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INTRODUCTION TO

ENTREPRENEURIAL ECONOMICS

Prepared by

Anupam Chakraborti

DEPARTMENT OF ECONOMICS

UNIVERSITY OF KALYANI

8 May 2012

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CONTENTS

Economics Honours, Paper VII, Group B: Rural Development and Entrepreneurial Economics(50 Marks)

Unit 3: Entrepreneurship

a) Concepts and basic characteristics of entrepreneurship

b) Function and types of entrepreneurs

c) Role of entrepreneurship in economic development

d) Rural entrepreneurship – meaning, need and problems

Unit 4: Theories of Entrepreneurship

a) Motivation Theories

b) Abraham Maslow’s “Need Hierarchy Theory

c) McClelland’s Achievement Motivation Theory

d) Motivating factors

Unit 5: Project

a) Meaning of project

b) Project Report, contents and formulation

c) Importance of balance sheet, cash flow statement and break even point

Unit 6:Financial Planning

a) Concept of financial planning

b) Sources of finance

c) Capital structure and its determinants

d) Concept of shares and debentures

e) Venture capital

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Unit 7: Institutional Support

a) Institutional support to enterprises

b) Small Industries Development Organisation (SIDO)

c) State Small Industries Development Corporation

d) District Industrial Centres

e) Industrial Estates

Unit 8: Growth Strategies

a) Growth strategies in small busin ess

b) Expansion and diversification

c) Joint venture

d) Merger

e) Subcontracting

Examples of Test Questions

_______________________________

Course Material – Entrepreneurial Economics

DEPARTMENT OF ECONOMICS , UNIVERSITY OF KALYANI

Prepared by : Dr. Anupam Chakraborti Date: 8 May 2012

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Unit 3. Entrepreneurship

a) Concepts and basic characteristics of entrepreneurship

Concepts

The word entrepreneurship has been derived from a French root which means "to

undertake". It is also called by various names, e.g. adventurism, risk taking, thrill seeking,

innovating, etc.

According to Higgins, "Entrepreneurship is meant the function of seeking investment and

production opportunity, organizing an enterprise to undertak e a new production process, raising

capital, hiring labor, arranging the supply of raw materials, finding site, introducing a new

technique and commodities, discovering new sources of raw materials and selecting top

managers of day-to-day operations of the enterprise”.

Jaffrey A. Timmons has defined entrepreneurship as "the ability to create and build

something from practically nothing. Fundamentally, a human creative activity, it is finding

personal energy by initiating, building and achieving an enterprise or organization rather than by

watching, analyzing or describing one. It requires the ability to take calculated risk and to reduce

the chance of failure….."

According to A.H.Cole "entrepreneurship is the purposeful activity of a n individual or a

group of associated individuals, undertaken to initiate, maintain or aggrandize profit by

production or distribution of economic goods and services."

The concept of entrepreneurship is understood as a combination of creativit y and

innovation. It is a stance taken within the business applying inherent creativity as the act of

'thinking of' new things. It involves coming up with innovative ideas and trying out new methods

within the operations. The concept of entrepreneurship is also concerned with new ways of

looking at opportunities and identifying a new approach towards solving problems.

Entrepreneurship requires the entrepreneur to shift paradigms and do away with old assumptions

and perspectives. The entrepreneur basically a dopts techniques to stimulate creativity amongst

employees.

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The concept of entrepreneurship involves the consideration of a number of opportunities

to enhance employee performance and business profits. The entrepreneur is expected to imply

strategic planning to assess if the opportunities provided for growth are worthwhile and how they

could be successfully exploited. Strategic planning is an essential part of the concept of

entrepreneurship and effective application helps to ensure successful operation. It is a useful tool

within the sphere of influence of entrepreneurship and serves a niche market for improving on

the business performance. The concept of entrepreneurship involves the owner taking absolute

responsibility of empowering the emplo yees and in turn, affecting sales and profitability of the

business.

Entrepreneur traits, creativity, innovation, business planning and growth management

are five of the main concepts of entrepreneurship.

Basic characteristics

Entrepreneurial creativity requires a paradigm shift and there are many techniques

available to help the entrepreneur to see things in a different perspective, to come up with new

ideas. Innovation involves implementing newly created ideas and the process can be classified as

invention, extension, duplication and synthesis. Strategic planning is used to assess the

entrepreneur's position in external/internal environments, to identify key success

factors/competencies and to implement a strategy. Fin ally, the issue of growth management

requires the entrepreneur to settle on what size of company he is happy with, how much direct

control is afforded to him and how entrepreneurial spirit can be retained in a growing business.

However the main characteris tics of entrepreneurship may be enlisted as follows

_ Ability to deal with a series of tough issues

_ Ability to create solutions and work to perfect them

_ Can handle many tasks simultaneously

_ Resiliency in the face of set-backs

_ Willingness to work hard and not expect easy solutions

_ Possess well-developed problem solving skills

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_ Ability to learn and acquire the necessary skills for the tasks at hand

b) Functions and types of entrepreneurs

Functions

An entrepreneur is an opportu nity seeker. He is also the organizer and coordinator of

the agents of production. He has to execute many a good functions while establishing a small

scale enterprise. He not only perceives the business opportunities but also mobilizes the other

resources like 5 Ms-man, money, machine, materials and methods. However, the main functions

of the entrepreneurs are discussed below.

1. Idea generation: This is the most important function of the entrepreneur. Idea generation can

be possible through the vision, ins ight, observation, experience, education, training and exposure

of the entrepreneur. Idea generation precisely implies product selection and project

identification. Ideas can be generated through environmental scanning and market survey. It is

the function of the entrepreneurs to generate as many ideas as he can for the purpose of selecting

the best business opportunities which can subsequently be taken up by him as a commercially -

viable business venture.

2. Determination of objectives : The next function of the entrepreneur is to determine and lay

down the objectives of the business, which should be spelt out on clear terms. In other words,

entrepreneur should be very much clear about the following things: (i) The nature of business

and (ii) The type of business. This implies whether the enterprise belongs to the category of a

manufacturing concern or a service -oriented unit or a trading business, so that the entrepreneurs

can very well carry on the venture in accordance with the objectives determined by him .

3. Raising of funds: Fund raising is the most important function of an entrepreneur. All the

activities of a business depend upon the finance and its proper management. It is the

responsibility of the entrepreneur to raise funds internally as well as ext ernally. In this matter, he

should be aware of the different sources of funds and the formalities to raise funds. He should

have the full knowledge of different government sponsored schemes such as PMRY, SGSY,

REGP, etc. by which he can get Government assi stance in the form of seed capital, fixed and

working capital for his business.

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4. Procurement of raw materials: Another important function of the entrepreneur is to procure

raw materials. Entrepreneur has to identify the cheap and regular sources of suppl y of raw

materials, which will help him to reduce the cost of production and face the competition boldly.

5. Procurement of machinery : The next function of the entrepreneurs is to procure the

machineries and equipments for establishment of the venture. Whi le procuring the machineries,

he should specify the following details:

(a) The details of technology

(b) Installed capacity of the machines

(c) Names of the manufacturers and suppliers

(d) Whether the machines are indigenously made or foreign made

(e) After-sales service facilities

(f) Warranty period of the machineries

All these details are to be minutely observed by the entrepreneurs.

6. Market research: The next important function of the entrepreneur is market research and

product analysis. Market research is the systematic collection of data regarding the product

which the entrepreneur wants to manufacture. Entrepreneur has to undertake market research

persistently in order to know the details of the intending product, i.e. the demand for the product,

the supply of the product, the price of the product, the size of the customers, etc. while starting

an enterprise.

7. Determination of form of enterprise : The function of an entrepreneur in determining the

form of enterprise is also important. Entrepreneur h as to decide the form of enterprise based

upon the nature of the product, volume of investment, nature of activities, types of product,

quality of product, quality of human resources, etc. The chief forms of ownership organizations

are sole proprietorship, partnership, Joint Stock Company and cooperative society.

Determination of ownership right is essential on the part of the entrepreneur to acquire legal title

to assets.

8. Recruitment of manpower : Entrepreneur has to perform the following activities whil e

undertaking this function:

(a) Estimating manpower need of the organization

(b) Laying down of selection procedure

(c) Devising scheme of compensation

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(d) Laying down the rules of training and development

9. Implementation of the project: Entrepreneur has to work on the implementation schedule or

the action plan of the project. The identified project is to 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, as well as competition. Thus, implementation of the project is an important function of

the entrepreneur.

To conclude with, all these functions of the entrepreneur can precisely be put in to the following

categories:

(i) Innovation (ii) Risk bearing (iii) Organization and (iv) Management

Types

Following are the classification of entrepreneurs on the basis of common characteristicsEntrepreneur

I II III IVA. Clarence Danhof B. Arthur H. Cole C. On the basis D. On the basisClassification Classification of ownership of scale of enterprise1. Aggressive/Innovative 1. Empirical 1. Private 1. Small Scale2. Imitative/ Adoptive 2. Rational 2. Public 2. Large Scale3. Fabian 3. Cognitive4. Drone

A. Clarence Danhof Classification:

Clarence Danhof classifies entrepreneurs into four types.

1. Innovative: Innovative entrepreneur is one who assembles and synthesis information and

introduces new combinations of factors of production. They are characterized by the smell of

innovativeness. These entrepreneu rs sense the opportunities for introduction new ideas new

technology, new markets and creating new organizations. Innovative entrepreneurs are very

much helpful for their country because they bring about a transformation in life style.

2. Imitative/ Adoptive: Imitative entrepreneur is also known as adoptive entrepreneur. He

simply adopts successful innovation introduced by other innovators. These entrepreneurs imitate

the existing entrepreneurs and setup their enterprise in the same manner. Instead of innovating,

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they just imitate the technology and methods innovated by others. These entrepreneurs are very

helpful in less developed countries as they contribute significantly in the growth of enterprise

and entrepreneurial culture in these countries. Further by adopting the technology, which is

already tested, they generate ample employment avenues for the youth and therefore they are

treated as agent of economic development.

3. Fabian: The Fabian entrepreneur is timid and cautious. He imitates other innovations only if

he is certain that failure to do so may damage his business. They are very much skeptical in their

approach in adopting or innovating new technology in their enterprise. They are not adaptable to

the changing environment. They love to remain in the existing business with the age -old

techniques of production. They only adopt the new technology when they realize that failure to

adopt will lead to loss or collapse of the enterprise.

4. Drone: These entrepreneurs are conservative or orthodox in outloo k. They never like to get

rid of their traditional business and traditional machinery or systems of the business. They

always feel comfortable with their old fashioned technology of production even though the

environment as well as the society have undergo ne considerable changes. Thus, drone

entrepreneurs refuse to adopt the changes. They are laggards as they continue to operate in their

traditional way and resist changes. His entrepreneurial activity may be restricted to just one or

two innovations. They refuse to adopt changes in production even at the risk of reduced returns.

B. Arthur H. Cole Classification:

Arthur H. Cole classifies entrepreneurs as

1. Empirical: He is an entrepreneur hardly introduces anything revolutionary and follows the

principle of rule of thumb.

2. Rational: The rational entrepreneur is well informed about the general economic conditions

and introduces changes which look more revolutionary.

3. Cognitive: Cognitive entrepreneur is well informed, draws upon the advice and services of

experts and introduces changes that reflect complete break from the existing scheme of

enterprise.

C. Classification on the Basis of Ownership:

1.Private: Private entrepreneur is motivated by profit and it would not enter those sectors of the

economy in which prospects of monetary rewards are not very bright.

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2. Public: In the underdeveloped countries government will take the initiative to share

enterprises.

D. Classification Based on the Scale of Enterprise:

1. Small scale: This classification is especial ly popular in the underdeveloped countries. Small

entrepreneurs do not posses the necessary talents and resources to initiate large scale production

and introduce revolutionary technological changes.

2. Large scale: In the developed countries most entrepre neurs deal with large scale enterprises.

They posses the financial and necessary enterprise to initiate and introduce new technical

changes. The result is the developed countries are able to sustain and develop a high level of

technical progress. In recent years, some new classifications have been made regarding

entrepreneurs, which are discussed further.

Following are some more types of entrepreneurs listed by some other behavioural scientists:

1. Solo operators: These entrepreneurs prefer to set up their business individually. They

introduce their own capital, intellect and business acumen to run the enterprise successfully They

operate their business mainly in the form of proprietorship type of concern.

2. Active partners: Entrepreneurs of this type jointly put their efforts to build enterprise pooling

together their own resources. They actively participate in managing the daily routine of the

business concern. As such, the business houses or the firms which are managed by the active

partners become more successful in their operation.

3. Inventors: These entrepreneurs primarily involve themselves in Research and Development

(R and D) activities. They are creative in character and feel happy in inventing new products,

technologies and methods of produ ction

4. Challengers: Entrepreneurs of this type take challenges to establish business venture as mark

of achievement. They keep on improving their standard and face boldly the odds and adversities

that come in their way. They use their business acumen an d talent to convert the odds into

opportunities thereby making profit. According to them, if there is no challenge in life, there is

no charm in life. Challenges make them bold, and thus, they never hesitate to plunge themselves

into uncertainties for earning profit.

5. Buyers (entrepreneurs): These entrepreneurs explore opportunities to purchase the existing

units which may be seized or are in running condition. If the units they purchase are sick they

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turn them around using their experiences, expertise an d business acumen. By purchasing these

units they make themselves free from the hassles of building infrastructures and other facilities.

6. Life timers: These entrepreneurs believe that business is the part and parcel of their life. They

take up the business to reunite successfully as a matter of ego satisfaction. They have a strong

desire for taking personal responsibility. Family enterprises which thrive due to high personal

skill are included under this category.

C) Role of entrepreneurship in economic development

Recent studies emphasize entrepreneurship as a driver of economic development and

some authors include entrepreneurship as a fourth production factor in the macroeconomic

production function (Audretsch and Keilbach 2004). Entrepreneurship is the factor that creates

wealth by combining existing production factors in new ways. Entrepreneurs experiment with

new combinations of which the outcomes are uncertain, but in order to make progress, many new

variations have to be tried in order to find out which ones will improve economic life (Rosenberg

and Birdzell 1986).

The major roles played by an entrepreneur in the economic development of an economy

in various ways.

(1) Promotes Capital Formation:

Entrepreneurs promote capi tal formation by mobilising the idle savings of public. They employ

their own as well as borrowed resources for setting up their enterprises. Such type of

entrepreneurial activities lead to value addition and creation of wealth, which is very essential for

the industrial and economic development of the country.

(2) Creates Large-Scale Employment Opportunities:

Entrepreneurs provide immediate large -scale employment to the unemployed which is a chronic

problem of underdeveloped nations. With the setting up.of more and more units by

entrepreneurs, both on small and large -scale numerous job opportunities are created for others.

As time passes, these enterprises grow, providing direct and indirect employment opportunities

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to many more. In this way, entrepreneurs play an effective role in reducing the problem of

unemployment in the country which in turn clears the path towards economic development of the

nation.

(3) Promotes Balanced Regional Development:

Entrepreneurs help to remove regional disparities through se tting up of industries in less

developed and backward areas. The growth of industries and business in these areas lead to a

large number of public benefits like road transport, health, education, entertainment, etc. Setting

up of more industries lead to mo re development of backward regions and thereby promotes

balanced regional development.

(4) Reduces Concentration of Economic Power:

Economic power is the natural outcome of industrial and business activity. Industrial

development normally lead to concentra tion of economic power in the hands of a few individuals

which results in the growth of monopolies. In order to redress this problem a large number of

entrepreneurs need to be developed, which will help reduce the concentration of economic power

amongst the population.

(5) Wealth Creation and Distribution:

It stimulates equitable redistribution of wealth and income in the interest of the country to more

people and geographic areas, thus giving benefit to larger sections of the society. Entrepreneurial

activities also generate more activities and give a multiplier effect in the economy.

(6) Increasing Gross National Product and Per Capita Income:

Entrepreneurs are always on the look out for opportunities. They explore and exploit

opportunities,, encourage effective resource mobilisation of capital and skill, bring in new

products and services and develops markets for growth of the economy. In this way, they help

increasing gross national product as well as per capita income of the people in a country.

Increase in gross national product and per capita income of the people in a country, is a sign of

economic growth.

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(6) Improvement in the Standard of Living:

Increase in the standard of living of the people is a characteristic feature of economic

development of the country. Entrepreneurs play a key role in increasing the standard of living of

the people by adopting latest innovations in the production of wide variety of goods and services

in large scale that too at a lower cost. This enables the people to avail bet ter quality goods at

lower prices which results in the improvement of their standard of living.

(7) Promotes Country's Export Trade:

Entrepreneurs help in promoting a country's export -trade, which is an important ingredient of

economic development. They produce goods and services in large scale for the purpose earning

huge amount of foreign exchange from export in order to combat the import dues requirement.

Hence import substitution and export promotion ensure economic independence and

development.

(8) Induces Backward and Forward Linkages:

Entrepreneurs like to work in an environment of change and try to maximise profits by

innovation. When an enterprise is established in accordance with the changing technology, it

induces backward and forward linkages whi ch stimulate the process of economic development in

the country.

(9) Facilitates Overall Development:

Entrepreneurs act as catalytic agent for change which results in chain reaction. Once an

enterprise is established, the process of industrialisation is se t in motion. This unit will generate

demand for various types of units required by it and there will be so many other units which

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. In this way, the entrepreneurs multiply their

entrepreneurial activities, thus creating an environment of enthusiasm and conveying an impetus

for overall development of the area.

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d) Rural entrepreneurship – meaning, need and problems

Meaning of Rural entrepreneurship

Rural entrepreneurship is that entrepreneurship which ensures value addition to rural

resources in rural areas engaging largely rural human resources . Rural entrepreneurs are those

who carry out entrepreneurial activities by establishing industrial and business units in the rural

sector of the economy. In other words, establishing industrial and business units in the rural areas

refers to rural entrepreneurship. In simple words, rural entrepreneurship implies ent repreneurship

emerging in rural areas. Or, say, rural entrepreneurship implies rural industrialization. Thus, we

can say, entrepreneurship precedes industrialization.

Need for Rural Entrepreneurship

The need for rural entrepreneurship in rural a reas is imbuded with multiplicity of

justifications as listed below:

1. Rural industries being labour intensive, have high potential in employment generation.

2. Rural industries have high potential for income generation in rural areas.

3. These industries encourage dispersal of economic activities in the rural areas and, thus,

promote balanced regional development.

4. Rural entrepreneurship build up village republic.

5. Rural enterprises protect and promote the art and creativity, i.e., the age -old heritage of

the country.

6. Rural industrialization curbs rural -urban migration, lessens the disproportionate

growth, reduces growth of slums, social tensions and atmospheric pollution.

7. Rural industries being environment friendly lead to the development without

destruction.

Problems of rural entrepreneurship

Rural entrepreneurship has its own drawbacks. Policies such as keeping of land in

protection when there is already an over production and pricing subsidy policies that helps to

retain the minimum income are two of the greatest threats to rural development. Due to the

remote access and unavailability of knowledgeable labor, it is difficult to advise the local

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entrepreneurs who are willing to take risk. Access to capital labor, commercial markets and the

managerial staff are hindered due to the remote locations.

The major problems faced in developing entrepreneurship in rural areas are :

(i) Lack of infrastructural facilities.

(ii) Non-supportive attitude of financial institutions which works more on pa pers. The procedure

to avail the loan facility is so time consuming that its delay often disappoints the entrepreneurs.

(iii) Lack of technical know-how.

(iv) Lack of communication facilities and market information. Information technology has

penetrated into rural areas through Internet but rural areas have hardly availed its benefits.

(v) Lack of warehousing facilities. The dilapidated condition of industrial estates proves it and

location of these houses hasn't been proper.

(vi) Incentives offered are many. Banks do provide concessional loans but their rules are very

rigid. Their reluctance to grant loans for the working capital adds to the problems of the rural

entrepreneurs.

(vii) Lack of Quality management.

Thus we see that rural industria lization is important for the country’s prosperity since

India lives in villages. Development of village industries in rural areas is the solution to alleviate

rural poverty. Such industries are an integral part of the village economy and help in the

upliftment of rural masses through diversification of their occupational base.

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Unit 4: Theories of Entrepreneurship

a) Motivation Theories

Entrepreneurial Motivation means what motivates an Entrepreneur. The word

‘Motivation’ is derived f rom Latin word – ‘Movere’ – to move. Psychologically, it means an

inner or environmental stimulus to action, forces or the factors that are responsible for initiation,

and sustaining behaviour. The importance of motivation to human life and work can be jud ged

by the number of theories that have been propounded to explain people’s behavior. They explain

human motivation through needs and human nature. Prominent among these theories and

particularly relevant to entrepreneurship are Maslow’s Need Hierarchy The ory and McClelland’s

Achievement Motivation Theory.

b) Abraham Maslow’s “Need Hierarchy Theory

One of the most widely mentioned theories of motivation is the hierarchy of needs

theory put forth by psychologist Abraham Maslow. Maslow saw human needs in the form of a

hierarchy, ascending from the lowest to the highest, and he concluded that when one set of needs

is satisfied, this kind of need ceases to be a motivator.

As per his theory these needs are :

(i) Physiological needs

These are important needs for sustaining the human life. Food, water, warmth, shelter, sleep,

medicine and education are the basic physiological needs which fall in the primary list of need

satisfaction. Maslow was of an opinion that until these needs were satisfied to a degree to

maintain life, no other motivating factors can work.

(ii) Security or Safety needs

These are the needs to be free of physical danger and of the fear of losing a job, property, food or

shelter. It also includes protection against a ny emotional harm.

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(iii) Social needs

Since people are social beings, they need to belong and be accepted by others. People try to

satisfy their need for affection, acceptance and friendship.

(iv) Esteem needs

According to Maslow, once people begin to sati sfy their need to belong, they tend to want to be

held in esteem both by themselves and by others. This kind of need produces such satisfaction as

power, prestige status and self -confidence. It includes both internal esteem factors like self -

respect, autonomy and achievements and external esteem factors such as states, recognition and

attention.

(v) Need for self-actualization

Maslow regards this as the highest need in his hierarchy. It is the drive to become what one is

capable of becoming; it includes gro wth, achieving one’s potential and self -fulfillment. It is to

maximize one’s potential and to accomplish something.

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As each of these needs are substantially satisfied, the next need becomes dominant. From

the standpoint of motivation, the th eory would say that although no need is ever fully gratified, a

substantially satisfied need no longer motivates. So if you want to motivate someone, you need

to understand what level of the hierarchy that person is on and focus on satisfying those needs o r

needs above that level.

Maslow’s need theory has received wide recognition, particularly among practicing

managers. This can be attributed to the theory’s intuitive logic and ease of understanding.

However, research does not validate this t heory. Maslow provided no empirical evidence and

other several studies that sought to validate the theory found no support for it.

c) McClelland’s Achievement Motivation 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 h is 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 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)

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These needs are found to varying degrees in all worker s and managers, and this mix of

motivational needs characterise 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 prog ress, 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 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).

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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 managemen t, and entrepreneurial roles.

d) Motivating factors

Some studies have listed the following motivating factors:

Entrepreneurial Ambition : 1. to make money 2. to gain social prestige 3. to secure selfemployment ; Compelling Reasons: 1. Unemplyment 2. Dissatisfaction with existing job oroccupation 3. to use technical or professional knowledge ; Facilitating Factors: 1. PreviousKnowledge, experience 2. Encouragement from family members, friends 3. Imitation ofsuccessful entrepreneurs Factors for Entrepreneurial Motivation .

Some researchers have classified the factors of motivation into two broad categories:

Internal factors:

Educational background

Occupational Experience

Desire to work independently

Desire to branch out to manufacturing

Family background

Desire for taking personal responsibility

Success stories of entrepreneurs

To gain social prestige

Technical knowledge

External factors:

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Assistance from Government

Assistance from financial institution

Availability of technology/raw material

Profit margin

Anticipation of future possibilities

Heavy Demand

Unit 5 : Project

a) Meaning of Project

A project is a time-bound intervention consisting of a set of planned and interrelated

activities executed to bring about a beneficial change. It has a start and a finish, involves a

multidisciplinary team collaborating to implement activities within constraints of cost, time and

quality, and has a scope of work that is unique and subject to uncertainty. Projects link p olicy

initiatives at a higher level (eg national or sectoral) with a specific problem faced by a target

group of local-level stakeholders or by institutions or organizations.

Project selection starts from where project identification ends. Afte r having some project

ideas, these are analysed in the light of existing economic conditions , the government policy and

soon. A tool generally used for this purpose is, what is called in the managerial jargon, SWOT

analysis. The intending entrepreneur ana lyses his/her strengths and weakness as well as

opportunities/competitive advantages and threats/challenges offered by each of the project ideas.

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 some projects is also described as

the “zeroing in process”.

b) Project Report, contents and formulation

Project Report

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Project report or business plan is a written statemen t of what an entrepreneur proposes to

take up. It is a kind of guide frost or course of action what the entrepreneur hopes to achieve in

his business and how is he going to achieve it. In other words, project report serves like a kind of

big road map to reach the destination determined by the entrepreneur. Thus, a project report can

best be defined as a well evolved course of action devised to achieve the specified objective

within a specified period of time. So to say, it is an operating document.

Contents of a project report

A good project report should contain the following components.

1. General Information : Information on product profile and product details.

2. Promoter: His/her educational qualification, work experience, project related

experience.

3. Location: Exact location of the project, lease or freehold, locational advantages.

4. Land and building: Land area, construction area, type of construction, cost of

construction, detailed plan and estimate along with plant layout.

5. Plant and Machinery: Details of machinery required, capacity, suppliers, cost,

various alternatives available, cost of miscellaneous assets.

6. Production Process: Description of production process, process chart, technical know how,

technology alternatives available, producti on programme.

7. Utilities: Water, power, steam, compressed air requirements, cost estimates, sources of

utilities.

8. Transport and Communication: Mode, possibility of getting, costs.

9. Raw Material: List of raw material required by quality and quantity, sources of procurement,

cost of raw material, tie-up arrangements, if any

10. Manpower: Manpower requirement by skilled and semi -skilled, sources of manpower

supply, cost of procurement, requirement for training. and its cost.

11. Products: Product mix, estimated sales, distribution channels, competitions and their

capacities, product standard, input -output ratio, product substitute.

12. Market: End-users of product, distribution of market as local, national, international, trade

practices, sales promotion devices, and proposed market research.

23

13. Requirement of Working Capital : Working capital required, sources of working capital,

need for collateral security, nature and extent of credit facilities offered and

available.

14. Requirement of Funds: Break-up of 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.

15. Cost of Production and Prof itability of first ten years.

16. Break-Even Analysis

17. Schedule of Implementation

Formulation of a project report

The process of Project formulation can be divided in to eight distinct and sequential

stages. These stages are:

1. General Information.

2. Project Description.

3. Market Potential.

4. Capital Costs and Sources of Finance.

5. Assessment of Working Capital Requirements.

6. Other Financial Aspects.

7. Economic and Social Variables.

8. Project Implementation.

c) Importance of balance sheet, cash flow statement and break even

point

Balance Sheet

In financial accounting, a balance sheet or statement of financial position is a

summary of the financial balances of a sole proprietorship, a business partnership, a corporation

or other business organization. Assets, liabilities and ownership equity are listed as of a specific

24

date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a

company's financial condition".

A standard company balance sheet has three parts: assets, liabilities and ownership

equity. The main categories of assets are usually listed first, and typically in order of liquidity.

Assets are followed by the liabilities. The difference between the assets and the liabilities is

known as equity or the net assets or the net worth or capital of the company and according to the

accounting equation, net worth must equal assets minus liabilities. Balance sheets are usually

presented with assets in one section and liabilities and net worth in the other section with the two

sections "balancing."

A business operating entirely in cash can measure its profits by withdrawing the entire

bank balance at the end of the period, plus any cash in hand. However, many businesses are not

paid immediately; they build up inventories of goods and they acquire buildings and equipment.

In other words: businesses have assets and so they cannot, even if they want to, immediately turn

these into cash at the end of each period. Often, these businesses owe money to suppliers and to

tax authorities, and the proprietors do not withdraw all their original capital and profits at the end

of each period. In other words businesses also have liabilities.

Sample Small Business Balance Sheet

Assets Liabilities and Owners' Equity

Cash Rs. 6,600 Liabilities

Accounts Receivable Rs. 6,200 Notes Payable Rs. 30,000

Tools and equipment Rs. 25,000 Accounts Payable

Total liabilities Rs. 30,000

Owners' equity

Capital Stock Rs. 7,000

Retained Earnings Rs. 800

Total owners' equity Rs. 7,800

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Total Rs. 37,800 Total Rs. 37,800

Cash Flow Statement

The cash flow statement was previously known as the flow of Cash statement . The cash

flow statement reflects a firm's liquidity. The balance sheet is a snapshot of a firm's financial

resources and obligations at a single point in time, and the income statement summarizes a firm's

financial transactions over an interval of time. These two financial statements reflect the accrual

basis accounting used by firms to match revenues with the expenses associated wi th generating

those revenues. The cash flow statement includes only inflows and outflows of cash and cash

equivalents; it excludes transactions that do not directly affect cash receipts and payments. These

non-cash transactions include depreciation or writ e-offs on bad debts or credit losses to name a

few. The cash flow statement is a cash basis report on three types of financial activities:

operating activities, investing activities, and financing activities. Non -cash activities are usually

reported in footnotes.

The cash flow statement is intended to

1. provide information on a firm's liquidity and solvency and its ability to change cash flows

in future circumstances

2. provide additional information for evaluating changes in assets, liabilities and equity

3. improve the comparability of different firms' operating performance by eliminating the

effects of different accounting methods

4. indicate the amount, timing and probability of future cash flows

The cash flow statement has been adopted as a standard financial statement because it

eliminates allocations, which might be derived from different accounting m ethods, such as

various timeframes for depreciating fixed assets.

Break-even Point

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In economics & business, specifically cost accounting, the break-even point (BEP) is the

point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has

"broken even". A profit or a loss has not been made, although opportunity costs have been

"paid", and capital has received the risk -adjusted, expected return.

In the linear Cost-Volume-Profit Analysis model, the break-even point (in terms of Unit

Sales (X)) can be directly computed in terms of Total Revenue (TR) and Total Costs (TC) as:

where:

TFC is Total Fixed Costs, P is Unit Sale Price, and V is Unit Variable Cost

.

Margin of Safety

Margin of safety represents the strength of the business. It enables a business to know what is

the exact amount it has gained or lost and whether they are over or below the break- even point.

27

margin of safety = (current output - breakeven output)

margin of safety% = (current output - breakeven output)/current output x 100

When dealing with budgets we would instead replace "Current output" with "Budgeted output".

Break Even Analysis

By inserting different prices into the formula, we will obtain a number of break even

points, one for each possible price charged.

To make the results clearer, they can be graphed. To do this, you draw the total cost

curve (TC in the diagram) which shows the total cost associated with each possible level of

output, the fixed cost curve (FC) which shows the costs that do not vary with output level, and

finally the various total revenue lines (R1, R2, and R3) which show the tot al amount of revenue

received at each output level, given the price you will be charging.

The break even points (A,B,C) are the points of intersection between the total cost

curve (TC) and a total revenue curve (R1, R2, or R3). The break eve n quantity at each selling

price can be read off the horizontal axis and the break even price at each selling price can be read

off the vertical axis. The total cost, total revenue, and fixed cost curves can each be constructed

with simple formulae. For example, the total revenue curve is simply the product of selling price

times quantity for each output quantity. The data used in these formulae come either from

accounting records or from various estimation techniques such as regression analysis.

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Application

The break-even point is one of the simplest yet least used analytical tools in management.

It helps to provide a dynamic view of the relationships between sales, costs and profits. A better

understanding of break-even, for example, is expressing break -even sales as a percentage of

actual sales—can give managers a chance to understand when to expect to break even (by

linking the percent to when in the week/mo nth this percent of sales might occur).

Limitations

Break-even analysis is only a supply side ( i.e. costs only) analysis, as it tells you nothing

about what sales are actually likely to be for the product at these various prices.

It assumes that fixed costs (FC) are constant. Although this is true in the short run, an

increase in the scale of production is likely to cause fixed costs to rise.

It assumes average variable costs are constant per unit of output, at least in the range of

likely quantities of sales. (i.e. linearity)

It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e.,

there is no change in the quantity of goods held in inventory at the beginning of the

period and the quantity of goods held in inventory at t he end of the period).

In multi-product companies, it assumes that the relative proportions of each product sold

and produced are constant ( i.e., the sales mix is constant).

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Unit 6: Financial planning

a) Concept of financial planning

Financial planning is simple mathematics. There are 3 major components :

Financial Resources (FR)

Financial Tools (FT)

Financial Goals (FG)

Financial Planning : FR + FT = FG

In general usage, a financial plan is a series of steps or goals used by an individual or

business, the progressive and cumulative attainment of which are designed to accomplish a final

financial goal or set of circumstances, e.g. elimination of debt, retirement preparedness, etc. This

often includes a budget which organizes an individual's finances and sometimes includes a series

of steps or specific goals for spending and saving future income. This plan allocates future

income to various types of expenses, such as rent or utilities, and also reserves some income for

short-term and long-term savings. A financial plan somet imes refers to an investment plan,

which allocates savings to various assets or projects expected to produce future income, su ch as a

new business or product line, shares in an existing business, or real estate.

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b) Sources of Finance

Internal Sources of Finance

These are sources of finance that come from the business' assets or activities.

Retained Profit

If the business had a successful trading year and made a profit after paying all its costs, it could

use some of that profit to finance future activities . This can be a very useful source of long te rm

finance, provided the business is generating profit (see section on profit & loss accounts).

Sale of Assets

The business can finance new activities or pay -off debts by selling its assets such as property,

fixtures & fittings, machinery, vehicles etc. It is often used as a short term source of finance

(e.g. selling a vehicle to pay debts) but could provide more longer term finance if the assets

being sold are very valuable (e.g. land or buildings). If a business wants to use its assets, it may

consider sale and lease-back where it may sell its assets and then rent or hire it from the

business that now owns the assets. It may mean paying more money in the long run but it can

provide cash in the short term to avoid a crisis.

Reducing Stocks

Stock is a type of asset (see balance sheet work for more on assets) and can be sold to raise

finance. Stock includes the business' holdings of raw materials (inputs), semi -finished products

and also finished products that it has not yet sold. Businesses will usually hold some stock. It can

be useful if there is an unexpected increase in demand from customers. Stock levels tend to rise

during economic slowdowns or recessions as goods are not sold and 'pile -up' instead. It is not

usually a source of large amounts of finance - if a business has very large stock piles, it might

mean that nobody wants to buy the product and reducing stocks will therefore be hard. It is often

considered to be a short term source.

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Trade Credit

A business does not normally pay for things before it takes possession of them. Instead, it will

usually place an order for supplies / inputs and will pay after receiving the items. It is good

practice to pay quickly (often within one month) as this will help the business develop a good

relationship with its suppliers. This source of finance appears on the balance sheet as trade

credit. This method of deferring (delaying) payment to a future date is a form of very short

term borrowing and helps with the problems of the cash cycle identified in the work on

liquidity.

External Sources of Finance

This is finance that comes from outside the business. It involves the business owing money to

outside individuals or institutions .

Personal Savings

This mainly applies to sole traders and partnerships. Owners may use so me of their own money

as capital to invest in the business. For instance, a person may be made redundant by a company

that needs to reduce in size. They would receive redundancy payment that they might use to start

their own business.

This is considered an external source as it is assumed that the money lent to the business will be

paid back to the private individual in the future, possibly with an extra amount to compensate the

individual for the help they gave. It can be a short or long term source of finance, depending

upon the amount invested and the decision of the person using their savings.

Commercial Banks

We tend to consider two types of finance that banks offer to businesses, overdrafts and loans.

If a business spends more money than it has in its bank account, we say that it has become

overdrawn. Businesses will often have an arrangement with the bank whereby the bank will pay

the extra money provided the business will pay them back in a fairly short period of time, with

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interest. This is a short term source of finance and is useful for small amounts. It is often used

for buying supplies / inputs.

A bank loan is a long term source of finance and will often be for much larger sums of money.

A loan is useful for a business that is starting up or look ing to grow. Loans are often used to buy

fixed assets (see balance sheets) such as machinery and vehicles. A business will pay the bank

back each month in instalments and will also pay an interest charge.

Interest - Banks are providing a service by lendin g money in the form of overdrafts and loans

and banks will charge for this service (they want to make a profit too). When a business takes a

loan, it will agree to pay it back over a period of years but it will also pay an extra charge. This

charge, called interest, is a percentage of the value of the loan.

Building Societies

A building society is a form of financial that is similar to a bank. It also provides loans but

specialises in providing mortgages. A mortgage is a special type of loan used to buy pro perty

(factories, shops, etc). Loans and mortgages tend to be paid back over a long period of time,

usually several years, at an interest rate. In recent years, the differences between banks and

building societies have reduced and both are now very similar . Both can offer mortgages and

loans

Factoring Services

Businesses are often owed money. If you supplied car parts to local garages, you would often

deliver the products to the garages and receive payment within a few weeks. The garages would

be paying by trade credit (see internal sources) and are in debt to you (they are your debtors -

see balance sheet).

A business may have difficulty in collecting its debts from its customers but may need to get its

hands on money very quickly. A special factoring company may offer to handle the debt

collection process for a charge. The factoring company pays the business most of the value of the

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debt first and would then collect the money from the debtor. This is a short term source of

finance.

Share Issue

An important source of finance for limited companies. A share issue involves a business selling

new shares that entitle the shareholders to share in the control of the business. Each share gives

the shareholder a vote on the direction of the company. This usually mea ns that the shareholder

can elect the board of directors of the company each year. If the shareholder doesn't like the way

the directors are running the business, they can elect new directors. This is a good incentive to

the directors to run the business w ell and make a profit which will be paid to the shareholders in

the form of dividends.

The more shares a person holds, the more control they have over a company. If one company

wanted to take another company over, it could arrange to buy over 50% of that c ompany's

shares. This would give it a majority of control and, therefore, ownership.

Issuing new shares can raise a lot of capital that can be used for expansion (buying more fixed

assets, etc). It is a long term source of finance. If the total number of s hares rises, the votes of

existing shareholders will have slightly less significance and they will have less control. The

business will also have to pay dividends on a larger number of shares.

Debentures

This is a form of long term loan that can be taken out by a public limited company for a large

sum and it will be paid back over several years. It is usually borrowed from specialist financial

institutions.

Venture capital

Some individuals join together to provide finance for new businesses that are just starting-up.

They look for promising businesses and invest in them, hoping that the businesses will grow and

that they will make a profit. This is similar to issuing shares.

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Leasing and Hire Purchase

Leasing involves a business renting equipment that it m ay use for several years or months but

never own. It will have a contract with a company who may come in to repair and service the

product. The deal may also involve the product being replaced with a new model every so often.

Businesses often lease equipment such as photocopiers.

Hire purchase involves paying for equipment in instalments. The business will not own

the item until all the payments have been made. It usually works out more expensive to buy an

item on hire purchase than paying all at once but it does mean that the business doesn't have to

spend a large amount of money at once.

c) Capital structure and its determinants

Capital structure means the permanent financing of the enterprise represented primarily by

long-term sources of funds, i.e., debt and equity. In simple words, capital structure is the ratio

between debt and equity capital. An optimum capital structure can be defined as a financing mix

incurring the least cost but yielding the maximum returns. It is obt ained when the market value per

equity share is maximum.

Determinants of capital structure:

1. Nature of business

2. Size of the enterprise

3. Trading on equity

4. Cash flows

5. Purpose of financing

6. Provision of future

d) Shares and Debentures

Share

Definition : The total capital of the company is divided into convenient units of equal value and

each unit is called a share.

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Shareholder :An individual who purchases/possesses the share/shares of the company is called a

shareholder of the company. Each share h older is issued a share certificate by the company,

indicating the number of shares purchased and value of each share.

Par value : The original value of the share, which is written on the share certificate, is called its

par value. This is also called nomi nal value or face value of the share.

Dividend : When the company starts production and starts earning profit, after retaining some

profit for running expenses interest on loans, if raised, the remaining part of the profit is divided

among shareholders, and is called dividend. Dividend is usually expressed as certain percentage

of its par value or certain among per share.

The shares are of two types :

(i) Preferred shares : There are the shares on which some fixed amount of dividend is paid,

after working expenses taxes, interests, etc. are paid, Sometimes, when the profit is not enough

even to meet the other expenses, even the preferred share holders do not get any dividend.

(ii) Ordinary (or common) shares : These type of shareholders get dividend only after the

holders of preference shares receive their share of profit. Due to this only the rate of dividend is

not fixed and keep on varying.

Like other commodities, shares are also sold and purchased in the market. This market is

given a special name "Stock Exchange ". The price of a share as quoted in the market, is called

the market value of the share. Like other commodities, the mar ket value of shares keeps on

changing according to demand in the market.

(i) When the market value of a share equals its face value, the share is said to be at par.

(ii) If the market value of a share is more than its face value, it is said to be above par (or at

premium). On the contrary, if the market price of a share is less than its face value, it is said to be

below par (or at discount)

Debenture

The capital is not only raised through shares, it is sometimes raised through loans, taken in

the form of debentures.

A debenture is a written acknowledgment of a debt taken by a company. It contains a

contract for the repayment of principal sum by some specific date and payment of interest at a

36

specified rate irrespective of the fact, whether the company has a profit or loss. Debenture

holders are, therefore, creditors of the company. Of course, they do not have any right on the

profits declared by the company. Like shares, debentures can also be sold in or purchased from

the market and all the terms used for shares also apply in this case ; with the same meanings.

37.2 A debenture is a loan we offer to a company. The company does not give any collateral

for the debenture, but pays a higher rate of interest to its creditors. In case of bankruptcy or

financial difficulties, the debenture holders are paid later than bondholders. Debenture s are

different from stocks and bonds, although all three are types of investment. When we buy shares,

we become one of the owners of the company. Our fortunes rise and fall with that of the

company. If the stocks of the company soar in value, our investment pays off high dividends, but

if the shares decrease in value, the investments are low paying.

Debentures are more secure than shares, in the sense that we are guaranteed payments

with high interest rates. The company pays us interest on the money we lend it until the maturity

period, after which, whatever we invested in the company is paid back to us. The interest is the

profit we make from debentures. While shares are for those who like to take risks for the sake of

high returns, debentures are for people who want a safe and secure income.

e) Venture Capital

Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk,

growth startup companies. The venture capital fund makes money by owning equity in the

companies it invests in, which usually have a novel technolog y or business model in high

technology industries, such as biotechnology, IT, software, etc. The typical venture capital

investment occurs after the seed funding round as growth funding round (also referred to as

Series A round) in the interest of generating a return through an eventual realization ev ent, such

as an IPO or trade sale of the company. Venture capi tal is a subset of private equity. Therefore,

all venture capital is private equity, but not all private equity is venture capital.

In addition to angel investing and other seed funding options, venture capital is

attractive for new companies with limited operating history that are too small to raise capital in

the public markets and have not reached the point where they are able to secure a bank loan or

37

complete a debt offering. In exchange for the high risk that venture capitalists assume by

investing in smaller and less mature companies, venture capitalists usually get significant control

over company decisions, in addition to a significant portion of the company's ownership (and

consequently value).

Venture capital is also associated with job creation , the knowledge economy, and used as

a proxy measure of innovation within an economic sector or geography. Every year, there are

nearly 2 million businesses created in the USA, and only 600 –800 get venture capital funding.

According to the National Venture Capital Association , 11% of private sector jobs come from

venture backed companies and venture backed revenue accounts fo r 21% of US GDP.

It is also a way in which public and private actors can construct an institution that

systematically creates networks for the new firms and industries, so that they can progress. This

institution helps in identifying and combini ng pieces of companies, like finance, technical

expertise, know-how of marketing and business models. Once integrated, these enterprises

succeed by becoming nodes in the search networks for designing and building products in their

domain.

There are typically six stages of venture round financing offered in Venture Capital, that

roughly correspond to these stages of a company's development.

Seed Money: Low level financing needed to prove a new idea, often provided by angel

investors. Crowd funding is also emerging as an option for seed funding.

Start-up: Early stage firms that need funding for expenses associated with marketing and

product development

growth (Series A round): Early sales and manufacturing funds

Second-Round: Working capital for early stage companies that are selling product, bu t

not yet turning a profit

Expansion : Also called Mezzanine financing, this is expansion money for a newly

profitable company

exit of venture capitalist : Also called bridge financing, 4th round is intended to finance

the "going public" process

38

Unit 7: Institutional support

a) Institutional support to enterprises

Small enterprises constitute a vibrant and dynamic sector of the industrial economy of

India. This sector has shown consistently good growth in terms of production, creation of

additional employment and spectacular performance in exports, year after year. Its contribution

to industrial growth and economic development of the country has been very significant. It

encompasses both traditional industries (includes some of the prominent export intensive

segments such as handicrafts, handlooms, carpets and gems and jewellery) and the modern small

industries which uses latest appliances, machinery and t echnologies, and includes electronics,

computer software, cotton/leather garments and accessories, auto components, food processing

and machine tools and scientific instrumentation. Small in India is more than beautiful -- it is

efficient, adaptable and adds value in economic and social spheres.

The post-liberalisation era in the Indian economy has enhanced the opportunities and

challenges for the small industries sector. Moving away from the era of protection, the small

industries have been steadily reorienting themselves to face the challenges posed by an

increasingly competitive environment. In order to stabilise healthy development and to hasten

the process of invigoration, the small enterprises, especially the modern ones, have been

39

provided with the stimuli to improve productivity and competitive strength through enhanced

flow of financial assistance and initiatives for technological up gradation, quality improvement

and overseas collaboration.

The problems faced by the small e nterprises particularly in accessing technology and

maintaining competitiveness have been formidable. Lack of familiarity with new options,

inability in accessing them, and organising necessary finance for growth need to be addressed

through institutional support.

b) Small Industries Development Organisation (SIDO)

SIDO is created for development of various small scale units in different areas. SIDO is

a subordinate office of department of SSI and ARI. It is a nodal agency for identifying the needs

of SSI units coordinating and monitoring the policies and programmes for promotion of the small

industries. It undertakes various programmes of training, consultancy, evaluation for needs of

SSI and development of industrial estates. All these functi ons are taken care with 27 offices, 31

SISI (Small Industries Service Institute) 31 extension centers of SISI and 7 centers related to

production and process development.

The activities of SIDO are divided into three categories as follows:

(a) Coordination activities of SIDO :

(1) To coordinate various programmes and policies of various state governments pertaining to

small industries.

(2) To maintain relation with central industry ministry, planning commission, state level

industries ministry and financial institutions.

(3) Implement and coordinate in the development of industrial estates.

(b) Industrial development activities of SIDO :

(1) Develop import substitutions for components and products based on the data available for

various volumes-wise and value-wise imports.

(2) To give essential support and guidance for the development of ancillary units.

(3) To provide guidance to SSI units in terms of costing market competition and to encourage

them to participate in the government stores and purch ase tenders.

40

(4) To recommend the central government for reserving certain items to produce at SSI level

only.

(c) Management activities of SIDO :

(1) To provide training, development and consultancy services to SSI to develop their

competitive strength.

(2) To provide marketing assistance to various SSI units.

(3) To assist SSI units in selection of plant and machinery, location, layout design and

appropriate process.

(4) To help them get updated in various information related to the small -scale industries

activities.

c) State Small Industries Development Corporation (SSIDC)

The State Small Industries Development Corporations (SSIDC) were sets up in various

states under the companies’ act 1956, as state government undertakings to cater to t he primary

developmental needs of the small tiny and village industries in the state/union territories under

their jurisdiction. Incorporation under the companies act has provided SSIDCs with greater

operational flexibility and wider scope for undertaking a variety of activities for the benefit of

the small sector.

The important functions performed by the SSIDCs include:

● To procure and distribute scarce raw materials.

● To supply machinery on hire purchase system.

● To provide assistance for marketing of the products of small -scale industries.

● To construct industrial estates/sheds, providing allied infrastructure facil ities and their

maintenance.

● To extend seed capital assistance on behalf of the state government concerned provide

management assistance to production units.

d) District Industries Centres (DIC)

41

The District Industries Centers (DIC’s) progra mme was started in 1978 with a view to

provide integrated administrative framework at the district level for promotion of small scale

industries in rural areas. The DIC’s are envisaged as a single window interacting agency at the

district level providing service and support to small entrepreneurs under a single roof. DIC’s are

the implementing arm of the central and state governments of the various schemes and

programmes. Registration of small industries is done at the district industries centre and PMRY

(Pradhan Mantri Rojgar Yojana) is also implemented by DIC. The organizational structure of

DICS consists of General Manager, Functional Managers and Project Managers to provide

technical services in the areas relevant to the needs of the district concerned. Management of

DIC is done by the state government.

The main functions of DIC are:

(1) To prepare and keep model project profiles for reference of the entrepreneurs.

(2) To prepare action plan to implement the schemes effectively already identified.

(3) To undertake industrial potential survey and to identify the types of feasible ventures which

can be taken up in ISB sector, i.e., industrial sector, service sector and business sector.

(4) To guide entrepreneurs in matters relating to selecting the most appr opriate machinery and

equipment, sources of it supply and procedure for importing machineries.

(5) To provide guidance for appropriate loan amount and documentation.

(6) To assist entrepreneurs for availing land and shed equipment and tools, furniture and fixtures.

(7) To appraise the worthiness of the project-proposals received from entrepreneurs.

(8) To help the entrepreneurs in obtaining required licenses/permits/clearance.

(9) To assist the entrepreneurs in marketing their products and assess the possi bilities of

ancillarization.

(10) To conduct product development work appropriate to small industry.

(11) To help the entrepreneurs in clarifying their doubts about the matters of operation of bank

accounts, submission of monthly, quarterly and annual retu rns to government departments.

(12) To conduct artisan training programme.

(13) To act as the nodal agency for the district for implementing PMRY (Prime Minister Rojgar

Yojana).

(14) To function as the technical consultant of DRDA in administering IRDP and TRYSEM

programme.

42

(15) To help the specialized training organizations to conduct Entrepreneur development

programmes.

In fine DIC’s function as the torch -bearer to the beneficiaries/entrepreneurs in setting up

and running the business enterprise right from the concept to commissioning. So the role of

DIC’s in enterprise building and developing small scale sector is of much significance.

e) Industrial Estates

Industrial estates are specific areas zoned for industrial activity in wh ich infrastructure

such as roads, power, and other utility services is provided to facilitate the growth of industries

and to minimize impacts on the environment. The infrastructure may include effluent treatment;

solid and toxic waste collection, treatmen t, and disposal; air pollution and effluent monitoring;

technical services on pollution prevention; quality management (quality assurance and control);

and laboratory services. There should be appropriate emergency preparedness and prevention

plans and liaison with local fire and emergency services. Selection of sites for industrial estates

should take into account social and environmental issues, as well as economic considerations.

The key document would normally be an industrial estate development plan covering issues such

as:

• Details of the location

• Mix of industries on the site (to ensure that the industries are compatible—for example, that

neighbors of food processing plants do not pose a risk of contaminating food products)

• Layout and design

• Transport services

• Fuel storage

• Air quality management

• Water quality management, including the provision of common effluent treatment facilities, as

required

• Solid waste management, including recycling

• Management of hazardous materials and hazardou s wastes

• Noise control

• Occupational health and safety

• Hazard and emergency planning and response.

43

Industrial estates should maintain safe distances from residential areas (for example, 100

meters for small industries with minimal environm ental hazard and at least 1 kilometer for very

polluting industries). Definition of institutional responsibilities is an essential component of a

development plan.

The first industrial estate in India was set up at Rajkot in Gujrat in September 1955.

Unit 8: Growth Strategies

a) Growth Strategies in Small Business

Most small companies have plans to grow their business and increase sales and profits.

However, there are certain methods companies must use for implementing a growt h strategy.

The method a company uses to expand its business is largely contingent upon its financial

situation, the competition and even government regulation.

Some common growth strategies in business include market penetration, market expansion,

product expansion, diversification and acquisition.

Market Penetration: One growth strategy in business is market penetration. A small company

uses a market penetration strategy when it decides to market existing products within the same

market it has been using. The only way to grow using existing products and markets is to

increase market share, according to the article "Growth Strategies" at gaebler.com. Market share

is the percent of unit and dollar sales a company holds within a certain market vs. all other

competitors. One way to increase market share is by lowering prices. For example, in markets

where there is little differentiation among products, a lower price may help a company increase

its share of the market.

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Market Expansion: A market expansion growth strategy, often called market development,

entails selling current products in a new market. There several reasons why a company may

consider a market expansion strategy. First, the competition may be such that there is no room

for growth within the current market. If a business does not find new markets for its products, it

cannot increase sales or profits. A small company may also use a market expansion strategy if it

finds new uses for its product. For example, a small soap distributor that sells to re tail stores may

discover that factory workers also use its product.

Product Expansion: A small company may also expand its product line or add new features to

increase its sales and profits. When small companies employ a product expansion strategy, also

known as product development, they continue selling within the existing market. A product

expansion growth strategy often works well when technology starts to change. A small company

may also be forced to add new products as older ones become outmoded.

Diversification: Growth strategies in business also include diversification, where a small

company will sell new products to new markets. This type of strategy can be very risky,

according to gaebler.com. A small company will need to plan carefully when using a

diversification growth strategy. Marketing research is essential because a company will need to

determine if consumers in the new market will potentially like the new products.

Acquisition: Growth strategies in business can also includes an acquisition. I n acquisition, a

company purchases another company to expand its operations. A small company may use this

type of strategy to expand its product line and enter new markets. An acquisition growth strategy

can be risky, but not as risky as a diversification strategy. One reason is that the products and

market are already established. A company must know exactly what it wants to achieve when

using an acquisition strategy, mainly because of the significant investment required to implement

it.

b) Expansion and diversification

Expansion: All successful small business startups eventually face the issue of handling

business expansion or growth. Business expansion is a stage of a company's life that is fraught

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with both opportunities and perils. On the one hand, business growth often carries with it a

corresponding increase in financial fortunes for owners and employees alike. In addition,

expansion is usually seen as a validation of the entrepreneur's initial busines s startup idea, and of

his or her subsequent efforts to bring that vision to fruition. But as Andrew J. Sherman observed

in The Complete Guide to Running and Growing Your Business, business expansion also

presents the small business owner with myriad issues that have to be addressed: "Growth causes

a variety of changes, all of which present different managerial, legal, and financial challenges.

Growth means that new employees will be hired who will be looking to the top management of

the company for leadership. Growth means that the company's management will become less and

less centralized, and this may raise the levels of internal politics, protectionism, and dissension

over what goals and projects the company should pursue. Growth means that market share will

expand, calling for new strategies for dealing with larger competitors. Growth also means that

additional capital will be required, creating new responsibilities to shareholders, investors, and

institutional lenders. Thus, growth brings with it a variety of changes in the company's structure,

needs, and objectives." Given these realities, Sherman stated that "the need of the organization to

grow must be tempered by the need to understand that meaningful, long-term, profitable growth

is a by-product of effective management and planning."

Small businesses can expand their operations by pursuing any number of avenues.

The most commonplace methods by which small companies increase their business are

incremental in character, i.e., increasing product inventory or services rendered without making

wholesale changes to facilities or other operational components. But usually, after some period

of time, businesses that have the capacity and desire to grow will find that other options should

be studied.

Common routes of small business expansion include:

Growth through acquisition of another existing business (almost always smaller in size)

Offering franchise ownership to other entrepreneurs

Licensing of intellectual property to third parties

Establishment of business agreements with distributorships and/or dealerships

Pursuing new marketing routes (such as catalogs)

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Joining industry cooperatives to achieve savings in certain common areas of operation,

including advertising and purchasing

public stock offerings

Employee stock ownership plans

Diversification: Diversification is a form of corporate strategy for a company. It seeks to

increase profitability through greater sales volume obtained from new products and new markets.

Diversification can occur either at the b usiness unit level or at the corporate level. At the

business unit level, it is most likely to expand into a new segment of an industry that the business

is already in. At the corporate level, it is generally very interesting entering a promising business

outside of the scope of the existing business unit.

Diversification is part of the four main growth strategies defined by the Product/Market

Ansoff matrix:

Ansoff pointed out that a diversification strategy stands apart from the other three strategies.

The first three strategies are usually pursued with the same technical, financial, and

merchandising resources used for the original product line, whereas div ersification usually

requires a company to acquire new skills, new techniques and new facilities.

The notion of diversification depends on the subjective interpretation of “new” market

and “new” product, which should reflect the perceptions of customers rather than managers.

Indeed, products tend to create or stimulate new markets; new markets promote product

innovation.

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Types of diversification: There are three types of diversification: concentric, horizontal, and

conglomerate.

Concentric diversification

This means that there is a technological similarity between the industries, which means that the

firm is able to leverage its technical know -how to gain some advantage. For example, a company

that manufactures industrial adhesives might decide to diversify into adhesives to be sold via

retailers. The technology would be the same but the marketing effort would need to change.

It also seems to increase its market share to launch a new product that helps the particular

company to earn profit. For instance, the addition of tomato ketchup and sauce to the existing

"Maggi" brand processed items of Food Specialities Ltd. is an example of technological -related

concentric diversification.

The company could seek new products that have technological or marketing synergies with existi

ng product lines appealing to a new group of customers.This also helps the company to tap that

part of the market which remains untapped, and wh ich presents an opportunity to earn profits.

Horizontal diversification

The company adds new products or services that are often technologically or commercially

unrelated to current products but that may appeal to current customers. In a competitive

environment, this form of diversification is desirable if the present customers are loyal to the

current products and if the new products have a good quality and are well promoted and priced.

Moreover, the new products are marketed to the same economic environme nt as the existing

products, which may lead to rigidity and instability. In other words, this strategy tends to

increase the firm's dependence on certain market segments. For example, a company that was

making notebooks earlier may also enter the pen marke t with its new product.

Conglomerate diversification (or lateral diversification)

The company markets new products or services that have no technological or commercial

synergies with current products but that may appeal to new groups of customers. The

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conglomerate diversification has very little relationship with the firm's current business.

Therefore, the main reasons of adopting such a strategy are first to improve the profitability and

the flexibility of the company, and second to get a better reception in capital markets as the

company gets bigger. Even if this strategy is very risky, it could also, if successful, provide

increased growth and profitability.

c) Joint venture

A joint venture is a strategic alliance where two or more parties, usu ally businesses, form a

partnership to share markets, intellectual property, assets, knowledge, and, of course, profits. It

is a legal organization that takes the form of a short term partnership in which the persons jointly

undertake a transaction for mutual profit. Generally each person contributes assets and share

risks. Like a partnership, joint ventures can involve any type of business transaction and the

"persons" involved can be individuals, groups of individuals, companies, or corporations.

Joint ventures are also widely used by companies to gain entrance into foreign markets.

Foreign companies form joint ventures with domestic companies already present in markets the

foreign companies would like to enter. The foreign companies generally bring new technologies

and business practices into the joint venture, while the domestic companies already have the

relationships and requisite governmental documents within the country along with being

entrenched in the domestic industry.

A joint venture differs from a merger in the sense that there is no transfer of ownership in

the deal. Companies with identical products and services can also join forces to penetrate

markets they wouldn't or couldn't consider without investing tremendous resour ces. Furthermore,

due to local regulations, some markets can only be penetrated via joint venturing with a local

business.

In some cases, a large company can decide to form a joint venture with a smaller business

in order to quickly acquire crit ical intellectual property, technology, or resources otherwise hard

to obtain, even with plenty of cash at their disposal.

Advantages of forming a Joint Venture

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Provide companies with the opportunity to gain new capacity and expertise

Allow companies to enter related businesses or new geographic markets or gain new

technological knowledge

access to greater resources, including specialised staff and technology

sharing of risks with a venture partner

Joint ventures can be flexible. For example, a joint ventu re can have a limited life span

and only cover part of what you do, thus limiting both your commitment and the

business' exposure.

In the era of divestiture and consolidation, JV’s offer a creative way for companies to exit

from non-core businesses.

Companies can gradually separate a business from the rest of the organisation, and

eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a

sale by one partner to the other.

The Disadvantages of Joint Ventures

It takes time and effort to build the right relationship and partnering with another business

can be challenging. Problems are likely to arise if:

The objectives of the venture are not 100 per cent clear and communicated to everyone

involved.

There is an imbalance in levels of expertise, investment or assets brought into the venture

by the different partners.

Different cultures and management styles result in poor integration and co -operation.

The partners don't provide enough leadership and support in the early stages.

Success in a joint venture depends on thorough research and analysis of the objectives.

d) Merger

The legal concept of a merger (with the resulting corporate mechanics, statutory merger

or statutory consolidation, which have nothing to do with t he resulting power grab as between

the management of the target and the acquirer) is different from the business point of view of a

"merger", which can be achieved independently of the corporate mechanics through various

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means such as "triangular merger", statutory merger, acquisition, etc. When one company takes

over another and clearly establishes itself as the new owner, the purchase is called an acquisition.

From a legal point of view, the target company ceases to exist, the buyer "swallows" the busines s

and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms agree to go forward as a

single new company rather than remain separately owned and operated. This kind of action is

more precisely referred to as a "merger of equals". The firms are often of about the same size.

Both companies' stocks are surrendered and new company stock is issued in its place.For

example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms cease d to

exist when they merged, and a new company, GlaxoSmithKline, was created. In practice,

however, actual mergers of equals don't happen very often. Usually, one company will buy

another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action

is a merger of equals, even if it is technically an acquisition. Being bought out often carries

negative connotations; therefore, by describing the dea l euphemistically as a merger, deal makers

and top managers try to make the takeover more palatable. An example of this would be the

takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to as a merger at the

time.

"Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes,

however, a smaller firm will acquire management control of a larger and/or longer -established

company and retain the name of the latter for the post -acquisition combined entity. This is

known as a reverse takeover. Another type of acquisition is the reverse merger, a form of

transaction that enables a private company to be publicly listed in a relatively short time frame.

A reverse merger occurs when a privately held company (often one that has strong prospects and

is eager to raise financing) buys a publicly listed shell company, usually one with no business

and limited assets.

Advantages of merger

A merger does not require cash.

A merger may be accomplished tax -free for both parties.

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A merger lets the target (in effect, the seller) realize the appreciation potential of the mergedentity, instead of being limited to sales proceeds.

A merger allows the shareholders of smaller entities to own a smaller piece of a larger pie,increasing their overall net worth.

A merger of a privately held company i nto a publicly held company allows the target companyshareholders to receive a public company's stock, despite the liquidity restrictions of SEC Rule144a.

A merger allows the acquirer to avoid many of the costly and time -consuming aspects of assetpurchases, such as the assignment of leases and bulk -sales notifications.

Of considerable importance when there are minority stockholders is the fact that upon obtainingthe required number of votes in support of the merger, the transaction becomes effective anddissenting shareholders are obliged to go along.

Disadvantages of merger

Diseconomies of scale, if business becomes too large, which leads to higher unit costs.

Clashes of culture between different types of businesses can occur, reducing the effectivenes s ofthe integration.

It may need to make some workers redundant, especially at management levels - this may havean effect on motivation.It may be a conflict of objectives between different businesses, meaning decisions are moredifficult to make and causing disruption in the running of the business.

e) Subcontracting

Subcontracting refers to the process of entering a contractual agreement with an outsideperson or company to perform a certain amount of work. The out -side person or company in thisarrangement is known as a subcontractor, but may also be called a free -lance employee,independent contractor, or vendor. Many sm all businesses hire subcontractors to assist with awide variety of functions. For example, a small business might use an outside firm to prepare itspayroll, an accountant to help with its record keeping and tax compliance, or a free-lance workerto handle a special project. Subcontracting is probably most prevalent in the construction

52

industry, where builders often subcontract plumbing, electrical work, drywall, painting, and othertasks.

Hiring subcontractors offers a number of advantages for small businesses. For example,subcontracting mundane but necessary tasks can free up time and resources to enable the smallbusiness owner to concentrate on making money and growing the business. In addition, hiring asubcontractor is usually less expensive than hiring a full -time employee, because the smallbusiness is not required to pay Social Security taxes, workers' compensation benefits, or healthinsurance for independent contractors. Subcontracting does pose some potential pitfalls,however, such as a loss of control over the quality and timel iness of work. But small businessowners can take several steps to help ensure that their relationships with subcontractors areproductive and beneficial for all concerned.

Working with Subcontractors

Small business owners can take a serie s of steps to help ensure that the subcontractingprocess provides the desired benefits. First, it is important to assess the needs of the smallbusiness to make sure that outside help is needed, decide which specific tasks or projects tosubcontract, and determine what sort of subcontractor could best perform the work. The smallbusiness owner should also give some thought to the type of relationship he or she wants to havewith the subcontractor. Some businesses choose to share control of the project or p rocess with atrusted subcontractor, even including the vendor in strategic decision -making. Indeed,subcontractors in many industries are often sources of valuable information and insight on waysin which small business owners can save time and money or i mprove quality. Other companieschoose to maintain a high degree of control internally and subcontract only minor projects on alimited, as-needed basis.

The next step in the subcontracting process involves preparing in -house staff andobtaining the support of key personnel for the decision. Many companies encounter resistancefrom employees who feel that their jobs are threatened by subcontracting. Other companies mayeven find that turnover increases when the most interesting or fulfilli ng jobs are outsourced,leaving employees to perform less attractive tasks. To avoid these problems, in -house employeesshould be informed of the plans to subcontract work and told the rationale behind the decision.The small business owner may also wish to get employee input about what work is appropriatefor subcontracting, and take steps to make sure that employees continue to receive rewarding,interesting, career-building responsibilities.

The next step is to begin contacting potential subcontractors, either formally orinformally, and asking specific questions about the services provided and the terms of thecontract. The questions should also seek to assess the subcontractor's inte ntions, or what theyhope to gain from the relationship. Some subcontractors may be seeking a long -term business

53

relationship, while others may simply wish to gather information in order to complete their workin a timely, professional fashion. Overall, th e questions should establish whether thesubcontractor will provide a good fit with the small business client. Ideally, the subcontractorwill have experience in handling similar business and will be able to give the small business'sneeds the priority they deserve.

Once a subcontractor has been selected, the small business owner should then negotiatea contract in order to help ensure a mutually beneficial relationship. The contract should alsoclearly define responsibilities and performance criteria, so that no questions arise later aboutwhether the subcontractor or the client was supposed to handle a certain task or pay any extracharges incurred. The contract should also outline the proc edures for changing the subcontractorrelationship, including the means for renewal, cancellation, or termination. Finally, the contractshould set strict confidentiality rules if needed and specify who owns the rights to any new ideas,inventions, or materials that are created from the business arrangement.

Advantages and disadvantages of subcontracting

Advantages Disadvantages

We can hire a subcontractor when you need more

flexibility

Subcontractors may cost our business more

than the equivalent daily rate for employing

someone

We can use subcontractor for one-off jobs and

jobs requiring specialist expertise or fast

turnaround

By relying on subcontractors, our business

does not acquire or develop skills in-house

Our permanent staff can concentrate on the core

business

Permanent staff may resent contractors being

paid more money for doing similar work to

them

Some subcontractors can start the work or project

at short notice, even when large numbers of

workers are required

If we use a contractor that then uses a

subcontractor, we have no direct control over

the quality of subcontractors' work

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workers are required the quality of subcontractors' work

We can often specify the type and duration of

contract you need for the job

Subcontractors may not appreciate our

business culture and may lack the motivation

and commitment of permanent staff

We have no National Insurance contributions

administration for contractors/subcontractors

Workers can be employees or subcontractors

of the contractor - we need to understand

relevant tax implications and other rights.

We can obtain temporary cover for a permanentstaff job or work that needs doing

EXAMPLE OF TEST QUESTIONS:

A. Question of ‘1’ or ‘2’ marks:

1. Define entrepreneurship.

2. What do you understand by the term ‘entrepreneur’?

3. State the different types of entrepreneurs.

4. What are the major categories of entrepreneurial functions?

5. List any four characteristics generally found in an entrepreneur.

6. Define rural entrepreneurship.

7. Write any two problems of developing rural entrepreneurship.

8. What is meant by entrepreneurial motivation?.

55

9. What do you mean by the term ‘Project’?

10. What is the meaning of SWOT analysis?

11. What is zeroing in process?

12. What is a project report?

13. Define the concept of break-even point.

14. What is meant by cash flow statement?

15. Give an example of balance sheet.

16. What do you mean by financial planning?

17. Name the two sources of short term finance.

18. Define the concept of capital structure.

19. Mention the two types of share.

20. What do you mean by debenture?

21. State the two main functions performed by SIDO.

22. Where and in which year was the first industrial estate in India set up?

23. What is meant by growth strategy?

24. Write the names of different types of growth strategies.

25. State four routes of expansion.

26. What is meant by merger?

27. Mention one advantage and one disadvantage of merger.

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28. Mention one advantage and one disadvantage of subcontracting.

B. Questions of higher marks.

1. What are the characteristics of a successful entrepreneur?

2. Discuss the role of an entrepreneur in economic development of a country.

3. Indicate the problems of rural industrialization. Suggest the remedies.

4. Define the concept of rural entrepreneurship. Explain in brief the factors behind the need for

rural entrepreneurship.

5. Briefly discuss on the ‘Needs” mentioned by A. Maslow in his motivation theory.

6. Write a short note on McClelland’s Achievement Motivation theory.

7. Explain the factors which prompt people to become entrepreneur.

8. Mention the essential contents of a project report. What are the stages of formulation of a

project?

9. What are the purposes served by the cash flow statement?

10. How ‘break-even analysis’ is applied as an analytical tool in management? In this respect

what is represented by margin of safety?

11. Appreciate the need for finance in a business enterprise. What are the various sources

available to a small scale enterprise to raise funds?

12. State the determinants of capital structure. Examine the role of industrial estates in the

economic development of a country.

13. Elucidate the functions of ‘Venture Capital” .

57

14. Discuss the need for institutional support to entrepreneurs. Name four i nstitutions providing

such support.

15. What are the functions performed by the Small Industries Development Corporation (SIDO)?

16. What are the important functions performed by the state small industries development

corporation?

17. What is a District Industrial Centre (DIC)? Explain the functions of DICs.

18. What is an industrial estate? Explain in brief the objectives and functions of an industrial

estate.

19. Describe the various stages of growth in the life of a small scale e nterprise.

20. Explain the different types of diversification.

21. What are the advantages and disadvantages of joint venture. How does it differ from

mergering?

22. Write a short note on subcontracting.

23. Distinguish between merger and subcontracting. D iscuss in this context the role of joint

venture.