. It is called as attempted performance or tender of performance But the contract is not discharged

DISCHARGE BY MUTUAL AGREEMENT

(a) Novation [Sec 62] – Novation means substitution of a new contract in the place of the original contract new contract entered into in consideration of discharge of the old contract. The new contract may be. Between the same parties (by change in the terms and condition) Between different parties (the term and condition remains same or changed)

Following conditions are satisfied :-

(1) All the parties must consent to novation (2) The novation must take place before the breach of original contract. (3) The new contract must be valid and enforceable.

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Example: A owes B Rs.50,000. A enters into an agreements with B and gives B a mortgage of his estate for Rs.40,000 in place of the debt of Rs.50,000. (Between same parties) o A owes money Rs.50,000 to B under a contract. It is agreed between A, B & C that B shall henceforth accept C as his Debtor instead of A for the same amount. Old debt of A is discharged, and a new debt from C to B is contracted. (Among different parties)

(b) Rescission [62]:- Rescission means cancellation of the contract by any party or all the parties to a contract. X promises Y to sell and deliver 100 bales of cotton on 1st oct his go down and Y promises to par for goods on 1st Nov. X does not supply the goods. Y may rescind the contract.

(c) Alteration [62] :- Alteration means a change in one or more of the terms of a contracts with mutual consent of parties the parties of new contracts remains the same.

Ex:- X Promises to sell and delivers 100 bales of cotton on 1st oct. and Y promises to pay for goods on 1st Nov. Afterwards X and Y mutually decide that the goods shall be delivered in five equal instalments at is godown . Here original contract has been discharged and a new contract has come into effect.

(d) Remission [63]:- Remission means accepting a lesser consideration than agreed in the contract. No consideration is necessary for remission. Remission takes place when a Promisee- (a) dispense with (wholly or part) the performance of a promise made to him. (b) Extends the time for performance due by the promisors (c) Accept a lesser sum instead of sum due under the contract (d) Accept any other consideration that agreed in the contract

A promise to paint a pictured for B. B after words for him to do so. A is no longer bound to perform the promise.

(e) Waiver:- Intentional relinquishment of a night under the contract.

(f) Merger :- conversion of an inferior right into a superior right is called as merger. (Inferior right end)

DISCHARGE BY OPERATIONAL OF LAW

(a) Death :- involving the personal skill or ability, knowledge of the deceased party one discharged automatically. In other contract the rights and liability passed to legal represent.

Example : A promises to perform a dance in B’s theatre. A dies. The contract comes to an end

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. (b) Insolvency:- when a person is declared insolvent. He is discharged from his liability up to the date of insolvency.

Example: A contracts to sell 100 bags of sugar to B. Due to heavy loss by a major fire which leaves nothing to sell, A applies for insolvency and is adjudged insolvent. Contract is discharged.

(c) By unauthorized material alteration – without the approval of other party – comes to an end – nature of contract substance or legal effect.

Example : A agrees upon a Promissory Note to pay Rs.5,000 to B. B the amount as Rs.50,000. A is liable to pay only Rs.5,000.

(d) Merger: When an inferior right accruing to a party in a contract mergers into a superior right accruing to the same party, then the contract conferring inferior right is discharged.

Example: A took a land on lease from B. Subsequently, A purchases that land. A becomes owner of the land and ownership rights being superior to rights of a lessee, the earlier contract of lease stands terminated.

5. Rights and liabilities vest in the same person: Where the rights and liabilities under a Contract vest in the same person, the contract is

discharged. Example: A Bill of Exchange which was accepted by A, reaches A’s hands after being negotiated and endorsed through 4 other parties. The contract is discharged.

DISCHARGE OF LAPSE OF TIME

Where a party fails to take action against the other party within the time prescribe under the limitation Act, 1963. All his rights to come end. Recover a debt – 3 Years recover an immovable property – 12 years

Ex.:- On 1st July 20X1 X sold goods to Y to Rs 1,00,000 and Y had made no payment till August 20X4. state the legal position on 1st Aug 20X4 (a) If no. credit period allowed (b) If 2 month credit period allowed.

DISCHARGE BY BREACH OF CONTRACT

Failure of a party to perform his part of contract

(a) Anticipatory Breach of contract :- Anticipatory breach of contract occurs when the part declares his intention of not performing the contract before the performance is due .

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(i) Express repudiation: - 5 agrees to supply B 100 tunes of specified category of iron on 15.01.2006 on 31.12.2005. 5 express his unwillingness to supply the iron to B.

(ii) Party disables himself: - Implied by conduct. Ex.:- 5 agrees to sell his fiat car to B on 15.01.2006 on 31.12.05 5 sells his fiat car to T.

(b) Actual Breach of contract :- If party fails or neglects or refuses to perform his obligation on the due date of performance or during performance. It is called as actual breach.

During performance – party has performed a part of the contact. Consequences of Breach of contract:- The aggrieved party (i.e. the party not at face it ) is discharged from his obligation and get rights to proceed against the party at fault. The various remedial available to an aggrieved party.

DISCHARGE BY IMPOSSIBILITY PERFORMANCE

(a) Effect of Initial Impossibility (b) Effect of supervening. Impossibility

(a) Initial Impossibility – at the time of making contract Both parties know – put life into deed body – void . Both don’t know – void. One know – compensate to other party

(b) Effect of super vanity Impossibility:- Where an act becomes impossible after the contract is made – void Becomes unlawful, beyond the control of promisor – void Promisor alone knows about the Impossibility – compensate loss. When an agreement is discovered to be void or where a contract becomes void

Contract of Indemnity

INTRODUCTION TO CONTRACT OF INDEMNITY

Indemnity Meaning – To make good the loss incurred by another person To compensate the party who has suffered some loss To protect a party from incurring a loss

Contract of indemnity Definition A contract is called as a ‘contract of indemnity’ if – One party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person.

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Modes of contract of indemnity Expressed: When a person expressly promises to compensate the other from loss. Implied : When the contract is to be inferred from the conduct of the parties or from the circumstances of the case.

ESSENTIAL ELEMENTS OF A CONTRACT OF INDEMNITY

Contract : All the essentials of a valid contract must also be present in the contract of indemnity Example:- X asks Y to beat Z and promises to indemnify Y against the consequences. Y beats Z and is fined Rs.1,000. Y cannot claim this amount from X because the object of the agreement was unlawful.

Loss to one party A person can indemnify another person only if such other person incurs some loss or it has become certain that he will incur some loss.

Indemnity by the promisor The purpose of contract of indemnity is to protect the indemnity holder from any loss that may be caused to the indemnity holder.

Reason for loss The contract of indemnity must specify that indemnity holder shall be protected from the loss caused due to – Action of the promisor himself; or Action of any other person; or Any act, event or accident which is not in the control of the parties.

RIGHTS OF INDEMNITY HOLDER (Sec. 125)

Right to recover damages

The indemnity holder has the right to recover all the damages which he is compelled to pay in any suit in respect of any matter covered by the contract of indemnity.

Right to recover costs

The indemnity holder has the right to recover all the costs which he is compelled to pay in bringing or defending such suit.

Condition: (a) The indemnifier authorised him to bring or defend the suit; or

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(b) The indemnity holder did not contravene the orders of the indemnifier; and The indemnity holder acted as it would have been prudent for him to act in the absence of any contract of indemnity.

Right to recover sums paid

The indemnity holder has the right to recover all the sums which he has paid under the terms of a compromise of such suit. (a) The indemnifier authorised him to compromise the suit; or (b) The indemnifier holder did not contravene the orders of the indemnifier; and the indemnity holder acted as it would have been prudent for him to act in the absence of any contract of indemnity.

Contract of guarantee

MEANING OF CERAIN TERMS (Sec. 126)

Meaning of ‘contract of guarantee’ A ‘contract of guarantee’ is a contract to – Perform the promise; or Discharge the liability, of a third person in case of his default.

Meaning of ‘surety’ The person who gives the guarantee is called as ‘surety’

Meaning of ‘principal debtor’ The person in respect of whose default the guarantee is given is called as ‘principal debtor’.

Meaning of ‘creditor’ The person to whom the guarantee is given is called as ‘creditor’.

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ESSENTIALS AND LEGAL RULES FOR A VALID CONTRACT OF GUARANTEE.

Must have all the essentials of a valid contract • All the essentials of a valid contract must be present in the contract of guarantee. • Exceptions:

(a) Consideration received by the principal debtor is a sufficient consideration to the surety for giving the guarantee. (b) Even if principal debtor is incompetent to contract, the guarantee is valid. But, if surety is incompetent to contract, the guarantee is void.

Primary liability of some person

The principal debtor must be primarily liable. However, even if the principal debtor is incompetent to contract the guarantee is valid. The debt must be legally enforceable. The debt must not be a time barred debt.

The contract must be conditional The liability of surety is secondary and conditional. The liability of surety arises only if the principal debtor makes a default.

No misrepresentation The creditor should disclose all the facts which are likely to affect the surety’s liability. There must not be any concealment of facts.

Form of contract A contract of guarantee may be either oral or written.

Joining of other co-sureties The guarantee by a surety is not valid if – A condition is imposed by a surety that some other person must also join as a co-surety; but Such other person does not join as a co-surety.

NATURE AND EXTENT OF SURETY’S LIABILITY Surety’s liability is coextensive with liability of principal debtor General rule – Surety is liable for all the debts payable by the principal debtor to the creditor. Accordingly, interest, damages, costs etc. may also be recovered from the surety.

Exception:- The contract of guarantee may provide otherwise.

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Commencement of surety’s liability • The liability of surety arises immediately on default by the principal debtor. • The creditor is not required to – (a) first sue the principal debtor; or (b) first give a notice to the principal debtor.

Surety’s liability may be limited The surety may fix a limit on his liability up to which the guarantee shall remain effective.

Surety’s liability may be continuous • The surety may agree to become liable for a series of transactions of continuous nature. • However, the surety may fix – a limit on his liability upto which the guarantee shall remain effective; a time period during which the guarantee shall remain effective.

Surety’s liability may be conditional The surety may impose certain conditions in the contract of guarantee. Until those conditions are met, the surety shall not be liable.

CONTINUING GUARANTEE

Meaning :A guarantee which extends to a series of transactions is called as continuing guarantee.

Revocation (Sec.130) Continuing guarantee may be revoked, at anytime, by the surety by giving a notice to the creditor. However, revocations shall be effective only in respect of future transactions (i.e. the liability of the surety with regard to previous transactions remains unaffected)

Death of surety (sec. 131) Death of the surety operates as a revocation of a continuing guarantee as to future transaction

RIGHTS OF SURETY (Sec.140, 141, 145, 146 and 147)

I. Rights against principal debtor

Right of indemnity There is an implied promise by the principal debtor to indemnity the surety. The surety is entitled to claim from the principal debtor all the sums which he has rightfully paid. The surety cannot recover such sums, which the he has paid wrongfully.

Right of subrogation On payment of a debt, the surety shall be entitled to all the rights which the creditor could claim against the principal debtor.

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II. Rights against the creditor

Right of subrogation The surety can claim all the securities which the creditor had at the time of giving of guarantee . It is immaterial as to whether the surety had knowledge of such securities or not. If the securities are returned by the creditor to the principal debtor the surety is discharged to the extent of value of the securities so returned.

Right of set off Any amount recoverable by the principal debtor may be claimed as deduction. Any amount recoverable by the surety may be claimed as deduction.

Rights to share reduction If the principal debtor becomes insolvent, the surety may claim proportionate reduction in his liability.

III. Rights against co-sureties

Rights to contribution

General Rule All the co-sureties shall contribute equally

Exceptions Under the contract of guarantee, the co-sureties may fix limits on their respective liabilities. Even in such a case, the co-sureties shall contribute equally, subject to maximum limit fixed by the co-sureties. The contract of guarantee may provide that the co-sureties shall contribute in some other proportion.

Right to share benefit of securities If one co-surety receives any security, all the other co-sureties are entitled to share the benefit of such security.

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DIFFERENCE BETWEEN INDEMINITY AND GAURANTEE

DISCHARGE OF SURETY FROM LIABILITY (Sec.130 to 144)

Notice of revocation by surety

Specific guarantee A specific guarantee can be revoked only if liability of principal debtor has not arisen. Continuing guarantee Contract : There must be a contract. The contract may be expressed or implied. Goods : Bailment can be made of goods only. Delivery : There must be delivery of goods by one person to another person.

Purpose of delivery : The goods must be delivered for some purpose. The purpose may be expressed or implied.

Return or disposal of goods • The delivery of goods must be conditional • The condition shall be that the goods shall be – returned (either in original form or in any altered from); or disposed of according to the directions of the bailor, when the purpose is accomplished.

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Questions:

1. Explain Agreement . Classify different types of agreements.

2. Define contract. Explain the essential elements of a contract.

3. Define offer. Explain the requirements of an offer.

4. Explain the different types of contracts.

5. Explain Discharge of contract.

6. Define contract of indemnity. What are the essential elements of indemnity?

7. Write short notes:

a) Difference between contract and agreement.b) Rights of indemnity holderc) Essential elements of contracts of guaranteed) Rights of suretye) Difference between contract of indemnity and contract of guaranteef) Discharge of suit from liability

Chapter – 11Types of Organizations

Organizing, Importance of organizing, Types of organizing – Formal and informal, Organizational structure – line organization, Line and staff organization, Functional organization

Organizing is the function of management which follows planning. It is a function in which the synchronization and combination of human, physical and financial resources takes place. All the three resources are important to get results. Therefore, organizational function helps in achievement of results which in fact is important for the functioning of a concern.

According to Chester Barnard, “Organizing is a function by which the concern is able to define the role positions, the jobs related and the coordination between authority and responsibility. Hence, a manager always has to organize in order to get results.

A manager performs organizing function with the help of following steps:-

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Identification of activities - All the activities which have to be performed in a concern have to be identified first. For example, preparation of accounts, making sales, record keeping, quality control, inventory control, etc. All these activities have to be grouped and classified into units.

Departmentally organizing the activities - In this step, the manager tries to combine and group similar and related activities into units or departments. This organization of dividing the whole concern into independent units and departments is called departmentation.

Classifying the authority - Once the departments are made, the manager likes to classify the powers and its extent to the managers. This activity of giving a rank in order to the managerial positions is called hierarchy. The top management is into formulation of policies, the middle level management into departmental supervision and lower level management into supervision of foremen. The clarification of authority help in bringing efficiency in the running of a concern. This helps in achieving efficiency in the running of a concern. This helps in avoiding wastage of time, money, effort, in avoidance of duplication or overlapping of efforts and this helps in bringing smoothness in a concern’s working.

Co-ordination between authority and responsibility - Relationships are established among various groups to enable smooth interaction toward the achievement of the organizational goal. Each individual is made aware of his authority and he/she knows whom they have to take orders from and to whom they are accountable and to whom they have to report. A clear organizational structure is drawn and all the employees.

IMPORTANCE OF ORGANIZING

1. Specialization - Organizational structure is a network of relationships in which the work is divided into units and departments. This division of work is helping in bringing specialization in various activities of concern.

2. Well defined jobs - Organizational structure helps in putting right men on right job which can be done by selecting people for various departments according to their qualifications, skill and experience. This is helping in defining the jobs properly which clarifies the role of every person.

3. Clarifies authority - Organizational structure helps in clarifying the role positions to every manager (status quo). This can be done by clarifying the powers to every manager and the way he has to exercise those powers should be clarified so that misuse of powers do not take place. Well defined jobs and responsibilities attached helps in bringing efficiency into managers working. This helps in increasing productivity

4. Co-ordination - Organization is a means of creating coordination among different departments of the enterprise. It creates clear cut relationships among positions and

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ensure mutual cooperation among individuals. Harmony of work is brought by higher level managers exercising their authority over interconnected activities of lower level manager

Steps in the process of organising

The process of organising consists of the following steps:1. Determining the activities to be performed to achieve the objectives of the organisation.2. Identification of major functions to which these activities relate.3. Grouping and sub-dividing the activities within each function on the basis of similarity or relatedness.4. Establishing relationship among individuals and groups.

1. Determining the activities to be performed to achieve the objectives of the organisation: Business organisations undertake economic activities with a view to earning profit. They may perform manufacturing, trading or service activity. In a manufacturing organisation, production and sales are the two major activities. In a trading organisation, purchases and sales are the two main activities. Service organisations provide services such as transportation to their customers. In carrying out these major activities, business units have to perform a number of other activities such as producing, financing, marketing, accounting, recruiting employees, etc. Since the objectives of different organisations are different, it is therefore, necessary to determine the activities of each organisation separately.

2. Identification of major functions to which these activities relate: The next step is to identify the major functions to which these activities relate. In a manufacturing organisation, production, selling, finance and personnel are the major functions. If the amount of work to be done in connection with each of these functions is large, separate departments may be created for each of these functions. Managerial positions will have to be created to supervise the activities of these departments. At this stage, a list of activities relating to each function must be prepared.

3. Grouping and sub-dividing the work within each function: In this step, it is decided how best the activities can be grouped on the basis of similarity or relatedness. The activities of a production department, for example, can be divided into a number of workshops where production will actually take place. Besides, separate sections may be created for such production related activities as quality control and repairs. The activities of other departments can similarly be sub-divided. This division and subdivision of activities goes on till individual positions have been created for performing all types of work in an organisation. Thereasons of dividing and sub-dividing functions and activities are as follows—

(i) The total work may be so large that it cannot be done by a single individual or by a few persons.

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(ii) If the work is divided into smaller units, it becomes easy to assign work to individuals who have the necessary skill and knowledge to perform the work efficiently.

4. Establishing relationship among individuals and groups: Managers divide activities to increase efficiency and to ensure that work is properly done. The activities which are performed by persons holding different positions must be related. The responsibility, authority and accountability of each person must be well defined. This is necessary to avoid conflict and confusion and to ensure that work is performed as planned. Establishing relationships among individuals and groups is, therefore, an important aspect of the organising process. It would be useful at this stage to explain the meaning of responsibility, authority, and accountability.

i) Responsibility: Responsibility is the obligation of a subordinate to perform the assigned duties. When a subordinate accepts duties, he has to perform those duties in the manner desired by the superior. Duties are assigned to subordinates when a manager has to share the work with them.

ii) Authority: When a person is given certain duties to perform, he must be given necessary authority also. Otherwise, he will not be able to do the work. A typist, for example, cannot do the typing job if he is not given the right to use facilities such as a place to sit in, a table,a chair, a typewriter, typing and carbon papers. etc. Authority includes the right to take decision, right to issue orders and the right to take action if orders are not carried out. An engineer responsible for the construction of a bridge has the authority to command his subordinates, procure the needed material, seek assistance of architects and other experts in the completion of the project. No person should be given any authority unless certain dutieshave been assigned to him. Authority should always follow responsibility.

iii) Accountability: After assigning duties and granting authority, one more relationship becomes necessary. This is the relationship of accountability. Accountability means

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answerability. That is, each person has to report to his superior how the work has been done and how authority has been used. Accountability is always upward. Each subordinate is accountable to his superior who in turn is accountable to his own superior. In this way, every person becomes accountable to top management. Accountability ensures that the work is done as planned and authority is properly used. An important principle of accountability is the principle of single accountability. A person should be accountable to one superior only. If a person is accountable to two or more persons, he may avoid the work or he may be in difficulty to decide whom to obey first.

TYPES OF ORGANIZATIONS

Organizations are basically classified on the basis of relationships. There are two types of organizations formed on the basis of relationships in an organization

Formal Organization - This is one which refers to a structure of well defined jobs each bearing a measure of authority and responsibility. It is a conscious determination by hich people accomplish goals by adhering to the norms laid down by the structure. This kind of organization is an arbitrary set up in which each person is responsible for his performance. Formal organization has a formal set up to achieve predetermined goals.

Informal Organization - It refers to a network of personal and social relationships which spontaneously originates within the formal set up. Informal organizations develop relationships which are built on likes, dislikes, feelings and emotions. Therefore, the network of social groups based on friendships can be called as informal organizations. There is no conscious effort made to have informal organization. It emerges from the formal organization and it is not based on any rules and regulations as in case of formal organization.

Relationship between formal and informal organizations

For a concerns working both formal and informal organization are important. Formal organization originates from the set organizational structure and informal organization originates from formal organization. For an efficient organization, both formal and informal organizations are required. They are the two phase of a same concern.

Formal organization can work independently. But informal organization depends totally upon the formal organization. Formal and informal organization helps in bringing efficient working organization and smoothness in a concern. Within the formal organization, the members undertake the assigned duties in cooperation with each other. They interact and communicate amongst themselves. Therefore, both formal and informal organizations are important. When several people work together for achievement of organizational goals, social tie ups tends to built and therefore informal organization helps to secure co-operation by

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which goals can be achieved smooth. Therefore, we can say that informal organization emerges from formal organization.

ORGANIZATIONAL STRUCTURE

You must have noted that in the organising process, work is arranged and distributed among the members of a group. The end-result of orgnising is a framework of formal relationships among different departments and positions. This framework of formal relationships is known as organisation structure. The term structure refers to the arrangement of parts and interrelationships among activities and people. For example when we refer to the structure of a building, following things immediately come to our mind. What is the total area in which the building has been constructed? How many floors are there? The number of rooms in each floor? The number of doors, windows and ventilators in each room. For what specific purpose, each room will be used. How is one room connected with the other and how is one floor connected with another and so on. Similarly, the organisation structure of a business unit consists of the following elements:

The number of departments The number of sections, units and positions in each department The function of each department, section and position The number of levels of management The responsibility, authority and accountability relationships The channels of communication, i.e., the paths through

which information travels from one position to another and from one level to the other.The structure of an organisation is created by top management and the structure so created is known as formal structure. The purpose of having a formal structure is to perform the activities in a planned and systematic manner.

LINE ORGANIZATION

Line organization is the most oldest and simplest method of administrative organization. According to this type of organization, the authority flows from top to bottom in a concern. The line of command is carried out from top to bottom. This is the reason for calling this organization as scalar organization which means scalar chain of command is a part and parcel

FEATURES OF LINE ORGANIZATION1. It is the most simplest form of organization. 2. Line of authority flows from top to bottom.

3. Specialized and supportive services do not take place in these organization.

4. Unified control by the line officers can be maintained since they can independently take decisions in their areas and spheres.

MERITS OF LINE ORGANIZATION1. Simplest- It is the most simple and oldest method of administration.

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2. Unity of Command- In these organizations, superior-subordinate relationship is maintained and scalar chain of command flows from top to bottom.

3. Better discipline- The control is unified and concentrates on one person and therefore, he can independently make decisions of his own. Unified control ensures better discipline.

4. Fixed responsibility- In this type of organization, every line executive has got fixed authority, power and fixed responsibility attached to every authority.

5. Flexibility- There is a co-ordination between the top most authority and bottom line authority. Since the authority relationships are clear, line officials are independent and can flexibly take the decision. This flexibility gives satisfaction of line executives.

6. Prompt decision- Due to the factors of fixed responsibility and unity of command, the officials can take prompt decision.

DEMERITS OF LINE ORGANIZATION1. Over reliance- The line executive’s decisions are implemented to the bottom. This

results in over-relying on the line officials. 2. Lack of specialization- A line organization flows in a scalar chain from top to bottom

and there is no scope for specialized functions. For example, expert advices whatever decisions are taken by line managers are implemented in the same way.

3. Inadequate communication- The policies and strategies which are framed by the top authority are carried out in the same way. This leaves no scope for communication from the other end. The complaints and suggestions of lower authority are not communicated back to the top authority. So there is one way communication.

4. Lack of Co-ordination- Whatever decisions are taken by the line officials, in certain situations wrong decisions, are carried down and implemented in the same way. Therefore, the degree of effective coordination is less.

5. Authority leadership- The line officials have tendency to misuse their authority positions. This leads to autocratic leadership and monopoly in the concern.

LINE AND STAFF ORGANIZATION

Line and staff organization is a modification of line organization and it is more complex than line organization. According to this administrative organization, specialized and supportive activities are attached to the line of command by appointing staff supervisors and staff specialists who are attached to the line authority. The power of command always remains with the line executives and staff supervisors guide, advice and council the line executives. Personal Secretary to the Managing Director is a staff official.

__________MANAGING DIRECTOR_______________

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↓ ↓ ↓

Production Manager Marketing Manager Finance Manager

↓ ↓ ↓

Plant Supervisor Market Supervisor Chief Assisstant

↓ ↓ ↓

Foreman Salesman Accountant

FEATURES OF LINE AND STAFF ORGANIZATION

1. There are two types of staff : a. Staff Assistants- P.A. to Managing Director, Secretary to Marketing Manager.

b. Staff Supervisor- Operation Control Manager, Quality Controller, PRO

2. Line and Staff Organization is a compromise of line organization. It is more complex than line concern.

3. Division of work and specialization takes place in line and staff organization.

4. The whole organization is divided into different functional areas to which staff specialists are attached.

5. Efficiency can be achieved through the features of specialization.

6. There are two lines of authority which flow at one time in a concern :

a. Line Authority

b. Staff Authority

7. Power of command remains with the line executive and staff serves only as counsellors

MERITS OF LINE AND STAFF ORGANIZATION1. Relief to line of executives- In a line and staff organization, the advice and

counseling which is provided to the line executives divides the work between the two. The line executive can concentrate on the execution of plans and they get relieved of dividing their attention to many areas.

2. Expert advice- The line and staff organization facilitates expert advice to the line executive at the time of need. The planning and investigation which is related to different matters can be done by the staff specialist and line officers can concentrate on execution of plans.

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3. Benefit of Specialization- Line and staff through division of whole concern into two types of authority divides the enterprise into parts and functional areas. This way every officer or official can concentrate in its own area.

4. Better co-ordination- Line and staff organization through specialization is able to provide better decision making and concentration remains in few hands. This feature helps in bringing coordination in work as every official is concentrating in their own area.

5. Benefits of Research and Development- Through the advice of specialized staff, the line executives, the line executives get time to execute plans by taking productive decisions which are helpful for a concern. This gives a wide scope to the line executive to bring innovations and go for research work in those areas. This is possible due to the presence of staff specialists.

6. Training- Due to the presence of staff specialists and their expert advice serves as ground for training to line officials. Line executives can give due concentration to their decision making. This in itself is a training ground for them.

7. Balanced decisions- The factor of specialization which is achieved by line staff helps in bringing coordination. This relationship automatically ends up the line official to take better and balanced decision.

8. Unity of action- Unity of action is a result of unified control. Control and its effectivity take place when coordination is present in the concern. In the line and staff authority all the officials have got independence to make decisions. This serves as effective control in the whole enterprise.

DEMERITS OF LINE AND STAFF ORGANIZATION1. Lack of understanding- In a line and staff organization, there are two authority

flowing at one time. This results in the confusion between the two. As a result, the workers are not able to understand as to who is their commanding authority. Hence the problem of understanding can be a hurdle in effective running.

2. Lack of sound advice- The line official get used to the expertise advice of the staff. At times the staff specialist also provide wrong decisions which the line executive have to consider. This can affect the efficient running of the enterprise.

3. Line and staff conflicts- Line and staff are two authorities which are flowing at the same time. The factors of designations, status influence sentiments which are related to their relation, can pose a distress on the minds of the employees. This leads to minimizing of coordination which hampers a concern’s working.

4. Costly- In line and staff concern, the concerns have to maintain the high remuneration of staff specialist. This proves to be costly for a concern with limited finance.

5. Assumption of authority- The power of concern is with the line official but the staff dislikes it as they are the one more in mental work.

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6. Staff steals the show- In a line and staff concern, the higher returns are considered to be a product of staff advice and counseling. The line officials feel dissatisfied and a feeling of distress enters a concern. The satisfaction of line officials is very important for effective results.

FUNCTIONAL ORGANIZATION

Functional organization has been divided to put the specialists in the top position throughout the enterprise. This is an organization in which we can define as a system in which functional department are created to deal with the problems of business at various levels. Functional authority remains confined to functional guidance to different departments. This helps in maintaining quality and uniformity of performance of different functions throughout the enterprise.

The concept of Functional organization was suggested by F.W. Taylor who recommended the appointment of specialists at important positions. For example, the functional head and Marketing Director directs the subordinates throughout the organization in his particular area. This means that subordinates receives orders from several specialists, managers working above them

FEATURES OF FUNCTIONAL ORGANIZATION1. The entire organizational activities are divided into specific functions such as

operations, finance, marketing and personal relations. 2. Complex form of administrative organization compared to the other two.

3. Three authorities exist- Line, staff and function.

4. Each functional area is put under the charge of functional specialists and he has got the authority to give all decisions regarding the function whenever the function is performed throughout the enterprise.

5. Principle of unity of command does not apply to such organization as it is present in line organization.

MERITS OF FUNCTIONAL ORGANIZATION1. Specialization- Better division of labour takes place which results in specialization of

function and it’s consequent benefit. 2. Effective Control- Management control is simplified as the mental functions are

separated from manual functions. Checks and balances keep the authority within certain limits. Specialists may be asked to judge the performance of various sections.

3. Efficiency- Greater efficiency is achieved because of every function performing a limited number of functions.

4. Economy- Specialization compiled with standardization facilitates maximum production and economical costs.

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5. Expansion- Expert knowledge of functional manager facilitates better control and supervision.

DEMERITS OF FUNCTIONAL ORGANIZATION1. Confusion- The functional system is quite complicated to put into operation,

especially when it is carried out at low levels. Therefore, coordination becomes difficult.

2. Lack of Co- ordination- Disciplinary control becomes weak as a worker is commanded not by one person but a large number of people. Thus, there is no unity of command.

3. Difficulty in fixing responsibility- Because of multiple authority, it is difficult to fix responsibility.

4. Conflicts- There may be conflicts among the supervisory staff of equal ranks. They may not agree on certain issues.

5. Costly- Maintenance of specialist’s staff of the highest order is expensive for a concern.

Questions:

1. Define organising. Explain the importance of organising.2. Explain the steps in process of organizing.3. Explain formal organization and informal organization.4. Explain Line organization , with merits and demerits.5. Write a note on line and staff organization.6. Write a note on functional organization with merits and demerits.

Chapter – 12Forms of Organizations

Sole proprietorship, Partnership firm, Types of partners , Co-operative organization

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After identifying the business in any field e.g., Insurance, it is necessary then to have a legal entity to be known in the society. The legal entity can be in any form of a business organization.

This kind of organization always helps in bringing efficiency in communication and bringing stability to a concernThe various forms of organization are as follows:1) Sole proprietorship2) Partnership3) Co-operative Society4) Joint stock company (Private and Public)

SOLE PROPRIETORSHIP

Meaning:The sole proprietorship is a form of business that is owned, managed and controlled by an individual. He has to arrange capital for the business and he alone is responsible for its management. He is there for , entitled to the profits and has to bear the loss of business, however, he can take the help of his family members and also make use of the services of others such as a manager and other employees. This type of business organisation is also called single ownership or single proprietorship. If the business primarily consists of trade, the organization is a sole trading organization.

Small factories and shops are often found to be sole proprietorship organisations. It is the simplest and most easily formed business organization. This is because not much legal formality is required to establish it. For instance to start a factory the permission of the local authorities is sufficient. Similarly to start a restaurant, it is only necessary to get the permission of local health authorities. Or again, to run a grocery store, the proprietor has only to follow the rules laid down by local administration.

Features of Sole Proprietorship: The important features of a sole-proprietary organization include the following:

(i) Individual Initiative: One person is the owner in a sole proprietary form of organisation.

(ii) Risk Bearing: The proprietor is the sole beneficiary of profits in this form organisation. If there is a loss he alone has to bear it. Thus the risks of business are borne bythe proprietor himself.

(iii) Management and control: Management and control of this type of organisation is the responsibility of the sole proprietor. He may, however, employ a manager or other people for the purpose.

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(iv) Minimum government regulations: The government does not interfere with the working of the sole proprietorship organisation. However, they have to comply with the general laws and rules laid down by government.

(v) Unlimited liability: The sole proprietor has to bear the losses and is responsible for the liabilities of the business. If the business assets are not sufficient to meet the liabilities, he may also have to sell his personal property for that purpose.

(vi) Secrecy: All important decision taken by the owner himself. He keeps all the business secrets only to himself.

Merits Of Sole Proprietorship: A sole proprietary organisation has the following advantages:

(i) Easy formation: A sole proprietorship business is easy to form where no legal formality involved in setting up this type of organization. It is not governed by any specific law. It is simply required that the business activity should be lawful and should comply with the rules and regulations laid down by local authorities.

(ii) Better Control: In sole proprietary organisation, all the decisions relating to business operations are taken by one person, which makes functioning of business simple and easy. The sole proprietor can also bring about changes in the size and nature of activity. This gives better control to business.

(iii) Sole beneficiary of profits: The sole proprietor is the only person to whom the profits belong. There is a direct relation between effort and reward. This motivates him to work hard and bear the risks of business.

(iv) Benefits of small-scale operations: The sole proprietorship is generally organized for small-scale business. This helps the proprietor’s family members to be employed in business. At the same time such a business is also entitled to certain concessions from the government. For example, small industrial organisations can get electricity and water supply at concessional rates on a priority basis.

(v) Inexpensive Management: The sole proprietor does not appoint any specialists for various functions. He personally supervises various activities and can avoid wastage in the business.

Limitations Of Sole Proprietorship: A sole proprietor generally suffers from the following limitations:

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(i) Limitation of management skills: A sole proprietor may not be able to manage the business efficiently as he is not likely to have necessary skills regarding all aspects of the business. This poses difficulties in the growth of business also.

(ii) Limitation of Resources: The sole proprietor of a business is generally at a disadvantage in raising sufficient capital. His own capital may be limited and his personal assets may also be insufficient for raising loans against their security. This reduces the scope of business growth.

(iii) Unlimited liability: The sole proprietor is personally liable for all business obligations. For payment of business debts, his personal property can also be used if the business assets are insufficient.(iv) Lack of continuity: A sole proprietary organisation suffers from lack of continuity. If the proprietor is ill this may cause temporary closure of business. And if he dies the business may be permanently closed.

From the above account of the merits and limitations it becomes clear that it is only personal services like repair work, tailoring etc. small factories, retail shops and professional activities which can be set up as sole proprietary organisations. In India, this form of organisation is quite popular and accounts for the largest number of business units.

PARTNERSHIP FIRM

Meaning:Partnership is an association of persons who agree to combine their financial resources and managerial abilities to run a business and share profits in an agreed ratio. Since the resources of a sole proprietor to finance, and his capacity to manage a growing business is limited, he feels the need for a partnership firm. Partnership business, therefore, usually grows out of the need for expansion of business with more capital, better supervision and control, division of work and spreading of risks.

The Indian Partnership Act defines partnership as “Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. The persons who have agreed to join in partnership are individually called “Partners” and collectively a ‘firm’. A partnership firm can be formed with a minimum of two partners and it can have a maximum of twenty partners.

Features of Partnership: The features of partnership are as follows:

(i) Existence of an agreement: Partnership is formed on the basis of an agreement between two or more persons to carry on business. It does not arise out of the operation of law as in the case of joint Hindu family business. The terms and conditions of partnership are laid down in a document known as Partnership Deed.

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(ii) Engagement in business: A partnership can be formed only on the basis of a business activity. Its business may include any trade, industry or profession. Thus, a partnership can engage in any occupation – production and/or distribution of goods and services with a view to earning profits.

(iii) Sharing of profits and losses: In a partnership firm, partners are entitled to share in the profits and are also to bear the losses, if any.

(iv) Agency relationship: The partnership business may be carried on by all or any of the partners acting for all. Thus, each partner is a principal and so can act in his own right. At the same time he can act on behalf of other partners as their agent. Thus, every partner can bind the firm by his acts.

(v) Unlimited Liability: The liability of partners is unlimited as in the case of sole proprietorship. In case some obligation arises then not only the partnership assets but also the private property of the partners can be taken for the payment of liabilities of the firm.

(vi) Common Management: Every partner has a right to take part in the running of the business. It is not necessary for all partners to participate in the day-to-day activities of the business but they are entitled to participate. Even if partnership business is run by some partners, the consent of all other partners is necessary for taking important decisions.

(vii) Restriction on transferability of share: No partner can transfer his share in partnership to any other person. He may, however, do so with the consent of all other partners.

(viii) Registration: To form a partnership firm, it is not compulsory to register it. However, if the partners so decide, it may be registered with the Registrar of Firms. There are advantages of registration, which are discussed later.

(ix) Duration: The partnership firm continues at the pleasure of the partners. Legally a partnership comes to an end if any partner dies, retires or becomes insolvent. However, if the remaining partners agree to work together under the original firm’s name, the firm will not be dissolved and will continue its business after settling the claim of the outgoing partner.

Formation and Registration:

Partnership Deed:Since partnership rests on an agreement among persons, its formation does not involve any special legal problems. Generally, the partnership agreement is reduced to writing and a Partnership Deed is prepared. Partnership Deed lays down the terms and conditions of partnership and the rights, duties and obligations of partners. The following points are generally covered in the Deed:

a. The nature of business.

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b. Name of the firm and the place where its business will be carried on.c. Amount of capital to be contributed by each partner.d. Duties, powers and obligations of all the partners.e. Method of preparing accounts and arrangement for audit.f. Whether loans will be accepted from a partner over and above the capital also,

if so, at what rate of interest.g. The amount to be allowed as private drawings by each partner and the interest to be charged thereon.h. The ratio in which profits are to be shared.i. Whether a partner can be expelled and, if so, the procedure for the same.j. Method for the settlement of disputes.k. Circumstances under which the partnership will stand dissolved, and in case of

dissolution, under whose custody the books of accounts will remain.

The Deed has to be stamped and each partner should have a copy of it.

Registration of firm:

Registration of a partnership firm is not compulsory under Indian Partnership Act. In England registration is compulsory.

In India, certain privileges which are allowed to those firms, which are registered. But an unregistered firm suffers from certain disabilities. These disabilities make it virtually compulsory for a firm to get registered. A partnership firm may be registered at any time. That is, at the time of formation or at any time during its existence. A partnership firm desiring registration applies lo the Registrar of Firms in prescribed form along with the registration fee. The application should state the following:

a. Name of the firm.b. The principal place of business of the firm.c. The name of any other place where the firm is to carry on business:d. Date of admission of the partners in the firm.e. Names and permanent addresses of the partners.f. Duration of the firm.

The application shall be signed and verified by each partner. Changes in the above particulars have to be communicated to the Registrar. The Certificate of registration is reliable evidence and a conclusive proof of the existence of the firm.

Consequences of Non-Registration:An unregistered firm suffers from the following serious disabilities:

(i) A partner of an unregistered firm can not file a suit against the firm or any other partner for enforcing his right arising out of the contract;

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(ii) An unregistered firm cannot file suit against any third party for the recovery of the claims;(iii) Such a firm also cannot file a suit against any partner.

Types of Partnership

According to the nature of agreement among partners, there can be three types of partnership as follows:(i) Partnership at-will: Such a partnership exists on the will of the partners. That is, it can be brought to an end whenever any partner gives notice of his intention to do so.

(ii) Particular partnership: A particular partnership is formed for undertaking a particular venture. It comes to an end automatically with completion of the venture.

(iii) Partnership for a fixed duration: Such partnership is for a fixed period of time say 2 years, 5 years or any other duration.

Types of PartnersThe various types of partner found in partnership firms are as follows:

(i) Active Partners: Partners who take active part in the conduct of day-to-day business of the firm are called active partners. These partners carry on business on behalf of the other partners.

(ii) Sleeping or dormant partners: Sleeping or dormant partners are those who do not take active part in the management of the business. Such partners only contribute capital in the firm and are bound by the activities of other partners. However, they share in the profits and losses of the business.

(iii) Others: Active and sleeping partners are, as a matter of fact, the full-fledged partners i.e. they share in profits and losses of the business and are liable for its dues. However, there are other types of partners also who may be associated with partnership directly or indirectly. They are not full-fledged partners, such partners may include the following:

(a) Nominal Partners: Nominal partners are those who do not have interest in the business but lend their name to the firm. They do not make any capital contribution, and are not entitled to take part in management, but are liable, like other partners, to third parties. Such partners generally have a pecuniary interest (like a share in the profits) in lending their name to a firm. However in certain cases they may not have any pecuniary interest in doing so. For example, a reputed industrialist may, without any profit motive lend his name to a firm run by his family members.

(b) Partners by holding out: If a person by his words or conduct holds out to another that he is a partner, he will be prevented from denying that he is not a partner. The person who thus

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becomes liable to third parties to pay the debts of the firm is known as a partner by holding out.

Minor admitted into the benefits of partnership

A minor is a person who has not attained the age of 18 years. Since a minor is not capable of entering into a valid agreement, he cannot become partner of a firm. He may, however, be admitted to the benefits of an existing partnership.It is clear from the preceding discussion that partners can be of three categories:

(i) Those who share in the profits and losses of the business and assume liability of the business debts (like active partners, dormant partners and nominal partners).(ii) Those who share in profits only (like minor partners) and (iii) Those who assume liability without sharing in the profits of the business (like partners by holding out).

Merits of Partnership : A partnership form of organisation offers the followingadvantages:

(i) Ease in formation: A partnership is very easy to form. All that is required is an agreement among the partners. Even the expenses to be incurred for registration are-not much.

(ii) Pooling of financial resources: A partnership commands more financial resources compared to sole proprietorship. This helps in expanding business and earning more profits. As and when a firm requires more money, more partners can be admitted.

(iii) Pooling of managerial stalls: A partnership facilitates pooling of managerial skills of all its partners. This leads to greater efficiency in business operations. For instance, in a big partnership firm, one partner can handle production function, another partner can look after all marketing activity, still another can attend to legal and personnel problems, and so on.

(iv) Balanced business decisions: In a partnership firm, decisions are taken unanimously after considering all the major aspects of a problem. This ensures not only balanced business decisions but also removes difficulties in the smooth implementation of those decisions.

(v) Sharing of risks: Unlike sole proprietary organisation, the risks of partnership business are shared by partners on a predetermined basis. This encourages partners to undertake risky but profitable business activities.

Limitations of Partnership : A partnership form of organisation suffers from the following major limitations:

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(i) Uncertainty of existence: The existence of a partnership firm is very uncertain. The retirement, death, bankruptcy or lunacy of any partner can put an end to the partnership. Further, the partnership business can come to a close if any partner demands it.

(ii) Risks of implied authority: It is true that like the sole proprietor each partner has unlimited liability. But his liability may arise not only from his own acts but also from the acts and mistakes of co-partners over whom he has no control. This discourages many persons with money and ability, to join a partnership firm as partner.

(iii) Risks of disharmony: In partnership, since decisions are taken unanimously, it is essential that all partners reconcile their views for the common good of the organisation. But there may arise situations when some partners may adopt rigid attitudes and make it impossible to arrive at a commonly agreed decision. Lack of harmony may paralyse the business and cause conflict and mutual bickering.

(iv) Difficulty in withdrawal from the firm: Investment in a partnership can be easily made but cannot be easily withdrawn. This is so because the withdrawal of a partner’s share requires the consent of all other partners.

(v) Lack of institutional confidence: A partnership business does not enjoy much confidence of banks and financial institutions. It is because the nature of its activities is notdisclosed at public and the agreement among partners is not regulated by any law. As a result large financial resources cannot be raised by partnership and growth of business cannot be ensured.

(vi) Difficulties of expansion: It is difficult for a partnership firm to undertake modernization of expansion of its operations. This is because of its inability to raise adequatefunds for the purpose. Limited membership (restricted to 20) and their limited personal resources do not permit large amounts of capital to be raised by the partners.

Therefore, large-scale business cannot generally be organised by partnerships. It is quite obvious from the discussions that the partnership form of organisation is excellent when the size of business is medium, i.e. neither too small not too large, and when the partners can work in full co-operation with one another,

CO-OPERATIVE ORGANISATION

Meaning:A co-operative form of business organization is different from other forms of organization. It is a voluntary association of persons for mutual benefit and its aims are accomplished through self help and collective effort. The main principle underlying a cooperative organization is

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mutual help, i.e., each for one and all for each. A minimum of 10 persons are required to form a co-operative society. To be called a co-operative society

Characteristics of Co-operative OrganisationThe following are the main characteristics of cooperative societies:

(i) Voluntary association: In co-operatives, the membership is voluntary. Anybody having a common interest is free to join a co-operative society. The member can also leave the society anytime after giving proper notice.

(ii) Equal voting rights: In a co-operative society, the principle of one-man one vote is adopted. A member has only one vote irrespective of the number of share(s) held by him. Thus, a co-operative society is run on democratic principles.

(iii) Separate legal entity: A co-operative society is required to be registered under the Co-operative Societies Act. Registration provides it a separate legal entity. Its existence is quite different from its members. The death, insolvency or lunacy of a member does not affect itsexistence. It can sue and be sued in its own name. It can make agreements as well as purchase and sell properly in its own name.

(iv) Service motive: A co-operative society is based on the service motive of its members. It’s main objective is to provide service to the members and not to maximize profits. Earning profit is the most important objective of other forms of business organisation. It is not so in the case of co-operatives.

(v) Distribution of surplus: Out of the profits of the cooperative, members are paid dividend and bonus. The bonus is given according to the volume of business transacted by each member with the co-operative society.

For example, in a consumer co-operative society, bonus is paid in proportion to the purchases made by members during a year. In producers’ co-operative the valued goods delivered for sale form the basis of distributing bonus.

Merits of Co-operative Organisations : The co-operative form of organisation offers the following advantages:

(i) Easy to form: A co-operative society is voluntary association and may be formed with a minimum of ten adult members. Its registration is very simple and can be done without much legal formalities.

(ii) Open membership: Membership in a Co-operative organisation is open to all having a common interest . A person can become a member at any time he likes and can leave the society by returning his shares without affecting its continuity.

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(iii) Democratic management : A co-operative society is managed in a democratic manner. It is based on principle of one man one vote. All members have equal rights and can have a voice in its management.

(iv) Limited liability: The liability of the members of a cooperative society is limited to the extent of capital contributed by them. They don’t have to bear personal liability for the debts of the society.

(v) Stability: A co-operative society has a separate legal existence. It is not affected by the death, insolvency, lunacy or permanent incapacity of any of its members. It has a fairly stable life and continues to exist for a long period.

(vi) Economical operations: The operation of co-operative society is quite economical due to elimination of middlemen and the voluntarily services provided by its members.(vii) Government patronage: Government gives all kind of help to co-operatives, such as loans at lower rates of interest and relief in taxation.

(viii)Other benefits: Certain non-economic benefits are also derived by members through cooperatives. Credit cooperatives, for instance, promote habits of thrift and producers’ co-operative encourage joint activity among members.

Limitations of Co-operative Organisations : As against the above-mentioned advantages of cooperatives the following limitations and drawbacks of this form of organisation must also be noted:

(i) Limited capital: Co-operatives are usually at a disadvantage in raising capital because of the low rate of return on capital invested by members.

(ii) Inefficient management: The management of a cooperative society is generally inefficient because the managing committee consists of part-time and inexperienced people. Qualified managers are not attracted towards a co-operative on account of its limited capacity to pay adequate remuneration.

(iii) Absence of motivation: A co-operative society is formed for mutual benefit and the interest of individual members are not fully satisfied. There is no direct link between effort and reward. Hence members are not inclined to put in their best efforts in a co-operative society.

(iv) Differences and factionalism among members: Once the initial enthusiasm about the co-operative ideal is exhausted, differences and group conflicts arise among members. Then it becomes very difficult to get full cooperation of the members. The selfish motives of members begin to dominate and service motive is some times forgotten. But the society continues because it functions in the interest of members.

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(v) Rigid rules and regulations: Excessive government regulation and control over Co-operatives affect their functioning. For example, a Co-operative society is required to get its accounts audited by the auditors of the co-operative department and submit its accounts regularly to the Registrar. These regulations and control may adversely affect the flexibility of operations and the efficiency of management in a co-operative society.

Definition Of Joint Stock Company :-

A joint stock company is an artificial person recognized by law with a distinctive name, a common seal a common capital comprising transferable carrying limited liability and having a perpetual succession.

It is formed and controlled under the company ordinance of the state. It is a very popular form of organization.

Features or Characteristics of Joint Stock Company

Following are the important feature of joint stock company :

1. Separate Legal Existence :-

joint stock company has separated entity from its members. It can sue in a court of law in its own name. Everybody knows only the name of the company and its address. Nobody knows about the share holders.

2. Long Life :-

A joint stock company has a long life as compared to the other forms of business organization. If any share holder dies or withdraws his capital there is no affect on the continuity of company life.

3. Distribution of Profit :-

The basic aim of the joint stock company is to earn profit. Some portion of the whole profit is transferred to Reserve Fund, While the remaining is distributed among the share holders.

4. Limited Liability :-

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The liability of the share holders is limited to the extent to the face value of the shares they hold. There is no liability on the private property of the share holder.

5. Number of the Members :-

In case of private company minimum members should be two and maximum fifty. While in a public company minimum member should be seven but there is no restriction on the maximum members.

6. Management :-

The share holder select the Board of Directors in the annual general meting. So all the management is conducted by the Board of Directors. Shareholders are not allowed to participate directly in the management.

7. Transferability of Shares :-

A share holder of the company can transfer his shares easily to other persons, There is no restriction on the purchase and sale.

8. Capital Borrowing :-

Joint stock company can borrow capital in its own name and can expand the business.

9. Changing in Business :-

A joint stock company may not change the nature of business except the sanction of court.

10. Trade Agreement :-

A joint stock company may join the trade agreement with other firms in its own name. Because it has a separate existence.

11. Common Seal :-

A company cannot sign itself. So the common seal with the name of the company is used as a substitute for its signature.

12. Payment of Double Taxes :-

First of all a company pays the tax on the whole dividend. Secondly shareholders pay tax on their individual income. So a joint stock company pays double taxes to the government.

13. Government Control :-

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A joint stock company has to comply the rules of the Govt. It has also to sub,it the various reports to Registrar. A company has also to audit its accounts.

14. Purchase and Sale of Property :-

A joint stock company can also purchase and sale the property in its name.

DIFFERENCE BETWEEN PARTNERSHIP AND JOINT STOCK COMPANYWe can distinguish between partnership and joint stock company by the following ways :

1. Formation :-Partnership : It is formed by a written agreement.Joint stock company : It is formed under the company ordinance.

2. Members :-Partnership : Minimum 2 and maximum 20 members in the partnership.Joint stock company : It has shareholders.

3. Liability :-Partnership : The liability of each partner is unlimited if it is not specified in the agreement.Joint stock company : Shareholders liability is limited only to the value of the shares.

4. Financing :-Partnership : Generally partners contribute the fund.Joint stock company : It issues ordinary paid up shares to collect the capital. It can also borrow from banks.

5. Tax :-Partnership : Each partner of the registered firm will pay tax individually.Joint stock company : The company is subject to double taxation.

6. Management :-Partnership : In this case managerial functions are shared by partners according their mutual agreement.Joint stock company : Shareholders elect the board of directors and board appoints the experts for each department.

7. Control :-Partnership : All the decisions are made with the consultation of all the members.Joint stock company : The board of directors controls the affairs of the business.

8. Dissolution :-Partnership : It can be dissolved with the mutual consent of the partners. It may be dissolved if any partner dies retires or become insolvent.Joint stock company : ( 1 ). It can be dissolved by court. ( 2 ). With the approval of majority

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share holders. ( 3 ). If corporate charter expires. ( 4 ). It can be dissolved by the state due to misuse of powers.

Questions:

1. Explain Sole proprietorship concern with advantages and disadvantages .2. Explain partnership concern with merits and demerits.3. Explain joint stock company.4. Explain in detail Co-operative organization.5. Write short notes

A. Types of partnersB. Difference between partnership and joint stock companyC. Partnership deed.

Chapter – 13Quick Start methods

Introduction, Franchising – Advantages and disadvantages , Acquisitions – advantages and disadvantages, mergers , outsourcing – advantages and disadvantages

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More often entrepreneurship is described in terms of starting a new venture, not buying an existing firm. But buying an existing firm has become common today as starting from scratch. Buying usually involves finding a suitable ongoing business, but it can also occur through transfer of ownership, as an when the business owner retires and sells the firm to his or her son or daughter. It can also be seen that venturing with others are recognized under new focus of ownership with new investors.

DEFINITION

An arrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications. The franchisee usually pays a one-time franchise fee plus a percentage of sales revenue as royalty, and gains (1) immediate name recognition, (2) tried and tested products, (3) standard building design and décor, (4) detailed techniques in running and promoting the business, (5) training of employees, and (6) ongoing help in promoting and upgrading of the products. The franchiser gains rapid expansion of business and earnings at minimum capital outlay.

A. ADVANTAGES FROM THE FRANCHISOR’S POINT OF VIEW:

1. Financial: Franchising creates another source of income for the franchisor, through payment of franchise fees, royalty & levies in addition to the possibility of sourcing private label products to franchisees. This capital injection provides an improved cash flow, a higher return on investment and higher profits. Other financial benefits that the franchisor enjoys are reduced operating, distribution and advertising costs. Of course that also means more allocated funds for research and envelopment. Additionally, there will always be economies of scale with regard to purchasing power.

2. Operational: The franchisor can have a smaller central organization when compared to developing and owning locations themselves. Franchising also means uniformity of procedures, which reflects on consistency, enhanced productivity levels and better quality. Effective quality control is another advantage of the franchise system. The franchisee is usually self motivated since he has invested much time and money in the business, which means working hard to bring in better organizational and monetary results. This also reflects on more satisfied customers and improved sales effectiveness.

3. Strategic: To the franchisor, franchising means the spreading of risks by multiplying the number of locations through other people’s investment. That means faster network expansion and a better opportunity to focus on changing market needs, which in its turn means reduced effect from competitors.

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4. Administrative: With a smaller central organization, the business maintains a more cost effective labour force, reduction of key staff turnover and more effective recruitment.

B. ADVANTAGES FROM A FRANCHISEE’S POINT OF VIEW:

1. Avoiding the unnecessary trial and error period in starting and operating a new business.

2. Lower financial risk, compared to other ventures, because investment costs are lower and profit margins are higher.

3. Business Format Franchising complete packages ensure a ready to go “turn-key” franchised unit.

4. Managing a small business whilst depending on the power of the franchisor company which has a bigger organization.

5. The franchisee has an opportunity to run a proven business concept with a successful operational track record.

6. The opportunity to learn the latest developments and changes in the local and global market from the franchisor and focus entirely on developing the sales revenues.

7. The benefit of operating under a recognized trade name/trademark, which can have better marketing results.

8. The franchisee has access to accumulated business experience and technical know-how in managing the business.

9. A unified store design which leverages the business reputation in marketing the concept.

10. Easier purchasing, storing, and product display systems.

C. DISADVANTAGES FROM A FRANCHISOR’S POINT OF VIEW:

1. Considerable capital allocation is required to build the franchise infrastructure and pilot operation. At the beginning of the franchise program, the franchisor is required to have the appropriate resources to recruit, train, and support franchisees.

2. At the beginning of the franchise program there is a broader risk that the trade name can be spoiled by misfits until such time the franchisor is capable of selecting the right candidate for the business.

3. There is a risk that franchisees exercise undue pressure over the franchisor in order to implement new policies and procedures.

4. The franchisor has to disclose confidential information to franchisees and this may constitute a risk to the business.

D. DISADVANTAGES FROM A FRANCHISEE’S PINT OF VIEW:

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1. The requirement to pay the franchise fees and royalty to the franchisor, which in some cases can be exaggerated.

2. The transfer of all goodwill built in the local market to the franchisor upon expiration or termination of the franchise contract.

3. The necessity of abiding by the franchisor’s operating systems, standards, policies and procedures.

4. Reduced corporate profit margin due to payment of royalties and levies.

BUYING AN EXISTING FIRM (ACQUISITION)

Definition of 'Acquisition'

A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own. Acquisitions are often paid in cash, the acquiring company's stock or a combination of both.

Acquisitions can be either friendly or hostile. Friendly acquisitions occur when the target firm expresses its agreement to be acquired, whereas hostile acquisitions don't have the same agreement from the target firm and the acquiring firm needs to actively purchase large stakes of the target company in order to have a majority stake.

In either case, the acquiring company often offers a premium on the market price of the target company's shares in order to entice shareholders to sell.

ADVANTAGES AND DISADVANTAGES OF BUYING AN EXISTING FIRM

AdvantagesDisadvantages

Goodwill

One of the major advantages to purchasing an existing business is that you get the benefit of the customer base, name recognition and other goodwill of the existing business.

If, for any reason, the existing business has a poor reputation in some respect, then you may inherit this as well when you buy the business – especially if you continue to trade under the same name.

EmployeesYou may get a set of experienced and capable employees, eliminating

You may get employees who are not necessarily people you would have

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or reducing the need for you to interview and hire a lot of new employees.

selected. You might also inherit problems with employees, such as disputes with particular individuals, unreasonable expectations as to pay and working conditions, or trade union issues.

Supplier relationships

You could get the advantage of favourable credit terms from suppliers who have a long-standing relationship with the business. In addition, suppliers may have a good understanding of the specifications for goods supplied and the other needs of the business.

There may be supplier relationships that are not so good, or key suppliers that have had bad experiences with the business in the past and therefore offer worse credit terms than they would offer to a start-up. Or suppliers offering good terms might want to re-negotiate on the change of ownership.

Banking and other financing arrangements

Although banks frequently will require that a business re-negotiate its credit arrangements on a change of ownership (even where the transaction is a share purchase rather than an asset purchase), the fact that the business has an earnings track record will likely make it easier to get better financing arrangements than a start-up business could obtain.

You could find that the business has a poor reputation amongst lenders.

Other credit arrangements (equipment hire-purchase, etc)

As with banking arrangements, the fact that an existing business has a track record may help you in procuring equipment financing, invoice discounting and other arrangements. In some circumstances, you may be able to keep existing arrangements in place after you buy the business.

The business could have a black mark with certain finance providers.

Liabilities: trade creditors

If the business has a good record of paying trade creditors, you will get the benefit of that.

If the business has a record or late payment, disputes and default in payment to trade creditors, you will inherit it.

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Liabilities: debts, pending litigation

If you are purchasing the business in an asset deal (rather than buying a company) and have carried out good due diligence, you should be able to insulate yourself from any liabilities associated with the business prior to your period of ownership. To give the buyer added protection, sometimes a business purchase agreement will require the seller to indemnify the buyer against any such liabilities, and a part of the purchase price might be withheld by the buyer for a period after completion – in order to provide security for that indemnity.

If you buy an existing business by purchasing a trading company (rather than just the assets of the business) then the company you purchase will continue to have all of the liabilities it had prior to your purchase. Ordinarily, the buyer will ask the seller to disclose all such liabilities, and the buyer will have a claim against the seller for any undisclosed liabilities that surface after the transaction completes. Without adequate protection, though, the buyer could, in effect, end up with responsibility for liabilities that the business incurred prior to the date the buyer purchased the business.

Premises

For a variety of reasons, there can be significant benefits in taking over existing premises rather than finding a new site for a start-up business. A solicitor can advise you as to the details.

Leases can be full of traps for the unwary. If you are taking over a leasehold or other premises occupied by the business you are purchasing, you should get detailed legal advice as to the responsibilities of the business in relation to such premises, including rent, service charges, dilapidations and other matters.

Stock

An existing business is likely to have sufficient stock to meet its near-term requirements, and as a buyer you may be able to negotiate an attractive price for the stock.

The value of stock may not be as it appears. Some stock could be old, damaged, obsolete or otherwise non-saleable. Where the stock represents a significant part of what the buyer is purchasing, a stock-take at completion is usually sensible – with an understanding that there will be a reduction in price for stock that is not likely to be useable or saleable.

Equipment / Vehicles An existing business will likely have

the equipment and/or vehicles and other capital items required for the operation of the business – although

The equipment, vehicles, etc owned by the existing business may be worn out or poorly maintained. Also, it may be difficult to establish a value for each

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it will be important to agree on the value of such of items for purposes of the depreciation that will be available to you, as buyer. If the sale is a “transfer as a going concern” it is likely that you will not have to pay VAT on such items.

such item.

Regulatory Consents

If the business requires some form of regulatory consent in order to operate, then the consent held by the existing business might – in some cases – be assignable or transferable or might continue to be valid despite a change in control.

Regulatory consents might not be assignable, so you will have to obtain new ones. In addition, the business you are purchasing might have a poor compliance record – which you will inherit.

VAT registration

If you purchase a limited company that operates the business, you will likely take over the existing VAT number of the entity. If, however, you simply purchase the assets of the business (not the entity) then you will need to register the business for VAT.

If you purchase the entity and take over its VAT registration, you may find that there are irregularities or liabilities associated with the entity’s VAT account that the seller did not disclose to you.

Tax “assets”

If you purchase a limited company that operates the business, you will get the advantage of any built-in tax assets, such as accumulated losses, depreciation, amortisation, etc. If you simply purchase the assets of the business, you will be able to depreciate certain assets based on the price allocated to them – but you will not get the benefit of losses and similar tax “assets” that belong to the seller.

The “tax assets” of a limited company that you purchase may be of little or no value to you, and in any event if you start a new business you will get depreciation on equipment and certain other capital items that you might purchase when you start the business.

Book debtsSometimes as the purchaser of an ongoing business, you will get the benefit of uncollected book debts – generally the terms on which you do

The seller’s debtor book may be full of debts that are old or otherwise difficult to collect, and therefore could end up yielding little cash.

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so are negotiated as part of the transaction. The ability to collect some of the existing book debts for your own account might help you generate cash shortly after you buy the business – rather than having to wait until you generate your own invoices and collect them.

Non-competition

Frequently, the purchaser of an existing business will get the benefit of a non-compete covenant from the seller (since the value of the goodwill the buyer is purchasing could be seriously undermined if the seller were to continue to trade in the same type of business). Even in a crowded marketplace, the non-compete covenant will remove at least one potential competitor.

Non-compete clauses can be difficult to enforce, and must be carefully drawn if they are to be enforceable.

MERGERS OR CONSOLIDATION

A merger is the complete absorption of one firm by another. The acquiring firrm retains itsname and its identity, and it acquires all of the assets and liabilities of the acquired firm. After a merger, the acquired firm ceases to exist as a separate business entity.

A consolidation is the same as a merger except that an entirely new firm is created. In a consolidation, both the acquiring firm and the acquired firm terminate their previous legal existence and become part of a new firm. For this reason, the distinction between the acquiring and the acquired firm is not as important in a consolidation as it is in a merger.

The rules for mergers and consolidations are basically the same. Acquisition by merger or consolidation results in a combination of the assets and liabilities of acquired and acquiring firms; the only difference lies in whether or not a new firm is created. We will henceforth use the term merger to refer generically to both mergers and consolidations.

There are some advantages and some disadvantages to using a merger to acquire a firm:

1. A primary advantage is that a merger is legally simple and does not cost as much as other forms of acquisition. The reason is that the firms simply agree to combine their entire

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operations. Thus, for example, there is no need to transfer title to individual assets of the acquired firm to the acquiring firm.

2. A primary disadvantage is that a merger must be approved by a vote of the stockholders of each firm. Typically, two-thirds (or even more) of the share votes are required for approval. Obtaining the necessary votes can be time-consuming and difficult. Furthermore, as we discuss in greater detail a bit later, the cooperation of the target firm’s existing management is almost a necessity for a merger. This cooperation may not be easily or cheaply obtained.

OUTSOURCING

Outsourcing is the contracting out of a business process to a third-party. The term "outsourcing" became popular in the United States near the turn of the 21st century. Outsourcing sometimes involves transferring employees and assets from one firm to another, but not always. Outsourcing is also used to describe the practice of handing over control of public services to for-profit corporations. [2]

Outsourcing includes both foreign and domestic contracting, and sometimes includes offshoring or relocating a business function to another country. Financial savings from lower international labor rates is a big motivation for outsourcing/offshoring.

The opposite of outsourcing is called insourcing, which entails bringing processes handled by third-party firms in-house, and is sometimes accomplished via vertical integration. However, a business can provide a contract service to another business without necessarily insourcing that business process.

Why do organizations outsource their business process?The key factors which have led to a growing trend of outsourcing are

Lack of expert-labor in some portions of the business process Availability of cheaper labor, whilst not comprising on the quality of output Ability and feasibility to concentrate on the other crucial business process

These factors have specifically contributed to most of the outsourced partners across different locations in the world. Expertise in communication capabilities, technical expertise and favorable financial packages are the most important advantages of outsourcing to India.

ADVANTAGES AND DISADVANTAGES OF OUTSOURCING

Outsourcing most commonly known as offshoring has pros and cons to it. Most of the time, the advantages of outsourcing overshadow the disadvantages of outsourcing.

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http://en.wikipedia.org/wiki/Vertical_integration

http://en.wikipedia.org/wiki/Insourcing

http://en.wikipedia.org/wiki/Offshoring

http://en.wikipedia.org/wiki/Outsourcing#cite_note-2

http://en.wikipedia.org/wiki/United_States

http://en.wikipedia.org/wiki/Contract


THE ADVANTAGES OF OUTSOURCING

Swiftness and Expertise: Most of the times tasks are outsourced to vendors who specialize in their field. The outsourced vendors also have specific equipment and technical expertise, most of the times better than the ones at the outsourcing organization. Effectively the tasks can be completed faster and with better quality output

Concentrating on core process rather than the supporting ones: Outsourcing the supporting processes gives the organization more time to strengthen their core business process.

Risk-sharing: one of the most crucial factors determining the outcome of a campaign is risk-analysis. Outsourcing certain components of your business process helps the organization to shift certain responsibilities to the outsourced vendor. Since the outsourced vendor is a specialist, they plan your risk-mitigating factors better.

Reduced Operational and Recruitment costs: Outsourcing eludes the need to hire individuals in-house; hence recruitment and operational costs can be minimized to a great extent. This is one of the prime advantages of offshore outsourcing.THE DISADVANTAGES OF OUTSOURCING

Risk of exposing confidential data: When an organization outsources HR, Payroll and Recruitment services, it involves a risk if exposing confidential company information to a third-party.

Synchronizing the deliverables: In case you do not choose a right partner for outsourcing, some of the common problem areas include stretched delivery time frames, sub-standard quality output and inappropriate categorization of responsibilities. At times it is easier to regulate these factors inside an organization rather than with an outsourced partner.

Hidden costs: Although outsourcing most of the times is cost-effective at times the hidden costs involved in signing a contract while signing a contract across international boundaries may pose a serious threat.

Lack of customer focus: An outsourced vendor may be catering to the expertise-needs of multiple organizations at a time. In such situations vendors may lack complete focus on your organization’s tasks.

With all these pros and cons of outsourcing to be considered before actually approaching a service provider, it is always advisable to specifically determine the importance of the tasks which are to be outsourced. It is always beneficial for an organization to consider the advantages and disadvantages of offshoring before actually outsourcing it.

Questions:

1. Define franchising with merits and demerits.2. Explain mergers . Explain their advantages and disadvantages.3. Explain what an acquisition is ? Explain the advantages and disadvantages of buying an existing firm.

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4. Write a note on outsourcing.

Chapter – 14Small and Medium Enterprises

Introduction , Importance of SMEs, Challenges, Classification

Introduction

SME sector in India is the key driver of the nation's economic growth with a contribution of over 40 percent of the country's industrial output and about 35 percent of direct exports and another 15 percent of indirect exports. In terms of employment it is a very crucial sector being the second largest sector after agriculture. The growth recorded by SSI in India is 2% more than any other sector; it accounts for 40% of the country’s GDP, 35% of Direct exports, 15% of Indirect Exports (through Merchant Exporters, Trading Houses & Export Houses) and employs more than 20 million people.

The small and medium enterprises today constitute a very important segment of the Indian economy. The development of this sector came about primarily due to the vision of our late Prime Minister Jawaharlal Nehru who sought to develop core industry and have a supporting sector in the form of small scale enterprises. SMEs sector has emerged as a dynamic and vibrant sector of the economy. The Indian economy is expected to grow by over 8 per cent per annum until 2020 and can become the second largest in the world, ahead of the United States, by 2050, and the third largest after China and the United States by 2032. The turnaround in manufacturing and other sectors, which has occurred in the face of increased global competition, is due to improved efficiency following the various policy reforms in recent years. Small and medium enterprises (SMEs) constitute 6 per cent of GDP, 34 per cent of national exports and account for the employment of more than 30 million people. This paper is divided into three sections- the first section deals with the definition aspect of the SME ‘s and Indian economy s general aspects, the second section deals with the challenges faced by SME s and the third on their impact on the Indian Economy.

SME is the abbreviation for Small and Medium Enterprises. These enterprises can be rightly called as the backbone of the GDP of India. The SME sector in India is growing at an exceptionally fast rate due to which it is proving to be beneficial to the Indian Economy.

Following are some of the current figures related to the SME sector in India:

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• The contribution of the SME sector to the entire output of the country is 40%.• Currently, there are over 11 million SME units in India that produces more than 8000 products.• 90% of the Industrial Units in India belong to the SME sector.• These SME units contribute 35% to the Indian Industrial Export.

FOLLOWING ARE SOME OF THE FACTORS THAT HAVE CONTRIBUTED TO THE GROWTH OF SME SECTOR IN INDIA.

SME units in India are being funded by foreign and local fund providers. The advancement in technology has also contributed highly to the SME sector. There are numerous business directories and trade portals available online that

contains a rich database of manufacturers, sellers and buyers. To start and maintain these units, minimal investment is required. These SME units are now being funded by many government and private banks. The SME sector is one of the greatest contributors of domestic production as well as

the export earnings. Many major mergers have taken place recently.

Though the SME sector is flourishing and expected to grow further in the near future, there are however certain challenges that the SME sector will have to face.

DEFINATION OF SME

SME‘s are the engines of growth of any country’s economy. They are an essential source of acountry’s jobs, create entrepreneurial spirit and jobs in a country and are crucial for fosteringcompetitiveness and employment.

According to the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 theMicro, Small and Medium Enterprises (MSME) are classified as:

1. Manufacturing Enterprises: The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation Act, 1951). The Manufacturing Enterprises are defined in terms of investment in Plant & Machinery.2. Service Enterprises: The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment.

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With the recent pronouncement of the MSMED Act, 2006, the Indian government has explicitly recognized the dynamic role to be played by the MSMEs in an increasingly globalised world.

THE CLEAR THRUST OF THE RECENT POLICY INITIATIVES HAS BEEN THREE-FOLD:

1. enhance competitiveness through encouraging an innovative ethos amongst firms and being quality conscious;

2. increase links with multiple stakeholders with a view to benefit from networks both nationally and globally; and

3. Strive for a larger market presence beyond the domestic. The policy attaches importance to networking with stakeholders both upstream and downstream in the entire global value chain, from raw material procurement to processing/manufacturing to marketing to customer services. For one thing, the Act has identified the category of ‘medium’

4. enterprises as a vital section in the manufacturing stream and, for the other, it has taken special note of distinct roles to be played by what are termed business serviceenterprises .

SME SECTOR FACES A NUMBER OF PROBLEMS

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absence of adequate and timely banking finance limited knowledge and non-availability of suitable technology low production capacity ineffective marketing and identification of new markets constraints on modernization and expansions non availability of highly skilled labour at affordable cost follow up with various agencies in solving regular activities and lack of interaction

with government agencies on various matters.

SMEs have strong technological base, international business outlook, competitive spirit and willingness to restructure them shall withstand the present challenges and come out with shining colours to make their own contribution to the Indian economy.

IMPORTANCE OF SME

The opportunities of growth in the SMEs sector are enormous due to the following factors:

1. Less Capital Intensive2. Extensive Promotion & Support by Government3. Reservation for Exclusive Manufacture by small scale sector4. Project Profiles5. Funding - Finance & Subsidies6. Machinery Procurement7. Raw Material Procurement8. Manpower Training9. Technical & Managerial skills10. Tooling & Testing support11. Reservation for Exclusive Purchase by Government12. Export Promotion13. Growth in demand in the domestic market size due to overall economic growth14. Increasing Export Potential for Indian products15. Growth in requirements for ancillary units due to the increase in number of green-field Units coming up in the large scale sector.

CLASSIFICATION OF SME

The SME can be classified into two types: Manufacturing enterprises and ServiceEnterprises. Which can be further classified as follows:

(A) MANUFACTURING ENTERPRISES

(i) Micro Manufacturing Enterprises:The investment in plant and machinery does not exceed Rs.25 lakhs(Rupees twenty five lakhs only)(ii) Small Manufacturing Enterprises:The investment in plant and machinery is more than twenty five lakh rupees

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but does not exceed rupees 5 crores (Rupees five crores only).(iii) Medium Manufacturing Enterprises:The investment in plant and machinery is more than rupees 5 crores but not exceeding Rs.10crores (Rupees ten crores only).

(B) SERVICE ENTERPRISES

(i) Micro Service Enterprises:The investment in equipment does not exceed rupees 10 lakhs.(ii) Small Service Industries:The investment in equipment is more than 10 (Ten lakh rupees) but does not exceeds rupees 2 crores.(iii) Medium Service Enterprises:The investment in equipment is more than rupees 2 crores but does not exceed rupees 5 crores.

Questions :

1. Define SME. Explain the importance of SMEs.2. Explain the different challenges faced by SMEs.3.Define SMEs. And classify the different types of SMEs.

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Chapter – 15Entrepreneurship - Training and Education

Introduction, Importance of training, EDP – Meaning, importance, Problems in EDP programmes, importance entraprenual traits

In the era of liberalisation, privatisation and globalisation along with ongoing IT evolution, capable entrepreneurs are making use of the opportunities emerging from the evolving scenario. However, a large segment of the population, particularly in the industrially backward regions/rural areas generally lags behind in taking advantage of these opportunities. Therefore, there is a need to provide skill development and entrepreneurship development training to such people in order to mainstream them in the ongoing process of economic growth.

Importance of Training:

1. It minimises the scrap and defective outputs and wastage in the production process.2. It increases the potential abilities and thus improves performance to the maximum3. It improves overall efficiency.4. It will be easy to accept new techniques.5. Standardization can be adopted in a factory where trained employees are available 6. Team work and team spirit can be promoted when employees are trained.7. Training helps to motivate the entrepreneurs.8. Training reduces fatigue.9. Training minimises accidents and risks 10. Enables works to speed up their work and help in earning profits

MeaningEntrepreneurial Development Programme means a programme conducted to help a person in strengthening his entrepreneurial motive and in acquiring skill and capabilities required for

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promoting and running an enterprise efficiently. A programme which is conducted with a motive to promote potential entrepreneurs, understanding of motives, motivational pattern, their impact on behaviour and entrepreneurial value is termed as entrepreneurial development programme. There are a number of programmes which give information to the prospective entrepreneurs regarding new business idea, how to set up a new venture, how to prepare a project report, sources of finance etc. These programmes should not be confused with EDP; these are all a part of EDP. EDP is primarily concerned with developing, motivating entrepreneurial talent and understanding the impact of motivation on behaviour.

A well designed EDP envisages three tiered approach:

1. Developing achievement motivation and sharpening entrepreneurial traits and behaviour.2. Guidance on industrial opportunities, incentives, facilities and rules and regulations.3.Developing managerial and operational capabilities

IMPORTANCE OF ENTREPRENEURSHIP DEVELOPMENT PROGRAMME (EDP):

Entrepreneurship plays a very important role in the economic development. Entrepreneurs act as catalytic agents in the process of industrialization and economic growth. Joseph Schumpeter states that the rate of economic progress of a nation depends upon its rate of innovation which in turn depends upon the distribution of entrepreneurial talent in the population. Technological progress alone cannot lead to economic development unless technological breakthroughs are put to economic use by entrepreneurs. It is the entrepreneur who organizes and puts to use capital, labour and technology in the best possible manner for the setting up of his enterprise.

Importance of entrepreneurship development programme (EDP) is to enable entrepreneurs initiating and sustaining the process of economic development in the following ways-

1. Creation of Employment Opportunities : Unemployment is one of the most important problems confronting developing and underdevelopment countries, EDP's enable prospective entrepreneurs in the setting up of their own units, thus enabling them to get self employment. With the setting up of more and more units by entrepreneurs, both on small and large scale, numerous job opportunities are created for the others.

Entrepreneur in this way get an opportunity to lead an independent and honorable life and at the same time they enable others in getting gainful employment. Several schemes like Nehru Rozgar Yojna, National Rural Employment Programme (NREP), Integrated Rural Development Programme (IRDP) etc. have been initiated by the government, of India in this direction. The thrust of all these schemes is to eliminate poverty and generate gainful employment opportunities for the unemployed. Thus entrepreneur can play an effective role in reducing the problem of unemployment.

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2. Capital Formation : It is not possible to set up an enterprise without adequate funds. Entrepreneur as an organizer of factors of production employs his own as well as borrowed resources for the setting up of his enterprise. Entrepreneur mobilizes idle savings of the public and put them to productive use. In this way he helps in capital formation which is so essential for the industrial and economic development of a country. Various development banks like ICICI, IFCI, IDBI; SFCs, SIDCs take initiative in promoting entrepreneurship through assistance to various agencies involved in EDP and by providing financial assistance to new entrepreneurs.

3. Balanced Regional Development : Small scale units can be set up in industrially backward and remote areas with limited financial resources. Successful EDP's assist in accelerating the pace of industrialization in the backward areas and reduce the concentration of economic power in the hands of a few, Entrepreneurs feel like taking advantage of the various concessions and subsidies offered by the state and central government. Success story of entrepreneurs set right example for others to follow and this accelerates the pace of industrialization in the backward areas. Setting up of more units leads to more development of backward areas and balanced regional development.

4. Use of Local Resources : In the absence of any initiative local resources are likely to remain unutilized. Proper use of these resources can result in the progress or development of the area and that too at lower cost. Alert entrepreneurs seize the opportunity and exploit it in the best interests of the area and industry. Effective EDPs can help in the proper use of local resources by providing guidance, assistance, education and training to the prospective entrepreneurs.

5. Improvement in per Capital Income : Entrepreneurs are always on the look out for opportunities. They explore and exploit the opportunities. Entrepreneurs take lead in organising various factors of production by putting them into productive use through the setting up of enterprises. More enterprises will lead to more production, employment and generation of wealth in the form of goods and services. It will result in the increase in the overall productivity and per capita income in the country. EDPs play a positive role in the setting of more units and thus help in generation of more employment and income.

6. Improvement in the Standard of Living : Entrepreneurs by adopting latest innovations help in the production of wide variety of goods & services. By making efficient use of the resources, they start producing more of better quality and that too at lower costs. This enable them to ensure easy availability of better quality products at lower prices to the consumers which result in the improvement in the standard of living of the people. EDPs provide the necessary support to entrepreneurs by educating them about the latest innovations and market trends.

7. Economic Independence : Entrepreneurs enable a country to produce wide variety of better quality goods & services and that too at competitive prices. They develop substitutes of the goods being imported and thus prevent over-dependence on foreign countries and at the same time help in the saving of precious foreign exchange. Through sale of their surplus

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products in foreign market entrepreneurs enable a country to earn foreign exchange, which is so essential for meeting developmental needs of the economy. Export promotion and import substitution thus help in promoting economic independence of the economy.

8. Preventing Industrial Slums : Industrially developed areas are faced with problem of industrial slums, which result in over burdening of civic amenities and adverse impact on the health of people. Dispersal of industries can help in the overcoming of this grave problem. EDPs can help in preventing spread of industrial slums by providing various incentives, subsidies and infrastructural support to entrepreneurs for setting up their enterprises in industrially backward areas. This will also help in reducing pollution and overtaxing of civic amenities.

9. Reducing Social Tension : Unemployment amongst the young and educated people is emerging as the major cause of social unrest. People are bound to feel frustrated if they fail to get gainful employment after completion of their education. EDPs can help in channelizing the talent of this section of society in the right direction by providing proper guidance, training and assistance for setting up their enterprises. This results in generation of self employment and prevention of social tension, unrest etc.

10. Facilitating Overall Development : An entrepreneur acts as a catalytic agent for change which results in chain reaction. With the setting up of an enterprise the process of industrialization is set in motion. This unit will generate demand for various types of inputs required by it and there will be so many other units which will require the output of this unit. This leads to overall development of an area due to increase in demand and setting up of more and more units there. Moreover success of one entrepreneur sets the right type of example for others to follow. Entrepreneurs, thus, create an environment of enthusiasm and convey a sense of purpose. This gives future impetus to the overall development of that area.

WHAT ARE THE VARIOUS PROBLEMS OBSTRUCTING THE GROWTH OF ENTREPRENEURSHIP?

Entrepreneurship is a skill, the resultant of a mix of many qualities, traits and competencies, Entrepreneurship must be a cluster of many entrepreneurial people devoted to their respective ventures. Entrepreneurship is nothing unless entrepreneurs give a creative response to the environment and undertake to establish their enterprise. But devoted, imaginative, hard-working, creative and competent entrepreneurs are not enough to further the process of entrepreneurship.

Entrepreneurship refers to a process of actions taken by entrepreneur in a specific environment. We can say that entrepreneurship is sum total of entrepreneur and his environment. We have studied both the aspects of entrepreneurship—and environment —in separate chapters. Let us now study that what is obstructing the growth of entrepreneurship. Is it poor entrepreneurs or unhealthy environmental factors or both ?

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Undoubtedly, entrepreneurship growth in India is slow as compared to other countries. Women's entrepreneurship is still slower and rather negligible.

As far as development of entrepreneurship is concerned, the factors responsible for its slow growth are :

(i) Incompetence and poor management.(ii) Low level of commitment.(iii) Restrictions imposed by custom and tradition.(iv) Involvement of high risk.(v) Socio-cultural rigidities.(vi) Lack of motivation.(vii) Lack of infrastructural facilities.(viii) Lack of communication network.(ix) Absence of entrepreneurial aptitude.(x) Low status of businessmen.(xi) Market imperfections.(xii) Legal formalities involved to set up a unit.(xiii) Low quantity products.(xiv) Low package of salaries to employees.

PROBLEMS OF ENTREPRENEURSHIP DEVELOPMENT PROGRAMMES (EDPS) ARE:

1. No Policy at the National Level. Though Government of India is fully aware about the importance of entrepreneurial development, yet we do not have a national policy on entrepreneurship. It is expected that the government will formulate and enforce a policy aimed at promoting balanced regional development of various areas through promotion of entrepreneurship.

2. Problems at the Pre training Phase. Various problems faced in this phase are — identification of business opportunities, finding & locating target group, selection of trainee & trainers etc.

3. Over Estimation of Trainees. Under EDPs it is assumed that the trainees have aptitude for self employment and training will motivate and enable the trainees in the successful setting up and managing of their enterprises. These agencies thus overestimate the aptitude and capabilities of the educated youth. Thus on one hand the EDPs do not impart sufficient training and on the other financial institutions are not prepared to finance these risky enterprises set up by the not so competent entrepreneurs.

4. Duration of EDPs. An attempt is made during the conduct of EDPs to prepare prospective entrepreneurs thoroughly for the various problems they will be encountering during the setting up and running of their enterprises. Duration of most of these EDPs varies between 4 to 6 weeks, which is too short a period to instill basic managerial skills in the entrepreneurs.

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Thus the very objective to develop and strengthen entrepreneurial qualities and motivation is defeated.

5. Non Availability of Infrastructural Facilities. No prior planning is done for the conduct of EDPs. EDPs conducted in rural and backward areas lack infrastructural facilities like proper class room suitable guest speakers, boarding and lodging etc.

6. Improper Methodology. The course contents are not standardized and most of the agencies engaged in EDPs are themselves not fully clear about what they are supposed to do for the attainment of pre-determined goals. This puts a question mark on the utility of these programmes.

7. Mode of Selection. There is no uniform procedure adopted by various agencies for the identification of prospective entrepreneurs. Organisations conducting EDPs prefer those persons who have some project ideas of their own and thus this opportunity is not provided to all the interested candidates.

8. Non Availability of Competent Faculty. Firstly there is problem of non availability of competent teachers and even when they are available, they are not prepared to take classes in small towns and backward areas. This naturally creates problems for the agencies conducting EDP.

9. Poor Response of Financial Institutions. Entrepreneurs are not able to offer collateral security for the grant of loans. Banks are not prepared to play with the public money and hence they impose various conditions for the grant of loans. Those entrepreneurs who fail to comply with the conditions are not able to get loan and hence their dream of setting up their own enterprises is shattered. Helpful attitude of lending institutions will go a long way in stimulating entrepreneurial climate.

IMPORTANT WAYS FOR DEVELOPING ENTREPRENEURIAL COMPETENCIES ARE EXPLAINED BELOW

Entrepreneurial success depends upon entrepreneur's qualities or competencies. There are certain inborn qualities while certain others can be acquired through education and training. This fact has been amply demonstrated in Kakinda Experiments conducted by Prof. Davis C. McClelland. Competencies have direct bearing on human behaviour and performance. Various competencies can be cultivated or developed in the following way.

1. Gaining first hand knowledge about competencies. Various competencies cannot be cultivated without clearly understanding their meaning significance and relevance. An earnest attempt must be made to understand at length the various competencies which are required for the efficient performance of the assigned task.

2. Competency Recognition. An individual's behaviour or performance depends upon the competencies he possesses. Therefore in order to get desired behaviour we should be in a

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position to know as to what are the competencies required in the individuals to perform in a particular manner. Under this step an effort is made to recognize the competency.

3. Self Assessment. After getting clear out idea about the competencies required for a particular type of behaviour, it is for the entrepreneur to see as to what extent he possesses these competencies and to what extent he is employing these competencies for achieving the desired goal.

4. Comparison of Competencies. The next step is to compare individual competencies with the competencies required for the desired performance. Wherever we find deficiencies an earnest attempt is made to find out the reasons for the same.

5. Developing Competencies and feedback. Once it is realized that an individual does not possess a particular competency required for a particular type of behaviour, the next step will be to develop this competency. Assistance from various behaviourial scientists may be taken for devising out ways and means for developing the required competency. In order to ensure that the required competency becomes part of the individual's behaviour, he is asked to practice the needed competency repeatedly.

Lastly an attempt is made to know as to what extent change in individual behaviour has taken place due to acquiring of the requisite competency and to what extent it has been useful. It is through continuous application that one can ensure that the desired competency becomes part of his habit or personality.

IMPORTANT ENTREPRENEURIAL TRAITS OR COMPETENCIES:

Whenever we are looking around, we find certain entrepreneurs doing exceedingly well. They are managing their enterprises very well and are out to make them grand success. The various questions that normally arise are —who are they ? what they possess ? and various other questions related with their style of functioning. In their case there is a judicious mixture of knowledge, skill and personality. All these are called entrepreneurial traits or competencies. Knowledge refers to the collection and retention of information about any job or activity. Knowledge forms the basis for any action. Only knowledge cannot ensure success.

Success depends upon the ability or skill of using the acquired knowledge for achieving desired results. Skill refers to practical application or use of the knowledge. Thus performance depends upon both knowledge and skill. Motivation is an inner urge in an individual which calls for action. According to Steneir "A motive is an inner state that energizes, activates or moves and directs or channels behaviour goals." It is this inner urge in an individual to achieve his/her goal which David McClelland has termed as 'Achievement Motivation'. It is this urge to achieve goal which prompts the individual to perform better and better. Thus in order to achieve success in any venture a person must possess a judicious combination of knowledge, skill and motive.

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Entrepreneurship Development Institute of India [EDI] conducted a study under the guidance of Professor David C McClelland, a reputed behavioral scientist in three countries namely India, Malawi and Equador. It was found out that possession of certain competencies or abilities result in superior performance. An entrepreneur may possess certain competencies and at the same time it is possible to develop these through training, experience and guidance. Various competencies required for superior performance were identified during the study and are as under.

1. Initiative : It is an inner urge in an individual to do or initiate something. There is popular saying 'Well begun is half done'. It is the entrepreneur who takes or initiates the first move towards setting up of an enterprise. Most of the innovators have got this urge to do something different. Entrepreneur basically is an innovator who carries out new combinations to initiate and accelerate the process of economic development.

2. Looking for Opportunity : An entrepreneur is always on the look out or searching for opportunity and is ready to exploit it in the best interests of the organisation.

3. Persistence : An entrepreneur is never disheartened by failures. He believes in the Japanese proverb 'Fall seven times, stand up eight'. He follows Try-Try Again for overcoming the obstacles that come in the way of achieving goals.

4. Information Seeker : A successful entrepreneur always keep his eyes and ear open and is receptive to new ideas which can help him in realizing his goals. He is ready to consult expert for getting their expert advise.

5. Quality Consciousness : Successful entrepreneurs do not believe in moderate or average performance. They set high quality standards for themselves and then put in their best for achieving these standards. They believe in excellence, which is reflected in everything they do.

6. Commitment to Work : Successful entrepreneurs are prepared to make all sacrifices for honoring the commitments they have made. Whatever they commit, they take it is a moral binding for honoring their commitments, irrespective of the costs involved.

7. Commitment to efficiency : Top performers are always keen to devise new methods aimed at promoting efficiency. They are keen to evolve and try new methods aimed at making working easier, simpler, better and economical.

8. Proper Planning : Successful entrepreneurs develop or evolve future course of action keeping in mind the goals to be realized. They believe in developing relevant and realistic plans and ensure proper execution of the same in their pursuit of attaining their goals.

9. Problem Solver : Successful entrepreneurs take problem as a challenge and put in their best for Finding out the most appropriate solution for the same. They will first of all understand the problem and then evolve appropriate strategy for overcoming the problem.

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10. Self Confidence : Top performers are not cowed down by difficulties as they believe in their own abilities and strengths. They have full faith on their knowledge, skill and competence and arc not worried about future uncertainties.

11. Assertive : An assertive person knows what to say, when to say, how to say and whom to say. He believes in his abilities and ensures that others fall in line with his thinking, aimed at promoting the interests of the organisation.

12. Persuasive : A successful entrepreneur through his sound arguments and logical reasoning is in a position to convince others to do the works the way he wants them to do. It is not physical but intellectual force he will use for convincing others.

13. Effective Monitoring : Top performers ensure that everything is carried out in their organisations as per their wishes. They ensure regular monitoring of the working so that the goals of the organisation are achieved in best possible manner.

14. Employees Welfare : Future of the organisation depends on its employees. If the employees are dedicated, committed and loyal, the organisation is bound to perform well. A successful entrepreneur tries to promote organization's interests through promotion of interests of the workers. India is second among all nations in total entrepreneurship activity as per the

Questions

1. Define training. Explain the importance of training.2. Define Entrepreneurship Development programmes . Explain the importance of EDPs3. What are the problem faced in EDP programmes.

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Chapter – 16Institutional Assistance for Entrepreneurs

Introduction, Financial institutions – IDBI, SIDO , NABARD, EXIM bank, SIDBI, ICICI, Investment bank of India, Promotional institutes – DICs, SIDCO,NSIC, SSIB, SISIs, Industrial estate , KVIC, Technical consultancy Organization.

Introduction

Global Entrepreneurship Monitor Report 2002. The liberalization of the economy since 1991 has paved the way for a huge number of people to become entrepreneurs. Developing countries like India are striving to be outward looking global economies rather than inward looking local economies. This will be possible only if small and medium scale enterprises (SMEs) are encouraged.

Entrepreneurship can be cultivated among the present youth and it can be developed systematically with the help of support system. The post-globalization era has brought with it a growing middle class and rising disposable incomes. This presents tremendous opportunities for developing entrepreneurship. The emerging entrepreneurs can reap the benefits of these opportunities by catering to various demands of this segment through their small scale industries.

Small scale industries: An industrial undertaking in which the investment in fixed assets in plant and machinery whether held on ownership basis or on hire purchase does not exceed Rs. 5 Crore can be termed as small scale industrial undertaking. Medium scale undertaking: Units with investment in plant and machinery in excess of SSI limit and up to Rs. 10 crore may be treated as Medium scale enterprises.

The small scale industries are of two types, traditional and modern. The traditional small scale industries include khadi and handloom, village industries, handicrafts, sericulture, coir etc. Modern small industries manufacture a wide variety of goods from simple items to

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sophisticated items like television sets, electronic control system, various engineering products, particularly as ancillaries to large industries.

Since independence, the growth and development of the small scale sector has been favored by the government of India on the following grounds:

1) Generation of employment opportunities by SSIs2) Mobilization of capital and entrepreneurship skills3) Regional dispersal of industries4) Equitable distribution of national income

Policies pursued by the government over the years have resulted in the growth of small scale sector to a considerable extent. To accelerate the pace of industrialization in the country and also to support economic development, Government at central as well as at state level has made good efforts by way of implementing various measures. Government have set up number of agencies and institutions to assist and support emerging and established entrepreneurs to set up and develop their business at two levels- small and medium. Starting a business or an industrial unit requires various resources and facilities. Finance has been an important resource to start and run an enterprise because it facilitates the entrepreneur to procure land, labour, material, machines to run an enterprise. Hence finance is the most important requirement of the business. Considering this, the government has come forward to help small entrepreneurs through the financial institutions and nationalized banks. But the finance alone is not sufficient to start a business. A minimum level of prior built-up of infrastructural facilities is also needed. This is one of the reasons for lack of industrial development in backward areas. Creation of infrastructure involves huge funds. In view of this various central and state government institutions have come forward to help small entrepreneurs in this regard by providing them various kinds of support and facilities. Institutional support makes the economic environment more conducive for the growth of the business. These institutions are supporting the entrepreneurs in various aspects of the business such as education, training, finance, marketing etc.

Support system for the development of entrepreneurship exists in the form of following institutions.1) Educational institutions providing professional and non-professional or traditional courses2) Financing institutions3) Promoting institutions4) Non-government organizations5) Government’s support6) Support from family members, relatives and friends

EDUCATIONAL INSTITUTIONS PROVIDING PROFESSIONAL AND NON-PROFESSIONAL COURSES

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Even though education is not pre-condition for entrepreneurship development, the education which is suitable for a particular type of business definitely fosters the entrepreneurship. There were examples of big businessmen in the past who successfully started and expanded their business without having any formal degree. But they were born entrepreneurs. Today the availability of different institutions providing education, training and guidance to the emerging entrepreneurs has proved that entrepreneurs are not born, but they can be made. The number of educational institutions grew substantially in the last four decades, especially in the last two decades there has been a phenomenal growth in the number of private self-financing institutions. The growth of professional and nonprofessional colleges has helped the young generation to acquire qualification necessary for choosing a particular type of career.

FINANCING INSTITUTIONS

Finance is one of the essential requirements of an enterprise. Without adequate funds, no business can be developed. In India, Central and state governments are promoting number of financial institutions to bring in the industrial development in the country. Some of the important financial institutions are:

1) Industrial development bank of India (IDBI)2) National bank for agriculture and rural development (NABARD)3) Export import bank of India4) Small industrial development bank of India (SIDBI)5) Industrial investment bank of India6) Industrial finance corporation of India (IFCI)7) Industrial Credit and Investment Corporation of India (ICICI)8) Industrial Reconstruction Bank of India9) Indian banking system and commercial banks10) State Financial Corporations11) Life Insurance corporation of India (LIC)12) Unit Trust of India (UTI)

1) Industrial development bank of India (IDBI)

IDBI is the apex institution in the field of industrial finance. It was established under the IDBI act 1964 as a wholly owned subsidiary of Reserve bank of India. It started its operations from 1st July 1964. It was de-associated from RBI under Public Financial Institution Laws (Amendment) Act 1976 and restructured as the principal financial institution of the country with the following objectives. a. Create a principal institution for long term financeb. Coordinate the institutions working in the field for planned development of industrial

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sectorc. Provide technical and administrative support to the industries and to conduct research and development activities for the benefit of industrial sector.

IDBI provides long term finance to industrial sector. It is engaged in direct financing of the industrial activities as well as refinance and rediscounting of bills against finance made available by commercial banks under their various schemes for industrial development purposes (Gupta, Kumar, 2009:171). It raises funds through various approaches such as market borrowing, bonds and deposits, borrowing from Government and RBI, borrowing from abroad in foreign currency and lines of credit.

IDBI is the tenth largest bank in the world in terms of development. Some of the institutions which have been built by IDBI are: The National Stock Exchange (NSE), National Securities Depository Services Ltd. Stock Holding Corporation of India Ltd.

Main functions of IDBI

IDBI coordinates the working of institutions engaged in encouraging, financing, promoting and developing industries. IDBI undertakes/ supports wide-ranging promotional activities including entrepreneurship development programmes for new entrepreneurs, provision of consultancy services for small and medium enterprises, up gradation of technology and programmes for economic upliftment of the under privileged. Its functions include:

1. Direct loans to industrial undertakings to finance their new projects.2. Soft loans for various purposes including modernization under equipment finance scheme.3. Underwriting and direct subscription to shares/ debentures of the industrial companies.4. Sanction of foreign currency loans for import of equipment of capital goods5. Short term working capital loans to the corporate houses for meeting their working capital requirements.6. Refinance to banks and other institutions against loans granted by them.

2) National Bank for Agriculture and Rural Development (NABARD)

NABARD is one of the apex development banks. It came into existence on July 12, 1982 under NABARD ACT, 1981 with a capital of Rs. 100crore contributed by Central Government and RBI, with its main office in Mumbai. The set up has been created by merging Agriculture Credit Department and Rural Planning and Credit Cell of RBI and took over the entire functions of Agriculture Refinance and Development Corporation.

NABARD raises funds through National Rural Credit-Long Term operations, National Rural Credit Establishment Fund, bonds and debentures guaranteed by Central Government, borrowing from RBI, Central Government or any other organization approved by Central Government and funds from external sources. Credit functions of NABARD include providing credit to agriculture, small and village and cottage industries through banks by way

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of refinance facilities to commercial banks, Regional Rural Banks, Cooperative Banks, Land Development Banks and other Financial Institutions like Khadi and Village IndustriesCommission (KVIC).Its developmental functions are co-ordination of various institutions, acting as agent of Government and RBI and providing training and research facilities. The regulatory functions include inspection of Regional Rural Banks, and Cooperative Banks, receipt of returns and making of recommendations for opening new branches.

3) Export Import Bank of India (EXIM BANK)

It is apex institution for coordinating the working of institutions engaged in financing exports and import of goods and services. With initial authorized capital of Rs. 200 crore, Exim Bank was established on Jan 01, 1982 under Export Import Bank of India Act 1982, which took over the export finance activities of IDBI. It raises funds by way of bonds and debentures, borrowing from RBI or other institutions, raising foreign deposits.

It undertakes following types of functions;

Direct finance to exporter of goods Direct finance to software exports and consultancy services Finance for overseas joint ventures and turnkey construction project Finance for import and export of machinery and equipment on lease basis Finance for deferred payment facility Issue of guarantees Multi-currency financing facility to project exporters Export bills rediscounting Refinance to commercial banks in India Guaranteeing the obligations

4) Small Industries Development Bank of India

SIDBI was established under SIDBI Act 1988 and commenced its operations with effect from April 02, 1990, as a subsidiary of IDBI. It took over the IDBI business relating to small scale industries including National Equity Scheme and Small Industries Development Fund. The objective of establishment of SIDBI is to strengthen and broad base the existing institutional arrangement to meet the requirements of small scale industries and tiny industries. Some of its functions include:

Administration of small industries development fund for development and equity support

to small and tiny industries. Providing working capital through single window scheme Providing refinance support to banks/development finance institutions Undertaking direct financing of SSI units

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Coordination of functions of various institutions engaged in finance to SSI and tiny units.

5)Industrial Investment Bank of India

IIBI was established as Industrial Reconstruction Corporation Limited during 1971 when it was renamed as Industrial Reconstruction Bank of India with effect from March 20, 1985 under IRBI Act 1984, to take over the function of industrial reconstruction corporation. During 1997, the bank was converted into a joint stock company by naming it as Industrial Investment Bank of India. Its functions are to provide finance for industrial rehabilitation and revival of sick industrial units by way of rationalization, expansion, diversification and modernization and also to coordinate the work of other institutions for this purpose.

6)Industrial Finance Corporation of India

IFCI was established under IFCI Act during July 1948 as India’s first development bank. The main objectives, for which IFCI was established, are to make medium and long term credit available to the industrial undertakings and to assist them in creation of industrial facilities. Its functions include:

Direct financial support to industrial units for undertaking new projects, expansion, modernization and diversification Subscription and underwriting of public issues of shares and debentures. Guaranteeing of foreign currency loans and also deferred payment guarantees Merchant banking, leasing and equipment finance During 1994, IFCI was converted into a joint stock.

7)Industrial Credit and Investment Corporation of India

ICICI was set up during 1955 as a private company with a view to provide support to industrial sector in India by way of rupee and foreign currency loans, particularly the private international investment and World Bank funds, to assist the industry in private sector. Its functions include:

Assistance to industrial undertakings for new projects, expansion, modernization and diversification of the business Subscription and underwriting of capital issues Guaranteeing the payment for credits Merchant banking, equipment leasing and project counselling

It floated a number of institutions successfully, which include Credit Rating Agency, Credit Rating Information Services of India Ltd. (CRISIL), ICICI Banking Corporation, State Credit

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and Investment Corporation of India (SCICI) a mutual Fund etc. During September 1998 it changed its name to Indian Credit and Investment Corporation of India (ICICI) Ltd. ICICI started providing working capital to industrial undertakings.

8) State Financial Corporation (SFC)

Financial Corporation Act 1951, made it mandatory that every state in India will have its own established financial corporation. The main function of State Financial Corporation is to provide mainly the term loan assistance to small and medium scale industries for acquiring fixed assets like land, building, plant and machinery. Loans are also extended for expansion, diversification, technology development, expansion of the business. The SFC also takes over term loan accounts from banks and other financial institutions when a borrower has a good track record with the corporation. SFCs undertake the issue of stock, shares, bonds or debentures of industrial concerns and to grant loans and advances to industrial concerns repayable within a period not exceeding 20 years.

Promotional Institutions

Government at state and central level has introduced lot of measures to support the growth and development of entrepreneurs. Government has set up number of promoting agencies and institutions to help emerging and established entrepreneurs, especially small and medium entrepreneurs. These institutions support the entrepreneurs in respect of training, finance and marketing. Some of such institutions are:

1) District Industries centres (DICs)2) Small Industries Development Organization(SIDO)3) The National Small Industries Corporation Ltd.(NSIC)4) Small Scale Industries Board (SSIB)5) Small industries Service Institutes (SISIs)6) Industrial estates7) Khadi and Village Industries Corporation(KVIC)8) Technical Consultancy Organizations

District Industries Centers(DICs)

These centers were established in the year 1978 with a focus to provide integrated administrative support for promotion of small scale industries in rural areas. These centers act as a chief coordinator in respect of various government departments and other agencies. DICs provide a single window interacting agency to the budding entrepreneurs at district level.

Role of DICs

1) Technical support for preparation of project report

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2) Information on machinery and equipment3) Promotion of new industrial estate4) Approval of project reports of special types5) Training through Entrepreneurship development programme6) Allotment of raw materials7) Financial assistance under self-employment schemes8) Assistance under Equipment Leasing Scheme through NSIC9) Assistance in marketing linkage with central government10) Assistance in ancillary industry tie-up with government undertakings11) Marketing assistance through participation in exhibition/ Trade fairs /Buyers-sellers meet12) Attending problems related to SSI registration/ Bank loan/ marketing of production13) Financial assistance for modernization of unit14) Export assistance15) Assistance in sick unit revitalization16) Promoting entrepreneurship through National level awards for innovative products17) Promotion of products under non-conventional energy sources18) Assistance in standardization of products19) Assistance in design and product development for handicrafts

Small Industries Development Organization (SIDO)

Small Industries Development Organization is a policy making, coordinating and monitoring agency for the development of small scale entrepreneurs in the country. It coordinates with Government, financial institutions and other agencies/ organizations promoting small scale enterprises.

SIDO functions through a network of field offices. SIDO renders services in the following areas:

It advices government in policy matters concerning small scale sector.It provides techno-economic and managerial consultancy, common facilities and extension services.It provides facilities for technology up-gradation, modernization, quality improvement and infrastructure.It facilitates human resource development through training and skill upgradation.It monitors Prime Minister RojgarYojana scheme.

Services provided by SIDO

The services provided by SIDO are as follows:

Technical resource centreTechnical consultancy servicesAssistance in marketingTechnical programmeVendor developmentQuality/technical up gradationTraining facilities

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The National Small Industries Corporation Ltd. (NSIC Ltd)

NSIC was set up in 1955 to support the growth of small scale industries in the country. Since then it has been assisting SSI through a number of schemes. Due to increased competition in post-globalisation period, NSIC restructured its activities from financing to promotion of marketing.

Some of the important programmes of NSIC are:

A) Marketing assistance programme Government purchase registration: Government being the biggest buyer of any product, NSIC provides a registration to small scale unit, making them eligible for the following benefits:

Tender at free of costExemption from Earnest money depositExemption from security deposit15% price preference over large and medium unit

Exports: the corporation assists in exporting the products of SSIs. NSIC is engaged in project exports also on turnkey basis and is a major supplier of relief items of India to United Nations and other international agencies. The corporation organizes international exhibitions related to specialized products and technology, to facilitate the marketing of SSI products.

Campaigns: NSIC organizes awareness campaigns at various locations near industrial estates in the states and also in the areas ideal for setting up new industries.

Cluster Development: The Corporation has identified 28 clusters throughout India where cluster development managers have been appointed.

Informatory services: NSIC has started Informatory Services at a very nominal annual fee. SSI useful information about marketing, technology and allied get matters after taking the membership of this service.

Mentoring and advisory services: NSIC has provided the support of experienced mentors who provide the guidance to the units facing the problems in the areas of production, management and marketing. Half of the expenses required for this guidance are reimbursed by the corporation.B) Financial support programme

NSIC provides finance for purchase of indigenous as well as imported machinery for setting up of new industry and technical upgradation of existing units on easy terms through its hire purchase scheme.The corporation has started Composite Term Loan Scheme to provide single window service. The scheme is mainly designed to encourage setting up of new SSI in the country. Under raw material assistance scheme, the corporation provides finance to SSI for the purchase of raw material against the security of bank guarantee.

Small Industries Service Institutes (SISIs)

The Small Industries Service Institutes are set up to provide consultancy and training to small entrepreneurs.

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The main functions of SISI are:

To serve as interface between State and Central Governments.To provide technical support services.To conduct entrepreneurship development programmesTo initiate promotional programmes

The SISIs also render assistance in the following areas:

Economic Consultancy/ Entrepreneurship Development Programme ConsultancyTrade and market informationProject profilesDistrict and state industrial potential surveysTraining in various trade/ activities

Industrial Estates Industrial estate is an institutional measure to promote industrialization in the country. An industrial estate is a place where the required facilities and factory accommodation are provided by the Government to the entrepreneurs to establish their industries there (Khanka, 1999:134). These estates promote the growth of especially small scale industries. Industrial estates are classified in three categories.

1) On the basis of functions : On the basis of functions industrial estates are broadly classified into two types: i) General type industrial estates, and ii) Special type industrial estates

General type Industrial Estates: These estates provide accommodation to a wide variety and range of industrial concerns. Most of the industrial estates are of this type.

Special type Industrial Estates: This type of industrial estate is constructed for specific industrial units, which are vertically or horizontally interdependent.2) On the basis of Organizational set up: On this basis industrial estates are classified into following four types:

Government industrial EstatesPrivate industrial estatesCo-operative Industrial Estates andMunicipal Industrial estates

3) On the basis of Other variants: On the basis of other variants industrial estates are classified into thee types:

Ancillary industrial estatesFunctional industrial estatesThe Workshop-bay

The main objectives of the establishment of industrial estates are:

To provide infrastructure and accommodation facilities to the entrepreneurs.

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To encourage the development of small scale industries in the country.To spread the industries in rural and backward areas.To develop entrepreneurship by creating the environment suitable to establish the industries in these estates.

The Khadi and Village Industries Commission (KVIC)

The Khadi and Village Industries Commission tool over the work of former All India Khadi and Village Industries Board. KVIC was established with the objective of providing employment, producing saleable articles and creating self reliance among the poor. Its wide range of activities include training of artisans, extension of assistance for procurement of raw materials, marketing of finished products and arrangement for manufacturing and distribution of improved tools, equipments and machinery to producers on concessional terms

KVIC’s major role is planning, organizing and implementing the programmes for development of Khadi and other village industries in the rural areas in coordination with other agencies engaged in rural development. KVIC bears the responsibility of encouraging and promoting research in the production techniques and equipments employed in the Khadi and Village Industries sector.

KVIC also aims at providing financial assistance to institutions and individuals for development and operation of Khadi and Village industries. KVIC is handling the government launched, Rural Employment Generation Programme through public sector banks and regional rural banks. This scheme envisages that 25%of the project cost for the project up to Rs. 10 lacs will be provided as “Margin money”. For projects above Rs. 10 lacs and up to Rs 25lacs, rate of Margin money will be 25% of Rs. 10 lacs plus 10% of the remaining cost of the project.

Technical Consultancy Organizations

Technical Consultancy Organizations was established with the purpose of fulfilling the consultancy needs of the emerging and established industrial units. These organizations were established in seventies and eighties in collaboration with state level financial and development institutions working for the cause of industrial development in the country.The major function of technical consultancy organization is to create favourable environment for the established and new units. These organizations assist enterprises in the following ways.

Project conceptualization and other related services

Guidance regarding the selection of projectsPreparation of feasibility studies and detailed project reportsCapital structuringProject appraisal and risk analysis

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Project management design Credit SyndicationPreparation of application for assistance from financial institutions/banks, offer documents and information memorandumSyndication of domestic and foreign loans and post sanction follow up.

Documentation of project reports

Assistance in preparation of technical and financial project reportAssistance in preparing various project specific agreements including credit documents

Implementation of project

Assistance and supervision in project during its implementationAssistance performance at regular intervalsProviding feedback from time to timeSuggesting and advising in export related mattersRestructuring of projectsValuation of assetsStock auditsAssessment of working capitalProject monitoring consultancySecuritization services

Questions:

1. Explain the functions of IDBI.2. Define DICs. Explain the function of DICs.3. Write a not on KVIC.4. What are the services provided by SISIs5. Write Short notes

A. Technical consultancy organizations.B. Industrial estates.C. NSIC D. SFC

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Chapter – 17Self Health Groups

SHGs Guidelines for forming SHG, Formation of SHG, Management of SHG

SELF HELP GROUPSelf-help group is a method of organising the poor people and the marginalized to cometogether to solve their individual problem. The SHG method is used by the government,NGOs and others worldwide. Take the example of the Grameen Bank of Bangladesh, it is a people bank formed by the poor to provide easy loans for themselves. The poor collect their savings and save it in their own banks. In return they receive easy access to loans with a small rate of interest to start their micro unit enterprise. Thousands of the poor and the marginalized population in Bangladesh are building their lives, their families and their society through Self help groups. The 9th five year plan of the government of India had given due recognition on the importance and the relevance of the Self-help group method to implement developmental schemes at the grassroots level.

SOCIO ECONOMIC CHANGES THROUGH SHGs

Villages are faced with problems related to poverty illiteracy, lack of skills health care etc. These are problems that cannot be tackled individually but can be better solved through group efforts. Today these groups known as Self help groups have become the vehicle of change for the poor and marginalized.

WHAT ARE SHG

· SHG is a development group for the poor and marginalized· It is recognised by the government and does not require any formal registration· The purpose of the SHG is to build the functional capacity of the poor and the marginalized in the field of employment and income generating activities· People are responsible for their own future by organising themselves into SHGs

GUIDING PRINCIPLES FOR FORMTION OF SHGs

The strong belief by the individual to bring about change through collective efforts· Effort is built on mutual trust and mutual support· Every individual is equal and responsible

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· Every individual is committed to the cause of the group· Decision is based on the principles of consensus· The belief and commitment by an individual that through the group their standard of living will improve· Savings is the foundation on which to build the group for collective action.

MEMBERSHIP· An SHG shall have a membership of not less than 10 persons or more than 20.· Members should reside in the same village· Membership should be based on affinity· The groups could be mixed /male or female· The members of the groups should preferable be from the low-income group.

THE FORMATION OF SHGPersons interested in forming SHGs should meet and discuss the following before they form· The meaning of SHG· The guiding principles of SHGs· Membership in SHGs· Management of SHGs· Types of economic activities they would like to take up individually or as a group· Amount of savings to be made by the members

NUMBERS OF SHGS IN A VILLAGE

There can be as many as possible SHGs in a village. In order to identify them each SHGmay give themselves a name or a number e.g.§ Mawlieh village SHG-I§ Mawlieh village SHG-II and so on

MANAGEMENT OF THE SHGs

· SHG elect a member as a chairman and Secretary of the group for a period of one year. The chairman acts as the representative of the groups and chairs group meeting while the secretary maintain records· Every decision of the group must be shares consulted and agreed by everyone· The group frames rules and regulations· The group must open an account with a bank· They must meet at least once a month· Maintenance of records. The following books are maintained by SHG- Register of Minutes- Register of accounts (Cash Book/ ledger/ vouchers/ receipts etc)- Admission register

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- Attendance register· SHGs will close the annual account on the 31st march every year and the secretary will present the annual reports related to savings loans activities etc.· The agenda of each group meeting shall consist of te following- Monthly savings accounts reports and bank account reports- Monthly savings- Other matters

INCOME GENERATING ACTIVITIES AND LOAN SYSTEM

· SHGs must save for at least 6 months before they can be linked to a bank credit or provide loans to its members· The rate of interest in lending among members from the groups fund will be decided by the group as well as the amount to be given and the rate of interest to be charged.· Loans maybe given to members for either productive or consumption purposes subject to the groups decision· All types of Income generating activities of SHGs must be supported by a brief market survey· All income-generating activities require functional skills. SHGs must promote its members to be trained in their selected activity to enhance their capability for sustainable surplus production

DISQUALIFICATION FROM SHGS

· A member being absent consecutively 3 times from SHG meetings· A member who violated the objectives principles and management of the group and the rules and regulation set by the group and found in its written constitution

MAVIM

Mahila Arthik Vikas Mahamandal is known as MAVIM and it is the State Women’s Development Corporation of Government of Maharashtra, established on the 24th February, 1975 on the occasion of International Women’s year. Her Excellency Hon. Pratibhatai Patil, Ex. President of India, was the first Chairperson of MAVIM.

MAVIM has been declared as a Nodal agency by Government of Maharashtra on 20th January 2003 to implement various Women Empowerment Programme through Self Help Groups ( SHGs). The headquarter of MAVIM is based at Mumbai and MAVIM has offices at every district to implement developmental schemes in rural areas. It is comprises of four professional officers, support staff and sahayoginis who act as a field workers in the field . Each sahayogini works with50-60 SHGs covering around 10 villages. She is responsible to provide the basic capacity building training inputs to SHG members depending upon their age and level of maturity and also nurture them qualitatively. It is registered under Companies Act 1956 (Section 25 C) as not for profit Company.

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Mission :

The mission of the corporation is “To bring about gender justice and equality for women, investing in human capital and the capacity building of women, thus making them economically and socially empowered and enabling them to access sustainable livelihoods”

Goal:

To establish social, economic and political justice for women thought for Sustainable Development.

Objectives :

The corporation has the objective of bringing about women’s empowerment by mobilizing women and building organizations of women, enhancing their capacities by training, increasing their self confidence and strengthening enterpreneurship among women and making credit and markets accessible to women. The corporation also seeks to improve women’s access to education, and increase their participation in decision making and governance.

Questions:

1. Define SHGs. Explain the formation of SHGs.2. Write a note on MAVIM

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Chapter – 18Types of risk

Introduction , Definition , Types of risk , Overcome business insecurities

Meaning and Definition

Risk is the potential of loss (an undesirable outcome, however not necessarily so) resulting from a given action, activity and/or inaction, foreseen or unforeseen. The notion implies that a choice having an influence on the outcome sometimes exists (or existed). Potential losses themselves may also be called "risks" without any indication of cause. Any human endeavor carries some risk, but some are much riskier than others.

TYPES OF RISK

Systematic Risk - Systematic risk influences a large number of assets. A significant political event, for example, could affect several of the assets in your portfolio. It is virtually impossible to protect yourself against this type of risk.

Unsystematic Risk - Unsystematic risk is sometimes referred to as "specific risk". This kind of risk affects a very small number of assets. An example is news that affects a specific stock such as a sudden strike by employees. Diversification is the only way to protect yourself from unsystematic risk.

Credit or Default Risk - Credit risk is the risk that a company or individual will be unable to pay the contractual interest or principal on its debt obligations. This type of risk is of particular concern to investors who hold bonds in their portfolios. Government bonds, especially those issued by the federal government, have the least amount of default risk and the lowest returns, while corporate bonds tend to have the highest amount of default risk but also higher interest rates. Bonds with a lower chance of default are considered to be investment grade, while bonds with higher chances are considered to be junk bonds.

Country Risk - Country risk refers to the risk that a country won't be able to honor its financial commitments. When a country defaults on its obligations, this can harm the performance of all other financial instruments in that country as well as other countries it has relations with. Country risk applies to stocks, bonds, mutual funds, options and futures that are issued within a particular country. This type of risk is most often seen in emerging markets or countries that have a severe deficit.

Foreign-Exchange Risk - When investing in foreign countries you must consider the fact that currency exchange rates can change the price of the asset as well. Foreign-

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http://www.investopedia.com/terms/f/foreignexchangerisk.asp

http://www.investopedia.com/terms/e/emergingmarketeconomy.asp

http://www.investopedia.com/terms/d/default2.asp

http://www.investopedia.com/terms/c/countryrisk.asp

http://www.investopedia.com/terms/j/junkbond.asp

http://www.investopedia.com/terms/i/investmentgrade.asp

http://www.investopedia.com/terms/c/corporatebond.asp

http://www.investopedia.com/terms/g/governmentsecurity.asp

http://www.investopedia.com/terms/c/creditrisk.asp

http://www.investopedia.com/terms/d/diversification.asp

http://www.investopedia.com/terms/u/unsystematicrisk.asp

http://www.investopedia.com/terms/s/systematicrisk.asp


exchange risk applies to all financial instruments that are in a currency other than your domestic currency.

Interest Rate Risk - Interest rate risk is the risk that an investment's value will change as a result of a change in interest rates. This risk affects the value of bonds more directly than stocks.

Political Risk - Political risk represents the financial risk that a country's government will suddenly change its policies. This is a major reason why developing countries lack foreign investment.

Market Risk - This is the most familiar of all risks. Also referred to as volatility, market risk is the the day-to-day fluctuations in a stock's price. Market risk applies mainly to stocks and options. As a whole, stocks tend to perform well during a bull market and poorly during a bear market - volatility is not so much a cause but an effect of certain market forces. Volatility is a measure of risk because it refers to the behavior, or "temperament", of your investment rather than the reason for this behavior. Because market movement is the reason why people can make money from stocks, volatility is essential for returns, and the more unstable the investment the more chance there is that it will experience a dramatic change in either direction.

HOW TO OVERCOME BUSINESS INSECURITIES

1. Listen to your gut and just go for it.“Don’t be afraid of what other people may think. If you overreach, you can always figure it out as you go. If you step on someone’s toes, you can always apologize later. You owe it to yourself to go for your dreams and live the life you deserve. I was an 18 year-old kid when I started working for a Fortune 500 company with no experience and no education. Three years later I was running my own business and became Entrepreneur of the Year. You too can live on your own terms – you just have to decide that from now on you will.”

2. Consider the worst case scenario.“Once, when I was dealing with the fear of failure, a mentor told me that to try to understand the worst case scenario, in addition to evaluating the likely risk and reward of the options. If that worst case scenario is still acceptable and the risk and reward is attractive, then it probably makes sense. However, if you can’t handle the worst case scenario, then you may have to re-evaluate.

Related to this, was a story a fellow entrepreneur told me about one of his employees who was extremely successful because of his experience as a war veteran. This employee understood the risk and reward of his business decisions and took calculated chances at work that others may have viewed as risky. The veteran understood real risk as bullets flying past your head, not a bad sales deal.

This employee more properly understood business risk and true worst case scenarios than people without his experience, so he achieved better results from taking better risks.”

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http://www.investopedia.com/terms/p/politicalrisk.asp

http://www.investopedia.com/terms/i/interestraterisk.asp

http://www.investopedia.com/terms/f/foreignexchangerisk.asp


3. Celebrate your failures.Celebrate your failures, recognizing they are a necessary part in the process of becoming successful. When I first started my own business, I was terrified of losing a client, thinking it would be the worst experience ever. Well, it eventually happened, and yes it was painful (mostly to my ego). But I analyzed what happened, made adjustments, and grew into a better person and a better company from the experience. Understanding that I will sometimes stumble, and that it’s okay when I do, has given me the confidence to run this crazy race of entrepreneurship!”

4. Be your own best cheerleader.“No one can – or will – advocate for you and make it happen like you can. Exude confidence in your business and your capabilities, and others will see you as capable as well. If you don’t believe in yourself, no one else will, either.”

5. Set small, realistic goals every week.“Starting a business from scratch isn’t for [the] faint at heart. Every entrepreneur is faced with periods of low self-esteem [and] lack of confidence, but most importantly, is uncertain of what is next. Am I on the right path? Am I doing the right things to grow the business? Is this normal? Am I panicking too early?

The way to combat this is very simple: set small realistic goals every week and conquer [them]. For example, when we first started our business we’d set goals of closing 2 deals a week. Now, that’s the norm for a day’s work. It’s amazing how much achieving such small goals can boost your confidence and motivation. As you build on winning small battles, the ultimate feat of winning the war will become real.”

6. Write a letter from your ‘future’ self.“Being a young, female founder in a male-dominated industry, I’ve had plenty of moments when I questioned myself and why I was doing what I was doing. I took some time out a while ago to write a short letter to myself from my future self. I carry this letter around with me. In those moments when I question myself, I pull the letter out. I take a quiet moment, and revisit it to remind myself who I am – and to stay the course.”

Questions:

1. Define risk. Explain the different types of Risk.2. Explain how to overcome business insecurities.

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