UNIT III - School of Open Learning · UNIT III LESSON 1 BUSINESS GROWTH Structure Seema Sabbarwal...

UNIT III

LESSON 1

BUSINESS GROWTH Structure

Seema Sabbarwal

1.0 Introduction

1.1 Objectives

1.2 Meaning of Business growth

1.3 Need for growth

1.4 Indicators of Business growth

1.5 Advantages of growth

1.6 Limitations of growth

1.7 Forms of growth

1.7.1 Organic growth

1.7.2 Inorganic growth

1.8 Summary

1.9 Self Assessment Questions

1.10 Further Readings

1.0 Introduction

Business growth is a natural process of adaptation and development that occurs under

favorable conditions. The growth of a business firm is similar to that of a human being who passes

through the stages of infancy, childhood, adulthood and maturity. Just like human beings, business

firms also pass through various stages in its life cycle. Introduction, growth, stability and decline are

the four phases of a business firm’s life cycle.

Business growth is the way to the survival and success of a business firm. No business firm

would like to remain at the same level of operations at which it started. A firm that doesn’t grow will

not be able to face the competition. Growth seems to be an almost necessary stimulant to most of the

business firma. Many business firms started small and have become big through continuous growth.

However, business growth is not a homogenous process. The rate and pattern of growth varies from

firm to firm. Some firms grow at a fast rate while others grow slowly. Also, not all enterprises

survive to grow big. This may be due either to the nature of the firm or the entrepreneur. Some

entrepreneurs do not want to grow their ventures, choosing instead to pursue other interest, spend

more time with family or develop other business activities.

1.1 Objectives

After going through the lesson you should be able to:

• Explain the meaning and need for growth

• Discuss the benefits and limitations of growth

• Identify various forms of growth

• Identify various indicators of growth

1.2 Meaning of Business Growth

Generally, the term ‘business growth’ is used to refer to various things such as rise in the total

sales volume per annum, an increase in the production capacity, employment of more workers, an

increase in physical output, an increase in the use of raw material and power. These factors indicate

2

growth but do not provide a specific meaning of growth. Simply stated, business growth means an

increase in the size or scale of operations of a firm usually accompanied by increase in its resources

and output.

Check your progress - 1

Write five indicators of growth.

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

1.3 Need for Growth

As we have already said that business enterprise is like a human being, growth is a necessary

stimulant to most of the business firms. As a matter of fact, growth is precondition for the survival of

a business firm. An enterprise that does not grow, may, in course of time have to be closed down

because of its obsolete products. The market is full of instances of very popular products

disappearing from the scene for lack of growth plans. For example, pagers vanished from the market

because better technology product i.e. cell phones were introduced. The reasons which drive business

enterprises toward growth are described below:

(i) Survival: In a competitive market no single enterprise can have monopoly. The competition

can be direct or indirect. Direct competition comes from other firms manufacturing the same

product. For example, there are many brands of shampoos available in the market. To survive

the competition the manufacturer of each brand of shampoo has to continuously bring new

versions of basic product to maintain an edge over his competitors. Indirect competition may

come from availability of cheaper substitutes. For example, the khadi industry faced a

problem when polyester emerged. Severe competition forces a firm to grow and gain

competitive strength. Any business firm that fails to grow can’t survive for long. A growing

concern will be an innovator and can easily face the risk of competition. Thus growth is

means of survival in a competitive and challenging business environment.

(ii) Economies of Scale: Growth of a firm may provide several economies in production,

purchasing, marketing, finance, management etc. A growing firm enjoys the advantages of

bulk purchase of materials, increased bargaining power, spreading of overheads, expert

management etc. This leads to low cost of production and higher margin of profit. This also

ensures full utilization of plant capacity.

(iii) Owners mandate: The owners of a company get the ultimate benefit of growth in the form

of higher profits. They may direct the management to reinvest a substantial portion of the

earnings in the business rather than paying them out. Capable management may on its own

like to take carefully calculated risk and expand the size of the company.

(iv) Expansion of the market – Increase in demand for goods and services leads business firms

to increase the supply also. Population explosion and transportation led to increase in the size

3

of markets which in turn resulted in mass production. Business firms grow to meet the

increasing demand. Expanding markets provide opportunity for business growth.

(v) Latest Technology – Some business firms invest in research and development activities to

create new products and new techniques, while others try to acquire latest technology from

the market. Rationalisation and automation results in more efficient use of resources and a

firm may grow to obtain them.

(vi) Prestige and Power – The more the size of the business firm increase the more is the

prestige and power of the firm. Businessmen satisfy their urge for power by increasing the

size of their business firm.

(vii) Government Policy – In a planned economy like India, business firms operate under a

plethora of rules and restrictions. A big firm is in a better position to carry out the various

legal formalities required to obtain licenses and quotas. Business firms may plan for growth

to make use of the incentives provided by the government. The government provides certain

subsidies and tax concessions to the new industrial units in the backward areas and those

producing goods for export only.

(viii) Self-sufficiency – Some firms grow to become independent in terms of marketing of raw

material or marketing of products. They integrate the various stages of industry or acquire

other firms to gain control over the supply of materials and marketing of finished products.


Activity A

List any three products that disappeared from the market for lack of growth plans.

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

1.4 Indicators of Business Growth

Growth is a measure of financial and non-financial improvement of a business firm. However,

there are no specific indicators of growth. Firms, producing different products, using different

techniques of production and operating in different environments are assessed by different indicators

of growth. However, there are some common indicators that can measure business growth, these

indicators are discussed below:

1. Assets: the increasing value of assets of a firm indicates growth. Inter-firm comparisons are

usually made on the basis of total assets value of the firms. Assets as a measure of growth

has following limitations:

a) The asset structure of different firms is different and, therefore, it cannot be a measure of

comparison. Some firms invest more in current assets while others invest more in capital

assets.

b) The assets are recorded in the firm’s financial statements at historical coat. Firms that

have bought assets at a later date will show higher value of assets while other firms may

actually be growing at a faster rate.

2. Labour: productivity of workers depends on their native ability, amount of raw labour they

bring to the market place, and the returns to their stock of human capital. Investments in the

latter include formal schooling, on-the-job-training, health care, and nutrition, and among

4

others. Intensity of effort also affects output, and in turn, is influenced by labour supply.

Thus, increase in the employment of skilled and trained workers help in making the firm’s

market more efficient and effective. A firm whose quality of labour is increasing over time is

said to be growing.

3. Technology: technology up gradation brings reduction in the average cost of production,

improvements in the quality of products and at the same time, efficiency of labour.

Improvements include changes in equipment, plant organization, changes in working capital

and soon- in fact, all essential requirements of business growth.

Technological progress can be capital-augmenting and labour-augmenting.

(a) Capital-augmenting technological progress results in more productive use of existing

capital goods.

(b) Labour-augmenting technological progress occurs when the quality or skills of the

labour force are upgraded.

4. Saving: undistributed profits are termed as saving. Saving is necessary for investment

because if the company utilizes all its profits, it would have to raise money from outside

sources for meeting its investment expenditures. Increasing savings or surplus, thus

strengthen the firm’s financial standing and improve its capacity to invest in profitable

investment projects. A firm whose savings are increasing is, thus, generally termed as a

growing firm.

5. Organization: it is not enough to say that growth is a function of land, capital, labour, and

technology. Some element or factor must combine these in the right proportion, and see to its

accomplishment and that is, organization. Thus, a firm whose organizational efficiency is

increasing is said to be a growing firm.

6. Output: both volume and value of output can be used as measure of business growth.

(a) Volume of output: increasing volume of output also indicates growth. This can be an

effective measure of assessing growth of a single firm over a period of time but inter-

firm comparison can be possible only if the firms are producing and selling same

type of product. Utilization of production capacity is a more appropriate measure of

growth where comparisons are made between firms who are producing different

products.

(b) Value of output: intra and inter-firm comparisons are facilitated by using value of

output as a measure of growth. A firm whose value of output (in monetary terms) is

growing over time is said to be a growing firm. Between two firms, the firm who is

selling a larger value of output is said to be agrowing at a faster rate. This is suitable

measure of growth when comparisons are made during stable price conditions. Such

indicators will be valuable when they are adjusted for suitable price level changes

through cost inflation indices.

7. Increase in the value of output accompanied by an increase in the value of sales, adjusted for

price level changes, is a suitable indicator for measuring gowth of a firm over a period of

time

1.5 Advantages of Growth

Business firms try to achieve growth in order to obtain the following advantages:

(i) For obtaining the economies of scale.

(ii) For exploitation of business opportunities.

(iii) For facing competition in the market by diversifying the product line.

(iv) For providing protection against adverse business conditions e.g. Depression.

(v) For gaining economic and market power

5

(vi) For raising profits and creating resources for further reinvestment into business.

(vii) For making optimum utilization of resources.

(viii) For securing subsidies, tax concessions and other incentives offered by the government

1.6 Limitations of Growth

Business firms cannot grow indefinitely. Growth has its own limitations which are:

(i) Finance: Growth, especially merger, requires additional capital investment which is

sometimes difficult for a small firm to arrange.

(ii) Market: Growth can be achieved to the extent that the size of market permits. If a firm grows

faster than increase in the size of the market, it is likely to face failure.

(iii) Human Relations Problems: In a big firm, management loses personal touch with

employees and customers. Motivation and morale tend to be low resulting in inefficiency.

(iv) Management: Growth increases the functions and complexities of operations. As the number

of functions and departments increase, coordination and control become very difficult. Unless

the organization and management structure is capable of accommodating them, growth may

be harmful.

(v) Lack of knowledge: Under conglomerate growth, a firm enters new industries and new

markets about which the managers know little. It becomes difficult to find and develop

managers who can quickly handle new units and improve their earning potential against

heavy odds. Many growing firms have had a downfall because their managers felt that they

could manage anything anywhere.

(vi) Social problems: Big firms may be undesirable from social point of view as they may lead to

concentration of economic power and creation of monopolies which exploit various sections

of the society. In their urge for growth firms indulge in combative advertising. The

quickening tempo or growth creates a cultural gap when society finds it difficult to cope with

technological change.

1.7 Forms of Growth

Once an entrepreneur understands some of the factors that influence growth and

development, he can choose a suitable way for achieving it. Business growth can take place in many

ways. Broadly, various types of growth can be divided into two broad categories – organic and

inorganic growth.

Organic Growth – It can also be termed as internal growth. It is growth from within. It is planned

and slow increase in the size and resources of the firm. A firm can grow internally by ploughing back

of its profits into the business every year. This leads to the growth of production and sales turnover

of the business. Internal growth may take place either through increase in the sales of existing

products or by adding new products. Internal growth is slow and involves comparatively little change

in the existing organization structure. It can be planned and managed easily as it is slow. The ways

used by the management for internal growth include: (i) intensification; (ii) diversification and (iii)

modernization.

Inorganic Growth – it can also be termed as external growth. It involves a merger of two or more

business firms. A firm may acquire another firm or firms may combine together to improve their

competitive strength. External growth has been attempted by the business houses through the two

strategies (a) mergers and acquisitions and (b) joint ventures. Merger again can be of two types: (i) a

firm merges with other firm in the same industry having similar or related products. This type of

6

merger leads to coordination problem between the two firms (ii) a firm merges with another firm in

altogether different lines of business and have little common in their products or proceses such a

merger is known as conglomerate merger.

Inorganic growth is fast and allows immediate utlization of acquired assets. Thiere is no risk of

overproduction as the capacity of the industry as whole remains unchanged. Merger leads to

combination of independent units to control competition, to gain economics of scale and also

sometimes, to modernize production facilities. But merger also leads to social problem of monopoly,

problem of coordination, strain on capital structure, etc. Thus, external growth involves problem of

reorganization.

1.8. Self – Assessment Questions

Q.1 What do you understand by ‘business growth’? State briefly its limitations.

Q.2 Discuss the various forms of business growth.

Q.3 Explain in detail the various indicators of business growth.

Q.4 Explain the motives of business growth. Discuss the problems of growth.

Q.5 Explain the meaning and forms of business growth.

1.10 Further Readings 1. Raw. N.G., ‘Entrepreneurship and Growth of enterprise in Industrial Estates’, Deep and

Deep, New Delhi 1986.

2. Singh N.P., ‘Emerging Trends in Entrepreneurship Development – Theories and Practices,

“IFDM, New Delhi, 1985.

3. Saxena A., ‘Entrepreneurship – Motivation. Performance. Rewards’. Deep & Deep, New

Delhi 2005.

4. Singh B.P. and Chhabra T.N., ‘Modern Business Organisation, Dhanpat Rai & Co., New

Delhi.

5. Gupta C.B., Modern Business Organisation’, Mayor Paperbacks, New Delhi 2001.

6. Ghosh B., ‘Entrepreneurship development in India’, National Publishing House, Jaipur &

New Delhi 2000.

7. Harward Business Review, July – Aug 1972, pg. 37 – 45.

7

LESSON 2

ALTERNATIVE GROWTH STRATEGIES

FOR SMALL BUSINESS Seema Sabbarwal

Structure

2.0 Introduction

2.1 Objectives

2.2 Meaning of growth strategy

2.3 Types of growth strategies

2.3.1 Intensive Growth strategy

2.3.2 Diversification

2.3.3 Modernization

2.3.4 Merger

2.3.5 Joint Venture

2.4 Crisis in Business Growth

2.5 Summary

2.6 Glossary

2.7 Self Assessment Questions

2.8 Further Readings

2.0 Introduction

In the earlier unit we discussed the meaning of growth and understood its necessity for the

survival and success of business. In this lesson we shall discuss the various growth strategies

available for a business firms. Also we shall do a comparison of the various strategies.

2.1 Objectives

After going through the lesson you should be able to:

• Explain the meaning of growth strategy

• Identify the alternative strategies available for growth

• Discuss the pros and cons of different strategies

• Identify the crisis of business growth

2.2 Meaning of Growth Strategy

The concept of strategy has been derived from military administration wherein it implies

‘Grand’ military plan designed to defeat the enemy. As applied to business, strategy is a firm’s

planned course of action to fight competition and to increase its market share. The term strategy

means a well planned, deliberate and overall course of action to achieve specific objectives.

According to chandler, “strategy is the determination of the basic long term goals and objectives of

an enterprise and the adoption of courses of action and the allocation of resources necessary to carry

out these objectives”.

‘Growth Strategy’ refers to a strategic plan formulated and implemented for expanding firm’s

business. For smaller businesses, strategic plans are especially important because these businesses

8

are extremely at risk to the smallest changes in the marketplace. Changes in customers, new moves

by competitors, or changes in the overall business environment can directly affect their cash flow in

a very short span of time. Negative effect on cash flow, if not estimated and adjusted for, can force

them to shut down. That is why they need to plan for the future. Small entrepreneurs generally

believe that strategic planning is for large business houses; in reality it is very crucial for small and

medium enterprises. Strategic Planning is a process that involves change. It provides a proper

direction to the business. Strategic planning is essential to take care of the additional efforts and

resources required for faster growth.

Different type of growth strategies are available each having its own advantages and

disadvantages. A firm can adopt different strategies at different points of time. All firms need to

develop their own growth strategy according to their own characteristics and environment.

2.3 Types of growth strategies

Given below is a list of the main growth strategies available to firms:

1. Intensive Growth Strategy (Expansion)

2. Diversification

3. Modernization

4. External Growth Strategy

(a) Mergers

(b) Joint Ventures

GROWTH STRATEGIES

Internal / Organic Growth Strategy

Intensive growth Strategy

Diversification

Modernization

External / Inorganic Growth Strategy

Mergers

Joint Ventures

2.3.1 Intensive Growth Strategy

Intensive growth strategy or expansion involves increasing the sales revenue, profit and

market share of the existing product line or services.The firm slowly but regularly expands its

production and so it is called internal growth strategy. The firms with smaller share of the market can

use this strategy in an effective manner. Three alternative strategies are available for expansion.

These are:

(a) Market Penetration – Under this strategy the firm aims at increasing the sale of present

product in the existing market through aggressive promotion. The firm penetrates deeper into

the market to capture a larger share of the market. For example, promoting the idea of cold

coffee during the summer season, the idea of instant coffee, instant tea and tea bags.

(b) Market Development – It implies increasing sales by selling present products in the new and

unexplored markets. For example selling electronic goods in rural areas or sale of chocolates

to middle aged and old persons. Market development leads to increase in sale of existing

products in unexplained markets.

9

(c) Product Development: In this, the firm tries to grow by developing improved products for

the present market. For example, Air conditioner with remote control, Refrigerator with

automatic defrost and flexible shelves.

Advantages of Intensive Growth Strategy (1) Growth can be handled easily as it is natural and gradual.

(2) Firm's own funds can be used to finance expansion

(3) Organisation structure and management systems of business do not require any major

changes.

(4) Better utilisation of existing resources becomes possible.

(5) Expansion provides economics of large-scale operations.

(6) The expanding firm can better face competition in the market.

Limitations of Intensive Growth Strategy

(1) Growth is slow and therefore takes time.

(2) It is not always possible to grow in the present product market.

(3) A business firm may not be able to exploit many business opportunities by confining its

operations to the existing products and markets.

Practical Problems of Intensive Growth Strategy

When small business firms attempt to expand they have to face many problems. Some of

these problems are given below:

(i) Scarcity of Funds: For expansion a firm needs to invest more in both fixed assets and current

assets. Funds for fixed capital and working capital are not easily available. Many a times a

small firm has to borrow funds at high rates of interest.

(ii) Marketing: Expansion is possible and profitable only when the increased output can be sold

at remunerative prices. Small-scale units face difficulties in selling and distributing their

products as a result of competition from large-scale units.

(iii) Technology: For expansion, sometimes it is necessary to improve technology and replace

plant and machinery. Modernization of technology is a time-consuming and expensive

process. It becomes essential to recruit new staff or retrain the existing staff in the use and

operation of new technology.

(iv) Risk: Expansion involves additional risk. Few small-scale firms have the ability or will-

power to assume these risks particularly where the competition is acute and raw materials

have to be imported. Many small-scale owners continue to operate at the existing scale due to

the risks and difficulties involved in expansion.


Match the following

1. Expanding the sale of chocolate by

including old persons to children.

2. Hindustan Lever expanding the sale

of detergent powder in rural area

3. ‘Colgate’ expanding the sale by

introducing ‘Colgate-salt active’

Product Development

Market Penetration

Market Development

10

Activity A

List the limitations involved in expansion

---------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------

2.3.2 Diversification

Beyond a certain point, it is no longer possible for a firm to expand in the basic product

market. So the firm seeks to increase sales by developing new products. This strategy towards

growth is called diversification. Diversification does not simply involve adding variety in the

existing product line but adding completely different line of products. Products added may be

complementary. Diversification is a widely used strategy for growth. Many companies have opted

for diversification as a growth strategy. For example, LIC, an insurance corporation originally,

diversified into mutual funds. State Bank of India diversified into merchant banking and mutual

funds. Similarly, Larsen and Toubro, an engineering company diversified into cement.

Table 1: Product-Market Matrix and Growth Strategy

Products

Markets

Present New

Present Market Penetration

(Penetrate existing markets

with existing products)

Product development

(Introduce new products in

existing markets)

New Market Development (Enter

new markets with existing

Products)

Diversification

(Introduce new products in

new markets)

Source: H.Igor Ansoff, Corporate Strategy (New york: McGraw-Hill, 1965), p.51

A firm may choose to grow by using diversification strategy under the following conditions:

(a) When the firm cannot attain its growth target by expansion alone.

(b) When diversification promises greater profitability than expansion.

(c) When the financial resources of the firm are much in excess of the requirements of

expansion.

The distinction between intensive growth strategy and diversification strategy must be

carefully noted. In the case of intensive growth, the firm increases the production and sale of its

existing products. But in case of diversification, new products and new markets are added.

Advantages of Diversification

Companies have increasingly adopted diversification strategy due to the following reasons:

(i) Diversification enables an enterprise to make better utilization of its existing resources. By

adding up related products to its existing product portfolio, a company can more effectively

utilise its managerial personnel, marketing network, research and development facilities, etc.

(ii) With more products, greater resources and higher profits, the diversified firm is more

competitive than a single product firm.

(iii) A company can use diversification strategy to minimize the decrease in sales of its present

product. By developing new products the sales revenue and earnings can be maintained or

even increased. For example, Bajaj Scooters India Ltd. entered in the field of mopeds.

11

(iv) A well-diversified company can use cash surplus of one business to finance another business

having good potential for growth.

(v) Diversification adds to size of business which improves the competitiveness of a firm. It

offers a lot of economy in operations because common facilities can be used for several

products. In other words, diversification can be used to capitalise on corporate strengths or to

minimise weaknesses.

(vi) Diversification helps to minimise risk. When one line of business faces recession, another

line may be in high growth stage. For example, a well-diversified engineering firm like

Larsen and Toubro did well even when the engineering industry was facing recession.

(vii) Diversification may be the only means of growth when government regulations have blocked

.growth in existing business, for example, multi-nationals like Hindustan Lever Limited

diversified in 1977 due to Foreign Exchange Regulations Act. Industrial licensing restricted

the capacity of firms in a given product thus forcing them to enter into new lines of business.

Also, financial sector reforms prompted Indian companies to diversify into financial services.

Limitations of Diversification The limitations of diversification are as given below:

(i) Huge funds are required for diversification. The internal savings of the business may not be

sufficient to finance growth through diversification.

(ii) Diversification may lead to unfamiliar products and markets leading to greater degree of risk.

(iii) The tasks and responsibilities of top executives increase because of need to handle new

product, technology and markets. They may find problems in coordination which may lead to

inefficient operations.

(iv) Diversification may involve new technology and new markets. The existing staff may

experience problems in adapting to this growth pattern.

Types of Diversification: 1. Vertical Diversification (Integration)

2. Horizontal Diversification:

(a) Concentric Diversification and

(b) Conglomerate Diversification

Vertical Diversification (Integration)

In this type of growth strategy new products or services are added which are complementary

to the existing product or service line. New products serve the firm's own needs by either supplying

inputs or serve as a customer for its output. It involves moving backward or forward from the present

product or service. Thus vertical integration may be of two types—backward and forward.

Backward integration It implies moving backword toward the source of raw materials. Firms integrate backwards to

produce their own inputs or raw materals. Rather than buying the inputs from outside sources, firms

manufacture their own inputs. Reliance Industries Ltd. has achieved remarkable growth through

backward integration. It started business with textiles and went for backward integration to produce

PFY and PSF, critical raw materials for textiles, then started producing PTA and MEG, raw materials

for PFY and PSF, then paraxylene, raw material for PTA and MEG, and finally naphtha for

producing paraxylene. Sugar mills having their own sugarcane farms are said to have diversified

through backward integation.

12

Advantages Backward integration offers the following benefits:

(i) It helps to ensure regular supply of raw materials or components.

(ii) It improves or ensures quality control over imports for the final product.

(iii) It facilitates higher return on investment for the company as a whole through better use of

overhead facilities.

(iv) It improves the company's power of negotiation with suppliers on the basis of known costs.

(v) It saves indirect taxes payable on the purchase of inputs.

(vi) It improves the competitive power of the company. As it controls more elements of the

production process, it has advantages over the unintegrated firms in the form of lower costs,

lower prices and lower risks.

Figure: 1

Disadvantages Backward integration suffers from the following limitations:

(a) The firm loses the opportunity of purchasing at a lower cost from technically more efficient

suppliers.

(b) If an existing input producing unit is taken over, it may require technological up gradation

which involves considerable investment.

13

(c) Heavy investment in the process of backward integration may hamper the development of the

final products. This in turn may lead to undue pressure on pricing and sales effort.

(d) When the divisions using the inputs do not have the freedom of comparing market conditions

of supply, the problem of transfer pricing may become acute.

(e) Changing economic conditions affecting the main product market may cause a magnified

effect on the production of inputs.

Forward integration Forward integration involves the entry of a firm into the business of finishing, distributing or

selling its existing products. It refers to moving higher up in the production/distribution process

towards the ultimate consumer. It involves entry of the firm into distribution outlets to maintain

direct control with their customers. The firm develops outlets for the use/sale of its own products.

Rather than selling the product through middlemen firms that diversify through forward integration

maintain their own sales outlets. For example, many textile companies like DCM, Bombay Dyeing,

Reliance and Raymonds have set up their own retail distribution system to sell their fabrics.

Advantages Forward integration offers the following benefits:

(i) It enables the firm to gain greater control over sales and prices of its products. This is very

useful in an oligopolistic market.

(ii) It improves the scope of quality control because the firm's own retail stores serve as better

source of customer feedback.

(iii) The firm can increase its profits by eliminating middlemen and by reducing the costs of

distribution.

(iv) The firm can secure the economies of integration. Handling and transportation costs can be

reduced.

Figure: 2

14

Disadvantages Forward integration suffers form the following drawbacks:

(a) The proportion of fixed costs in the firm’s costs increases. As a result the firm is exposed to

greater cyclical changes in earnings. Moreover, the fortunes of business are tied to the in-

house distribution system. From this point of view, forward Integration increases business

risk.

(b) Since its processes are interdependent, a slight interruption in one process may dislocate the

entire production system.

(c) In the absence of proper balance between up-stream and down-stream units, the firm has to

buy from or sell in the open market. The firm may be competing with its own customers.

(d) It is very difficult to efficiently manage an integrated firm because every business has its own

structure, technology and problems.

Horizontal Diversification

It involves addition of parralel new products to the existing product line.

This may happen internally or externally.

(i) Internal Diversification: firms use their own resources to add new products to their existing line

of products. For example, Reliance industries have diversified into areas like textiles,

telecommunications, etc. Godrej manufactures steel almirahs, refrigerators and locks through its own

resources. This is internal diversification.

(ii) External Diversification: when new products and services are added through mergers and

acquisitions, it is known as external diversification.

Horizontal Diversification can be of two types i.e. concentric diversification and conglomerate

diversification

(a) Concentric Diversification When a firm enters into some business which is related with its present business in terms of

technology, marketing or both, it is called concentric diversification.

In technology-related concentric diversification new product or service is provided with the help of

existing or similar technology. For example, Nestle as added 'Tomato Ketchup' and 'Maggi Noodles'

to its range of baby food. In marketing-related concentric diversification, the new product or service

is sold through the existing distribution system. For instance, a hire-purchase firm may start

providing lease finance for purchase of consumer durables.

Concentric diversification may be employed for the following purposes:

(a) To counteract cyclical fluctuations in the present products or services;

(b) To utilise the cash flows generated by the existing product or service;

(c) To face saturation of demand for present product or service;

(d) To gain managerial expertise in new field of business; and

(e) To capitalise on the reputation of present product or service.

(b) Conglomerate Diversification In this growth strategy a firm enters into business which is unrelated to its existing business

both in terms of technology and marketing. Several Indian companies have adopted this strategy.

DCM, Essar group, ITC, Godrej, Hyderabad Allwyn, HMT are examples of conglomerate

diversification.

15

Conglomerate diversification strategy may be adopted for the following reasons:

(i) To achieve a growth rate higher than what can be realised through expansion;

(ii) To make better use of financial resources with retained profits exceeding immediate

investment needs;

(iii) To avail of potential opportunities for profitable investment;

(iv) To achieve distinctive competitive advantage and greater stability;

(v) To spread the risks; and

(vi) To improve the price earning ratio and market price of the company’s shares

Diversification strategies discussed above can be concised in the following matrix given by

“Ansoff”.

Table 2: Ansoff’s Diversification Matrix

New functions Related Technology New Products Unrelated Technology

Firm is its own

customer

Vertical

Integration

Same type of

product

Horizontal

Diversification

Similar type of

product

Marketing and Technology

related concentric diversification

Marketing related

concentric diversification

New type of

product

Technology related concentric

diversification

Congomerate

Diversification

Source: H.Igor Ansoff, Corporate Strategy (New york: McGraw-Hill, 1965), p.132

Check Your Progress - 2

Activity B Give three examples of companies (other than those given in the previous section) which have

pursued Diversification and classify them with respect to the direction of their diversification.

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

2.3.3 Modernization

An existing business unit may plan to grow through Modernization of operations.

Modernization basically involves upgradation of technology to increase productivity, efficiency and

product quality and to reduce wastages and cost of production in the long-run. The worn-out and

obsolete machines and equipment are replaced by the modern machines and equipment.

Modernization plans can have the following implications:

(i) A firm may resort to Modernization to maintain its position in the market. Thus, the purpose

of Modernization would be stability in operations in the coming years.

(ii) Modernization may be pursued with full vigour to stimulate internal growth. Thus, it is used

as an internal growth strategy.

Advantages of Modernization The benefits of Modernization are as under:

(i) Modernization increases the productivity and efficiency of the firm.

(ii) It makes available better products to the customers.

16

(iii) Because of increased efficiency and reduced wastages, the profitability of the firm goes up.

Thus, the owners of the business are also benefited.

(iv) The works acquire advanced skills because of which their wages go up.

(v) The competitive position of the firm in the long-run improves because of Modernization.

(vi) The growth is systematic and does not affect the normal functioning of the firm.

However, a Modernization plan .can be implemented only if the firm has adequate capital

through accumulated savings or is able to raise capital from different sources for the acquisition of

modern plant and machinery. The benefits of Modernization will actually accrue if the workers are

adequately trained in the new method of production.

Limitations of Modernization The limitations of Modernization are as follows:

(i) The internal savings of the business may not be sufficient to finance Modernization of plant

and machinery.

(ii) The existing staff may experience problems in adapting to the new technology.

(iii) The responsibilities of top executives would increase because of need to handle new product,

technology and markets.

2.3.4 Merger

Merger is an external growth strategy. When different companies combine together into new

corporate organizations, such a process is known as mergers. Merger can occur in two ways: (a)

Acquisition or takeover and (b) amalgamation.

Takeover or acquisition takes place when a company offers cash or securities in exchange for

the majority shares of another company. It involves one company acquiring control over another.

Amalgamation takes place when two or more companies roughly of equal size or strength formally

submerge their corporate identities into a single one in a friendly atmosphere.

Advantages The mergers take place with a number of motivations. Some of the benefits of merger are:

(i) A merger provides economies of large-scale operations.

(ii) Better utilisation of funds can be made to increase profits.

(iii) There is possibility of diversification.

(iv) More efficient use of resources can be made.

(v) Sick firms can be rehabilitated by merging them with strong and efficient concerns.

(vi) It is often cheaper to acquire an existing unit than to set up a new one.

(vii) It is possible to gain quick entry into new lines of business.

(viii) It can provide access to scarce raw materials and distribution network and managerial

expertise.

Disadvantages Mergers are not always successful due to the following drawbacks:

(a) The combined enterprise may be unwieldy. Effective co-ordination and control becomes

difficult. As a result efficiency and profitability may decline.

(b) Mergers give rise to monopoly and concentration of economic power which often operate

against the interest of the society and the country.

17

Guidelines for Successful Mergers Willard Rockwell, based on his experience, has given the following guidelines to make the

merger successful:

(i) Identify the merger objectives, especially economic objectives.

(ii) Specify gains for the shareholders of both the joining companies.

(iii) Be convinced that the acquired company's management is or can be

made competent.

(iv) Report the existence of important dovetailing resources; but do not

expect perfect compatibility.

(v) Start the process of merger with active involvement of the top executives.

(vi) Define clearly the business that the company is in.

(vii) Analyse and identify the strengths, weaknesses and key performance

factors for both the combining units,

(viii) Foresee possible problems and discuss them at the initial stage with the other company so as

to create a climate of trust.

(ix) Don't threaten the management to be acquired.

(x) Human considerations should be of prime importance in planning for merger and designing

the organisation structure for the new set up.


Find three key words from the above section. Write their meaning in your own words.

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

2.3.5 Joint Venture When two or more firms mutually decide to establish a new enterprise by participating in

equity capital and in business operations, it is known as joint venture. A joint venture is a business

partnership between two or more companies for a specific business operation.

Joint venture can be with a firm in the same country or a foreign country. For example, Birla

Yamaha Ltd. is a joint venture of Birla and Yamaha Motor Co. of Japan, DCM and Daewoo

Corporation of Korea established DCM Daewoo Motors Ltd. Hindustan Computers Ltd. and Hewlett

- Packard of USA formed HCL-HP Ltd, a joint venture company.


Activity - C

Give five examples of the firms which have achieved joint venture in India.

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------


“External Growth Strategies”, “Amalgamation”, “Joint Venture”, “merger”, “Absorption”. Rewrite

the above given key-words in their logical sequence.

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

18

2.4. Crisis of Business Growth All organizations pass through various stages of growth and at each stage the organization is

required to solve some specific problems.

A very useful model of organizational growth has been developed by Greiner. He argues that

each organisation moves through five phases of development as it grows. There are five phases in

organizational growth – creativity, direction, delegation, coordination and collaboration followed by

a particular crisis and management problems.

1. Creativity Stage. Growth through creativity is the first phase. This phase is dominated by

the entrepreneurs of the organizations and the emphasis is on creating both a product and a

market. However, as the organization grows in size and complexity, the need for greater

efficiency cannot be achieved through informal channels of communication. Thus, many

managerial problems occur which the entrepreneur may not solve effectively because they

may not be suited for the kind of job or they may not be willing to handle such problems.

Thus, a crisis of leadership emerges and the first revolutionary period begins. Such questions

as ‘who is going to lead the organisation out of confusion and solve the management

problems confronting the organisation; who is acceptable to the entrepreneurs and who can

pull the organisation together arise. In order to solve the problems a new evolutionary phase –

growth through direction – begins.

2. Direction Stage. When leadership crisis leads to the entrepreneurs relinquishing some of

their power to a professional manager, organisational growth is achieved through direction.

During this phase, the professional manager and key staff take most of the responsibility for

instituting direction, while lower level supervisors are treated more as functional specialists

than autonomous decision making managers. Thus, directive management techniques enable

the organisation to grow, but they may become ineffective as the organisation becomes more

complex and diverse. Since lower level supervisors are most knowledgeable and demand

more autonomy in decision making, a next period of crisis – crisis for autonomy begins. In

order to overcome this crisis, the third phase of growth – growth through delegation –

emerges.

3. Delegation Stage. Resolution of crisis for autonomy may be through powerful top managers

relinquishing some of their authority and a certain amount of power equalisation. However,

with decentralisation of authoirty to managers, top executives may sense that they are losing

control over a highly diversified operation. Field managers want to run their own show

without coordinating plans, money, technology or manpower with the rest of the organisation

and a crisis of control emerges. This crisis can be draft with the next evolutionary phase – the

coordination stage.

4. Coordination Stage. Coordination becomes the effective method for overcoming crisis of

control. The coordination phase is characterised by the use of formal systems for achieving

grater coordination with top management as the watch dog. The new coordination system

proves useful for achieving growth and more coordinated efforts by line managers, but result

in a task of conflict between line and staff, between head quarters and field. Line becomes

resentful to staff, staff complains about unco-operative line managers, and everyone gets

bogged down in the bureaucratic paper system. Procedure takes precedence over problem

solving; the organisation becomes too large and complex to be managed through formal

programmes and rigid systems. Thus, crisis of red – tape begins. In order to overcome the

19

crisis of red-tape, the organisation must move to the next evolutionary stage – the

collaboration stage.

5. Collaboration Stage. The Collaboration stage involves more flexible and behavioural

approaches to the problems of managing a large organisation. While the coordination stage

was managed through formal systems and procedures, the collaboration stage emphasizes

greater spontaneity in management action through teams and skilful confrontation of

interpersonal differences. Social control and self – discipline take over from formal control.

Though Greiner is not certain what will be the next crisis because of collaboration stage, he

feels that some problems may emerge as it will centre round the psychological saturation of

employees who grow emotionally and physically exhausted by the intensity of team work and

of the heavy pressure for innovating solutions.

2.5 Summary

In the unit we have discussed what strategic alternatives a firm could consider for growth.

Once a firm has identified the various strategic possibilities, it has to make a selection from

among these alternatives. And this would depend upon its growth objectives, attitude towards risk,

the present nature of business and the technology in use, resources at its command, its own internal

strengths and weakness, Government policy etc. There are several managerial factors which

moderate the ultimate choice of a strategy. For a firm desiring immediate growth and quick returns,

mergers and takeovers afford attractive opportunities as they obviate the necessity of starting from

scratch. However, identifying the right candidate for merger or acquisition is an art at which only a

few managements can really excel. Establishing joint venture, especially in the international arena, is

a low risk alternative. Many firms prefer this approach.

2.6 Glossary

1. Red Tape - Too much attention to rules and regulations.

2. Obsolete Technology - Technology which is no longer used as it

is out of date.

3. Automation - Use of methods and machines to save labour.

4. Monopoly - Possession of the sole right to supply which

is not or cannot be shared by others.

5. Overheads - Those expenses which are needed for

carrying on a business e.g., rent, advertising, salaries, light, not

manufacturing costs.

6. Mass Production - Production in large quantities.

7. Subsidy - Money granted by a govt. to an industry

to keep prices at a low level.

8. Unexplored sector - Those sectors of the economy which are

hitherto not served.

20

2.7 Self – Assessment Questions

Q.1 What do you understand by ‘business growth’? State briefly its limitations.

Q.2 Explain the term ‘growth strategy’. Why does a firm seek to grow?

Q.3 Distinguish between horizontal integration and vertical integration.

Q.4 What is Modernization? Describe its advantages as a growth strategy.

Q.5 Distinguish between backward and forward integration.

Q.6 What is Merger? State the benefits and limitations of Merger.

Q.7 Write a note on joint ventures as a business growth strategy.

Q.8 ‘Growth is most frequently used corporate strategy’. Discuss the reasons why a firm must

grow? Under what circumstances a firm may not consider growth a desirable strategy?

Q.9 Do you know of any mergers or take-overs which have taken place recently? What were the

motivations behind such mergers or take-overs?

2.8 Further Readings 8. H.Igor Ansoff, ‘Corporation Strategy’, McGraw Hill, New York, 1965, p.51.

9. William F.Glueck and Lawrence R. Jauch, ‘Business Policy and Strategic Management’,

McGraw Hill, New Delhi, 1984, p.220

10. Raw. N.G., ‘Entrepreneurship and Growth of enterprise in Industrial Estates’, Deep and

Deep, New Delhi 1986.

11. Singh N.P., ‘Emerging Trends in Entrepreneurship Development – Theories and Practices,

“IFDM, New Delhi, 1985.

12. Charles A. Scharf, “Acquisitions, Mergers, Sales and Takeovers’, Prentice Hall N.J. 1981.

13. Saxena A., ‘Entrepreneurship – Motivation. Performance. Rewards’. Deep & Deep, New

Delhi 2005.

14. Singh B.P. and Chhabra T.N., ‘Modern Business Organisation, Dhanpat Rai & Co., New

Delhi.

15. Gupta C.B., Modern Business Organisation’, Mayor Paperbacks, New Delhi 2001.

16. Ghosh B., ‘Entrepreneurship development in India’, National Publishing House, Jaipur &

New Delhi 2000.

17. Dollinger M.J., ‘Entrepreneurship strategies and Resources’, 3rd

edition, Pearson Education,

New Delhi 2006.

18. Harward Business Review, July – Aug 1972, pg. 37 – 45.

21

LESSON 3

ENTREPRENEURSHIP AND ENVIRONMENT

Pawan Kumar Jain

Business environment refers to the factors external to a business enterprise which influence its

operations and determine its effectiveness. Business environment may be healthy or unhealthy.

Healthy business environment means the conditions are favourable to the growth of business

whereas unhealthy environment implies conditions hostile or unfavourable to business operations.

Business and its environment interact with each other. Economic system and other conditions in the

environment determine the success of business enterprises. The firm and its management have to

adjust to the conditions prevalent around it. However, business enterprises try to influence and shape

the environment. Successful working of business concerns improves the economic and social condi-

tions in the country.

No business concern can ignore the environment around it except at its own peril. “The penalty of

environ mental disregard is heavy. It not only reduces profit margins and makes opportunities for

expansion slip, but it also arouses social hostility and makes social environment growingly

inhospitable to business operations.”

A study of business environment offers the following benefits:

1. It provides information about environment which is essential for successful operation of

business firms.

2. It opens up fresh avenues for the expansion of new entrepreneurial operations. The

entrepreneurs may come forward with new ideas and with new ventures when they find

environment suitable to their enterprises.

3. Knowledge about changing environment enables businessmen to adopt a dynamic approach

and maintain harmony of business operations with the environment.

4. By studying the environment entrepreneurs can make it hospitable to the growth of business

and thereby earn popular support.

Thus, the entrepreneur should continuously study the nature of environment and its influence on

business. However, mere study is not enough. Attempts must be made to influence the environment

in order to make it congenial and favourable to entrepreneurial activities. The most successful

entrepreneur is one who not only adjusts to the environment but also modifies the environment to

suit his requirements through the direct and indirect influences he can exercise over the system.

PHASES OF BUSINESS ENVIRONMENT

Business environment may be classified into four broad categories; namely (i) economic, (ii) legal,

(iii) political; and (iv) socio-cultural.

Economic Environment

Economic environment is of multidimensional nature. It consists of the structure of the economy, the

industrial, agricultural, trade and transport policies of the country, the growth and pattern of national

income and its distribution, the conditions prevailing in industrial, agricultural and other sectors, the

22

position relating to balance of trade and balance of payments, and other miscellaneous conditions of

the economy.

There is a close relationship between a business firm and the economic environment around it. The

success of a business enterprise depends considerably upon the State and growth of the economy.

Commenting on the Indian economic environment and its impact on Indian business houses, Dr.

Surinder P.S. Pruthi wrote: "The face of the Indian business has altered considerably during the last

few years as a series of legislative enactments and other environmental features. The abolition of the

managing agency system, the birth of the concept of joint sector, the promulgation of the Monopolies

and Restrictive Trade Practices Act, the growing role of financial institutions in the management of

private sector undertakings, the emergence of a professionally trained class of managers, growing

internationalisation of business, etc., have all combined to change the face of Indian business in

recent years."

An economy comprises public and private sector and the relative role of the two sectors in the

economy makes a lot of difference to business. In a privately owned and controlled economy (free

economy), the primary goal of a business firm is to earn profit and profitability is the main criterion

of judging the efficiency of business. On the other hand, in a society owned and controlled

economy (closed economy), the primary goal of business is social benefit and social responsibility

is the main criterion of judging its efficiency.

In a mixed economy like India, business enterprises work for both profitability and social interest.

In this age of planning, business enterprises work within the framework of a planned business

environment. Private sector has to function within the conditions largely created by the State. The

private and public sectors must function as parts of a single organism rather than as two separate

entities.

The Industrial Policy of 1956 stressed the need for proper direction and regulation of the private

sector as well as the increasing role of the State to achieve rapid growth in national wealth. In the

words of the planners, "It (private sector) has to visualise for itself a new role and accept in the

larger interest of the country a new code of discipline. Private enterprises, like any other institution,

will endure and justify itself only to the extent to which it proves to be an agent for promoting the

public good."

Some changes were made in the Industrial Policy in 1970 and 1973. Restrictions on large industrial

houses, preferential treatment to small scale sector, boost to joint sector, etc., are some of these

changes. In recent years there has been a trend towards liberalisation, simplification and

rationalisation of industrial policy.

Legal Environment

Business must function within the framework of legal structure. Therefore, an adequate knowledge

of laws and rules is necessary for efficient managerial performance. When new laws are made and

controls exercised through legal enactments, the first reaction of the business community is to

oppose them and disobey them. Management should try to understand what should be the right laws

and strictly obey them when so made. In addition, it can influence the government to change and

improve the law and make it useful to the business community.

23

There are several business laws in our country. These relate to development of corn panics, foreign

collaboration, foreign exchange, labour management, industrial disputes, social security benefits, and

other such allied problems. A working knowledge of these laws is very helpful for the entrepreneur

and the business executive. Such knowledge will keep them away from innocent breaches and

resultant penalties. Some laws differ from Slate to State and amendments arc made from time to

time. Therefore, the entrepreneur must always keep in touch with those who know the latest position

in law. In addition, an entrepreneur should:

(a) read the books that enlighten on the legal side of business

(b) consult government agencies concerned with the implementation of business laws.

(c) retain labour law consultants.

Political Environment

In a democratic country like India, politics cannot be ignored. Managers and entrepreneurs should

understand the working of the political system. Such understanding and concern for national

problems will help them in the long run in discharging their responsibilities to the satisfaction of the

public.

Public opinion is very important and today's public opinion becomes tomorrow's legislation.

Businessmen should, therefore, learn to take public opinion into account in the decision-making

process. If business does not learn how to deal adequately with public opinion, it will face a disaster.

This does not mean that business should surrender itself to public opinion. Rather, it implies in-

telligent response in order to change wherever necessary and a constructive approach to problems.

There exists an interacting relationship between business and politics. Business cannot develop

without the understanding and support of the politicians. Similarly, business strategy and business

activities influence politics and the Government. It is, therefore, in the interest of businessman to

ensure that the Government is stable and helpful to business. Government should also take the

business community into confidence while preparing and implementing plans for the country's

development.

It is commonly observed that business community and the Government are hostile to each other and

there is lack of trust among the two. Businessmen should establish a cordial relationship and proper

communication with the people in power and win their confidence. They should try to study and

understand the political processes and the working of the Government departments and agencies.

As regards relationship of businessmen with politicians there are two opposite approaches. The

traditional approach is that businessmen should not align themselves with any political party and

should keep themselves away from the political bosses. The modern view is that businessmen should

take keen interest in the political affairs of the local, State and Central Governments. They should

have their representatives on various Government bodies at all levels of policy formulation and

planning.

Socio-Cultural Environment

Traditional culture should be protected in so far as it is not a hindrance to innovation, motivation,

and development. In under developed countries a great deal of superstition exists and people believe

that success or failure depends upon the God's mercy. Much time is wasted when activities like

laying down the foundation of a building or a project are postponed for auspicious days recom-

24

mended by Pandits. As a result lime and cost overruns occur frequently. Certain occupations are not

considered fit for particular castes or communities. Social position or status is linked with ownership

of land and house rather than with ownership of an enterprise. All this results in considerable

immobility and inflexibility and thus wasted labour.

Work is done in a customary way and experimentation is resented. Incentive to hard work and more

earnings is reduced because one has to share his income with the members of the joint family.

Savings and investment are left to the household who is usually an old person devoted to traditions

and static customs. In such an economic culture carrot and stick approach is used to motivate people.

On the other hand, the modern view is that employees should be treated as human beings. Unless a

healthy work environment and modern attitudes towards work are developed, entrepreneurship

cannot flourish. Depressing social conditions and conservative attitudes hamper innovations. It is not

easy to maintain and create the required quantity and quality of entrepreneurship.

SOCIO-ECONOMIC ORIGINS OF ENTREPRENEURSHIP

The entrepreneurial activity at any time is dependent upon a complex and varying combination of

socio-economic, psychological and other factors. The various environmental factors exercise a

strong influence on the personality or personal backgrounds of the entrepreneurs. Therefore, any

attempt to understand the entrepreneurial spirit among people should include an examination of the

socio-economic origins of the entrepreneurs. The process of interaction and adaptation between the

individual and his environment goes on continuously.

A few empirical studies have been conducted to examine the socio-economic origins of

entrepreneurs. In one such study of 40 enterprises in two districts of Andhra Pradesh, the following

socio-economic factors were analysed.

1. Caste origins: To begin with some social groups produce a larger and more capable body of

entrepreneurs than other groups. This is due to the influence of prevailing social factors. It

has often been suggested to at certain religions and castes encourage the growth of

entrepreneurial talent. The caste system has been found to be exercising its own influence on

the occupational mobility. Some religious communities like the Parsees, Marwaris and

Sindhees seem to have an affinity for industrial activity. It is true that certain castes have

imbibed in themselves a particular culture that fosters entrepreneurship. It was mainly the

people hailing from Kamma, Kapu, Vysya, Brahmin and Kshatriya communities who

dominated the entrepreneurship in the two industrial estates. The study of Hadimani also

revealed that entrepreneurs from the trading castes (Marwaris) succeeded better in the initial

stages. Caste system in India led to rigid traditions and customs and economic activity was

rigidly stratified by the caste system. Therefore, a few ethnical communities engaged in trade

and industry for centuries in India. Marwaris, Parsees, Jains, Baniyas, Sindhis, Vaishyas, and

Khatris have been the dominant sources oi' entrepreneurs hip. Dominance of certain ethnical

groups in entrepreneurship is a global phenomenon. The protestant ethics in the west, the

Summurai in Japan, the trading classes in U.S.A. and the family business concerns of France

have distinguished themselves as entrepreneurs.

Hadimani found that caste attachment was high in both weavers and non-weavers. In case of

the former such attachment hindered entrepreneurship while in the latter it promoted

entrepreneurship. A holistic approach to the problems of caste dualism revealed that

Marwaris succeeded better because they had entrepreneurial traits. Enduring qualities of

business men such as hardwork, devotion to work, honesty and quality control were more

25

pronounced among Marwaris. However, entrepreneurship is no more confined to the

traditionally known communities.

2. Entry into entrepreneurship: The time and age at which the entry is made into

entrepreneurship are important factors. The Kamma community entered the field of

entrepreneurship earliest of all other communities. It reveals the resourcefulness and

enterprising quality of Kamma entrepreneurs. In comparison with Kamma and Kshatriya

entrepreneurs, Kapu and Brahmin entrepreneurs entered into entrepreneurship at a younger

age and Vysya entrepreneurs at an older age.

3. Family background: This factor includes size of family, type of family

and economic status of family. Hadimani's study revealed that Zamindar family

helped to gain access to political power and exhibited higher level of entrepreneurship. To

some extent, joint family provided family property to invest and

expand the family firm. Background of a family in manufacturing provided a

source of industrial entrepreneurship. Occupational and social status of the family

influenced mobility.

The average annual income of the entrepreneurs from different sources a: the time of

commencement was found to be around Rs. 19,000. This does not suggest that economic

status greatly influences the emergence and performance of entrepreneurship. About 57.8 per

cent entrepreneurs had an urban background and others had a rural background. Obviously,

rural background is not a handicap for the exercise of entrepreneurship though urban

background may prove to be an added advantage.

4. Religious background: Religion exercises a strong influence on attitudes towards material

gains relatively to efforts. Max Weber propounded the theory that the 'protestant ethic' among

Christians fosters the right attitude for entrepreneurship. On the other hand, Islam and Hindu

religions do not foster such an attitude. However, subsequent researchers have questioned

Weber's theory. Several empirical studies reveal that religions in India do not inhibit

entrepreneurial spirit. Hadimani suggests that mo re than the form of religion practised the

type of interpretation given to different religious values determine entrepreneurial success.

For example, Marwaris dharma (Moral duty), artha (wealth) and kama (desire) were inner

worldly while Moksha (salvation) was outer worldly and that too at the end. On the other

hand, weaving caste entrepreneurs considered moksha as the ultimate goal of life.

5. Education and technical know how: Education, entrepreneurship and development are

interrelated. Education is the best means of developing man's resourcefulness which

encompasses different dimensions of entrepreneurship. Ashok Kumar found in his study that

majority of the entrepreneurs were graduates and post-graduates particularly in engineering

and other technical disciplines. Kamma and Brahmin entrepreneurs were relatively more

educated than others. It may be expected that the high level of education may enable the

entrepreneurs to exercise their entrepreneurial talent more efficiently and effectively.

6. Occupational Background: Employed people were more attracted towards entrepreneurship

than those engaged in agriculture or business. A sizeable number of entrepreneurs were the

unemployed youth prior to starting the industrial units. Entrepreneurship is thus not

confined to any particular occupation. What is required is the presence of entrepreneurial

spirit and zeal. Most of the entrepreneurs came from families where the pa rental occupation

was agriculture or employment.

26

7. Migratory character: As much as four - fifths of the entrepreneurs were immigrants having

come from different places within the State or from outside.

8. Type of Industry started: Nearly two-thirds of the entrepreneurs started industrial units in

engineering works. A little more than one–tenth preferred to start units in non- metallic

products while 7.5 percent started units belonging to plastic works industry. A few other

entrepreneurs started units belonging to food products, aluminium products and other

miscellaneous products.

9. Type of ownership preferred: More than one-half of the units were partnership firms, nearly

one-third were sole trading concerns and about one-tenth were private limited companies.

Most of the entrepreneurs preferred partnership to avoid legal formalities involved in starting

a company.

Another study of 334 entrepreneurs in the Anakapalle and Gudivada districts of Andhra

Pradesh revealed that more than 90 percent of entrepreneurs at both the towns were Hindus.

Gavaras and Kammas were the two dominant castes and they belonged to land owning and

land tilling class. This shows that the bold of the caste structure on occupations in India is

getting loosened. Entrepreneurial opportunities are now open to people who are willing to

take risks irrespective of their caste origins.

About two-thirds of the entrepreneurs entered into entrepreneurs hip before the age of 25 years.

People from the mercantile communities entered comparatively at a younger age due to their early

orientation and guidance by their parents. Non-traditional merchants entered into the merchant

activities on a large scale only after 1960s. However, the degree of occupational mobility of these

farming castes was greater than traditional merchant castes. Occupational mobility was found to be

tow but growth rate was high.

Formal education helps to develop entrepreneurial skills like resourcefulness, initiative and

entrepreneurs. However, the lack of higher education is not a limiting factor. The study revealed that

majority of the entrepreneurs lacked higher education, most of the young persons with higher

education prefer white collar jobs in the Government. However, technicians, engineers and other

professionals are now coming forward as entrepreneurs. This is an encouraging trend. The

entrepreneurs were well informed, widely travelled and experienced. Most of them entered business

neither casually nor accidentally but after preparation.

Structure and economic status of the family are important because these determine the support which

an entrepreneur gets from his family. Such support influences the success of an entrepreneur.

"Membership of a resourceful family or community facilitates entrepreneurship. Joint family system

is supposed to inhibit individual is in and accumulation of control. But once a beginning is made the

family become the breeding ground for more entrepreneurs. The same family members who are a

drag on resources prove to be strength in adversity. About half of the entrepreneurs were living

independently and the other half in joint families.

The average annual earnings increased from grandfather to father and from father to the entrepreneur

himself. This improvement in economic status must have had a positive impact on entrepreneurs'

activities. The financial soundness of the past generation creates a sense of security and thereby

encourages the spread of entrepreneurship. The magnitude of entrepreneurial activity also depends

upon the economic status or financial origins of the entrepreneur. Most of them show initiative in

27

consolidating and building up on the base provided by the father and the grandfather. Few of them

start from a scratch and thus become selfmade entrepreneurs.

About 44 percent of the entrepreneurs were proprietary concerns. About 55 percent were

partnerships and the rest were companies. Greater number of entrepreneurs originating from nuclear

families organised themselves into family partnerships. This shows that family bond has been

strengthened by business bond.

A look into the place of activity and nature of market revealed that about 84 percent of the

entrepreneurs operated from the local area and 90 percent of the entrepreneurs had local or regional

markets. However, the markets for trading, manufacturing and other services were widely spread

than those for fanning and professional services.

N. Gangadhar Rao conducted a study of 87 entrepreneurs operating in 13 industrial estates of

Andhra Pradesh. He found

1. Enterprises of Vaisyas constitute the single largest group but Kammas account for more than

l/4th of the total units.

2. Most of the entrepreneurs entered enterprises at the age of 30-40 years.

3. Quite contrary to the popular belief that entrepreneurs are drawn mostly from merchant classes,

white collar workmen emerged as the single largest group.

4. Half of the entrepreneurs were either graduates or post-graduates but the other half were non-

graduates.

5. Average annual earnings of all the entrepreneurs and their fathers at the time of starting the

enterprise were found to be Rs 27,000.

6. Migration was very low and the pull of the place where they lived initially was very high. More

than two-thirds of them were sons of the soil.

7. Partnership is the most popular form of organisation.

8. Entrepreneurs' family members played a useful role in shaping the entrepreneurial ambitions.

9. All but two entrepreneurs expected financial assistance from the nationalised banks and other

State agencies. Ancillary relations with large firms, dependable partners, allotment of plot/shed,

assistance from Government in importing machinery or materials were other expectations.

10. Availability of technical knowhow, ease of setting up, lack of competition and previous

employment in industry were the main reasons for choice of industry.

Sharma investigated the economic, social and geographic origins of the entrepreneurs who promoted

220 public limited non-government manufacturing companies during April, 1961 to March 31,

1963.

1. Occupational origins: An overwhelming majority (134 out of 198) of the individual

entrepreneurs came from the mercantile background. However, a shift in favour of newer

occupations, e.g., technicians, real estate owners, etc., was noticed. The entrepreneurs are

now drawn from diverse backgrounds which suggests that the base of entrepreneurship is

getting widened.

2. Educational backgrounds: About 30 per cent of the entrepreneurs were graduates, 10

percent postgraduates, 10 percent undergraduates. About 28 percent had professional

qualifications in engineering and technology and about 11 percent in law. Rest had

professional education in medicine, accounting and management.

28

3. Social and geographic origins: The traditionally trading castes of Banias-- Hindu and Jain,

Chettiars, etc. constituted 47% of all enterprising families and 49% of all promotions.

However, the share of these castes was going down as more people from other communities

(Brahmins, Patels, Loharas, Khatris, Sikhs, Aroras, etc.) joined the ranks of industrialists.

4. Nature of enterprise: Well-established business houses and professionally qualified

entrepreneurs have by and large preferred the modern sector (engineering, metals, chemicals

and electricals). On the other band, newer entrepreneurs have floated enterprises in the

traditional sector (textiles). In general individuals having technical knowledge entered related

industries in the modern sector. But a slightly lower proportion of new entrepreneurs than the

old ones possessing education unrelated to specific nature of industry went into the traditional

sector. The traditionally trading communities relied more on the modem sector while the

South Indian entrepreneurs preferred their floatations in the traditional sector.

The socio-economic background exerts significant influence on the level of entrepreneurial

motivation, access to resources, risk-bearing capacity, etc. which in turn influence significantly the

growth of entrepreneurs. In his study, H. Sadoak evaluated the socio-economic origins of 'First

Generation Entrepreneurs' who were defined as those who have first time taken entrepreneurship

after independence. He used 'Survey Interview Method'.

The main findings of his study are as follows:

1. Out of 100 units, 61 were located in backward districts.

2. 55 units were proprietorships, 27 partnerships and 18 private limited companies.

3. 60 units were having project costs up to Rs 5 lakhs and 40 units employed up to 10 persons.

4. 72 entrepreneurs were below 41 years of age.

5. About 70 percent of the entrepreneurs were graduates or postgraduates.

6. About 32 percent had experience in the same line, 40 percent in other lines and 28 percent had no

past experience. More persons without and with experience in the same line started industries in

notified backward areas.

7. In backward regions. 70 to 90 percent of project costs came from Government agencies. Most of

the first-generation entrepreneurs could not start their own projects without financial support

from the financial institutions.

8. Average investment per unit and average employment were lower in backward areas than in non-

backward areas. There is a tendency among the entrepreneurs to promote capital-intensive

industries in backward areas clue to the availability of central subsidy based on capital

investment. In order to create more employment opportunities in backward areas employment

subsidy rather than capital subsidy should be used. However, the policy of incentives and

institutional efforts have helped to create income and employment opportunities through the

promotion of new industries.

ENVIRONMENTAL FACTORS AFFECTING ENTREPRENEURSHIP

A complex and varying combination of financial, institutional, cultural and personality factors

determines the nature and degree of entrepreneurial activity at any time. The personal backgrounds

of the entrepreneurs are determined mainly by the environment in which they are born and brought

up and work. A multitude of environmental factors determine the entrepreneurial spirit among

people. The entrepreneurs in turn create on impact on the environment. The interaction between the

entrepreneur and his environment is an ongoing process. At any given point of time, the

29

entrepreneurs derive meanings from the environment prevailing at that time and try to adapt and/or

change the environment to suit their needs.

The environment, particularly the external environment is dynamic. It keeps on environment on the

organisation depends largely on the degree to which the organisation depends (immediate or remote)

on the environment and organizational response to environmental changes. All the factors outside

and inside (Individual, groups, machinery, equipment, procedures, rules, policies, etc.) an

organisation interact and affect the performance of the organisation. Some of the environmental

factors which hinder entrepreneurial growth are given below:

1. Sudden changes in Government policy.

2. Sudden political upsurge.

3. Outbreak of war or regional conflicts, e.g. ‘sons of the soil’ call.

4. Political instability or hostile Government attitude towards industry.

5. Excessive red-tapism and corruption among Government agencies.

6. Ideological and social conflicts.

7. Unreliable supply of power, materials, finance, labour and other inputs.

8. Rise in the cost of inputs.

9. Unfavourable market fluctuations.

10. Non-co operative attitude of banks and financial institutions.

Entrepreneurship is environmentally determined. The most important essential for entrepreneurial

growth is the presence of a favourable business environment. A healthy business environment

requires active social and cultural behaviour of the people, efficient economic conditions, helpful

motivating Government policies, etc. When environment mitigates entrepreneurship it must be

modified.

STATE AND THE ENTREPRENEUR

State plays now a vital role in the sphere of entrepreneurship. This role may be classified into three

categories:

1. Supporting role

2. Regulating role

3. Participative role

Support: The Government of India has launched several schemes for the growth of entrepreneurship

so as to ensure the rapid economic development of the country. It has created a vast network of

institutions and agencies which provide several types of assistance to new and established

entrepreneurs. Public financial institutions or development banks are one part of this institutional

framework. These banks at the national and State level provide financial, managerial and

promotional assistance.

At the national level Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment

Corporation of India (ICICI), Industrial Development Bank of India (IDBI), Small Industries

Development Bank of India (SIDBI) are the major institutions. Every State has its own-State

financial corporation and/ or State industrial development corporation. These agencies provide

industrial finance through term loans, underwriting and direct subscription to industrial securities.

They also render assistance in the identification and promotion of industrial projects. They have set

30

up several institutes for undertaking training and research in different fields of management. They

have sponsored technical consultancy organisations (TCOs) for providing necessary facilities and

guidance to new enterprises. 'Seed capital' is provided to new entrepreneurs on soft terms. In

addition a directory of industrial, technical and management consultants has been prepared so that

entrepreneurs can take their help in the formulation and implementation of projects. Special schemes

are available for backward areas, women entrepreneurs, sick units and technical graduates, industrial

Reconstruction Bank of India (IRCBI), and Bureau of Industrial and Financial Reconstruction

(BIFR) have been set up to prevent and correct sickness in industry. National Small Industries

Corporation (NSIC) and other bodies are operating to promote small scale entrepreneurs.

In addition to institutional framework, the Government has developed industrial infrastructure in the

form of transportation, communications, power, etc. It provides incentives and subsidies of various

types to deserving entrepreneurs. But for the assistance and facilities provided by the Government,

entrepreneurial base in India would have remained narrow.

Regulation: In order to achieve the objective of socialist pattern of society, Government of India

has enacted innumerable regulations and controls. These regulations are designed to set priorities of

industrial development, to regulate the pattern of production and distribution, to check the growth of

monopolies and concentration of economic power, etc. Some of the more important ways in which

Government regulates business activities are given below:

(i) Industrial Policy Resolutions

(ii) Industrial licensing under the Industries Development and Regulation Act, 1951

(iii) Capital Issues Control

(iv) The Companies Act, 1956

(v) Control over Monopolies and Restrictive Trade Practices

(vi) Fiscal and monetary controls

(vii) Controls over exports and imports

(viii) Foreign exchange regulations

(ix) Commodity controls

Private industrialists in India often complain that there are too many controls and these controls have

failed to achieve the intended objectives. In recent years there has been a trend towards liberalisation

of economic activities. The control and regulatory mechanism is a dynamic process and has to be

viewed against the environmental situation existing at a point of time. Different degrees of control

may be necessary at different stages of economic growth.

Participation: In India, Government has emerged as the single largest entrepreneur through the

public sector. The top ten companies in India in terms of size are all in the public sector. Key and

basic industries like iron and steel, coal mining, aeronautics, power, railways, communications,

cement, etc. are mostly owned and controlled by the Government. All major commercial banks and

insurance companies have been nationalised.

Government began to participate in industry and trade because it felt that private sector alone will

not be able to industrialise the country at the desired pace and scale. Government enterprises seek to

achieve economic (planned growth, rapid industrialisation, generation of surplus), social

(employment generation, balanced regional development, egalitarian society), and political (self-

reliance, national defence, etc.) objectives.

31

ENVIRONMENT IN UNDERDEVELOPED COUNTRIES

Development of a healthy business environment is an essential condition for growth of

entrepreneurs. New enterprises can flourish and grow only under favourable economic, social and

political conditions. Unfortunately, economic and social conditions in underdeveloped countries are

unfavourable and even prohibitive. There is lack of adequate infrastructure and capital. Social

institutions are hopelessly traditional and social attitudes inhibit entrepreneurial behaviour. People in

general are conservative and do not initiate and appreciate changes. Obviously entrepreneurship

cannot flourish under such conditions. Therefore, it is very difficult lo create and maintain the

required quantity and quality of entrepreneurship in underdeveloped countries.

Business environment in underdeveloped countries is such that entrepreneurship can be organised on

a small scale. Shortage of capital and imperfect market restricts large scale enterprises. Most of the

entrepreneurs can imitate but few can innovate. That is why these countries place emphasis on the

small scale sector as an instrument of economic planning and development. Political ideology also

requires the development of a decentralised industrial structure where ownership and economic

power are mostly distributed. The State in these countries provides preferential treatment to small

scale enterprises lo generate employment, to mobilise local capital and skills and to ensure a more

equitable distribution of income and wealth.

In order to supplement the efforts of private entrepreneurs the Government in underdeveloped

countries has become an important entrepreneur. Active participation of the Slate in business helps to

spread innovating and imitating entrepreneurship throughout the country. In addition the

Government takes various physical and financial measures to stimulate the growth of

entrepreneurship.

32

LESSON 4

GENERATION OF BUSINESS IDEA Pawan Kumar Jain

The foremost task of a dynamic entrepreneur is the generation of an idea that is new and appears to

be worthwhile for further use. This involves a lot of creativity on the part of the entrepreneur. The

business idea arises from an opportunity in the market. It originates from real demand for any

product or service that an entrepreneur should have a keen and open mind to look for opportunities

and generate business ideas.

While selecting a business idea, the following points need adequate consideration:

(i) The business idea should enable the entrepreneur to utilise his technical and professional

skills. If an entrepreneur has knowledge of some special manufacturing techniques, because

of previous experience or otherwise, it would be easier for the entrepreneur to manage such

techniques effectively.

(ii) It should enable the use of locally available raw materials for product or service. As

compared to imported materials/ local materials are easy to procure.

(iii) It should ensure making products that have a demand, but are not freely available in the

market. It is potentially a good idea to start with a product that could be sold.

(iv) It should enable the entrepreneur to solve a current problem existing in the market. Products

may be available in the market but they do not meet the demand fully or in a satisfactory

manner. Sometimes, an existing product is used in combination with another, which is not

available. Attempts to solve such market problems do give rise to business ideas.

Sources of Information for Business Ideas

As said earlier, generation of project idea is the starting point in product development. For this, an

entrepreneur can refer to potential studies prepared by different organisations. There are a number of

potential studies conducted by several organisations like the National Council of Applied Economic

Research (NCAER), financial institutions and other promotional organisations such as Confederation

of Indian Industries (CII), etc. These may include the following:

(a) Area studies which identify development potential of particular areas like a backward

area or a district.

(b) Subsectoral studies which identify opportunities in specified subsectors (such as food

processing).

(c) Resource-based studies which identify opportunities based on utilisation of natural or

industrial resources such as forest-based industries, marine-based industries, industries using

rubber as the main raw material, etc.

(d) Studies of the product consumption pattern of the country.

(e) Surveys of existing industrial establishments.

(f) Import and export possibilities.

(g) Demand forecasts made by Industrial Chambers such as CII, FICC1, ASSOCHAM, etc.

Approaches to Generating Ideas

While exploring different sources of business ideas, an entrepreneur can use the following

approaches to generate ideas:

33

(i) Brainstorming. It helps in generating a large number of product ideas. It should be

conducted by an expert and none of the ideas mentioned should be evaluated or judged. At

this stage one should not worry if the ideas are suitable or not.

(ii) New ways of doing old things. A large number of products are being made and provided in

the market using traditional methods and practices. One approaches can be to examine if

these could be made by a different and newer method that would give the entrepreneur an

advantage over the older methods.

(iii) Converting hobby into business. Some people are adept at doing something or the other as

a hobby or for use in the house only. It is possible to use such skills to set up an enterprise.

Hobbies like photography, interior decoration, fashion designing etc. are often developed as

business ventures.

(iv) Improving an existing product. An existing product can be improved by using old

techniques with more care or using newly developed technology.

(v) Utilising waste material. Conservation and environment protections are presently getting a

lot of attention. Recycling waste or turning them into useful products are good product ideas.

Presently, energy conservation products also have good potential.

Selection of Project Idea

At this stage, all the project ideas are screened on the basis of well defined criteria to eliminate ideas

which are not promising and select the best idea. While selecting the idea, the following facts should

be considered:

(i) The project should be compatible with the objectives and resources of the entrepreneur. It

should also match his capabilities and skills.

(ii) The resources required for the project such as capital requirements, technical know-how, raw

materials, power supply etc. must be reasonably assured.

(iii) The cost structure of the proposed project must enable it to realise reasonable returns on

investment.

(iv) The effect of external environmental factors such as technological changes, state of economy,

competition, etc. should be considered.

(v) The project idea should be consistent with the government policies, licensing requirements,

environmental regulations, foreign exchange regulations, etc.

ROLE OF CREATIVITY AND INNOVATION

Entrepreneurship is the ability to create and build something from practically nothing.

Fundamentally, it is creative activity manifested by initiating and building an enterprise or an

organisation. It is knack of sensing an opportunity where others see chaos, contradiction, and

confusion. Entrepreneurship can be viewed as n creative and innovative response to the environment

and an ability to recognise, initiate mid exploit an economic opportunity.

Creativity and Innovation

There is a popular notion that creativity is a mysterious process performed by gifted or brilliant

mind. It is largely a product of sweaty trial and error. To be creative a person must work hard to

34

generate multiple solutions. Creativity is a prerequisite for innovation and it can be developed in any

individual especially when there is concern for excellence. It is an accepted fact that concern for

excellence is a common trait of most of the entrepreneurs. Hence, to become an entrepreneur one

should develop creativity in oneself. Creativity is defined as the ability to bring something new into

existence. The emphasis is on the "ability" and not the activity of bringing something new into

existence. A creative person must conceive of something new and envision how it will be useful to

the society. The action for putting the conceived idea to use is another issue. Even if no effort is

made to follow up the conceived new idea, the person is a creative person.

Innovation is the process of doing new things or doing old things through new techniques.

While creativity relates to the ability to conceive, innovation means doing new things. Ideas have

little value until they are converted into useful products or services. Innovation transforms creative

ideas into useful applications. Hence, creativity is a pre-requisite to innovation.

Stages in Creativity

According to Schumpeter : "Entrepreneurs need ideas to pursue but ideas hardly materialise

accidentally." Ideas normally pass through a long evolutionary process. In other words, ideas evolve

through a creative process whereby a person with imagination germinates ideas, nurtures them and

develops them successfully. A simple model of how the creative process works is shown in Fig. This

model reveals that there are five stage of the creative process: (a) idea germination, (b) preparation,

(c) incubation, (d) illumination and (e) verification. It should be noted that these stages are different

but interrelated. In fact, in each stage a creative individual behaves differently to move an idea from

the initial stage of germination to the last stage, i.e., verification.

Fig.: The Creative Process

An overview of the stages in creativity is given below:

35

1. Idea Germination. The germination stage is the sowing stage of the process. History

reveals that most creative ideas can be traced to an individual's interest in or curiosity

about a specific problem or area of enquiry.

2. Preparation. Once a seed of curiosity has taken the shape of a focused idea, the creative

person will make a thorough search for appropriate answers. If it is a problem that has to be

solved, he would begin by seeking information about the problem and by looking at how

others have tried to solve the same problem in the past. If it is an idea for a new product or

service there is need to carry out appropriate market research. While scientists will carry out

laboratory experiments, designers will start engineering new product ideas and marketeers

will study consumer buying habits. An individual with an idea will thereafter think about it

and concentrate his energies on rational extensions of the idea and how this can be converted

into a saleable product or service.

3. Incubation. Creative people and people with vision often concentrate intensely on an idea,

but, in most cases, they simply allow ideas time to grow without international effort. Most

ideas evolve in the minds of people with imagination and foresight while they go about other

activities. The idea once sown and given substance through preparation is put on back-burner.

This means that the subconscious mind is given enough time to assimilate information

collected from diverse sources.

Incubation is a stage of mulling it over while the subconscious intellect controls the whole

creative process. This is, no doubt, a crucial aspect of creativity because when imaginative

people consciously focus on a problem, they behave rationally in their search for systematic

solutions. In this context, one may refer to the art of synectics which means a joining together

of different and often unrelated ideas. This means that when a person has consciously worked

to resolve a problem without success, allowing it to incubate in the subconscious mind will

often lead to a resolution.

4. Illumination. Illumination occurs when a certain idea resurfaces as a realistic creation. Most

creative people normally pass through numerous cycles of preparation and incubation,

searching fur full meaning of the idea. When a cycle of creative behaviour fails to result in a

catalytic event, the cycle is repeated until the idea takes shape or disappears. This stage is

most crucial for entrepreneurs because ideas by themselves carry little practical living in a

world of illusion from creative people who find a way to creative value.

5. Verification. An idea illuminated in the mind of an individual still has little meaning until

verified as realistic and useful. The significance of entrepreneurial effort lies in the fact that it

is essential to translate an illuminated idea into a verified, realistic and useful application. In

fact, verification refers to the development stage of refining knowledge into application.

During this stage, many ideas will be rejected as they do not appear to be fruit-bearing or

having practical relevance. It is often found that a good idea has already been developed or

the eager entrepreneur finds that competitors already exist in the market. Inventors often face

such a situation when they seek patent protection only to discover similar inventions already

registered.

Innovation and Invention

Innovation implies doing new things or doing things that are already being done in new ways. It may

occur in the following forms:

36

(i) Introducing a new manufacturing process that has not yet been tested and commercially

exploited.

(ii) Introduction of a new product with which the consumers are not familiar or

introducing a new quality in an existing product.

(iii) Locating a new source of raw material or semi-finished product that was not exploited

earlier.

(iv) Opening a new market, hitherto unexploited, where the company products were not

sold earlier.

(v) Developing a new combination of means of production.

Shumpeter has made a distinction between ‘an innovator’ and ‘an inventor’. An inventor discovers

new methods and new materials. On the other hand, an innovator is one who utilises or applies

inventions and discoveries to produce newer and better quality goods that give greater satisfaction to

tin- consumers and higher profits to the entrepreneur. An inventor produces ideas and an innovator

implements them for economic gain. An inventor adds to the knowledge of the society while an

innovator adds to their satisfaction by means of newer and better products and services. It is an

innovator who commercially exploits an invention. The difference between invention and innovation

has been shown in Fig.

Fig.: Invention versus Innovation

FEASIBILITY STUDY

The feasibility study provides a basis for investment decision on an industrial project – a project of a

defined production capacity at a selected location, using a particular technology or technologies in

relation to defined materials and inputs at identified investment and production costs, and sales

revenues yielding a defined return on investment. The purpose of feasibility study is to examine the

viability of a project. A feasibility study presented in the form of a project report is needed to get

sanction for the project from the concerned authorities, including financial institutions. The various

aspects of the viability of a project are evaluated by the concerned authorities on the basis of the

feasibility study.

The feasibility study should contain an analysis of the following aspects:

(1) Technical

(2) Commercial

(3) Financial

(4) Socio-economic.

Besides these, a project report should also contain general information, including description of the

project, the status of the project in the national priority and the government policies supporting the

project, information about the promoters of the project, etc.

37

(1) Technical Aspect: The importance of technical appraisal in project evaluation is quite

obvious. Technical appraisal of a project broadly involves a critical study of the following

parameters:

(a) Location. An industrial feasibility study should define the location and site suitable

for the project. Selection of location refers to the selection of geographical area where

the project is to be located like a backward district or an industrial area and the site

refers to the exact plot in the geographical area where the project is to be put up. The

first step, therefore, is the selection of the location and site selection comes only after

the geographical location is finalised. However, the required site characteristics

should also be kept in mind while selecting the location.

(b) Plant Capacity or Size. The size of the plant or scale of operation is an important

factor that determines the economic and financial viability of a project. In many

industries, there are certain technological sizes which are economical. If the size is

sub-optimal, there are bound to be diseconomies of scale. The uneconomic size is one

of the important reasons for the poor performance of many industrial units in India.

The uneconomic size results in high cost and makes survival in a competitive market,

particularly in the international market, very difficult.

(c) Plant and Equipment. The feasibility study should define the technology required

for a particular project, evaluate technological alternatives and select the most

appropriate technology in terms of optimum combination of project components. The

various implications of the acquisition of such technology should be assessed,

including contractual aspects of technology licensing, when applicable.

The feasibility study should consider the adequacy and suitability of the plant and

equipment and their specifications, plant layout, balancing of different sections of the

plant, proposed arrangements for procurement of plants and equipments, reputation of

the equipment suppliers, etc.

(d) Infrastructure. Proper functioning of a project depends a lot on the sufficiency and

efficiency of infrastructure like facilities to transport raw materials and other inputs,

facilities to transport and distribute the output, power and fuel supply, water supply,

storage and warehousing facilities, etc.

(e) Effluent Treatment and Discharge. Disposal of effluents is a major problem for a

number of industries like chemical industry, paper industry, etc. Projects which

produce effluents should have proper facilities and arrangements for the treatment and

disposal of the effluents without causing harm to the environment. The feasibility

report should provide relevant details about the plan for effluent treatment and

disposal. It may be mentioned here that while evaluating the application for industrial

licence, government considers the arrangements proposed to ensure the safe disposal

of effluents and gases into air, water and soil.

(f) Foreign Collaboration. The project report of a project involving foreign

collaboration should contain the relevant details about the collaboration. The terms of

collaboration should strictly adhere to the government policies and guidelines in this

regard.

38

(2) Commercial Aspect: The commercial viability of a project depends on the size of the market

and demand for the products and services to be produced by the proposed project. A project

is considered commercially viable if it is able to market its products competitively in the

domestic or international market at a reasonable margin of profit.

One of the crucial factors that determines the commercial viability of an industrial project is

the market for the product(s) proposed to be manufactured by the project. Several factors like

recession, industrial sickness, technological changes, changing nature of competition, etc.,

make it all the more imperative that a detailed market survey and a thorough appraisal thereof

are carried out to assess the commercial viability of the project.

(3) Financial Aspect: Scrutiny of the financial aspects involves an analysis of the working

results, balance sheets, and cash flow for the last few years in the case of an existing concern

and also an examination of the following aspects in existing as well as new projects :

(i) The estimated cost of the project.

(ii) Financing of project with reference to the capital structure, promoter's contribution to

the total project cost, debt-equity ratio and the availability of anticipated resources.

(iii) Critical examination of the applicant's existing investment, if any, in other concerns or

any trading activities other than normal industrial activities.

(iv) Projection of future profitability.

(v) Projection of cash flow, both during the construction and operation periods, of the

project.

(vi) Internal rate of return, debt service coverage, domestic resources cost, both in respect

of import substitution and export promotion aspects, etc.

(4) Socio-Economic Aspect: In case of private sector projects, evaluation is done in terms of the

commercial profitability of a project. But in the case of public projects like irrigation

projects, power projects, transport projects or other infrastructural projects or social overhead

projects, national profitability (i.e., the net socio-economic benefits) is as important as

commercial profitability and sometimes more important than commercial profitability. Even

in respect of projects sponsored by private entrepreneurs, national profitability analysis is

important, particularly in developing countries because of the need to optimise the utilisation

of scarce resources. The national profitability of a project is measured by assessing the extent

to which it makes a net contribution to meeting the socio-economic objectives of

development.

National profitability analysis essentially involves social cost-benefit analysis (SCBA). Every

project entails some costs to the nation and produces certain benefits. The contribution of the

project to social objectives such as employment, health delivery system, transport,

communication, earning of foreign exchange, import substitution, etc. are evaluated. In the

Indian context, the socio-economic viability of a project may be judged on the basis of its net

contribution to the following objectives:

(i) Generation of employment.

(ii) Income distribution.

(iii) Foreign exchange earnings/savings.

(iv) Self-reliance.

(v) Development of backward regions.

(vi) Development of small-scale and ancillary industries.

39

(vii) Development of infrastructure.

(viii) Development of technology.

(ix) Improvement of quality of life of the general public.

Project Appraisal

Project appraisal is an indepth analytical study of the project after the feasibility study has been

completed. Project appraisal is carried out before the project is implemented. It involves a systematic

procedure for weaving the technical and financial information about the project with relevant data

about its economic environment, together into one or a few criteria on the basis of which the project

is recommended for selection or rejection. It may be noted that project preparation and its partial or

initial economic evaluation are carried out simultaneously and are closely related. However, an

overall economic evaluation is carried out only on the basis of data provided at the end of the project

formulation stage.

Project Report

A report regarding the project of a new establishment or the expansion of an already existing unit is

prepared in all its aspects by the entrepreneur or his consultant for further investigation and analysis.

The project report is useful for applying for loans from financial institutions and for getting clearance

from the government.

The project report should comprise the following information:

1. Name, address, history and other details of the entrepreneur.

2. Brief summary of the project.

3. Inputs for the proposed project such as land, building, location, plant and machinery,

water, materials, power, etc.

4. Financial aspects-cost of fixed assets, working capital, sources of finance, assets and

liabilities.

5. Cost of production and marketability.

6. Total income, operative net profit, etc.

7. Technological feasibility, licensing regulations, foreign exchange requirements, etc.

8. Information regarding marketing, present demand, new market likely to be available, foreign

exchange market, competition, marketing strategic, availability of substitutes, etc.

9. Importance of project to national economy, availability of government support, if any.

Productivity management is considered to be one of the important and difficult tasks of management.

It is also one of the more frequently discussed topics in seminars and management circles. In spite of

the attention, only a few organisations will admit having a satisfactory level of productivity. The

other areas which require adequate attention in Indian Industries are quality control and logistics

management quality management (TQM).

PRODUCTIVITY

The Concept of Productivity

In a broad sense, the term 'productivity' represents goods and services produced in relation to the

resources utilised in their production. It may be defined as the ratio of firm's total output to total

40

input, adjusted for inflation for a specified period of time. Higher productivity means efficient

use of inputs and vice versa. According to Peter Drucker, productivity represents the balance

between all factors of production that will give greater output at the smallest effort. In technical

terms, productivity may be defined as the relationship between total output and total input of a firm.

Productivity = ,Inputs

Output

energyandmachinesmaterial,capital,Labour,

producedservicesandGoods=

Productivity measures the efficiency of the entire production system in the use of all inputs. The

efficiency with which resources are utilised is called productive efficiency. Higher productivity

means producing more from a given amount of inputs or producing a given amount with lesser

inputs. This yardstick of productive efficiency is very useful for comparison of productivity of

different firms in the same industry.

Measurement of Productivity of Different Factors

Productivity may be measured either on aggregate basis or on individual basis. In the first case,

output is compared with all the input factors taken together.

This is known as total productivity. In the second case, output is compared with any one of the input

factors and this is called factor productivity.

According to the International Labour Office, "The ratio between output and one of the factors of

input is generally known as productivity of the factor considered." Thus, productivity means the ratio

between output and any of the factors of production, say, labour, machines, capital, materials, land,

etc.

Productivity (in general terms) = Output / input

Productivity of Labour = Output / Number of man-hours

Productivity of Machines = Output / Number of machine-hours worked

Productivity of Capital = Output / Net capital employed

Productivity of Material = Output / Weight, volume, number or length of

raw material used

Productivity of Land = Total production of land /Area of land used.

Production and Productivity

There is a difference between the two terms, namely, production and productivity. If inputs are

increased and a large production is obtained, it does not necessarily result in increased productivity.

But if production is increased with the use of the same inputs or the same output or production is

obtained with smaller inputs, productivity is said to have increased. Production is concerned with the

end results of the contribution of various factors of production in the share of volume, value or

quantity of goods and services turned out by a plant, whereas productivity views the volume, value

of quantity of production in relation to the resources utilised in the production of such goods and

services. Thus, productivity shows the efficiency of the production unit whereas production

represents the total volume of output produced or manufactured.

41

Productivity is always concerned with the efficiency of the production unit. For example, if greater

output is achieved by the use of more inputs, it does not necessary result in increased productivity.

But if production is increased with the use of the same inputs of the same output or production is

obtained with the end result of the contribution of various factors of production where productivity

measures the relative efficiency of the various factors of production.

Productivity and Efficiency

Productivity represents the ratio between output and input. There are two broad ways of improving

upon the level of productivity : (a) increasing the output with the same amount of input, and (b)

reducing the inputs for the existing level of output. In the first case, better utilisation of resources

will help in improving the level of productivity, while in the second, economy in the use of resources

will increase productivity. When higher productivity is the outcome of better utilisation of resources,

this is referred to as 'increase in efficiency'. And when saving and conservation of resources result in

higher productivity, this is described by the term 'economy'.

Both efficiency and economy in the utilisation of resources are desirable to increase productivity. As

a matter of fact, economy and efficiency are the two sides of the same coin, i.e., productivity. The

term 'effectiveness' represents the extent to which the business objectives are achieved with the given

resources of inputs. As a matter of fact, it incorporates productivity, efficiency and economy.

Productivity and Quality

Productivity is the ratio of output to input under a given set of circumstances. But 'quality' is "the

degree to which the specifications for a product or service are appropriate to its function and use, and

the degree to which a product or service conforms to its design specifications." There is a clear

relationship between productivity and quality. In general, when quality increases, productivity is

likely to increase; because wastage is eliminated. The amount of inputs (the denominator of the

productivity ratio) required to produce outputs (the numerator) is reduced and, thus, productivity

increases whenever there is an increase in quality. But in certain cases, increase in productivity might

lead to decrease of quality. This happens when wages are linked to productivity and not quality.

Significance of Productivity

The relation between productivity and economic growth in a nation is almost self explanatory.

Productivity is an important element in the process of economic growth. When the productivity in an

industry is increased, the rate of economic growth increases automatically. Increase in productivity

in an industry leads to higher production with the most economical use of the available resources. In

other words, the cost of production is decreased. This benefits the customers by reducing the prices,

the workers by increasing their wages, and the entrepreneurs by increasing profits. Since the income

of the people increases, their demand is also increased. Increase in demand makes it possible to start

new industrial units and generate more employment. Thus, it is obvious that higher productivity is

instrumental in the economic growth of any nation.

The drive for higher productivity makes the entrepreneurs conscious about the most economical use

of the available factors of production. The productivity drive has higher significance in case of

developing countries which are facing the problems of inadequacy of capital, raw material personnel

etc.

42

The advantages of higher productivity are as follows:

(i) Increase in the efficiency of various factors of production.

(ii) Economical use of various factors of production. This decreases the total cost of production

per unit.

(iii) Decrease in overhead cost.

(iv) Better quality of goods at lower price. This has the impact of increasing the standard of living

of the people.

(v) Increase in wages and salaries to the workers. The workers also get better working conditions

and higher bonus.

(vi) Profits are increased and this facilitates internal financing of expansion programmes.

(vii) Better economic strength and stability of the enterprise. (viii) Overall growth of the economy

leading to increase in national income.

Factors Influencing Industrial Productivity (Determinants of Productivity)

The factors affecting industrial productivity are inter-related and inter-dependent and it is a difficult

task to evaluate the influence of each individual factor on the overall productivity of industrial units.

The impact of certain important factors is briefly examined below :

(i) Technological Advancement. The technological factors include degree of mechanisation,

technical know-how, product design, etc. Improvement in any of the technological factors

will contribute towards the increase in industrial productivity. In India, application of

mechanical power, introduction of semi-automatic and automatic machines, improvements in

the production processes, better integration of production processes and higher degree of

specialisation have contributed a lot towards the increase in industrial productivity.

(ii) Quality of Human Resources. The human resources play a significant role in raising

industrial productivity in most of the industries. If the employees are not adequately qualified

and/or not properly motivated, all the steps taken to increase the industrial productivity will

have no result. The employees' performance and attitudes have an immense effect on the

productivity of any industrial unit. Three important factors which influence the productivity

of labour are : (a) ability of the worker (b) willingness of the worker, and (c) the environment

under which he has to work,

The ability of the worker to perform well on his job is a very important factor in productivity.

It depends upon his inherent and acquired skills, general education, training, experience,

intelligence, aptitude, capacity, etc.

The willingness of the worker to work (i.e. motivation) depends upon a number of factors. In

many cases, system of wage payment and provision of other incentives acts as an important

motivating factor. An incentive system linked with productivity will motivate the workers to

show higher productivity. The other motivational factors are of non-financial nature. These

factors include delegation of authority, participative management, feeling of responsibility,

opportunity for innovation, etc.

Lastly, the physical conditions of work under which the worker has to do his job also affects

the job performance of the worker. Thus, better lighting, better ventilation, improved safety

devices, safe drinking water, rest rooms, etc. should be provided to the workers so that they

are able to maintain their physical health and contribute to higher productivity.

43

(iii) Availability of Finance. The ambitious plans of an industrial unit for increasing the

productivity will remain mere dreams if adequate financial resources are not available to

introduce new technical improvements and give appropriate training to the workers. The

greater the degree of mechanisation to be introduced, the greater is the need for capital.

Capital will also be required for investment in research and development activities, upkeep of

plant and machinery, etc.

(iv) Managerial Talent. The significance of managerial talent has increased with the

advancement in technology. Professional managers are required to make better use of the

new technological development. Since the modern enterprises are run on a large scale, the

managers must possess imagination, judgement and willingness to take initiative. The

managers should be devoted towards their profession and they should understand their social

responsibilities towards the owners of the business, workers, customers, suppliers,

Government and the society. This is essential if the managers want to manage their

organisations effectively. The managers should have conceptual, human relations and

technical skills in order to increase the productivity of the enterprise.

(v) Government Policy. The economic and industrial policies of the Government have an

important impact on the industrial productivity. The Government should frame and

implement such policies which create favourable conditions for saving, investment, flow of

capital from one industrial sector to another and conservation of national resources. The

Government policies should encourage investment in modern plant and machinery so as to

ensure higher productivity. It is also the duty of the Government to check the growth of

monopolistic enterprises so that the interests of the consumers and the workers are not

jeopardised.

(vi) Natural Factors. The natural factors such as physical, geographical and climatic exert

considerable impact on the industrial productivity. The relative importance of these factors

depends upon the nature of the industry, goods and services produced and the extent to which

physical conditions controlled. The geological and physical factors play a very dominant role

in determining the productivity of extractive industries like coal mining in which the physical

output per head is greatly influenced by the depth of the coal-mines, the thickness of the coal

seams, the topography of the region and the quality of coal available.

Steps to Increase Productivity

The following measures should be taken to increase productivity :

(i) Better Technology. Latest machines and equipment should be procured by the industrial

units as they are more efficient and economical. The industrial units using old machines have

low productivity and so can't complete with those units using new technology.

(ii) Improved Raw Materials. Raw materials of right quality should be procured by every

industrial unit. This will reduce wastage and increase the productivity of workers and

machines.

(iii) Scientific Selection of Workers. In order to handle various positions in the organisation,

right type of employees should be appointed. They should also be provided adequate training

in the use of raw materials, machines, etc.

44

(iv) Good Working Conditions. There should be proper arrangements of lighting, ventilation,

cleanliness, cooling and heating of work-place. If these arrangements are not proper,

productivity is likely to be low.

(v) Provision of Incentives. Workers should be offered incentives to increase their productivity.

Workers with good record of productivity should be recognised and suitably rewarded.

Productivity linked bonus plan may be introduced to get good response from the workers.

(vi) Harmonious Relations. There should be industrial peace in the organisation. Cordial

relations between the workers and the management are key to higher productivity. Higher

production targets can be achieved if there are minimum possible conflicts between the

workers and the management.

(vii) Quality and Cost Consciousness. Both the workers and the management should be

conscious about cost and quality. This will reduce unnecessary wastages in the production

process.

(viii) Industrial Research. The government should encourage industrial research by the industrial

units and research institutions. New methods and techniques of production will increase

industrial productivity in the country.

45

LESSON 5

QUALITY Pawan Kumar Jain

The Concept of Total Quality Management (TQM)

Quality is a dynamic concept and so is its management. Total Quality Management (TQM) has been

accepted throughout the world these days. It calls for continuous improvement of quality with the

cooperation of workers through innovation in product and technology so as to meet the changing

requirements of the customer. The launching of ISO: 9000 series standards by the International

Standards Organisation is an attempt to help the industrial organisations in adopting Total Quality

Management to improve their quality and productivity and to serve their customers efficiently.

According to International Organisation for Standardisation (ISO), "Quality means the totality of

features and characteristics of a product or service that bear on its ability to satisfy stated or implied

needs". While earlier quality meant product specifications and test reports, today it refers to the

entire organisation—its systems, strengths and ability to deliver cost effective and consistently good

products or services. In simple words, quality means meeting the customer or client needs everytime.

Total Quality Management (TQM) refers to meeting the requirements of customers consistently by

continuous improvement in the quality of work of all employees. For achieving total quality, three

things are essential:

(i) Meeting customers' requirement;

(ii) Continuous improvement through management process;

(iii) Involvement of all employees.

Total Quality Management is a dynamic concept as the quality standards do not remain the same

forever. They are to be modified or changed to meet the requirements of customers and to make use

of new technology. Even the ISO : 9000 series standards have a provision of revision, modification

or deletion of quality standards after every five years. Total Quality Management also calls for

involvement of employees in this programme. Without the active involvement of employees, high

quality standards can't be achieved. Further, the whole concept of TQM is directed towards meeting

the requirements of customers.

Elements of TQM

There are three essential elements of TQM which are discussed below :

(i) Meeting Customers' Requirements. Under TQM, the term 'customer' means every user of a

product or service and not only the end-user. This is a very broad meaning of 'customer'. For

example, a product that passes through a number of stages, every next stage is a customer for

the preceding stage.

TQM aims at satisfying the requirements of customers which never remain constant, but keep

on changing with the change in time, environments, circumstances, needs, fashion, etc. Thus,

meeting the changed requirements of customers is a continuous goal of the producer.

(ii) Continuous Improvement. The change in customer requirements may be in terms of desire

for better quality product/services, bigger size, reduced cost, etc. So a producer has to cope

up with new requirements. A new process may have to be developed, or it may require a new

46

design. The production process has thus to be attuned and accelerated to meet these changing

requirements. The management has also to take care of competition in the market so that

customers do not shift to other producers- For instance, introduction of 300 ml. cold drink

bottles by one producer led other producers to shift to bottling of 300 ml. of their brands.

(iii) Involvement of Employees. As said above, TQM requires a continuous improvement in

quality of products. This calls for the improvement in the quality of work of employees

through training and development. The enhancement of skills of employees will not only

improve quality, but also bring down the cost of products through efficient use of machines

and materials and reduction of wastages. The employees must also be conscious about the

need for improvement in the quality of work. Quality circle is an outstanding example in this

regard. It is because of employees' involvement in improvement of quality that TQM is

referred to as people's process.

(iv) Managerial Commitment. TQM should be the concern of nil managers and workers in the

organisation if it is to serve its purpose fully. No doubt, TQM is planned by the top

management, the people at the middle and lower levels must be taken into confidence before

launching the TQM. Thus, each and every employee must be encouraged to become involved

in implemented, necessary skills and resources must be invested in the organisation.

Benefits of Total Quality Management

The following benefits can be derived from a sound TQM programme:

(i) Total Quality Management brings quality consciousness in the enterprise which encourages

the production of quality products.

(ii) TQM helps in providing greater satisfaction to customers by meeting their requirements. If

the customers are satisfied, the sales are increased.

(iii) It creates a good public image of the enterprise by helping it to provide goods and services of

higher quality to the society.

(iv) There is better utilisation of materials, machines, capita!, human resources, etc.

(v) Wastages are reduced to the minimum. As a result, cost of production is reduced and

profitability is increased. Even the customers could be provided goods at lower prices. The

competitive position of the firm in the market is improved.

(vi) The employees are committed to higher quality and feel highly motivated. Their morale is

also higher because of the public image of the firm and its goods in the market.

Steps in Implementation of TQM

W.E. Deming, an internationally renowned quality expert known as father of TQM, has suggested

Plan-Do-Check-Act Cycle for the implementation of TQM in any organisation. The steps in FDCA

cycle as shown in Fig. are as follows :

47

Fig.: Steps in TQM Process

(i) Lay down policies and objectives of TQM. Determine what the customer is supposed to

receive and what they are actually receiving.

(ii) Chalk out the methods to achieve TQM objectives.

(iii) Educate and train workers and managers to understand and meet the requirements of TQM.

(iv) Start the operation of TQM by introducing new product, machines, procedures, etc.

(v) Check the causes of non-conformance to quality standards.

(vi) Determine the consequences of non-conformance and place the report before the top

management.

(vii) Meet with suppliers and enlist their help in Quality improvement. Establish personal

relationships with employees so they can voice their concerns and ideas.

(viii) Work on problem prevention rather than problem correction.

Requirements of a Successful TQM Programme

For the successful implementation of TQM, the following guidelines should be followed :

(i) The objectives and policies of the firm must reflect its commitment to quality as a philosophy

of customer satisfaction.

(ii) The TQM philosophy must be effectively communicated to each and every employee and

department so that it is clearly understood throughout the organisation.

(iii) The TQM programme should be properly designed to meet the requirements of the

customers.

(iv) The participation of all the employees should be encouraged so that innovative ideas are put

forward by the employees. TQM should not be imposed upon the employees. The

management should make TQM an employees' programme through proper education of

workers.

(v) Workers and managers should be given the necessary training for the effective

implementation of TQM.

48

(vi) TQM must involve product design and improvement, adoption of new technology, systems

and procedures.

(vii) TQM should be considered a continuous programme as the requirements of customers keep

on changing. TQM should also try to integrate the operations of various departments.

ISO : 9000 SERIES

The International Standards Organisation (ISO) was founded in 1946 and has its headquarters at

Geneva in Switzerland. It has emerged as an apex institution of 'standard organisations' of 91

countries including India. The major thrust of ISO is on quality systems and well knitted procedures

for stringent quality standards to the manufacturer on quality systems and management. The series of

specifications are commonly known as ISO-9000, It may be noted that ISO-9000 is a coveted

standard not only for the quality of products, but also for the systematised planning and management

of an organisation as a whole.

The International Standards Organisation is responsible for promotion and development of

international standards and related activities including conformity assessments such as testing,

inspection, laboratory, accreditation, certification and quality assessment. ISO covers standardisation

in all fields except electrical and electronic engineering standards which are covered by International

Electrotechnical Commission (IRC).

Features of ISO : 9000 Series

The salient features of ISO : 9000 series standards are as follows :

(i) ISO : 9000 series standards call for integration of all activities which have a direct or indirect

effect on the quality of a product or service. They, in fact, lead to the implementation of the

concept of Total Quality Management (TQM).

(ii) ISO : 9000 standard series informs suppliers and manufacturers what is required of quality

oriented working systems.

(iii) It defines the basic concepts and specifies the procedures and criteria to ensure that the

outgoing product meets the customer's requirements. It requires the user organisation to

establish its own procedures.

(iv) The quality standards are designed to be user-friendly. They are generic in nature, and follow

a logical, easily understood format. They are applicable to every product, let it be a tooth

brush or a nuclear reactor.

(v) There is no compulsion to get ISO : 9000 certification. However, the customer would be sure

of the quality if the company has ISO : 9000 certificate.

ISO Standards and India

ISO standards were lain down in 1987 to be renewed every five years to determine whether they

should be confirmed, revised or withdrawn. Standards organisations of various nations have adopted

the ISO standards, though changing their numbers. For example, ISO: 9000 in Britain is known as

BS 5750, in European Community as EN 29000, in Australia AS 39000, in Denmark DS/EN 29000

etc. In India, Bureau of Indian Standards (BIS) has published IS : 14000 series as quality system

standard equivalent of ISO : 9000.

49

Exhibit : ISO Standards and Equivalent Indian Standards.

S.No. International

Standard Title

Equivalent

Indian Standard

1. ISO 8402 : 1986 Quality systems - Vocabulary IS 13999 : 1988

2. ISO 9000 : 1987 Quality systems - Guidelines for selection

and use of standards on quality system

IS 14000 : 1988

3. ISO 9001 : 1987 Quality systems - Model for quality

assurance in design / development

production, installation and servicing

IS 14001 : 1988

4. ISO 9002 : 1987 Quality systems - Model for quality assurance in production and installation

IS 14002 : 1988

5. ISO 9003 : 1987 Quality systems - Model for quality

assurance in final inspection and test

IS 14003 : 1988

Benefits of ISO: 9000

If a business concern gets ISO : 9000 certification, it will draw the following advantages :

(i) It is an internationally accepted series of quality system standards. It provides for competitive

edge in the domestic as well as international market.

(ii) It helps in achieving consistency, economy and cost effectiveness through standardisation of

operations.

(iii) It increases customer's confidence in the supplier through quality system transparency.

(iv) It is a versatile marketing tool in today's international scenario. The European countries and

some other countries don't accept foreign goods unless they carry the ISO : 9000

certification.

(v) It paves the way for total quality management (TQM) since it ensures continuous quality

improvement to meet the requirements of customers.

(vi) It reduces the need for inspection by the buyers. It thus saves time and money which would

be spent on multiple inspection of the products for conformance if it does not carry the ISO :

9000 certificate.

(vii) In India, some concessions for import have been given as per Export and Import Policy to the

companies adopting ISO : 9000 certificate.

(viii) The ISO : 9000 certification by a company is a source of motivation to its employees. The

employees feel proud in achieving excellence.

50

Exhibit: ISO : 9000 at a Glance

What Is ISO : 9000 ?

• It is a sel of written standards which comprise quality system.

• It defines the basic elements of the system through documentation.

• It creates a quality system rooted in customers' requirements.

• It ensures uniform systems that are universally recognised.

• It is based on world-recognized standards.

• The quality standards are designed to be user friendly.

How does ISO : 9000 facilitate TQM ?

• It complements TQM's emphasis on the human element.

• It helps assess the organisation's quality standards.

• It translates quality concepts into achieveable targets.

• It provides an opportunity to create and improve quality systems.

• It helps spread the message of quality across the organisation.

Whom does ISO : 9000 help ?

• Companies that market their products to the Europeans and other countries.

• Vendors supplying to companies that demand ISO : 9000 certification.

• Companies whose competitors carry ISO : 9000 certification.

• Companies with global operations.

• Companies whose transnational parent companies have ISO : 9000

certification.

QUALITY CONTROL

The Concepts of Quality and Quality Control

The word 'quality' refers to the degree of excellence of a product. In other words, the quality of a

product means the degree of excellence of the characteristics it possesses. It is a relative term, like

high, low, or inferior grade or in terms of conformity with certain specifications. The word 'control'

is used to denote the process of setting standards, measuring the performance and taking corrective

action. "Control of quality deals with the determination of quality standards and measurement

and control necessary to see that the established standards are maintained and practised."

Quality control refers to the systematic control of various factors that affect the quality of the end

product. The quality of the end product depends on the quality of raw materials used, the

manufacturing tools and equipment, the degree of skill and proficiency of the workers, working

conditions, etc. The purpose of quality control is to regulate these factors to the extent that the end

product conforms to the predetermined standards.

51

A good quality control programme involves the following steps :

(i) Establishing the standards and specifications of products on the basis of the preferences of

the customers and the cost of manufacture.

(ii) Design and use of measures for making production conform to the standards,

(iii) Selection of the process of manufacture.

(iv) Establishing a logical inspection plan and collection and analysis of data. It also includes

evaluation of methods and processes of manufacture.

(v) Coordination of activities to improve the quality.

Benefits of Quality Control

The following benefits can be derived from the efficient system of quality control:

(i) Quality control brings quality consciousness in the enterprise which discourages the

manufacture or production of sub-standard products.

(ii) Quality control ensures better utilisation of resources.

(iii) Quality control helps in providing greater satisfaction to customers. If the customers are

satisfied, the sales are increased.

(iv) Since there is less waste, the cost of production is reduced.

(v) The morale of the employees is increased. They feel that they are working in an enterprise

producing goods of higher quality.

(vi) Quality control creates a good public image of the enterprise by helping it to provide goods

and services of the higher quality to the society.

Methods of Quality Control

The methods of quality control include (1) inspection; and (2) statistical quality control. These

methods are discussed below :

(1) Inspection of Quality. Inspection is an important part of any system of production

control. It aims at getting the products of the right quality. It may be noted that inspection

may be either remedial or preventive. Preventive inspection takes place at various stages of

production in order to avoid the production of substandard products. Remedial inspection is

carried after the goods have been produced or manufactured in order to separate defective

goods from the right quality goods. Inspection is used at the time of purchase of raw

materials also. It helps in accepting a lot as good or bad one.

Following types of inspection may be carried out in workshop :

(a) Remedial inspection. This is done to separate useable raw materials or work- in-

progress from defective raw materials or work-in-progress.

(b) Preventive inspection. This is done to find out the causes responsible for defective

work and to suggest measures to overcome these causes.

(c) Operative inspection. This is done to check and control the quality standards in the

production process.

(d) Centralised and floor inspection. Inspection may be done at specified central points

in the organisation or at the place where actual operations are being carried out. The

52

former is known as centralised inspection and the latter as floor inspection. Under

centralised inspection, raw materials or products are moved to the inspection centre

where the inspectors apply various kinds of tests. But under floor inspection, the

inspectors move from department to department and inspect raw materials, work-in-

progress and finished products then and there. This is also known as patrolling

inspection.

(2) Statistical Quality Control. Statistical Quality Control (SQC) applies the statistical tools to

testing or inspection. It is based on the theory of probability. Statistical Quality Control

makes sample inspection more reliable. In case of sample inspection, a small part of a certain

lot of products is inspected and its quality is assumed to be the quality of the lot. This is

called ‘statistical inference’. The characteristics of the whole lot or population are inferred to

be like the sample. Sampling may prove to be risky because of the possibility that a sample

may not have exactly the same characteristics as the lot.

Sampling is very useful if it is reliable. It eliminates 100% inspection and is the only possible

method for products which must be tested until they fail or break. It is also the only method

to test the chemical characteristics of liquids and powdered materials or the thickness gauge

of sheet metal, paper and cloth. Sampling saves money as well as time.

Statistical quality control deals with samples and their reliability as the indicators of the

characteristics of the lot. The objectives of statistical quality control are to show how reliable

the sample is and how to control the risk associated with sampling technique. According to

Moore and Hendrick, "Statistical quality control has three general uses : (1) to control the

quality of work done on individual operations while the work is being done, (2) to decide

whether to accept or reject lots of products already produced {whether purchased or made

within the company), and (3) to furnish management with a quality audit of the company's

products."

There are two important techniques of statistical quality control, namely, Control Chart and

Acceptance Sampling. Control chart technique is used for the control of process and

acceptance sampling checks the products already completed.

53

UNIT V LESSON 1

PRODUCT LIFE-CYCLE

Dr. Hem Chand Jain

Like human beings, products also have a limited life-cycle and they pass through several stages in

their life-cycle. A typical product moves through five stages, namely, introduction, growth, maturity,

saturation and decline.

Fig….. Time (Years) Product Life-Cycle

These stages in the life of a product are collectively known as product life-cycle. The length of the

cycle and the duration of each stage may vary from product to product, depending on the rate of

market acceptance, rate of technical change, nature of the product and ease of entry. But sales

volume and profit level change from stage to stage as shown in Fig…….. Every stage creates unique

problems and opportunities and, therefore, requires a special marketing strategy. A brief description

of each stage and the marketing strategy required for it is given below:

1. Introduction: In the first stage, the product is introduced in the market and its acceptance is

obtained. As the product is not known to all consumers and they take time to shift from the

existing products, sales volume and profit margins are low. Competition is very low,

distribution is limited and price is relatively high. Heavy expenditure is incurred on

advertising and sales promotion to gain quick acceptance and create primary demand. Growth

rate of sales is very slow and costs are high due to limited production and technological

problems. Often a product incurs loss during this stage due to high start up costs and low

sales turnover.

2. Growth: As the product gains acceptance, demand and sales grow rapidly. Competition

increases and prices fall. Economies of scale occur as production and distribution are

widened. Attempt is made to improve the market share by deeper penetration into the existing

market or entry into new markets. The promotional expenditure remains high because of

increasing competiton and due to the need for effective distribution. Profits are high on

account of large scale production and rapid sales turnover.

54

3. Maturity: During this stage prices and profits fall due to high competitive pressures. Growth

rate becomes stable and weak firms are forced to leave the industry. Heavy expenditure is

incurred on promotion to create brand loyalty. Finns try to modify and improve the product,

to develop new uses of the product and to attract new customers in order to increase sales.

4. Saturation: Market peaks and levels off during saturation. Few new customers buy the

product and repeat orders disappear. Prices decline further due to stiff competition and firms

fight for retaining market share or replacement sales. Sales and profits inevitably fall unless

substantial improvements in the product or reduction in costs are made. Product

differentiation, market segmentation and product improvement are the marketing strategies

used in this stage.

5. Decline: The sales and profits of the product fall rapidly due to its gradual displacement by

new products or evolving change in consumer preferences. As cost control becomes essential

to avoid losses, promotion expenditure is considerably reduced. Price becomes the main

weapon of competition. Many firms ultimately abandon the product to make better use of

resources. New product innovations enter the market to take the place of the obsolete and

abandoned products. This is the obsolescence stage. Finns' which fail to develop new or

improved products to arrest continuous decline in sales are forced out of business.

The concept of product life-cycle has important implications. Firstly, the concept indicates that

products have a limited life and management must develop new products or improve existing ones to

replace them to maintain sales and profits. Secondly, the product life-cycle concept shows the

expected sales volume and profit margins for a new product at various stages in its life. It can,

therefore, be used as a tool of business forecasting. Thirdly, the concept serves as a framework for

taking sound marketing decisions at each stage of the product life-cycle. Fourthly, the product life-

cycle points out the need for significant and periodic adjustments in the marketing strategy or

marketing mix of the firm. Emphasis on different elements of the marketing mix varies from one

stage to another. In initial stages, product design and promotion are important considerations. During

the middle phase, skilled distribution and effective dealer control become significant. In the final

stage, operating cost control becomes vital. Timely recognition of the need to change marketing

strategy is essential to maintain growth. In the introductory stage, informative advertising is used to

build up initial demand for the product while during maturity, persuasive advertising is required to

improve the competitive status of the product.

Stages in Product Life Cycles and Corresponding Strategies

Stage Features Possible Strategies

Introduction 1. Product unknown 1. Create favourable first

impression

2. Slow customer acceptance 2. Informative advertising––try

my product.

3. High risk of failure 3. Gifts and discounts to attract

customers

4. Main task is to create primary

demand

4. Maintain close personal

contact

5. Skimming price strategy

lengthens life cycle but brings

in competition

55

Growth 1. Sales run ahead of production 1. ‘Buy my brand’ promotional

strategy

2. Profits and competition rise 2. New versions of basic

product model offered to

accommodate the growing

market

3. New competitors enter the

market

3. Expand distribution channels

4. Distribution becomes more significant

4. Establish a range of prices

5. Prices fall 5. Persuasive mass advertising

6. Develop brand image and

preferences

7. Focus on customer service

8. Change from skimming price

strategy to competitive

pricing strategy

Maturity 1. Highest degree of competition 1. Try to maintain differential

price advantage

2. Sales rise at declining rate 2. Introduce new features into

the product

3. Extend warranties

4. Very competitive promotion

strategy

Saturation 1. Sales level off 1. Hold or increase market share

2. Supply exceeds demand 2. Focus packaging to create

more frequent use

3. Intense price competition 3. Develop new uses of the

product

4. Develop new markets

5. Create psychological product

differences

56

6. Diversify

Decline 1. Overcapacity develops 1. Integrate forward

2. Sales and price fall 2. Introduce elements of style

and fashion

3. Selective and specific

promotion

4. Defensive mergers and

acquisitions

5. Repositioning, repackaging to

revive the product

6. Informative advertising.

Product life-cycle analysis is a disciplined and periodic review that provides a profile of a product's

position. Product life-cycle concept does not perfectly explain the behaviour of all products and it

may be difficult to predict the timings of various stages. For instance, salt and sugar have never been

in the decline stage. However, by providing a life-history of a product, life-cycle concept is helpful

in designing appropriate marketing strategies. The life of a product can be prolonged or changed by

developing new uses, reducing prices, using aggressive promotion, changing package, brand or label

and by improving the product. For instance, Dupont, a company of U.S.A. has sustained the sale of

nylon by (1) promoting more frequent use among current users, i.e., necessity of wearing nylon

stockings; (2) developing more varied use of the product, i.e., fashion value of tinted hose; (3)

creating new users, i.e., earl teenagers; and (4) finding new uses for the basic material, e.g., nylon

tyres.

ADVERTISING

Meaning

Mass selling requires quick and economical dissemination of information on a large scale to

potential customers. Advertising is an effective means for this purpose. According to the American

Marketing Association, Advertising is "any paid form of non-personal presentation or promotion of

ideas, goods or services by an identified sponsor." In the words of Stanton, "advertising consists of

all the activities involved in presenting to a group a non-personal, oral or visual, openly sponsored

message regarding a product, service or idea; this message called an advertisement, is disseminated

through one or more media and paid for by the identified sponsor."

Thus, advertising includes all activities required to prepare the message (advertisement) and to get it

to the intended persons to induce action in accordance with the intent of the advertiser.

57

The main features of advertising are as follows :

(i) It is impersonal form of presentation or promotion of products, services or ideas. There is no

face to face contact with the customers.

(ii) It is paid form of communication. The advertisements are communicated through various

advertising media and the advertiser has to pay for the space or time hired to the owner of the

media.

(iii) It is issued by an identified sponsor. The advertisement contains the name of the advertiser.

(iv) It is a form of mass communication. The message is directed to a large number of persons

simultaneously.

Advertising and Publicity

Publicity is any form of commercially significant news about an organisation, a product or service

carried by the press, radio, television, etc. that is not paid for by the sponsor. An organisation may

skillfully promote itself by inducing the news media to carry news favourable to it. These days

business firms commission professional public relations experts for promotion through publicity.

Advertising is different from publicity in the following ways :

(i) Advertising is paid for by its sponsor whereas publicity is usually not paid by its sponsor.

(ii) Advertising is done by an identified sponsor but in publicity the sponsor is not identified.

(iii) Advertising is always impersonal whereas publicity may be both personal and impersonal.

(iv) In advertising the sponsor exercises direct control over the size and frequency of the message.

But in publicity control lies with the news media.

(v) Publicity has greater versatility than advertising. News, stories, editorials and special write

ups about a company or its products appear more authentic to the readers than advertisements

sponsored by a company.

(vi) Publicity is off guard because the news can reach even those who otherwise avoid

advertisement. Advertising is not off guard in this way.

Advertising and Salesmanship

Advertising and salesmanship both are techniques of promoting sales. However, there are following

differences between the two:

(i) Advertising is impersonal and indirect communication whereas salesmanship is direct face to

face and personal communication.

(ii) Advertising is mass communication whereas salesmanship is individualistic communication.

"Advertising is like a shot gun conveying message to masses while personal selling is like a

rifle shooting showing communicating with individuals."

(iii) Advertising is done through written and visual messages while salesmanship involves the use

of spoken word only. Advertising is sometimes described as salesmanship in print. However,

printed word is only one medium of advertising.

58

Distinction between Advertising and Personal Selling

Point of distinction Advertising Personal Selling

1. Nature of

communication

Impersonal and mass method of

communication — No face to

face interaction

Personal and individualised

communication — Face to face

interaction

2. Payment Direct payment for each

advertisement

No direct payment for each

contact

3. Cost Less costly and less time consuming

More costly and more time consuming

4. Flexibility Less flexible Very flexible

5. Feedback No immediate feedback

available

Immediate feedback available

6. Aims To create customers To make sales

7. Completeness Incomplete sales tool Complete sales tool

8. Sales force

management

Recruitment, training and

motivation of sales

persons not required

Requires recruitment, training

and motivation of sales persons

Despite the above differences, advertising and salesmanship are complementary to each other.

Advertising prepares the necessary ground for personal selling by making people aware of a product

and its features. It helps to reduce sales resistance by highlighting the utility and superiority of a

product or service. Advertising is a mass communication that supplements the voice and personality

of the individual seller. Salesmanship converts the potential demand into sales. It completes the task

of advertising by making actual sales to customers attracted through advertising.

To conclude, "salesmanship and advertising are similar in that the main purpose of each is to

persuade individuals outside the company to act in the company's interests. While the salesman uses

the charm of his presence to arouse the customers' interest in the product the advertising man makes

use of his art and copy. They are like cup and saucers or coat and trouser, one being incomplete

without the other."

Objectives and Functions of Advertising

The ultimate objective of advertising is to sell something—a product, service or idea. However,

advertising by itself cannot make sales. Therefore, the real objective of advertising is to influence the

behaviour of prospective buyers in a manner that will lead to higher sales. In addition to this general

objective, advertising is also used for certain specific objectives which are given below:

1. To introduce a new product by creating awareness and interest for it among the prospective

customers.

2. To enter a new market or attract a new group of customers.

3. To fight competition in the market by reminding users to buy the product.

4. To create brand preference and brand loyalty.

5. To support personal selling by opening customer's doors for salesmen.

59

6. To enhance the goodwill of the firm by promising better quality at fair prices.

7. To improve dealer relations because dealers prefer to sell products which are effectively

advertised.

8. To reach people inaccessible to salesmen.

9. To warn the public against imitations or spurious products.

Utility (Need and Significance) of Advertising

Advertising has become an indispensable function in modem business due to cut-throat competition

and mass production. It pervades our economic and social life. It helps to disseminate information

which is useful to businessmen, consumers and the society in general. Through it one can create an

indirect and impersonal link with his prospects easily, quickly and economically. The benefits of

advertising to various parties are described below :

To Producers and Traders: Advertising is helpful to manufacturers and dealers in the following

ways:

(i) Meeting competition: Advertising is an important means for facing competition. By creating

brand loyalty, it helps to maintain sales and market share. It supplements personal selling and

sales promotion. It creates preference for a particular product, opens doors for salesmen and

reinforces point of purchase display, thereby reducing the costs of creating and maintaining

demand.

(ii) Steady demand: Advertising creates regular demand by smoothening out seasonal and other

fluctuations. For instance, advertising is used to emphasise hot and cold uses of coffee to

maintain regular sales both during summer and winter. By suggesting new and more frequent

use of product, advertising helps to maintain demand throughout the year. Steady demand

enables regular production.

(iii) Higher sales volume: Advertising helps to increase demand, expand markets and enhance

sales of existing products. Through repeated advertising, a producer can create new

customers and enter new markets. It creates new wants and increases sales. Advertising is an

essential technique of mass selling.

(iv) Introduction of new product: Advertising is helpful in introducing new products by creating

awareness and gaining their acceptance. By informing consumers about the new product,

advertising stimulates their interest and persuades them to buy it. Effective advertising helps

in over-coming consumers' resistance to new products.

(v) Economies of scale: Advertising facilitates mass distribution of goods. It reduces

dependence on middlemen as dealers are more willing to stock and sell well-advertised

goods. Direct distribution and rapid sales turnover help to reduce costs of distribution. Mass

distribution and steady demand lead to large scale and regular production. As a result, several

economies of scale become available and cost of production per unit is reduced. Investment

in inventories can be reduced.

(vi) Goodwill: Advertising helps in creating a good image of the firm and reputation for its

products. A favourable image increases the capacity of the firm .to survive competition and

depression. It is through effective advertising that Tatas, Birlas, etc. have become household

names. It has rightly been observed that "doing business without advertising is like winking

60

at a girl in the dark. You know what you are doing but no one else knows". By building

goodwill advertising enables business firms to obtain repeat orders.

(vii) Employee morale: By building reputation of the firm, advertising provides a sense of security

to employees and improves their morale. Salesmen feel happy as their task becomes easier

when the product and its producer are known to customers. In a well reputed firm, executives

have a feeling of pride and job satisfaction which are necessary for better performance.

To Customers: Advertising is beneficial to consumers due to the following reasons :

(i) Convenience: Advertising makes purchasing easy by reducing the time and effort involved

in shopping. People become aware of the source and availability of different products and

need not search them out. They can make better choice among different varieties.

(ii) Education of consumers: Advertising provides education and knowledge to consumers about

new products and their diverse uses. Consumers get the benefit of better advice in safe and

proper use of products and develop new ways of life. In this way advertising makes for better

living.

(iii) Lower prices: Effective advertising reduces costs due to large scale production and

elimination of wholesalers. As a result customers get goods at lower prices. Prices of

advertised goods fluctuate less widely and unscrupulous traders cannot easily exploit

consumers by overcharging. Many expensive products of yesteryears have come within reach

of the common man due to continuous advertising and consequent reduction in prices.

Advertising helps to eliminate unnecessary middlemen, thereby making products cheaper for

the consumers.

(iv) Better quality: Advertising is generally done through brand names. Producers try to create

special features in their products to successfully communicate product differentiation. Need

to find arguments in advertising and desire to live upto the image, leads them to improve

quality and product design. Consequently, consumers get better quality and variety of goods.

"Large scale advertising of a product can be really effective if there is a rigid quality control

which enables the customer to buy products of the same standards of performance

anywhere."

(v) Consumers' surplus: Advertising brings the customer closer to the producer so that each can

fully appreciate the needs of the other. Such understanding helps in better matching of

products and services with human needs. Through advertising consumers better appreciate

the utility of products and derive higher satisfaction from their consumption. This satisfaction

and pleasure derived by them from the products is called consumers' surplus.

To Society: Advertising serves the society in the following ways :

(i) Employment: Advertising provides direct employment to a large number of people engaged

in designing, writing and issuing advertisements. Indirectly, advertising increases

employment opportunities by increasing the volume of production and distribution.

(ii) Standard of Living: Advertising improves the standard of living of the people by promoting

variety and quality in consumption. It educates people about new uses of products and

provides information for developing better ways of life. To quote Franklin D. Roosevelt, the

61

late President of America, "advertising brings to the greatest number of people actual

knowledge concerning useful things, it is essentially a form of education and the progress of

civilisation depends on education."

(iii) Sustains the Press: Advertising provides an important source of revenue to newspapers,

magazines, radio and television. As a result public gets news at lower rates and the

circulation of newspapers and magazines increases. Press is the guardian of public opinion

and by helping it to remain independent, advertising promotes liberty and democracy in the

country. By subsidising the press, advertising serves as a bright symbol of freedom of choice.

(iv) Stimulates Research and Development: Advertising can be successful only when it is

backed by new and better products. To derive maximum benefit from advertising in the

competitive market, every producer tries to differentiate his products from the competitive

products. Big business firms have research and development departments to develop new

products and new uses. Research and development becomes necessary also to maximise

.efficiency and to minimise costs of production. In the absence of advertising and mass

distribution, many products would remain confined to the laboratory. By promoting research

and development, advertising helps in the process of rapid industrialisation.

(v) Incentive to Progress: Advertising is a great motivating force. In the words of Sir Winston

Churchill, "Advertising nourishes the consuming power of man. It creates a desire for better

standard of living. It spurs individual exertion and greater production." People are induced to

work hard and earn more to buy new products brought to their knowledge through

advertising.

(vi) Art and Culture: Advertising promotes the creative energies of people required in

designing and developing advertisements. Commercial art is largely the creation of

advertising. Advertising provides a glimpse of national life, a running commentary on the

way people live and work. Advertising also provides entertainment to the public. Many

sponsored programmes on radio and television have become very popular due to their

entertainment and aesthetic value.

Advertising is thus a great force in modem society. It serves as an accelerator of economic progress

by promoting savings and investment. It is the backbone of international trade. In a developing

country like India, it helps to accelerate the rate of capital formation and foreign exchange earnings.

Advertising can be a healing force in a society torn by race, language and caste conflicts, a means of

national integration, civilisation and human welfare. Advertising is to business what steam is to

machinery the great propelling power, the lubricant of the machinery of commerce. It pays to

advertise.

Is Advertising a Social Waste?

Several objections have been raised against advertising and some people criticise advertising as a

social waste. The main points of criticism are as follows:

1. Higher Prices: It is argued that large amounts spent on advertising increase the cost of

distribution which is transferred to customers in the form of higher prices. This objection may

be true in case of inelastic demand when advertising merely transfers demand from one

producer to another. But effective advertising often creates demand and increases the scale of

production. Large scale operations result in lower costs and lower prices. In developed

62

countries, business have reduced costs and prices while spending millions on advertising

every year. "As a competing tool, advertising is perhaps less costly than many other tools

which will be used to a greater degree if advertising were banned."

2. Wasteful Consumption: Advertising multiplies the needs of people and encourages

unhealthy consumption. By exploiting human sentiments, it persuades people to buy products

which they do not need or cannot afford. Advertising promotes artificial living and

extravagance and creates demand for trivial goods. "Modern society has become a society of

chocolate, Campa Cola and Lolipops instead of natural and wholesome food largely because

of advertising." This allegation may be true to some extent but it is based on the assumption

that satisfaction of psychological needs is not as important as that of physiological needs.

Moreover, new tastes and finer emotional experience of life are necessary for the progress of

civilisation. By itself, advertising cannot force people to buy things which they consider

unnecessary.

3. Misleads the Consumer: It is said that advertising is often deceptive and misrepresents

facts to the consumer. Exaggerated or tall claims and flowery language are used to dupe

unwary consumers. They are induced or defrauded through bogus testimonials and false

comparisons to buy goods of doubtful value. There is no denying the fact that some firms

indulge in false and misleading advertising and unscrupulous use of advertising by them

destroys public confidence in advertising. But just because a few people misuse advertising

does not mean that advertising itself is bad and unnecessary.

4. Creates Monopoly: Advertising creates brand preferences and restricts free competition.

Large firms which can afford huge amount of money on advertising eliminate small firms by

creating brand monopoly. Advertising thus encourages the survival of the mightiest rather

than the best. But advertising creates only a temporary brand monopoly as after some time

other brands offer competition. For instance, 'Amul' brand butter enjoys monopoly of brand

but has to face competition from 'Vita' and other brands of butter. In the long run, advertising

"often enables the small businessmen to compete with large concerns as well as to start new

business."

5. Wastage of National Resources: In order to make use of advertising, producers create trivial

differences in their products. Valuable resources that can be used to create new industries are

wasted in the production of needless varieties and designs. Vance Packard, in his book "The

Waste Makers", gives several interesting examples of how producers in America coax

consumers to replace their cars, radios etc., much before their useful life comes to an end.

Appearance, design and style have become more important than the physical utility of the

product. Manipulative and combative advertising leads to criminal wastage of resources.

"The natural resources, capital equipment and labour energy which go into the production of

new items to take the place of the discarded ones amount to waste when measured in terms of

social well-being." Valuable stationery, time and energy used in advertisements go waste as

most of the advertisements either escape the attention of the people or are ignored by them.

6. Undermines Social Values: Modem advertising exerts such a corrupting influence on

cultural and social life that it is not only wasteful but immoral. It degrades ethical and

aesthetic values through nude photographs and indecent language. Many advertisements are

highly objectionable and socially undesirable as they encourage social evils like drinking and

smoking. To some extent advertisements may really be in poor taste but majority of them

63

help to improve social standards. The improved attitude towards hygiene is attributable in no

small measure to the extensive advertising of detergents.

Despite its limitations, advertising is an essential marketing function in modern business. If

advertising were wasteful and unnecessary, it must have been discarded long ago. It becomes

wasteful and objectionable only when it is used dishonestly for anti-social ends. In fact, advertising

is the cheapest selling tool and its abolition will require use of more expensive selling techniques.

"As long as we insist on 'maintaining competition as the core of our economic system, the

elimination of advertising would increase rather than reduce economic waste."

Money spent on advertising is not wasteful or unnecessary provided it is spent in a scientific and

responsible manner. The drawbacks of advertising can be removed through concerted action on the

part of advertisers, public and the Government. Businessman should avoid wasteful and excessive

advertising. Trade associations and chambers of commerce should set up Better Business Bureaus to

exercise self-regulation and control over obscene and deceptive advertising. A suitable code of

conduct may be formulated to ensure that all advertisers follow ethical standards in their

advertisements. Newspapers, radio and television authorities should not accept undesirable

advertisements. Consumers' associations can act as a countervailing force against manipulating and

misleading advertising. Consumers should not get carried away by such advertisements. They should

verify the claims made in advertisements before purchasing a product. Customers' reactions to

advertisements should be invited. Writings on walls and public buildings and noisy advertisements

should be banned. An agency like the Federal Trade Commission of U.S.A. may be constituted to

check deceptive and obscene advertising. “The maintenance of acceptable ethical standards in all

forms of advertising is essential if advertising is to fulfil its proper function as a marketing tool.”

SALES PROMOTION

Sales promotion consists of all promotional activities other than advertising, personal selling and

publicity that help to increase sales through non-repetitive and one time communication. According

to the American Marketing Association, sales promotion includes "those marketing activities other

than personal selling, advertising and publicity that stimulate consumer purchasing and dealer

effectiveness, such as point of purchase displays, shows and exhibitions, demonstrations and various

non-recurring selling efforts not in the ordinary routine."

The ultimate aim of sales promotion is increasing the sales and profits but it is different from

advertising and personal selling in approach and techniques. Personal selling involves face to face

contact with specific individuals while advertising is directed at a large number of potential

customers. Sales promotion serves as a link between the two by focussing selling effort on selected

small groups of people. Sales promotion usually involves non-recurring and non-routine methods, in

contrast to the routine and recurring nature of advertising and personal selling. Under advertising, the

media is not owned and controlled by the advertiser except in direct mail advertisements but sales

promotion methods are controlled by the advertiser. Advertising and personal selling are essential or

basic ingredients of promotion mix while sales promotion is a supporting or facilitating element of

promotional strategy. Sales promotion bridges the gap between advertising and personal selling. It

supplements and reinforces the personal selling and advertising efforts of the firm. Sales promotion

covers miscellaneous stimulants directed to the consumers and dealers. It may stimulate consumer

buying at the point of sale or improve dealer effectiveness at the retail outlets.

64

Sales promotion is of two kinds — consumer sales promotion and dealer sales promotion. Consumer

sales promotion includes activities designed to inform and educate the consumer and to stimulate

demand. Examples of consumer sales promotion are samples, demonstrations, gift coupons,

premium and price offers, fashion shows or parades, bonus stamps, contests, exhibition-cum-sale,

etc. Dealer sales promotion is used to help dealers and to improve dealer effectiveness. It includes

free display material, free window display services, free demonstrations and trials, trade deals

offering discounts and gifts, sales contests for dealers or salesmen, trade show, dealers' conference,

house organs, training of dealers' sales force, advertising display allowances, etc.

Sales promotion activities are designed to achieve the following objectives :

(a) to introduce new products;

(b) to attract new customers;

(c) to increase sales during slack periods;

(d) to encourage dealers to carry large stocks;

(e) to improve the public image of the firm.

Techniques of Sales Promotion

At present a wide variety of devices are available for sales promotion. Some of the important sales

promotion methods are described below:

1. Distribution of Free Samples: Many a times free samples of low priced and repeat sales

items are distributed to selected people to gain consumer acceptance and to popularise the

product. The sample may be distributed in the shop or door-to-door. This is an effective

device of sales promotion as consumers can test the product before buying it. It is particularly

useful in the introduction of new products. Explanatory literature stating the features and uses

of the product can be added to the sample. However, this device is costly and can be used by

big firms. It is not suitable for products which are very expensive or do not give repeated

sales.

2. Coupons: Some firms issue coupons to prospective buyers through newspapers, direct mail,

dealers, package and door-to-door salesman. A coupon is a certificate that entitles its holder

to a specified saving or discount on the purchase of a particular product. The holders of

coupons present their coupons to retailers and get the product at a reduced price. The

manufacturer reimburses the retailers for the value of coupon redeemed by them in addition

to some commission to cover handling costs. Coupons induce the retailers to stock the

product and consumers are stimulated to buy the product.

3. Premiums: A sales premium or bonus offer is the offer of an article free of cost or at a

nominal price on the purchase of a specified product. For instance, one 'Lux' toilet soap may

be given free on the purchase of an economy pack of' Surf detergent powder. A premium is

also known as a combination offer. It is a practical persuasion to buy that helps to increase

immediate sales. Premiums are used in case of convenience goods like detergents, toothpaste,

toilet preparations which are bought frequently. Success of the premium offer depends upon

judicious choice of the bonus item which should be useful and in good taste.

Premiums can be of following types:

(a) With pack premium: In which the bonus item is included either inside or outside the

package, e.g., one spoon free in the packet of Horlicks.

(b) Price off premium: Which implies a reduction in price on the purchase of a large or

65

economy pack.

(c) Money-refund premium: Wherein the cost of the article is fully or partially refunded

on the presentation of the proof of purchase, e.g., wrapper, cash memo, etc.

(d) Extra-quantity premium: Under which a customer can get one unit of the product

free on the purchase of specified units, e.g., one tooth brush free on the purchase of

six tooth brushes.

4. Trading Stamps: Trading or bonus stamps are issued by retailers to customers who buy

goods from them. The number of stamps given to a buyer depends upon the amount of

purchases made by him. For instance, in India Ramon Bonus Stamps are issued at the rate of

2½ per cent of the purchase amount. These stamps are given free of charge and the customer

can redeem them to obtain products out of the specified list. This technique induces

customers to buy their requirements from the retailers who offer such stamps. The purpose is

to increase customer loyalty.

5. Point of Purchase Materials: Such materials include banners, signs, photos, posters, strips,

price cards, racks and other in store promotional tools. They are demonstrated or displayed at

the place where the customer makes actual purchases. Almost every general retail shop

displays posters and signs promoting soft-drinks, cigarettes, confectionery and other

consumer products. The popularity of point of purchase display is increasing due to the

proliferation of brands and expansion of self-service stores with large inventories. Such

materials are an effective device of sales promotion as they remind customers about the brand

name and promote impulsive buying. They should be attractive and self-explanatory. They

are also called dealer aids.

6. Prize Contests: Under this device, consumers are given rewards for analytical or creative

thinking about the product in the form of slogan writing, sentence completion, problem

solving quiz, etc. Rewards are given to successful participants in the form of cash prizes,

merchandise or free travel. Such contests help to create consumers' interest in the product,

provide new ideas for advertising and may reveal buying motives. Contests are generally held

through newspapers, magazines and radio. Such contests may also be organised for salesmen

and dealers to induce them to devote greater effort or to obtain new sales ideas. To be

successful sales contests should be properly planned and objectively executed. The date, time

and period of the contest should be such that all people have equal opportunity. Entries

should be judged by competent people in a fair manner and rewards should be given

promptly.

7. Fairs and Exhibitions: Trade shows, fashion shows, or parades, fairs and exhibitions are an

important technique of sales promotion. They provide a forum for the exhibition or

demonstration of the product. Free literature can be distributed to introduce the firm and its

products to the public. Fairs and exhibitions are organised usually by big firms or trade

associations. At these fairs and exhibitions, business firms are allotted stalls wherein they

display their products. Fairs and exhibitions have wide appeal as several people visit them.

Customers can be attracted through free gifts, special concessions and free demonstrations of

technical and speciality products. They provide an opportunity to the visitors to observe the

competing products and help to promote sales. For instance, the Trade Fair Authority of India

organises trade fairs of various types in New Delhi. The National Book Trust organises after

every two years a World Book Fair at New Delhi where publishers all over the world are

invited to display their publications. Sometimes, sales conventions or conferences of dealers

are held. Producers of garments often organise fashion shows to promote their products.

66

8. Merchandising Aids: These refer to the services provided to induce commercial buyers to

purchase goods in large quantity. Such aids include training in stores layout and inventory

control, advertising, product demonstrations, etc.

9. Clearance Sale: Sales at reduced prices may be organised at important festivals or other

occasions. Such sales attract a large number of customers and help to clear accumulated

stocks. For instance, the Khadi Gramodyog Bhavan in New Delhi offers special discount on

Khadi goods on Gandhi Jayanti.

10. Public Relations: Public relations activities include greetings or thanks in newspapers,

donating space for noble causes, etc. Their purpose is not to create immediate demand or to

increase sales. They are designed to create a good image of the firm in the society.

67

LESSON 2

CHANNEL DECISIONS Dr. Hem Chand Jain

A channel of distribution or trade channel is the path or route along which goods move from

producers to ultimate consumers or industrial users. It is the distribution network through which a

producer puts his products in the hands of actual users. It is the pipeline through which products flow

during their journey to the market. A trade or marketing channel consists of the producer, consumers

or users and the various middlemen who intervene between the two. The channel serves as a

connecting link between the producer and consumers. By bridging the gap between the point of

production and the point of consumption, a channel creates time, place and possession utilities. A

channel of distribution represents three types of flows :

(a) Goods flow downwards from producer to consumers;

(b) Cash flows upwards from consumers to producer as payment for goods; and

(c) Marketing information flows in both directions. The downward flow includes information on

new products, new uses of existing products, etc. The upward flow of information is the

feedback on the wants, suggestions, complaints, etc. of ultimate

consumers or users.

Nature and Significance of Channel Decisions

Channel decisions refer to the managerial decisions concerning the selection of the most suitable

routes or paths for the distribution of goods from the producer to various consumers or users. Such

decisions involve choice of a channel, determination of market coverage (number of middlemen) and

the selection of particular middlemen or dealers.

The choice of a suitable channel for the distribution of the firm's products is an important decision

area in the field of marketing. It is an important policy decision in marketing management due to the

following reasons:

(i) Distribution channel is an important element of the marketing mix of a firm and other

elements are closely interrelated with and interdependent on the channel of distribution.

Therefore, choice of channel influences other marketing decisions like pricing, promotion

and physical distribution. A mistake in the choice of channel may affect adversely the whole

marketing mix of the firm.

(ii) The cost involved in the use of a distribution channel enters the price of the product that the

ultimate consumer has to pay. Due to a wrong decision regarding channel, distribution cost

may be very high and sales might be very limited. On the other hand, a sound channel

decision enables the firm to cut down costs and maximise sales revenue. Thus, channel

influences sales .volume and profits.

(iii) A product or service is really useful to consumers only when it is available at the right time

and place. The channel decision determines where and when the product will be available to

ultimate consumers or users.

(iv) The choice of a marketing channel involves long-term commitment of the firm. The relations

between the manufacturer and the middlemen depend largely upon the choice of appropriate

channels of distribution. Changes in the channel are very difficult and costly.

(v) If the choice of channels is proper, fluctuations in production can be reduced due to

continuous and effective distribution. The stability of production will help to ensure steady

employment and proper budgetary control. The manufacturer can continuously monitor the

68

sales and stock of his middlemen to exercise effective control over distribution network.

Types of Distribution Channels

Several channels are used for the distribution of products of different types. They vary in the number

and types of middlemen. Some channels are short and direct permitting the producer to have a close

touch with the customers while others are long and indirect involving the use of several types of

intermediaries. The various channels of distribution may broadly be classified as under:

Distribution Channels

1. Manufacturer-consumer: This is the shortest and simplest channel involving direct sale of'

goods and services by the producer to the consumers. No middleman or intermediary is

present between the producer and the consumer. The producer may sell directly to consumers

through door-to-door salesman, direct mail and through his own retail stores. For instance,

Bata India Ltd. has set up its own retail shops throughout the country to sell shoes and other

products through direct contact with customers. Industrial products of high value are

generally sold through this channel. Some firms use direct selling to distribute consumer

products like shoes, clothes, books, hosiery goods and cosmetics. Small producers and those

producing perishable commodities also sell directly to the local customers.

This channel is very fast and economical. The producer has direct contact with his customers

and full control over distribution. But the expert services of middlemen are not available and

the producer himself has to perform all the marketing activities. Large investment is required

to create facilities for direct selling. Therefore, this channel is more popular among big and

well-established firms. In recent years, direct selling has become increasingly popular due to

increasing competition, need for control over distribution costs, wide product lines, technical

nature of products, availability of public warehouses and desire to reduce dependence on

middlemen.

2. Manufacturer-retailer-consumer: Under this channel, the manufacturer sells to one or

more retailers who in turn sell to the ultimate consumers. Various marketing functions are

performed by the producer and the retailers. This channel is popular when the retailers are big

and buy in large quantities, e.g., departmental stores, chain stores and super markets. This

channel is often used for the distribution of consumer durables and products of high value.

Automobiles, home appliances, readymade garments, shoes and perishable products are often

sold through this channel. This channel relieves the manufacturer from much burden of

selling and at the same time provides him control over distribution.

69

3. Manufacturer-wholesaler-retailer-consumer: This is the 'traditional' or normal channel for

the distribution of consumer goods. This channel is suitable where the producer has limited

finance and a narrow product line or where the wholesalers are specialised and provided

strong promotional support. Small producers and small retailers find this channel most

convenient especially in case of products with widely scattered markets. This channel is also

used in case of consumer durables which are not subject to frequent changes in fashion.

Producers of industrial goods may use an industrial distributor who serves as a wholesaler as

well as a retailer.

4. Manufacturer-agent-retailer-consumer: When the retailers are few or geographically

concentrated, distribution through agents may be more economical than through wholesalers.

For instance, a manufacturer may employ selling agents and brokers to sell his products to

retailers. Sometimes even the retailer is bypassed and the agent sells directly to institutional

buyers like consumer cooperatives, business firms, educational institutions and government

agencies or departments. This channel is commonly used to sell textiles, agricultural

products, machinery and equipment, etc. In case of industrial goods, an agent may be used in

place of industrial distributor to reach industrial users.

5. Manufacturer-agent-wholesaler-retailer-consumer: This is the longest channel of

distribution. It is used when the manufacturer wants to be fully relieved of the problem of

distribution. The producer hands over his entire output to the selling agent who distributes it

among a few wholesalers. Each wholesaler sells to a number of retailers who in turn sell to

ultimate consumers. In case of cloth this channel is widely used. For the sale of many

industrial products an industrial distributor is employed due to the storage facilities provided

by him. This channel results in wider distribution of the product.

Choice of a Channel of Distribution

Choice of a channel of distribution involves the selection of the best possible combination of

middlemen or intermediaries. The objective is to secure the largest possible distribution at minimum

costs. The channel must be flexible and efficient. It should be consistent with the declared marketing

policies and programmes of the firm. Such a channel can be selected by evaluating alternative

channels in terms of their costs, sales potential and suitability. The factors affecting the choice of

distribution channels may be classified as follows:

1. Product Considerations: The nature and type of the product have an important bearing on

the choice of distribution channels. The main characteristics of the product in this respect are

given below:

(a) Unit value: Products of low unit value and common use are generally sold through

middlemen as they cannot bear the costs of direct selling. Low priced and high

turnover articles like cosmetics, hosiery goods, stationery and small accessory

equipment usually flow through a long channel. On the other hand expensive

consumer goods and industrial products, e.g., jewellery, machines are sold directly by

the producers.

(b) Perishability: Perishable products like vegetables, fruits and bakery items have

relatively short channels as they cannot withstand repeated handling. Same is true

about articles of seasonal nature. Goods which are subject to frequent changes in

70

fashion and style are generally distributed through short channels as the product has to

maintain close and continuous touch with the market. Durable and non-fashion

articles are sold through agents and merchants.

(c) Bulk and weight: Heavy and bulky products are distributed directly to minimise

handling costs. Coal, bricks, stones, etc., are some examples.

(d) Standardisation: Custom-made and non-standardised products usually pass through

short channels due to the need for direct contact between the producer and the

consumers. Standardised and branded goods can be distributed through middlemen.

(e) Technical nature: Products requiring demonstration, installation and after-sale

service are often sold directly. The producer appoints sales engineers to sell and

service industrial equipment and other products of technical nature. Consumer

products like television, refrigerator, electric mixer-grinder, washing machines, etc.,

are sold through retailers but the after-sale service is generally provided by the

manufacturer.

(f) Product line: A firm producing a wide range of products may find it economical to

set up its own retail outlets. On the other hand, firms with one or two products find it

profitable to distribute through wholesalers and retailers.

(g) Age of the product: A new product needs greater promotional effort and few

middlemen may like to handle it. As the producer gains acceptance in the market,

more middlemen may be employed for its distribution. Channels used for competitive

products may also influence the choice of distribution channels.

2. Market Considerations: The nature and type of customers is an important consideration in

the choice of a channel of distribution. Following factors relating to the market are

particularly significant:

(a) Consumer or industrial market: The purpose of buying has an important influence

on channel. Goods purchased for industrial or commercial use are usually sold

directly or through agents. This is because industrial users buy in a large quantity and

the producer can easily establish a direct contact with them. To ultimate consumers,

goods are sold normally through middlemen.

(b) Number and location of buyers: When the number of prospective buyers is small or

the market is geographically located in a limited area, direct selling is easy and

economical. In case of large and widely scattered markets, use of wholesalers and

retailers becomes necessary.

(c) Size and frequency of order: Direct selling is convenient and economical in case of

large and infrequent orders. When articles are purchased very frequently and each

purchase order is small, middlemen may have to be used. A manufacturer may use

different channels for different types of buyers. He may sell directly to departmental

and chain stores and may depend upon wholesalers to sell to small retail stores.

(d) Buying habits: The amount of time and effort which customers are willing to spend

in shopping is an important consideration. Desire for one-stop shopping, need for

71

personal attention, preference for self- service and desire for credit also influence the

choice of a trade channel.

3. Company Considerations: The nature, size and objectives of the firm play an important role

in channel decisions:

(a) Market standing: Well-established companies with good reputation in the market are

in a better position to eliminate middlemen than new and less known firms.

(b) Financial resources: A large firm with sufficient funds can establish its own retail

shops to sell directly to consumers. But a small or weak enterprise which cannot

invest money in distribution has to depend on middlemen for the marketing of its

products.

(c) Management: The competence and experience of management exercises influence

on channel decision. If the management of a firm has sufficient knowledge and

experience of distribution, it may prefer direct selling. Firms whose management

lacks marketing know-how have to depend on middlemen.

(d) Volume of production: A big firm with large output may find it profitable to set up

its own retail outlets throughout the country. But a manufacturer producing a small

quantity can distribute his output more economically through middlemen.

(e) Desire for control of channel: Firms which want to have close control over the

distribution of their products use a short channel. Such firms can have more

aggressive promotion and a thorough understanding of customers' requirements. A

firm not desirous of control over channel can freely employ middlemen.

(f) Services provided by manufacturers: A company that sells directly has itself to

provide installation, credit, home delivery, after-sale service and other facilities to

customers. Firms which do not or cannot provide such services have to depend upon

middlemen.

4. Middlemen Considerations: The cost and efficiency of distribution depend largely upon the

name and type of middlemen as reflected in the following factors:

(a) Availability: When desired type of middlemen are not available, a manufacturer may

have to establish his own distribution network. Non-availability of middlemen may

arise when they are handling competitive products or they do not like to handle more

brands.

(b) Attitudes: Middlemen who do not like a firm's marketing policies may refuse to

handle its products. For instance, some wholesalers and retailers demand sole selling

rights or a guarantee against fall in prices.

(c) Services: Use of those middlemen is profitable who provide financing, storage,

promotion and after-sale services.

(d) Sales potential: A manufacturer generally prefers a dealer who offers the greatest

potential volume of sales.

72

(e) Costs: Choice of a channel should be made after comparing the costs of distribution

through alternative channels.

(f) Customs and competition: The channels traditionally used for a product are likely to

influence the choice. For instance, locks are sold usually through hardware stores and

their distribution through general stores may not be preferred. Channels used by

competitors are also important.

(g) Legal constraints: Government regulations regarding certain products may influence

channel decision. For instance, liquor and drugs can be distributed only through

licensed shops.

Distribution Policy

After selecting the channel of distribution, a manufacturer has to determine the number of

middlemen to be used or the intensity of distribution. This depends on the degree of market coverage

desired for the product. Market coverage reflects the channel strategy and can be of three types:

(i) Intensive Distribution: Under this strategy, a manufacturer tries to sell his product through

every possible outlet in order to obtain the maximum exposure. Such a distribution policy is

usually employed for the marketing of consumer products of everyday use, e.g., toothpaste,

cigarettes, cosmetics, food products, soaps, etc. In the purchase of these convenience goods,

consumers prefer the nearest location. Therefore, an attempt is made through intensive selling

to go as near to the ultimate consumer as possible. Intensive distribution is sometimes used in

case of some industrial goods like spare parts, lubricants and other supplies. Intensive

distribution can be successful when the manufacturer obtains cooperation from all middlemen

and advertises his products on a large scale.

(ii) Selective Distribution: Selective distribution implies the use of a few selected middlemen in

each sales territory. This policy may be employed at both the wholesale and retail levels. This

type of distribution is appropriate in case of speciality goods and accessories. In such

products, consumers generally have a brand preference so that the use of every outlet is not

necessary. Selective distribution is more economical and provides the manufacturer sufficient

control over the distribution of his products. As the number of middlemen is limited, each

one of them gets sufficient sales volume which is helpful in securing their cooperation.

Dealers are likely to take greater interest in the display and promotion of the products.

(iii) Exclusive Distribution: Such distribution involves the use of one dealer in each sales

territory. The dealer is granted the exclusive right to sell the product in the specified territory

through an agreement with the manufacturer. The dealer is prohibited from dealing in the

competitive products. Exclusive selling is adopted in case of shopping and speciality goods

enjoying brand loyalty. In the purchase of such goods, the consumer spends lot of time and

effort. It is also used when the product requires huge investment in stocks and showrooms,

e.g., automobiles and household appliances like mixer grinder, cooking range, etc. Exclusive

distribution provides full control over distribution and reduces distribution costs. It also

increases the prestige of the product. However, this policy is less flexible and does not permit

wide distribution of the product.

73

Choice of Middleman

After deciding the number of middlemen, a manufacturer has to select the particular dealers through

whom he will distribute his products. While selecting a particular wholesaler or retailer, the

following factors should be taken into consideration:

(i) Location of the dealer's business premises;

(ii) Financial position and credit standing of the dealer;

(iii) Knowledge and experience of the dealer;

(iv) Storage and showroom facilities of the dealer;

(v) Ability of the dealer to secure adequate business and to cover the market;

(vi) Capacity of the dealer to provide after-sale service;

(vii) Willingness of the dealer to handle the manufacturer's products;

(viii) The degree of cooperation and promotional service he is willing to provide;

(ix) General reputation of the dealer and his sales force;

(x) Nature of other products (competitive or complementary), if any, handled by the dealer.

POLICY INITIATIVES FOR ENTREPRENEURIAL GROWTH

To mention a few policy measures that have positively created an ideal environment entrepreneurial

growth are:

(a) Identification of backward areas and announcement of a number of concessions

and incentives for the entrepreneurs to start their ventures in such areas;

(b) Change In the attitude of both Central and State Governments towards private

enterprise in general and promotion of small scale industries in particular;

(c) Liberalisation of Industrial Licensing Policy and announcement of special

incentives for NR1 investments and exporting industrial units.

(d) Promoting coordinated development of large and small industries by—

(i) reserving further expansion either exclusively or partly for the small sector in certain

industries.

(ii) developing small industries more vigorously as ancillaries to large industries, and

(iii) encouraging the participation of small industries in the export drive.

Small Scale Industries Policy

In order to give a fillip to small industries development and thereby to entrepreneurial growth, the

Government for the first time announced a separate small scale industries policy in August 1991. The

highlights of this policy are as follows:

• For small scale industries the investment limit (investment in plant and machinery) is raised

to Rs. 75 lakhs for both ancillary and export oriented units and Rs. 60 lakhs to SSI units. Both

these limits were later on raised to Rs. five crores.

• The investment limit for the tiny sector was raised to Rs. 5 lakhs from Rs. 2 lakhs. This limit

has now been raised to Rs. 25 lakhs.

• Hereafter irrespective of their location would be recognised as small scale industries.

• The Small Industries Development Organisation (SIDO) has been recognised as the nodal

agency to support the small scale industries export promotion.

• An export development centre would be set up in SIDO to serve the small scale units through

its network of field officers to further augment export activities of the sector.

74

• A technology development cell (TDC) will be set up in SIDO which could provide

technology inputs to improve quality and competitiveness of products of small scale sector.

• The scheme for the handloom sector which contributed 30 % of the total textile production in

the country would be redesigned keeping in view the local and regional needs. It would be

the policy of the Government to promote handloom to sustain employment In rural areas and

to improve quality of life for handloom weavers.

• The National Small Industries Corporation (NS1C) would concentrate on marketing of mass

consumption items under common brand name and organizational links between NSIC and

SSlDCs would be established.

• The scope of the national equity fund scheme will be widened to cover projects upto Rs. 10

lakhs for Equity Support (upto 15 per-cent).

• The Single Window loan scheme has also been enlarged to cover projects upto Rs. 20 lakhs

with working capital margin upto Rs. 10 lakhs.

• Small Scale units can have equity support to the extent of 24% of the total investment from

the medium and large scale industries, public undertakings. NRIs or foreign Investment.

In conformity with the socio-economic objectives of the national development plans. the

development banks have introduced a number of promotional innovational schemes to be operated

either separately or jointly. Some of the important schemes are soft loan scheme, seed capital

assistance, risk capital assistance, concessional schemes, etc. In addition, 1FC1 is operating different

subsidy schemes for new and small entrepreneurs. Recently, it has introduced eight consultancy

schemes and lour interest subsidy schemes for the benefit of the entrepreneurs.

Meaning of Incentives and Subsidy

The term 'incentive' is a general one and includes concessions, subsidies and bounties. 'Subsidy'

denotes a single lump sum which is given by a government to an industry. It is granted to an industry

which is considered essential In the national Interest. The term 'bounty' denotes bonus or financial

aid which is given by a government to an industry to help it compete with other units in a nation or in

a foreign market. It is given in proportion to its output. Bounty confers benefits on a particular

industry, while a subsidy is given in the interest of the nation.

These subsidies and incentives offer the following advantages:

(a) They act as a motivational force which makes the prospective entrepreneurs to

enter into manufacturing line.

(b) They encourage the entrepreneurs to start industries in backward areas.

(c) By providing subsidies and incentives the Government can—

(i) Bring industrial development uniformly in all regions

(ii) Develop more new entrepreneurs which leads to entrepreneurial development

(iii) Increase the ability of entrepreneurs to face competition successfully

(iv) Reduce the overall problems of small scale entrepreneurs.

Need for Incentives

1. To remove regional disparities in development. While developed regions in a country are overcrowded with industrial and business activities the backward areas

remain ignored for want of facilities for industrial development. Incentives are used as

baits to lure industrialists to locate their units overlooking such deficiencies. In the long run

the backward areas become developed and regional imbalances are corrected. Such a

development may lead to the effective utilisation of regional resources, removal of disparities

in income and levels of living and contribute to a more integrated society.

75

2. To promote entrepreneur ship and strengthen the entrepreneurial base in the economy. The new entrepreneurs may face a number of problems on account of

inadequate infrastructure facilities and other supporting services such as market

assistance, technical training and consultancy and other institutional services, etc. All

these problems may demotivate them. The various incentives normally tend to mitigate some

or all of the problems by several means. Industrial estates, growth centres, power traiff

concessions, capital investment subsidies, transport subsidy, etc. are a few examples of

incentives and subsidies which are aimed at encouraging entrepreneurs to take up new

ventures without much reluctance.

3. To provide competitive strength, survival and growth. While some incentives

are available at the time of promotion of industrial units, several other incentives are

made available over a long period. Reservation of products to small units, price preferences,

concessional finance, etc. contribute towards the competitive strength.

survival and growth of certain industrial units.

4. To generate more employment and remove under-employment and

unemployment. The proper use of incentives and subsidies will generate more

employment by accelerating the industrial growth. Market adjustments and external

economies play a significant role in economic development. The entrepreneurs will

move from developed to backward areas to start more number of units. This will create more

number of jobs which will help to reduce the problems of unemployment and under-

employment.

Problems of Incentives

1. The antagonists argue that the incentive schemes may deteriorate into useless

tax-give away schemes if they are not implemented properly.

2. Empirical studies reveal that the incentive schemes are being highly misused

rather than properly used. Some of the units are located in backward areas with a view

to mainly avail the subsidies and concessions. The real objective of providing incentives is

hardly achieved.

3. Favouritism and corruption have crept into the administrative machinery which

has caused much financial strain on the exchequer.

Schemes of Incentives in Operation

Different incentive schemes applicable to the industrial sector in India are in operation. These

schemes are offered by Central and State Governments including Union Territories. The list of

incentives offered by either or both the governments are listed below :

(i) Export/Import subsidies and bounties

(ii) Interest free loans

(iii) Subsidy for R & D works

(iv) Capital investment subsidy

(v) Transport subsidy

(vi) Interest subsidy

(vii) Subsidy for power generation

(viii) Exemption from property tax

(ix) Subsidies to artisans and traditional industries including handlooms

76

(x) Incentives to non-resident Indians

(xi) Special incentives to women entrepreneurs

(xii) Exemption from income tax

(xiii) Interest free sales tax loans

(xiv) Sales tax exemptions

(xv) Subsidy for buying test equipment

(xvi) Subsidy for industrial housing

(xvii) Land and building at concessional rates

(xviii) Price preference lo SSI units

(xix) Subsidy/Assistance for technical consultancy

(xx) Exemption from stamp duty

(xxi) Concessional water

(xxii) Provision for seed capital

(xxiii) Allotment of developed/constructed sheds

(xxiv) Allotment of controlled or subsidised raw material

(xxv) Subsidising the cost of market studies/feasibility studies or reports.

Incentives for Development of Industries in Backward Areas

As a part of the measures to ensure balanced regional development. Government of India have

announced a number of concessions and facilities for industries established in selected backward

districts/areas from time to time. The Central Government has declared 247 districts (covering about

70% of the areas in the country) as backward and eligible for the subsidies. Many State Governments

have added to this list for the purpose of State level subsidies. The programme of assistance drawn

up for setting up industries in the selected backward area/district is briefly indicated below:

(i) Concessional Finance: All India financial institutions namely, 1DBI. IFCI and others extend

financial assistance on concessional terms to all. new and existing industrial projects having

expansion schemes irrespective of the project costs located in the 247 districts selected by the

government The concessions given by these financial institutions are in the form of lower

interest rate, viz., 9.5% p.a. against the normal rate of 11%, a reduced commitment charge of

0.5 % (which could be waived in exceptional cases), lower underwriting commission of 1.

25% and 0.75% for shares and debentures respectively, initial moratorium period upto five

years, longer amortisations of 15 to 20 years and participation in the risk capital on selective

basis. Besides these the 1DBI follows a flexible attitude in respect of promoter's contribution

margin requirements, rescheduling of repayments during the currency of the loan. Depending

upon the merits of specific cases in respect of refinance, the IDB1 charges a special rate of

6% with the primary lender's rate being subject to a ceiling of 9.5%. The normal rate of

refinance Is 6% with ceiling of 12.5% by the primary lending institution.

(ii) Central Investment Subsidy: The granting of cash subsidy on the capital investment is

called capital investment subsidy. It will be usually in the form of outright grant of 10 % to

20 % of the amount of capital invested in the industrial units in areas specified to be

backward regions/districts. The government also fixes ceiling above which they could not

avail. It is offered by the Central Government.

Out of the 247 districts declared backward by the planning commission. 101 districts/areas

have been selected to qualify for Central investment subsidy. These districts/areas have been

selected on the pattern of six districts/areas for industrially backward states and three

districts/areas for other states. The salient features of the scheme are given below:

77

(a) Quantum of subsidy: When the scheme was originally announced in 1971 10% of

the investment made on fixed capital investment, viz., land, building and plant and

machinery was to be reimbursed as an outright grant subject to a ceiling of Rs. 15

lacs. This was raised to 15 % with effect from 1.3.1973. The maximum amount

payable is, however, restricted to Rs. 15 lakh per industrial unit.

After the division of backward districts into (A), (B) and (C) categories the subsidy

will be: (A) 25 % subject to a maximum of Rs. 25 lacs; (B) 15 % subject lo a

maximum of Rs. 15 lacs (c) 10 % subject to a maximum of Rs. 10 lacs.

(b) Eligibility: An industrial unit other than those run departmentally which made

investments In land, building, and plant and machinery on or after 1-3-1973 and

located In the above category of districts/areas is eligible to claim subsidies. Existing

units taking into expansion, modernisation and diversification are also eligible to

claim subsidy.

(c) Procedure for Claiming Subsidy: The State Governments/Union Territory

administrations have nominated disbursing agencies to administer the scheme of

investment subsidy. State Financial Corporation and financial institutions such as

IDBI, IFCI, and ICICI are some of the agencies selected fur disbursements of subsidy

under the scheme. Each industrial unit being set up in the specified district/area gets

registered with the Director of Industries for claiming investment subsidy. The units

desirous of getting investment subsidy may approach the disbursing agencies who in

trun make recommendation after verification etc., to the State level committee which

has been appointed in each State Union/Territory.

(iii) Tax holiday to new industrial undertakings set up in backward States and Union Territories: Under section 80-1A of the Income-tax Act 1961. deduction is allowed, in

computing die taxable income in respect of profits derived from new industrial undertaking

or a ship or the business of a hotel. The deduction under this section is allowed in the case of

companies, at 30 per cent of profits in respect of the assessment year relevant to the previous

years in which the hotel starts functioning or the industrial undertaking starts manufacture or

the ship is first brought to use and nine assessment years immediately succeeding the initial

assessment year. In the case of taxpayers being a co-operative society, similar deduction is

allowed for the initial assessment year and eleven succeeding years, the deduction is allowed

at the rate of 25 % in the case of non-corporate assessees. Likewise in the case of new hotels

set up in a hilly area or a rural area or a place of pilgrimage or such other place as the Central

Government may specify, the deduction is admissible at the rate of 50 per cent of the profits.

Tax Holiday for the Power Sector

With a view to substantially increasing the power generation capacity in the country, the Bill

proposes to provide for a full tax holiday for five years and thereafter a partial tax holiday in respect

of profits and gains of industrial undertakings set up anywhere in India for generation or generation

and distribution of power. Such undertaking which begins to generate power on or after 1.4.1993 will

be allowed deduction under section 80-1A, at the rate of 100 per cent of profits in respect of the first

five assessment years starting from the assessment year relevant to the previous year in which I he

undertaking begins generation of power. For the subsequent assessment years, deduction from the

profits from such undertakings will be allowed at the normal rate of 30 per cent in the case of

78

companies and 25 per cent in the case of non-corporate assessees. The deduction, at the enhanced

rate and the normal rale together, will be limited to twelve assessment years In the case of co-

operative societies and ten assessment years in the case of other assessess, as in the existing

provisions.

Subsidised Consultancy Services

Small entrepreneurs proposing to set up rural, cottage, tiny or small scale units, or to

expand/diversity/modernise their existing units, can get consultancy services at a low cost from the

technical consultancy organisations (TCO's) sponsored by all India and State level financial and

promotional institutions and banks. They have to pay only 20 % of the fees charged by a TCO for

assignments such as preparation of feasibility studies, project reports, market studies, pre-investment

studies, diagnostic studies and special studies and applications for seeking financial assistance from

financial institutions, technical assistance, etc. The entire balance of 18 % or Rs. 5,000 whichever is

lower is subsidised by 1FCI in the case of assignments relating to the use of biogas or

renewable/alternative sources of energy. For units identified or assignments covering physically

handicapaped or scheduled caste/tribe entrepreneurs, 100 % of the fees of the TCO for the

assignment or Rs. 6.000 whichever is lower is subsidised. If any entrepreneur is unable to take

effective steps to set up the project within one year from the date of completion of consultancy

assignments he will not be entitled to prevent the use of the report in any form or manner by the TCO

or other entrepreneurs. An entrepreneur who has already set up a project at one place and wishes to

set up an entirely different project at another place may be considered eligible for subsidy for the

second project also. In any case, the subsidy will not be made available to the same entrepreneur for

more than two projects.

Subsidy for Market Studies

New entrepreneurs (locally based or non resident Indians) entering the field of medium and /or

medium large industry for the first time in the country can have market studies for their products

undertaken by TCO at a cheaper cost. The fee for the preparation of a market study payable to TCO

would be subsidised by IFCI up to 75% of the cost or Rs. 15,000 whichever is lower. The subsidy

will be made available only to the TCO with which one or more financial institutions or development

agencies at the State or all India level are associated as shareholder(s) or member(s) of board of

management. The entrepreneur will have to bear only 25% of the cost of the study.

Adoption of Indigenous Technology

Promoters of project involving commercial exploitation of indigenous technology can get assistance

in the form of subsidy covering the interest payment due to IFCI during the first three years of

operations of the project subject to a ceiling of Rs. 5 lakhs a year. In appropriate cases, the total

subsidy could be upto Rs. 25 lakhs over a period of five years. However, the extent of subsidy would

be determined by IFCI on a case to case basis having regard to the earning potential and projected

cash flow of the project. The subsidy would be reimbursed to the concern after it makes payments of

installments of interest to IFCI on due dates. For being eligible for concessional assistance, the

project should be set up with loan assistance from IFCI and be based on indigenous technology. The

right to use this technology must have been acquired by the agency implementing the project from

the concerned institution, viz. Government laboratories, public sector companies, universities, or any

other institution recognised by the Government of India. The technology should be one which has

not already been exploited on a commercial scale in the country, and a certificate to this effect will

have to be obtained from the concerned institution. The technology should be basic to the

79

manufacture of the proposed product and not merely peripheral and the project must be of national

priority as indicated by government from time to time.

Machinery on Hire Purchase

Small scale industrial units including ancillaries are eligible to procure machinery on hire purchase

basis from the National Small Industries Corporation Ltd. through its libralised terms and conditions

for supplying machinery to .small scale industries located in backward areas which qualify for

investment subsidy.

Transport Subsidy

The transport subsidy scheme envisages grant of a transport subsidy to industrial units in selected

areas to the extent of 50% of the transport costs of raw materials which are brought into and finished

goods which are taken out of the selected areas.

The scheme covers the State of Jammu and Kashmir. Himachal Pradesh, hilly areas of Uttar Pradesh

and North Eastern Region comprising States of Assam. Meghalaya, Nagaland, Tripura and the Union

Territories 'of Arunachal Pradesh, Andaman and Nicobar Islands. Mizorarn and Lakshadweep.

Subsidy is paid on transport costs between the selected railheads and location of the industrial units

in the above states/Union Territories.

The highlights of the scheme are: 1. Industrial units in the above-mentioned areas will be given transport subsidy in

respect of the raw materials brought into and the finished goods which are taken out of such

areas.

2. No transport subsidy will be allowed for the internal movement of raw materials

and finished goods within the State of Jammu and Kashmir and the North-Eastern

Region.

3. In the case of Jammu and Kashmir, the transport subsidy will be given between

the railhead at Pathankot and the location of the industrial unit or between the location

of the industrial unit and Jammu. whichever is nearer.

4. For the other above-mentioned States (except J & K). the transport subsidy will

be given on the transport cost between Siliguri and the location of the industrial unit in

these States. While calculating the transport cost, the cost from Siliguri to the railway

station nearest to the industrial unit will be taken into account in respect of raw

materials and finished goods. If any other mode of transport is used the cost will be

limited to the amount which the industrial unit may have paid, if it had used the above

mode of transport.

5. Freight charges for the movement of goods by road will be determined on the

basis of the transport rates fixed by the government of a State/Union Territory from

time to time, or the actual freight paid, whichever is less.

6. The cost of loading or unloading and other handling charges will be taken into

account for the purpose of determining transport costs.

7. All new industrial units located in the selected areas will be eligible for a

transport subsidy equivalent to B0% of the transport cost of raw materials and finished goods.

8. Existing industrial units are also eligible for a 50% subsidy in respect of

additional transport costs of raw materials and finished goods resulting from a

substantial expansion or diversification effected by them after the commencement of the

80

Transport Subsidy scheme.

9. The transport subsidy will cover 50% of the transport charges on the movement

of steel from the Gauhati Stockyard of Hindustan Steel Limited to the site of an

industrial unit in the North-Eastern Region.

10. The State Government/Union Territories will set up a committee consisting of

the Director of Industries, a representative of each of the State Industrial Departments

or the State Finance Departments and a representative of the Ministry of Industry

Development. The committee will operate at the State/Union Territory level. The

claimants would be asked to submit proof of raw materials "imported" into, and the

finished goods "exported" out of the State/Union Territory from a registered chartered

accountant, in the State/Union Territory.

11. The Directorates of Industries in the States/Union Territories will lay down

system of pre-registration of industrial units which are eligible for the transport subsidy. At

the time of registration, the Director will fix and indicate the capacity of such units, and lay

down the procedure to be followed to ensure a regular inflow regarding the movement of raw

materials and finished goods to and from the industrial units.

12. The Ministry of Industrial Development will periodically review the arrangements

made by the Directorates of Industries of various States and Union Territories and

suggest modification in the Procedure for scrutinising the claims, payment of transport

subsidy, etc.

81

LESSON 3

INCENTIVES AVAILABLE TO SSI UNITS IN

BACKWARD/RURAL INDUSTRIES PROJECT AREAS Dr. Hem Chand Jain

Certain special facilities and incentives have been provided to these back-ward districts. Of these,

101 districts/areas have been declared further as specially backward and hence additional incentives

like capital subsidy, special import facilities, etc.. are provided to industrial projects in these 101

districts/ areas over and above what is given in the 247 districts.

In addition, 111 districts in the country have been covered under the Centrally-sponsored Rural

Industries Project Programme. Small-scale units set up in these areas gel other special concessions

and facilities. The various benefits are enumerated below:

1. An outright subsidy of 15% on the fixed capital investment up to a maximum of Rs. 15 lakhs

is admissible to new units being set up in backward areas.

2. Allotment of factory or factory sheds In Industrial estates/areas and industrially developed

colonies on easy terms.

3. Interest-free loans in lieu of inter-state Sales tax paid/payable by SSI units are

available up to 7 years, provided the loan in a particular year will not exceed 8% of the

capital investment.

4. Loans and advances to SSI units under the State Aid to Industries Act and Rules framed

thereunder, for the construction of factory buildings, purchase of machinery and equipment

and working capital on easy terms.

5. The State Financial Corporations grant loans for acquisition of fixed assets up to

Rs. 30 lakhs in the case of limited companies and registered co-operative societies and

up to Rs. 15 lakhs for others at liberalised margins and rate of interest, and this is done over a

longer span of repayment and moratorium period.

6. The Central/State Government directly or through its subsidiary concern—the

Stale Industrial Development Corporation—underwites or participates in the preference

shares of public limited companies on a selective basis for setting up medium and large

industrial units. The State Government also considers cases for setting up of joint ventures

with the private sector.

7. The SSI units in the backward areas and other industries with a capital

investment in plant and machinery upto Rs. 1 lakh are relieved from the following

taxation in some States:

(i) New units established in the districts are completely exempted from the payment of

electricity duty up to a period of 7 years.

(ii) (New units are exempted from property tax for a period of 5 years.

(iii) Industrial units set up within the municipal limits are exempted from octroi on capital

equipment and building materials subject to a maximum period of 3 years from the

date of regular registration.

8. Provision of essential, controlled raw materials to the SSI units on priority and at

very liberal terms.

9. State Governments have set up independent testing laboratories on behalf of the

Indian Standards Institution, the Export Inspection Council, the Department of Defence,

Government of India and various other government organisations for making industrial

products of good quality.

10. In order to provide some important and sophisticated common facilities, a

network of industrial development centres, heat treatment centres and common facility

82

workshops have been set up in the States to equip the SSI units with modern techniques and

process of manufacturing.

Special incentives in the form of transport subsidy to compensate partially for the higher transport

cost of established industries in hilly backward areas is also being provided by the Union

Government.

The small scale units are now permitted to set up consortia to organise the sales of their own

products abroad. Similarly, a co-operative society of small units will also be permitted to do so. Such

consortium or a co-operative society of small scale units will be eligible for grant of an Export House

Certificate on the following basis :

(1) The applicant is a corporate body or a partnership firm or a co-operative society

and is registered as an exporter;

(2) All the members of the applicant consortium are small or cottage units,

(3) The minimum limit prescribed for select products for grant of a certificate will be

Rs. 50 lacs (the minimum exports may be either in the immediately preceding years or

the annual average of the three years of the base period).

For the purpose of granting the first export house certificate to the consortium, the exports made by

its members will be taken into account, if otherwise acceptable. Thereafter, for the purpose of

renewal, the exports made in the name of the consortium alone will be acceptable.

Seed Capital Assistance

One of the constraints faced by the entrepreneurs, especially first generation or technical

entrepreneurs, is the lack of resources to meet the minimum promoter's contribution. To help the

entrepreneurs overcome the problem. IDBI has come up with a scheme which has gained popularity

as the Seed Capital Scheme. If the project is coming up in non-backward areas, then the project

would not be eligible for subsidy. Hence, the entire amount of promoter's contribution would be

brought by the contributor himself. This would be reduced to the extent of the subsidy if the project

is coming up in backward areas like (category A, B, or C). The maximum amount which can be

sanctioned is to the extent of Rs. 5 lacs per project on the fulfillment of certain conditions.

Objectives of the Scheme

The objective of the scheme is to create new generation entrepreneurs who have the requisite traits of

entrepreneurship but whose financial resources are limited. It envisages extension of assistance at a

nominal service charge for meeting the risk capital requirements of entrepreneurs. The scheme is

expected to promote wider dispersal of ownership and control of industrial undertakings.

Agencies for Operating the Scheme

The scheme is operated through the agency of notified SIDCs and SFCs. Assistance under the

scheme will also be given directly by IDBI in exceptional cases. Projects assisted by commercial

banks are also eligible for seed capital assistance. However, the entrepreneurs will have to submit

their applications through SFC/SIDC functioning in the region.

83

Eligibility Criteria

To be eligible for assistance the entrepreneurs should be technically or professionally qualified or

possess relevant experience or skills either in industry, business or trade. The following categories of

entrepreneurs are eligible for assistance under the scheme:

1. New generation entrepreneurs in small scale requiring seed capital of more than

Rs. 4 lacs.

2. Small scale entrepreneurs who undertake expansion/diversification or modernisation.

3. Entrepreneurs intending to graduate from the small scale to medium sector for the first time.

4. Entrepreneurs intending to set up a project in the medium sector for the first time.

5. Entrepreneurs already in medium sector and intending to undertake diversification for

achieving better viability. Entrepreneurs seeking additional seed capital to meet project cost

over-run caused by factors beyond their control.

6. Entrepreneurs intending to take over an existing sick or closed unit. Projects constituted as

public/private limited companies or partnership/proprietary concerns eligible for assistance.

Amounts and Mode for Assistance

The amount of seed capital assistance for project shall not exceed Rs. 15 lacs. However, the actual

amount will be determined on the basis of gap in the equity required for the project as also shortfall

if any in the prescribed minimum promoter's contribution after taking into consideration his own

contribution and from other sources and subsidies and incentives. For deciding the quantum of

assistance, the debt equity norms of 2:1 in the case of SSI units and 1.5:1 in the case of medium scale

units would be adopted.

The assistance will be in the form of soft loans in the case of proprietary and partnership concerns. In

the case of private limited companies the assistance will be by way of soft loans of subscription to

1% cumulative redeemable preference shares. In the case of public limited companies the assistance

will be normally by way of subscription to equity capital or cumulative redeemable preference shares

(at 1%) or both or by way of soft loan.

The soft loan would be interest free which will carry a service charge of 1% per annum. However,

IDBI may have option to charge the interest on soft loan at a different rate. There is no commitment

charge. The repayment period depends upon repaying capacity of the unit with an initial moratorium

period not exceeding 5 years. Now security except the personal guarantee of the promoter is

stipulated.

TAXATION BENEFITS

The taxation benefits available to small scale industries are explained below:

1. Tax Holiday: New small scale industries are exempted from the payment of

income tax under Section 80J of the Act on their profits up to 6% (7.5 % for companies) from

the total income of the units in the assessment year in which the units began manufacture,

provided the small scale units have followed the procedures laid down in Section 80 J. This

tax holiday is available up to 5 years from the commencement ofproduction.

2. Depreciation Allowance: Under Section 32 of the Income Tax Act. a small scale

industry is eligible to get a deduction on depreciation account of plant and machinery.

land and buildings, at the prescribed rates. In the case of small scale industries the

84

deduction from the actual cost of plant and machinery is allowed up to Rs. 20 lakhs.

The depreciation is calculated on the reducing balance system. Full depreciation is available

for a year irrespective of the actual number of days for which the assets have been used.

Sometime, an additional allowance, called extra shift allowance is available to the units. Any

machinery or plant costing less than Rs. 750 is allowed to be written off completely in the

year in which it is first used.

3. Development Rebate: In respect of new plant or machinery other than office

appliance or road transport vehicles of a small scale unit, which is wholly used for the

purpose of production, a sum, by way of development rebate, as specified below, is allowed

under Section 33, in addition to normal depreciation.

(i) In the case of plant and machinery, 35% of the actual cost, if it were installed before

1st April 1970, and 25% of such cost if it were installed after 31st March 1970.

(ii) Where the plant machinery was installed after 31st March 1967, being an asset

representing expenditure of a capital nature on scientific research related to the

business carried on by a unit, development rebate is given at the specified rates.

4. Rehabilitation Allowance: This is granted to small scale units, under Section 33

B. whose business has been disturbed by:

(a) Riot or civil disturbance.(fa) Floods, typhoons, hurricanes, cyclones, earthquakes or

other natural disasters.

(b) Accidental fire or explosion.

(c) Action by an enemy.

The small scale unit re-established, reconstructed or revived, is allowed a deduction of a sum, by

way of rehabilitation allowance, equivalent to 60% of the amount of the deduction allowable to the

unit.

Investment Allowance: The Investment allowance was introduced in 1976 in place of depreciation

allowance. It is allowed at the rate of 25 per cent of the cost of acquisition of new plant or machinery

installed. The benefit of investment allowance is available for the articles or things except certain

low priority items specified in the Eleventh Schedule. However, the Small scale units are eligible for

investment allowance irrespective of whether they are used for the purpose of business of

construction, manufacture or production of low priority items listed in the Eleventh Schedule.

If a small scale industrial unit produces any article or thing (not listed in the XI Schedule) by using

the know-how developed in Government laboratories, public sector companies and universities, the

rate of investment allowance will be 35 per cent. This higher rate may be claimed only if the new

plant or machinery is installed by it after 20-6-1977 but before 1-4-1982.

The Small scale unit can avail of the benefit of investment allowance only when it has put to use the

plant and machinery either in the year of installation or In the immediate following year; otherwise

the benefit will be forfeited.

Conditions to be fulfilled: An Investment Allowance Reserve must be created during the relevant

financial year. This reserve should be utilised for the purchase of plant and machinery for the

business purpose of the small scale unit in India. It cannot be used for any other purpose such as

distribution of dividends or separation of profits or creation of assets outside India.

85

When Withdrawable: The Investment Allowance will be withdrawn:

(i) If plant and machinery is sold or otherwise transferred by the assessee to any person (other

than the Government, a local authority, a corporation or a Government Company) at any time

before the expiry of eight years from the end of the financial year in which it was acquired or

installed. It is not withdrawn if the sale or transfer is made in connection with the

amalgamation of a partnership firm into a company or where a firm is succeeded by a

company in the business carried on by it.

(ii) If a small scale industrial unit ceases to be a small scale unit by virtue of the total value of

plant or machinery installed exceeding the authorised limit.

Publication of Books : A small scale industry engaged in the business of publication of books is

entitled to claim a deduction of a sum equal to 20 per cent of (.lie-profits and gains derived from

such business under section 80 of the Act. "Books" for the purpose of this Section do not include

newspapers, journals. Magazines, diaries, brochures, pamphlets and other publication of similar

nature.

Tax Benefits for Amalgamation of Sick Units: Sickness in an industry, whether large or small. Is

quite widespread in the country and has become a national problem which has caused a great deal of

concern. It is estimated that the aggregate amount involved in the sick units is more than Rs. 2000

crores. The policy of the Government has been to encourage the amalgamation of sick units and

concessions have been announced to induce healthy units to take over sick concerns in the public

interest. Tax concessions are available for the amalgamation of sick units.

Excise Concession: The long term Fiscal Policy has envisaged to provide the best solution for the

problem of cascading effect of taxation of inputs on the value of final product in the Modified Value

Added Tax (MODVAT) Scheme. This scheme provides for the extension of the present system of

proforma credit to all excisable commodities with the exception of a few sectors like petroleum,

tobacco and textile products. The objective of the scheme is to extend the scope of the provisions for

set offs for excise and countervailing duties paid on inputs. This programme will be implemented in

phased manner over a period of years, taking due account of the revenue implications, the need to

revise administrative procedures and the lessons from experience gained in the early stages of the

reform.

The purpose to use MODVAT is not to give substantial net reliefs on excise. The loss of duty on

inputs will be recouped through higher excise taxation of final products. Indeed, shifting the effective

burden of excise taxation away from inputs and on to final products is at the heart of the proposed

reform. Aside from reducing distortionary effects on production and thus increasing the

competitiveness of Indian industry, the shifting of excise burden to final products will help in

tailoring excise duties in such a manner that the well off bear a higher proportionate burden than the

poor.

Tamil Nadu Micro, Small and Medium Industries Policy 2008

This policy is the first-of-its-kind in the country, with a vision to enhance the Competitiveness of the

Micro, Small and Medium Enterprises sector and aim for sustained annual growth rate of over IO per

cent for MSMEs and generate direct and indirect employment opportunities to the tune of 10 lakhs

during the XI Five Year Plan period. The Policy focused on all initiatives to be taken up for the

development of MSMEs in the State including infrastructure development, incentive schemes,

86

technology development, subsidy schemes for units located in industrially backward areas, skill

development, marketing support, deregulation and simplification, administrative reforms and

rehabilitation of sick enterprises in the state, Through this initiative, the Khadi and Village Industries

Commission. I he Khadi and Village Industries Board, Coir Board, Small Industries Development

Bank of India (SIDBI), Tamil Nadu Industrial Investment Corporation Limited. Tamil Nadu

Industrial Cooperative Bank Limited belonging to the Central and Stale Governments facilitate

assistance and loans along with employment opportunities.

Subsidy Schemes

(a) Micro Manufacturing Enterprises

Micro Manufacturing Enterprises established anywhere in the State are eligible for the

following incentives:

• 15% capital subsidy on the value of eligible plant and machinery, subject to a

maximum of Rs. 3.75 lakhs

• 20% low tension power tariff subsidy for 36 months from the date of

commencement of commercial production or from the date of power connection.

whichever is later, after allotment of Entrepreneur Memorandum.

• 100% subsidy on the net value of value added tax (VAT) paid by them for the

first 6 years up to the value of investment made in plant and machinery at the

time of allotment of Entrepreneur Memorandum.

(b) Backward Area Development Subsidies

Micro, Small and Medium manufacturing enterprises established in 251 industrially

backward blocks and all industrial estates promoted by the Government and Government

Agencies like SIPCOT. SIDCO, etc. (excluding industrial estates located within the radius of

50 Kms. from Chennai City center) and agro based enterprises set up in 385 blocks in the

State are eligible for the package of incentives given below:


maximum of Rs. 30 lakhs-

• 5% additional employment intensive subsidy on the value of eligible plant and

machinery for giving employment to 25 workers for 3 years within the first 5

years from the date of commencement of commercial production, subject to a

maximum of Rs. 5 lakhs.

• 5% additional capital subsidy on the value of eligible plant and machinery for

units set up by women, SC/ST. physically disabled persons and transgender

entrepreneurs, subject to a maximum of Rs. 2 lakhs.

• 25% additional capital subsidy on the value of eligible plant and machinery

installed to promote cleaner and environment friendly technologies, subject to a

maximum of Rs. 3 lakhs and certification by Tamil Nadu Pollution Control Board.


commencement of commercial production or from the date of power connection,

whichever is later.

(c) Special Capital Subsidy for Thrust Sector manufacturing enterprises set up

anywhere in the State

87

Ten thrust-sector manufacturing enterprises viz. Electrical and Electronic Industry. Leather

and Leather goods, Auto parts and components. Drugs and Pharmaceuticals. Solar Energy

Equipment, Gold and Diamond Jewellery for exports. Pollution Control equipments. Sports

Goods and Accessories. Cost effective building material and Readymade Garments, set up

anywhere in the State are eligible for a special capital subsidy of 15% on the eligible plant

and machinery, subject to a maximum of Rs. 30 lakhs.

(d) Generator Subsidy

Micro, Small and Medium manufacturing enterprises established anywhere in the State are

eligible for a subsidy of 25% on the cost of Generator set purchased (up to 125 KVA

capacity), subject to a maximum of Rs. 1.50 lakhs.

(e) Back-ended Interest Subsidy

A back-ended Interest subsidy at the rate of 3% (subject to a maximum of Rs. 10 lakhs per

enterprise over a period of five years) will be extended on loans taken up to Rs. 100 lakhs by

Micro. Small and Medium Enterprises for Modernization by induction of well established

and improved technologies in specified sub-sectors/products as listed in the guidelines on

Credit Linked Capital Subsidy Scheme (CLCSS) of Government of India.

Schemes for Technology Development

The following new schemes for Technology Development are announced In the Micro, Small

and Medium Industries Policy 2OOS:

• 50% subsidy on the cost of filing a patent application, subject to a maximum of Rs. 2 lakhs per

application and 50% of the cost of the application for trade mark registration or Rs. 25000

whichever is less for Micro, Small and Medium Manufacturing Enterprises.

• Establishment of industrial clusters and mini tool rooms under Public Private Partnership mode

by providing 25% of the total project cost, subject to a maximum of Rs. 1 crore as assistance.

• Creation of Technology Development Fund for evolving cleaner/energy efficient/lT

enabled technologies for the Micro. Small and Medium Manufacturing Sector.

• Assistance for creation of Centers of Excellence and Technology Business incubators for

introduction of a new production techniques and design Development to the tune of Rs. 50

lakhs per incubator/center of excellence.

Schemes of Skill Development and Training

Reimbursement of 50% of the tuition fees for Skill Development Training schemes for the benefit of

the educated unemployed youth and upgradation of the skills of existing employees of Micro. Small

and Medium Enterprises by the MSME Associations have been announced in the MSMI Policy

2008.

Marketing support

Government has announced the following schemes to provide marketing support to Micro, Small and

Medium Enterprises in the MSMI Policy 2008.

• 15% Price preference for purchase of goods of domestic Micro and Small

Enterprises as provided in the Tamil Nadu Transparency in Tenders Act. 1998.

88

• Purchase preference for items notified from time to time by the State Government.

• Waiver of Earnest Money Deposit for participation in tenders.

• 50% grant on hall rent for participation in exhibitions within the State and also

in other States by MSME Associations.

• Support for marketing under a common banner or brand name.

Credit Linked Capital Subsidy scheme: The Government of India is operating Credit Linked

Capital Subsidy Scheme to facilitate the upgrading of technology in SSI units in respect of 48

specified products/sub-sectors. Under this scheme. 15% capital subsidy is granted for induction of

proven technologies approved under the Scheme.

TUF scheme for textile: Additional option available for Capital subsidy in lieu of interest rebate for

selected sectors. New or existing SME units—including units in cotton ginning and processing

sector—are eligible 5%/4% interest reimbursement and (he interest actually charged.

Mega Projects Subsidy: The Govt. of Tamil Nadu is offering Mega Project Subsidy for the projects

with investment in Fixed Assets above Rs. 5.00 crores and upto 200 crores as back ended ranging

between 30.00 lakhs to 100.00 lakhs depending up to the investment and direct employment to the

workers.

Subsidy of Ministry of Food Processing Industries: The Ministry of Food processing, Government

of India with a view to accelerate the growth in this sector is providing grants for setting up of food

processing units (including meat and fish processing/milk products/spices/coconut/walnut/cashew

nut) or upgradation and expansion of such unit and for establishing Food Parks. Grant is available at

25% of the cost of capital equipment and technical civil works up to a maximum of Rs. 50.00 lakhs.

Employment Incentive Subsidy: Employment Incentive Subsidy of an additional 5% subject to a

maximum of Rs. 5.00 lakhs will be granted, if at least 25 workers have been employed for a

minimum period of 3 years within the first 5 years from the date of commencement of production.

Special Capital Subsidy to thrust sector enterprises : Micro/Small/Medium manufacturing

enterprises in the following Thrust Sectors are eligible plant and machinery subject to a maximum of

Rs. 30.00 lakhs—

1. Electrical & Electronics Industry

2. Leather & Leather Goods

3. Auto Parts and components

4. Drills and Pharmaceuticals

5. Solar Energy Equipments etc.

Low-tension power tariff (LTPT) subsidy: Flat rate of 20% for the first 36 months from the date of

commencement of production or from the date of power connection, after allotment of an

Entrepreneur Memorandum from District Industries Center.

INSTITUTIONAL SET UP

In order to accelerate the small industries development, Governments at the Central and State levels

have set up a number of development agencies/institutions such as District Industries Centres (DICs).

Small Industries Service Institutes (SIS1) and Small Industries Development Organisation, etc. All-

India Financial Insitutions—1DB1, IFC1. 1CICI—have promoted/sponsored a number of Technical

Consultance Organisations (TCOs) to assist small entrepreneurs in different ways. In 1986. the Small

89

Industries Development Fund was set up in IDBI in order to assist small scale, village and cottage

industries and tiny sector units in the rural areas. Recently, the Small Industries Development Bank

of India (SIDBI) has been established to help small scale units. In addition to these institutions there

are agencies like National Science and Technology Entrepreneurship Board, Khadi and Village

Industries Commission, Commercial Banks, EXIM Bank and Co-operative Banks who undertake

promotional activities aiming at facilitating industrial development.

District Industries Centres (DICS)

Governments—both Central and State, have in the past taken a number of measures for the

development of small and village industries, but the actual achievements have been far below the

expectations. Also the focus of attention for industrial development was mainly on large cities and

State capitals to the neglect of district areas. In addition, multiplicity of institutions involved in small

industries development and complicated systems and procedures made the job of promoting the

industrial units an uphill task for small entrepreneurs. Hence, it was felt necessary to establish a

development agency which could provide all services and facilities to village and small industries

under one roof. Accordingly, the DICs were established in May 1978 in order to cater to the needs of

small units.

Each district has a DIG at its headquarters. The main responsibility of DIC is to act as the chief

coordinator or multifunctional agency in respect of various Government departments and other

agencies. The prospective small entrepreneur would get all assistance from DIC for setting up and

running an industry in rural areas. Up to 1991 about 422 DICs have been set up throughout the

country. These DICs have assisted more them 1.5 lakh units generating employment for more than

10.3 lakh persons. The metropolitan cities of-Delhi, Bombay, Calcutta and Madras have been kept

outside the purview of the DIC.

Functions of DIC

Identification of Entrepreneurs: DIC develops new entrepreneurs by conducting entrepreneurial

motivation programmes throughout the district especially in Panchayat Union Headquarters and

small towns.

Selection of Projects: DIC offers technical advice to new entrepreneurs for the selection of projects

suitable to them.

Provisional Registration under SSI: After the selection of projects, entrepreneurs are issued with

provisional SSI Registration which is essential for obtaining, assistance from the financial

institutions.

Purchase of Fixed Assets: DIC sponsors the loan applications to TIIC. S1DCO and banks for the

purchase of land and buildings anti sanctions margin money under Rural industries Project Loan

Scheme payable to other financial agencies for the purchase of plant and machinery.

Clearances from Various Departments: It takes the initiative to get clearances from various

departments and takes follow up measures to gel speedy power connection.

Assistance to Raw Material Supplies: It makes necessary recommendations to the concerned raw

materials suppliers and issues the required certificates for the import of raw materials and machinery

wherever necessary.

90

Assistance to Village Artisans and Handicrafts: DIC arranges for the financial assistance with the

lead bank or nationalised banks of the respective areas.

Interest-Free Sales Tax Loan: SSI units set up in rural areas can get IFST Loan up in a maximum

limit of 8% of the total fixed assets from S1DCO. But the sanction order from the same is being

issued by DIC. The DIC also recommends the SSI units to NSIC for registration for Government

Purchase Programme.

Subsidy Schemes: DIC assists SSI units and rural artisans to get subsidies such as power subsidy,

interest subsidy for engineers, subsidy under IRDP, etc., from various institutions.

Training Programmes: DIC gives training to rural entrepreneurs and also assists other units giving

training to small entrepreneurs.

Self-employment for Unemployed Educated Youth: This scheme was introduced in 1983-84 for

youths between 18 years and 25 years with SSLC, Technocrats and women are given preference.

District Industries Centres are supposed to provide pre-investment, investment and post- investment

assistance to entrepreneurs under one roof. These centres have done commendable work in the

promotion of small industries, development of entrepreneurship and generation of self- employment.

But much is still desired to be done to make the DIC really one-window service. Steps should be

taken to strengthen and suitably restructure the district industries centres for playing a leading role in

district level industrial development

Industrial Estates

Developing countries require institutional arrangements for their rapid industrialisation and balanced

growth. One such institutional measure is industrial estates. The term 'industrial estate' is called by

different names, e.g. industrial park, industrial zone, industrial region, industrial city, industrial area,

industrial township, etc.

An industrial estate has been defined as a method of "organising, housing and servicing industry, a

planned clustering of industrial enterprises offering standard factory buildings erected in advance of

demand and a variety of services and facilities to the occupants". In other words, an industrial estate

is a tract of land sub-divided and developed according to a comprehensive plan for the use of a

community of industrial enterprises. It is a planned clustering of industrial units offering standard

factory buildings and a variety of services and facilities to entrepreneurs.

The main features of an industrial estate are as follows:

(i) It is a tract of land subdivided and developed into factory plots or sheds.

(ii) It provides several common facilities or infrastructural amenities such as water, power,

transport, toolroom, training, bank, post office, repairs and maintenance, etc. to the

occupants.

(iii) It is a planned clustering of industrial units.

(iv) It is designed as a tool of industrialisation and balanced regional development.

(v) It may be developed in urban, semi-urban or rural areas,

(vi) It may be large, medium and small,

(vii) It may be set up the Government or by cooperatives or by private agencies.

91

Types of Industrial Estates

Industrial estates may be classified into the following categories:

1. General Purpose or Composite Industrial Estates: Such an industrial estate

provides- accommodation to all types of smallscale industries.

It consists of a wide variety and range of industrial units. Most of the Industrial estates in

India are of this type.

2. Special Purpose Industrial Estates: This type of industrial estate is particularly

constructed for specified groups of entrepreneurs, e.g., technically qualified persons.

craftsmen or artisans, etc. For example, Industrial estates for artisans and technical

personnel have been set up at Hyderabad.

3. Ancillary Industrial Estates: Such an industrial estate houses manufacturing

units, which produce, parts and components for a large industrial unit. It is generally

set up near the parent unit.

4. Functional Industrial Estates: This type of Industrial estate consists of

industrial units manufacturing the same product. Such estates have been set up for

leather goods, electronics, sports goods, food preservation, ceramics, etc.

5. Flatted Factory Estates: These are multi-storey buildings constructed in big

cities, to provide space to industrial units manufacturing light weight goods with the

help of simple machine tools. They help to conserve space.

Advantages of Industrial Estates

Industrial estates offer the following benefits:

1. Economies of Scale: Location of many medium or small plants within a large

area offers several economies. Economies of scale arise because all the industrial units enjoy

common infrastructural facilities. As the size of an industrial estate increases the costs of

estate development and administration per unit of each facility decline.

2. Economies of Agglomeration: In an industrial estate, several industrial units

are clustered together. They become interrelated and interdependent. This enables them to

enjoy the benefits of agglomeration and external economies. These external economies

include access to better transportation facilities, availability of trained labour, regular supply

of power and water, easy access to testing and repair facilities, availability of raw materials,

etc.

3. Low Investment: A small scale entrepreneur can obtain an Industrial plot or

shed on rent or hire purchase basis. This reduces considerably fixed capital

requirements as well as fixed costs.

4. Less Risk: Industrial estates serve as risk-absorbing device because of low

capital investment and provision of common facilities and services.

92

5. Saving of Time and Effort: An individual entrepreneur is relieved of the trouble

of searching for a suitable space. He need not waste his time and effort in formalities

involved in acquiring land, obtaining the approval of local authorities, securing power

connection, etc.

6. Nursery for New Entrepreneurs: Industrial estates reduce risks and increase

profitability through Internal and external economies. This induces new entrepreneurs

to setup industrial units.

7. Mutual Cooperation: Industrial estates promote the spirit of cooperation and

joint efforts. All industrial units located in an industrial estate face common problems

and seek to achieve common objectives.

8. Balanced Regional Development: By developing estates in relatively backward

regions, the Government can ensure the balanced industrialisation of different parts of

the country. This will also lead to decentralisation of industries.

Thus, an industrial estate serves as a multipurpose arrangement for the growth of entrepreneurship.

By providing the necessary facilities and services at a single place, it provides a congenial climate

for the growth of small scale industries. It encourages the development of new enterprises. Industrial

estates not only accelerate industrialisation but also facilitate decentralisation of industry

93

LESSON 4

SMALL INDUSTRIES DEVELOPMENT ORGANISATION (SIDO) Dr. Hem Chand Jain

SIDO is a policy-making, coordinating and monitoring agency for the development of small scale

entrepreneurs. It maintains a close liaison with government, financial institutions and other agencies

which are involved in the promotion and development of small scale units. It provides a

comprehensive range of consultancy services and technical, managerial, economic and marketing

assistance to SSI units. It has a network of 28 Small Industries Service Institutes, 30 branch SISIs, 37

Extension Centres, four Regional Testing Centres, one Product and Process Development Centre,

three Footwear Training Centres and five Production Centres and ten Field Testing Centres.

Functions

The main functions of the SIDO are coordination, industrial development and industrial extension

service. Some important functions are:

(1) To assess the requirements of indigenous and imported raw materials and

components for the small scale sector and to arrange their supplies;

(2) To collect data on consumer items which are imported, and encourage the setting

up of new units by giving them coordinated assistance;

(3) To prepare model schemes, project reports and other technical literature for

prospective entrepreneurs;

(4) To secure reservations of certain products for the SSIs.

(5) To provide consultancy and training services and marketing assistance to

improve the competitive strength of small scale units.

(6) To evolve a national policy for the development of SSIs and coordinate the

policies and programmes of various State Governments

SIDO is now Known as Micro, Small and Medium Enterprises Development Organisation.

NATIONAL SMALL INDUSTRIES CORPORATION LIMITED (NSIC)

The NSIC was set up in 1955 with the objective of supplying machinery and equipment to small

enterprises on a hire-purchase basis and assisting them in procuring Government orders for various

items of stores. NSIC provides a wide range of promotional services to small scale units

The Corporation's Head Office is at Delhi and it has four regional offices at Delhi, Bombay, Madras

and Calcutta, and eleven branch offices. It has one central liaison office at Delhi and depots and sub-

centres. The main functions of NSIC are:

(1) To develop small scale units as ancillary units to large-scale industries:

(2) To provide SSIs with machines on hire-purchase basis;

(3) To assist small enterprises to participate in the stores purchase programme of

the Central Government:

(4) To assist small industries with marketing facilities:

(5) To distribute basic raw materials through their depots:

(6) To import and distribute components and parts to actual small scale users in

specific industries: and

94

(7) To construct Industrial estates and establish and run prototype production-cum-training

centres.

(8) To develop small scale industries in other developing countries on turn key basis

The NSIC has taken up the challenging task of promoting and developing small scale industries

almost from scratch and has adopted an 'integrated approach' to achieve the socio-economic

objectives.

NSIC, in consultation with Rating Agencies and Indian Banks Association, has formulated

Performance & Credit Rating Scheme for Small Industries. The Scheme is aimed to create awareness

amongst small enterprises about the strengths and weakness of their existing operations and to

provide them an opportunity to enhance their organisational strengths and credit worthiness.

NSIC acts as a facilitator to promote marketing efforts and enhance the competency of the small

enterprises for capturing the new market opportunities by way of organizing participating in various

domestic & international exhibitions/trade fairs, buyers-seller meets, intensive campaigns seminars

and consortia formation. NSIC helps small enterprises to participate in International/national

exhibitions/trade fairs at the subsidized rates to exhibit and market their products, participation in

these events provides small enterprises an exposure to the national/international markets.

Buyer Seller Meets are being organized to bring bulk buyers/government departments and micro &

small enterprises together at one platform. This enables micro & small enterprises to know the

requirements of bulk buyers on the one hand and help the bulk buyers to know the capabilities of

micro & small enterprises for their purchases. Intensive campaigns and seminars are organized all

over the country to disseminate/propagate about the various schemes for the benefit of the small

enterprises and to enrich the knowledge of small enterprises regarding latest developments, quality

standards etc.

DIRECTORATES OF INDUSTRIES OF THE STATE GOVERNMENTS

The small-scale Industries is a State subject and. therefore, the development and implementation of

the schemes of assistance to SSIs is the primary responsibility of the State Government. Directorates

of Industries in each State do the work relating to the development of industries in general and small

scale industries in particular. Each directorate is stalled with administration and technical officers at

State headquarters and by a District Industries Officer with supporting staff in each district. The State

Directorates run various training schemes, production schemes and common facilities schemes. They

also provide facilities of developed industrial land and factory sheds in industrial estates, allocate

quotas of scarce raw materials, certify import requirements and organise industrial cooperatives.

Their functions are varied and have grown with the development and diversification of the small

scale sector.

STATE SMALL INDUSTRIES CORPORATIONS

Many State Governments have-set up Small Industries Corporations in order to undertake a number

of commercial activities. The most important of these activities are distribution of scarce raw

materials, supply of machinery on hire-purchase basis, constitution and management of industrial

estates, procurement of orders from Government Departments, assistance in export marketing and in

certain cases provision of financial, technical and managerial assistance to small enterprises.

95

Small Industries Development Corporation (SIDCO)

In Tamilnadu SIDCO is the state small industries corporation. It plays a lead role in developing small

scale sector. It provides the following facilities to small scale units:

(a) Provision of constructed sheds/plots in industrial estates. These are sold to

entrepreneurs on hire-purchase basis or given on rental basis.

(b) Assistance in procuring some scarce key raw materials like iron and steel, paraffin wax,

potassium chlorate, Fatty Acids, etc., through its various distribution centres. Financial

assistance in the form of subsidies to industrial units in back areas like Central Investment

Subsidy, State Capital Subsidy, Interest Sales Tax Loans, Power Tariff Subsidy and Margin

Money Assistance the Rehabilitation of the Sick Small Scale Industries.

(c) Marketing Assistance to small entrepreneurs.

SMALL INDUSTRIES SERVICE INSTITUTES (SISIS)

Established in 1956 this institute—one in each State has been rendering very useful service to small

scale industries. The assistance rendered by the institute and its extension centres in Tamilnadu may

be listed as follows :

1. Technical Consultancy and Advisory Service: This relates to selector of profitable small

enterprises, choice of appropriate machinery and equipment, appraisal of the technique of"

manufacture, processing of raw materials, adoption of recognised standards of testing, quality

performance of the small industry products and encouraging small units to participate in

Governments stores Purchase Programme. The Institute explores the possibility of setting up

small scale units to supply parts/components to large scale industries.

2. Common Facility Service: This includes supply of designs and drawings and

provision of workshop facilities for the manufacture of dies, tools, jigs and fixtures and

components.

3. Training Facilities: Training is provided to workers in basic trades in the workshops

attached to this Institute and its extension centres, to increase their productivity and this helps

to encourage development of small scale industries in rural areas.

Training in various aspects of industrial and business management is also provided for the

benefit of small industrialists.

A training course in small industries entrepreneurship and management to young engineers

with emphasis on the practical aspects of small industries management Is conducted. This has

been Instrumental in creating a new class of qualified entrepreneurs.

4. Testing Facilities: Basic testing facilities (both physical and chemical) are

provided in the laboratories and workshops attached to this institute at concessional

rates.

5. Marketing Assistance: Economic information on the nature and extent of the

market for specific products is collected and furnished to small industrialists at their

request. The institute offers export promotion service by counselling on export

procedures and trends in foreign markets.

96

Market survey for specific products of small enterprises is also undertaken on a regional basis to

enable a small industrialist to increase the sales of his products in the region.

The special information bureau, called the Tamilnadu Sub Contract Exchange, is a Central

Information Centre where machine capacities of small scale industries are registered and enquiries

from large industries for the manufacture of different components are passed on to registered small

scale units having spare capacity, so as to enable them to feed the requirements of large scale units.

The institute conducts economic surveys of particular areas to ascertain their industrial potential.

KHADI AND VILLAGE INDUSTRIES COMMISSION (KVIC)

KVIC was established in 1953 with the primary objective of developing Khadi and Village industries

and improving rural employment opportunities. Its wide range of activities include training of

artisans, extension of assistance for procurement of raw materials, marketing of finished products

and arrangement for manufacturing and distribution of improved tools, equipment and machinery to

producers on concessional terms.

KVIC provides assistance to Khadi and Village industries which are characterised by low capital

intensity and ideally suited to manufacturing utility goods by using locally available resources. There

are about 26 specified village industries such as processing of cereals and pulses, leather, cottage

matches. Gur and Khandsari, palm gur, non-edible oils and soaps, bee-keeping, village pottery,

carpentry and blacksmithy, gobargas, household alluminium utensils, etc.

KVIC's policies and programmes are executed through 30 State Khadi and Village Industries Boards,

2320 institutions registered under the Societies Registration Act. 1960 and about 30,600 Industrial

Cooperative Societies registered under State Cooperative Societies Act. Activities involving

pioneering types of work, such as developing new industries in hilly, backward and inaccessible

areas are undertaken by KVIC directly.

COMMERCIAL BANKS AND ENTREPRENEURIAL DEVELOPMENT

In recent times commercial banks have not confined themselves to mere extension of finance to

small entrepreneurs hut have shown genuine concern for their progress and development. They have

now entered the challenging field of promoting new small scale entrepreneurs through

entrepreneurship development programmes. In their new role as promoters of small scale sector they

have accepted yet another challenging task. They are now holding EDPs in collaboration with

specialised Institutions such as DIG, SIS1, TCOs, etc, with a view to identifying entrepreneurs,

especially in backward areas, and training and monitoring them to start new ventures.

State Bank of India (SBI)

In order to accelerate the development of backward areas by monitoring potential entrepreneurs to

take up risky new ventures, the SBI launched EDPs in 1978. As per the Bank's ventures, the EDPs

consist of one month's intensive training in behavioural science, management aspects, field training.

During the training period, the entire cost of boarding and lodging is borne by the Bank, The Bank's

EDP consists of three phases:

(i) Initiation phase for cretin" awareness about entrepreneurial opportunities.

(ii) Development phase through training programmes in developing motivation and managerial

97

(iii) Support phase counselling, encouragement and infra-structural support for establishing and

running an enterprise.

In 1967 the SBI launched a liberalised scheme for providing financial assistance to technically

qualified or trained entrepreneurs to the extent of 100 per cent, if necessary. The target group is the

technocrats who lack the financial capability to meet the normal margins stipulated by the Bank.

Under its Equity Fund Scheme, the Bank may grant interest-fee loan for the 25% of the project cost

which is the minimum contribution of an entrepreneur.

Recently SBI has set up a Research and Development Fund of Rs. 5 crores for inter-alia. assisting

entrepreneurial development. SBI and its group offer package of financial arrangement and

assistance to small scale units in their promotional and expansion activities and act as banker to

capital issues.

Punjab National Bank

Through its Merchant Banking Division it offers similar package of assistance to small scale units.

The package of measures include the following:

1. The banks study the economic viability and technical feasibility of the proposals

and help in preparation of market-survey report with the assistance of technical consultants.

2. They provide assistance to entrepreneurs in obtaining various government

consents required for industrial projects right from the time the application for letter of intent

is made.

3. They assist the entrepreneur in raising rupee resources in the form of

debentures, term loans, dereferred payment guarantees from financial institutions.

4. They assist in raising foreign exchange resources required for import of plant and

machinery, components, raw materials, etc., by arranging through the Bank's foreign

correspondents, suppliers' credit, buyers' credit and foreign currency loans.

5. They determine the capital structure, assist in obtaining consent of SEB1.

finalisation of syndication of underwriting arrangements, handling of share applications

and relative allotment in consultation with stock exchange, etc.; financing export of

capital equipment on deferred payment terms.

6. They suggest strengthening the capital base of small scale industries, which intend to

expand/diversify by conversion of partnership firms into private limited company, or

conversion of private limited company into public limited company.

Indian Bank—Entrepreneurship Service Cell

The bank provides consultancy services to persons who graduate from colleges and institutions of

engineering, technology, etc. and unemployed engineers, diploma holders and other graduates or

business executives. The consultancy service right from identification of a project to its

implementation and marketing is provided through the personnel of the bank and panels of expert

specialists. For this purpose, the cell after preliminary discussion with a prospective entrepreneur

arranges a meeting with the appropriate panel member. The cell and the appropriate panel member

then assist the entrepreneurs. This service was inaugurated on 3rd October. 1973 and is available

only at Madras and a few other selected centres.

98

Bank of Baroda—Entrepreneurial Banking Service

Bank of Baroda has started what is known as 'Entrepreneurial Banking' in collaboration with Uttar

Pradesh Small Industries Corporation to assist technician entrepreneurs to set up their own units at

Rae Bareli Industrial Complex for building and hardware materials. Under this scheme, the

Corporation assists the technicians with the acquisition of fixed assets, and Bank of Baroda arranges

in-plant training in established industrial units and provides working capital facilities to the

entrepreneurs.

Bank of Baroda has also started a Multi Service Agency at Bombay to provide technical assistance to

self-employed persons about feasibility of their projects/proposals, guide the entrepreneurs in regard

to availability of raw materials, marketing prospects, etc.

Bank of India—Entrepreneurial Clinic-Cum-Guidance Service

With a view to fostering growth of entrepreneurship and economic development, the bank has set up

the cell. The scheme offers;

(i) assistance in selection of industry, preparation and evaluation of project report and market

survey:

(ii) practical training in the line, if necessary;

(iii) assistance in obtaining government clearance, procurement of machinery and equipment and

marketing of product;

(iv) assistance and guidance in implementation of project.

The novel feature of the scheme is the bank will provide from a panel of industrialists a 'foster father'

to guide and assist the budding entrepreneurs.

Canara Bank—Industrial Information and Guidance Service

The bank has set up an industrial information and guidance service to provide information and

advice to its clients on matters, such as scope for establishment of industries, technical and marketing

facilities, taxation, export and imports, accounting and management and to prepare project reports on

proposed industries.

Grindlays Bank Limited

It has two Small Scale Consultancy Service and Merchant Banking Division. Small Scale

Consultancy Service Division is located in Calcutta. This division offers assistance in preparing

project feasibility reports, conducting overall industry studies, marketing and sales, and management

accounting. This division undertakes a detailed in-depth study of the existing system and procedures

in various functional areas for idea problems and other deficiencies, to develop tailor-made solutions.

The Division also helps the management in implementing the suggestions.

The Merchant Banking Division located at Mumbai, Chennai, Calcutta and New Delhi managers

public issues for raising capital, helps to establish liaison with government lending bodies for raising

capital, helps term development finance, assesses the strengths and weaknesses of the company

through management audits and suggests tailor-made solutions to eliminate the weaknesses.

99

Syndicate Bank

Small Scale Industries Department of the Bank with a technical cell of engineers working at the head

office at Manipal (Karnataka) and at different industrial growth centres, besides appraising the

viability of credit proposals from small scale industries sector, offers counselling services to the

entrepreneurs, including helping them to prepare project r ports.

Union Bank of India—General Services Cell

The Bank has opened a General Services Cell at its head office at 66/80 Bombay Samachar Street,

Fort Bombay exclusively for small industrialists and other small borrowers to provide services like

selection of machinery, accounting procedure, financial planning and other matters.

United Bank of India

The Bank's Technical Cell at Calcutta provides assistance to persons about feasibility of their

projects and technical as well as non-technical guidance.

United Commercial Bank

The Bunk has a cell in its head office at Calcutta to provide technical assistance/guidance to self-

employed persons about feasibility of their projects. It also renders them advice in regard to sources

and availability of raw materials, and marketing of their products.

New Entrepreneur Development Agency

The New Entrepreneur Development Agency has been created in order to assist educated

unemployed graduates to set up SSI units in urban and metropolitan areas. The Agency will choose

candidates only from among those sponsored by Government Institutions and Agencies like SISI,

DICs, University Employment Guidance Bureau, etc.

The selected candidates will be assisted in selecting the projects suitable to their aptitude and

backgrounds. The candidates on identifying the projects will undergo an Entrepreneur Development

Programme to be conducted by Agencies like SISI, ITCOT, etc. Practical training will also be

arranged in industries, wherever possible.

Projects with credit requirements up to Rs 5 lakhs are only eligible lor finance under the scheme.

Hundred per cent finance will be provided in the beginning and margin will be built up to 20 per cent

over a period of time depending on the profitability of envisaged project. Assets created with bank

finance and personal guarantees of parents will be sufficient securities for the loans given.

The maximum amount of loan will be Rs. 5 lakhs and the repayment of term loans will be based on

the profitability projection and within seven years. The interest rate for medium term loan is 13.5 per

cent p.a., and for working capital- 14 per cent p.a., up to Rs. 2 lakhs and 15.5 per cent p.a. above Rs.

2 lakhs up to Rs. 5 lakhs.

The candidate will be assisted in getting marketing tie-up with user industries, wherever possible.

Their unit will have to be registered as small scale Industries with the Directorate of Industries and

Commerce, or the DICs as the case may be.

100

Indian Overseas Bank—Bank's Small Business Aid Agency

The agency specialises in the field of small business and offers necessary guidance to those persons

who wish to start the same. It also offers consultancy to professionals, like doctors, engineers,

lawyers, etc. to enable them to start their practice. The operations of this agency are presently

restricted to Madras city and Madurai. though the bank plans to establish similar agencies in other

centres in due course.

SPECIAL ECONOMIC ZONES

In 1980, barely a year after the Chinese strongman Deng Xiaoping initiated his country’s switch to

market economy, a nondescript town in the Guangdong province in southern China, Shenzhen, was

designated a special economic zone (SEZ) by the authorities. It has virtually not modern industries

worth speaking of and had the slow-paced lifestyle that characterizes all backwaters. Today, some 27

years later, Shenzhen is a modern, sprawling metropolis with a population of more than 10.5 million

and home to some elite global brands and Fortune 500 companies. Crammed to the full with

industries of every hue, it is now the economic heartland of China. More importantly, it showcases a

model of growth that leapfrogs the limitations imposed by dirigisme to a high-growth export-led

powerhouse that is the envy of the world.

Today, India Inc. hopes to replicate the Chinese success story by creating its own brand of SEZs.

In simple terms, an SEZ is a designated free trade enclave that is deemed as a “foreign territory’ only

for trade operations’ dukes and tariffs. It has more liberal economic and labour laws than those of the

country and hence has the capacity to attract foreign investments, help promote exports and create a

level-playing field for domestic enterprises and manufacturers to compete in the global market. And

it’s not a new concept either. Since the end of World War II, SEZs, export-processing zones (EPZs)

and free trade zones (FTZs) have been bandied about as a solution to Jump-start economic

development in the developing countries to take on their Western counterparts. Interestingly, it was

the small Latin American country of Puerto Rico that showed the way for SEZs way back in 1947,

when it decided to pass a tax exemption law to attract firms from mainland USA to its shore. But It is

really the success of the five Chinese SEZs—especially Shenzhen in the Guangdong province, which

has attracted more than S 140 billion in FDI since the inception in 1980 and exported goods worth

nearly S 150 billion in 2004 (almost double of India's total exports in 2004-05 of S 80 billion)—that

has made SEZs a global media darling, in fact, China's astounding growth over the last three decades

is largely attributed to SEZs, which contribute more than 45% of the total Chinese exports.

India, too, has along history of dabbling in export promotion schemes. Asia's first EPZ was sent up in

Kandla in 1965, it was followed by the Santa Cruz EPZ in 1973. There were eight EPZs in the

country, but their performance is nothing to talk about.

What thwarted EPZs' progress were multiplicity of controls and clearances, lack of good

infrastructure and an unstable fiscal structure the very bottlenecks the SEZ policy, inspired by the

Chinese model, seeks to remove.

While the EPZs are just industrial estates, SEZs are industrial townships that provide supportive

infrastructure such as housing, roads, ports and telecommunication. EPZs have little protection from

cumbersome procedures and paperwork, while SEZs have single-window clearances that reduce

transaction costs and procedural hassles. But then again, while EPZs enjoy no benefits in terms of

101

relaxation in labour laws, the SEZ Act allows state governments to liberalie the labour laws in SEZs

falling within its jurisdiction.

Considering the country's creaking infrastructure, sorry state of public finances and massive

unemployment, getting private investment in infrastructure and attracting huge amounts of foreign

direct investment (FDI) especially into labour-intensive manufacturing sectors, should be the prime

objectives of the policy makers. After all, India—ranked—ranked at a lowly 134th on the ease of

doing business in the latest World Bank-IMF list—needs radical policy changes to emerge as a

global investment hotspot. And SEZs could just be the perfect tool to woe' all those multinationals

waiting to access our huge pool of cheap labour as well as the big market that India is.

And for one, it will be the private players and not the cash-strapped central government that will be

involved in converting large tracts of land into massive industrial townships.

Incentives for Manufacturers

• Duty-free import of capital goods, raw-materials, consumables and spares.

• 100% exemption on export profits for the first five years.

• 50% tax exemption on export profits for the next five years

• 50% tax exemption for another five years on reinvested profits.

• Exemptions from minimum alternate tax.

• Goods purchased from DTA are exempt from central sales tax.

• Exemption from service tax and capital gains on transfer from an urban area to SEZ.

Incentives for Developers

• No duty on goods imported either from the DTA or abroad.

• Income-tax exemption for the first 10 years.

• Service tax exemption for all services rendered within the SEZ.

• Exemptions from purchase, sale and turnover tax on all transactions.

• Exemption from stamp duty, registration fee and electricity duty.

• No tax on income from dividends and long-term capital gains tax.

• 100% FDI allowed for developers.

Debate over SEZs

The SEZs have been an issue of intense debate. Arguments have been advanced both for and against.

These can be briefly summarised as follows.

Arguments for SEZs

They will:

• Attract global manufacturing companies to set up base here.

• Create world-class infrastructure in the hinterland.

• Help create much-needed jobs across the country.

• Help the Centre save revenue on infrastructure development.

• Ease pressure on metres by creating new centres of employment.

• Ensure that risks of failure are borne entirely by the private sector

• Offer easier access to funds as foreign banks will be allowed in

102

• Bring down transaction costs for companies.

• Make units competitive through flexible labour laws.

• Bring foreign investment, technology and managerial talent.

Arguments against SEZs

They will:

• Lead to exploitation of the policy by fly-by-night developers.

• Could result in significant revenue losses for governments.

• Divert large tracts of farmland into non-performing SEZs.

• Result in domestic markets becoming under-served.

• Not produce world-class facilities in case of smaller size.

• Not guarantee the future of units in unsuccessful zones.

• Distort taxation structure, making units uncompetitive in DTA.

• Not be VITO compatible all the time.

• Lead lo large-scale exodus of industries from DTA.

• Allow the rise of private monopolies that will be against public interest.

103

LESSON 5

MARKETING Dr. Hem Chand Jain

Marketing may be narrowly defined as a process by which goods and services are exchanged and the

value determined in terms of money prices. That means marketing includes all those activities

carried on to transfer to goods from the manufacturers of producers the consumers.

We shall be learning later in the lesson that marketing is more than mere physical process of

distributing goods and services. It is the process of discovering and translating consumer wants into

products and services. It begins with the customer (by finding their needs) and ends with the

customer (by satisfying their needs).

The scope of marketing can be understood in terms of functions that an entrepreneur has to perform.

These include the following:

(a) Functions of exchange: which include buying and assembling and selling?

(b) Functions of physical supply: include transportation, storage and warehousing.

(c) Functions of facilitation: product planning and development, marketing research,

standardization, grading, packaging, branding, sales promotion, financing.

The Marketing Concept

The marketing concept holds that the key to achieving organizational goals consists in determining

the needs and wants of target markets and delivering the desired satisfactions more effectively and

efficiently than competitors. Under marketing concept, the emphasis is on selling satisfaction and not

merely on the selling a product. The objective of marketing is not the maximization of profitable

sales volume, but profits through the satisfaction of customers. The consumer is the pivot point and

all marketing activities operate around this central point. It is, therefore, essential that the

entrepreneurs identify the customers, establish a rapport with them, identify their needs and deliver

the goods and services that would meet their requirements.

The components of marketing concept are as under:

(a) Satisfaction of customers: In the modern era, the customer is the focus of the organization.

The organization should aim at producing those goods and services, which will lead to

satisfaction of customers.

(b) Integrated marketing: The functions of production, finance and marketing should be

integrated to satisfy the needs and expectations of customers.

(c) Profitable sales volume: Marketing is successful only when it is capable of maximizing

profitable sales and achieves long-run customer satisfaction.

Marketing versus Selling

The basic difference between marketing and selling lies in the attitude towards business. The selling

concept takes an inside-out perspective. It starts with the factory, focuses on the company’s existing

products, and calls for heavy selling and promoting to produce profitable sales. The marketing

concept takes an outside-in perspective. It starts with a well-defined market, focuses on customer

needs, coordinates all the activities that will affect customers, and produces profits through creating

customer satisfaction.

104

Starting point Focus Means Ends

Selling Concept

Factory Products Selling and Profits through

Promoting sales volume

Marketing Concept

Market Customer Coordinated Profits through

Needs marketing customer satisfaction

Importance of Marketing in Small Business

Since marketing is consumer oriented, it has a positive impact on the business firms. It enables the

entrepreneurs to improve the quality of their goods and services. Marketing helps in improving the

standards of living of the people by offering a wide variety of goods and services with freedom of

choice, and by treating the customer as the most important person.

Marketing generates employment both in production and in distribution areas. Since a business firm

generates revenue and earns profits by carrying out marketing functions, its will engage in exploiting

more and more economic resources of the country to earn more profits.

A large scale business can have its own formal marketing network, media campaigns, and sales

force, but a small unit may have to depend totally on personal efforts and resources, making it

informal and flexible. Marketing makes or breaks a small enterprise. An enterprise grows, stagnates,

or perishes with the success or failure, as the case may be, of marketing. “Nirma” is an appropriate

example of the success of small scale enterprise.

Marketing of Services

The services sector is more than twice the size of the manufacturing sector. The growing competitive

market for services means that a marketing orientation has become essential for the survival for

service industries too.

India’s high capabilities in Information Technology are well known. In addition, there is the most

popular segment of its services sector, the entertainment industry, particularly films and TV happens

to be one of the fastest growing in the world. Indian films are popular across West Asia, Afghanistan,

Central Asia, Russia, South Africa and South East Asia. They are now penetrating the western world.

Market Segmentation

A market consists of large number of individual customers who differ in terms of their needs,

preferences and buying capacity. Therefore, it becomes necessary to divide the total market into

different segments or homogeneous customers groups. Such division is called market segmentation.

They may have uniformity in employment patterns, educational qualifications, economic status,

preferences, etc.

105

Market segmentation enables the entrepreneur to match his marketing efforts to the requirements of

the target market. Instead of wasting his efforts in trying to sell to all types of customers, a small

scale unit can focus its efforts on the segment most appropriate to its market.

A market can be segmented on the basis of the following variables:

1. Geographic Segmentation: The characteristics of customers often differ across nations,

states regions cities or neighbourhoods. The entrepreneur can decide to operate in one or a

few or all the geographic areas, but pay attention to differences in geographic needs and

preferences.

2. Demographic Segmentation: Variables such as age, sex, family size, income, occupation,

education, religion, race and nationality are widely used for market segmentation.

3. Psychological Variables: Personality, life style, social class, etc. can also be used for market

segmentation. For example, some products like pens, watches, cosmetics and briefcases are

designed differently for common men and status seekers.

4. Behavioural Segmentation: Buyers are divided into groups on the basis of their knowledge,

attitude, use or response to a product.

Marketing Mix

In order to cater to the requirements of identified market segment, an entrepreneur has to develop an

appropriate marketing mix. Marketing mix is a systematic and balanced combination of the four

inputs which constitute the core of a company’s marketing system – the product, the price structure,

the promotional activities and the place or distribution system. These are popularly known as “Four

P’s” of marketing.

An appropriate combination of these four variables will help to influence demand. The problem

facing small firms is that they sometimes do not feel themselves capable of controlling each o the

four variables in order to influence the demand.

Product Mix Price Mix Place Mix Promotion Mix

• Features

• Design

• Variety

• Quality

• Brand name

• Packaging

• Sizes

• Services

• Warranties

• List Price

• Discounts

• Allowances

• Payment Period

• Credit Terms

• Location

• Transport

• Channels

• Coverage

• Delivery

• Availability

• Inventory

• Advertising

• Personal selling

• Sales

promotion

• Publicity

A brief description of the four elements of markets mix is as follows:

106

1. Product: The first element of marketing mix is product. A product is anything that can be

offered to a market for attention, acquisition, use, or consumption that might satisfy a want or

need. Products include physical objects, services, events, persons, places, ideas or maxis of

these. This element involves decisions concerning product line, quality, design, brand name,

label, after sales services, warranties, product range, etc. An appropriate combination of

features and benefits by the small firm will provide the product with USP (unique selling

proposition). This will enhance the customer loyalty in favour of its products.

Products and services are broadly classified into consumer products and industrial products.

Consumer products are bought for final consumption; whereas industrial products are bought

by individuals and organisations for further processing or for use in conducting business.

Other ways of classifying products are as follows:

(a) Convenience products: These are consumer products that the customer buys very

frequently, without much deliberation. They are low priced of low value and are

widely available at many outlets. They may be further subdivided as:

• Staple Products: Items like milk, bread, butter etc. which the family consumes

regularly. Once in the beginning the decision is programmed and it is usually

carried on without change.

• Impulse Products: Purchase of these is unplanned and impulsive. Usually when

the consumer is buying other products, he buys these spontaneously for e.g.

Magazines, toffees and chocolates. Usually these products are located where they

can be easily noticed.

• Emergency Products: Purchase of these products is done in an emergency as a

result of urgent and compelling needs. Often a consumer pays more for these. For

example, while travelling if someone has forgotten his toothbrush or shaving it; he

will buy it at the available price.

(b) Shopping products: These are less frequently purchased and the customer carefully

checks suitability, quality, price and style. He spends much more time and effort in

gathering information and making comparisons. E.g. furniture, clothing and sued cars.

(c) Specialty products: These are consumer goods with unique characteristics / brand

identification for which a significant group of buyers is willing to make a special

purchase effort. For example, Mitsubishi Lancer, Ray ban glasses.

(d) Unsought product: These are products that potential buyers do not know exist or do

not yet want. For example Life Insurance, a Lawyers services in contesting a Will.

The above product decisions are very important to ensure the sale of products. A product has

both tangible and intangible components. While buying a product, the customer does not

merely look for the physical product, but a bundle of satisfaction. Thus, the impact that any

product has upon a buyer goes well beyond its obvious characteristics. There is a

psychological dimension to all customer purchases; what a customer thinks about a product is

influenced by far more than the product itself. For example, the buyer of an air conditioner is

107

not purchasing cooling machine only. He looks for attractive colour and design, durability,

low noise, quick cooling, etc. these influencing factors must be considered by the small firms

to meet the requirements of different kinds of customers.

2. Price: The second element is the price, which affects the volume of sales. It is one of the

most difficult tasks of the marketing manager to fix the right price. The variables that

significantly influence the price of a product are: demand of the product, cost competition

and government regulation. The product mix includes: determination of unit price of the

product, pricing policies and strategies, discounts and level of margins, credit policy, terms of

delivery, payment, etc. Pricing decisions have direct influence on the sales volume and profits

of the firm. Price, therefore, is an important element of the marketing mix. Right price can be

determined through pricing research and by adopting test-marketing techniques.

Small firms should think of pricing as a method whereby prices are set with regard to costs,

profit targets, competition and the perceived value of products. Because of their simplicity,

cost-plus-pricing are attractive to small businesses, though this is not the only mode of

pricing utilized by small firms. For example, the profit margin in the cost-plus approach may

well be fixed after examining both the nature of the market and the competitor activity within

it. It is a mistake for small firms to rely wholly on cost-plus, but very small firms do that to

the detriment of profits and market share.

The pricing policies mainly followed by the small firms are:

(a) Competitive pricing: This method is used when market is highly competitive and the

product is not differentiated significantly from the competitor’s products.

(b) Skimming-the-cream pricing: Under this pricing policy, higher prices are charged

during the initial stages of the introduction of a new product. The aim is to recover the

initial investment quickly. This policy is quite effective when the demand for a

product is likely to be more inelastic with respect to price in its early stages; to

segment the market into segments that differ in price elasticity of demand and to

restrict the demand to a level, which a firm can easily meet.

(c) Penetration pricing: Under this policy, prices are fixed below the competitive level

to obtain a larger share of the market. Penetration pricing is likely to be more

successful when the product has a highly elastic demand; the production is carried out

on a large scale to achieve low cost of production per unit; and there is strong

competition in the market.

3. Promotion: Promotion refers to the various activities undertaken by the enterprise to

communicate and promote its products to the target market. The different methods of

promoting a product are through advertisement, personal selling, sales promotion and

publicity.

3. Place or Physical Distribution: This is another key marketing mix tool, which stands for the

various activities the company undertakes to make the product available to target customers.

Place mix or delivery mix is the physical distribution of products at the right time and at the

right place. It refers to finding out the best means of selling, sources of selling (wholesaler,

retailers, and agents), inventory control, storage facility, location, warehousing,

108

transportation, etc. This includes decisions about the channels of distribution, which make the

product available to target customers at the right time, at the right place and at the right price.

By selecting wrong distribution channels or by using the ones it has traditionally used, a

small firm could be depriving it of new market opportunities.

In a situation where a small firm has only one primary product, the general rise and fall of sales will

lead to a rise and fall of the firm, unless the firm learns to consistently adjust its marketing mix to

match consumer demand.

Marketing mix of a firm selling automatic washing machines

Target market Urban household with high income and status

consciousness.

Product Latest technology, automatic washing machines.

Price High, but should not be beyond the low range high-

income groups.

Promotion Heavy advertising through high image magazines and

television stressing the high quality of the machines.

Place (distribution) Though high image retailers.

A marketing mix must be consistent for any product. Pricing, for example, must be consistent with

packaging and perceived product quality. If one of these is not in line with others, then sales might

suffer as a consequence. A manager selecting a marketing mix is like a cook or chef preparing meal.

Each knows through experience that there is no ‘one best way’ to mix the ingredients. Different

combinations may be used depending upon one’s needs and objectives. In the marketing as in

cooking, there is no standard formula for a successful combination or ingredients. Marketing mixes

vary from company to company and from situation to situation. The right marketing mix is important

for any product to have a long life cycle.

Tender Marketing

The Corporation participates in bulk global tender enquiries and local tenders of Central and State

government and Public Sector Enterprises on behalf of small-scale units. It is aimed to assist small

units with ability to manufacture quality products but which lack brand equity and credibility or have

limited financial capabilities. Under this scheme, the Corporation has identified large number of

items for which it actively participate sin tenders of these Departments and Enterprises. On receipt of

the orders, Corporation farms out these orders to the units on whose behalf it has quoted. This

assistance has enabled large number of small units to compete for the orders, which are normally out

of reach of the individual units because of the bulk requirement.

The main benefits of the scheme are:

• Small scale units are provided with all requisite financial support depending upon the units’

individual requirements the purchase of raw material and financing of sale bill.

• Enhanced business volume helps small units achieve maximum capacity utilization.

109

• They are exempted from depositing earnest money.

• Small units are helped to participate in large and global tenders up to its capacity and capability.

• They are also assisted technically for quality upgradation and new product development in

addition to testing facility.

• Ensures fair margin to small units for their production.

• Publicity to small 8industries products.

• Production of quality products from the small scale sector.

Consortia Marketing

A small unit in its individual capacity faces problem very often to procure and execute large orders,

which inhibits and restricts the growth of small scale units. National Small Industries Corporation

Limited (NSIC) accordingly adopted Consortia Approach and built groups / consortia of units

manufacturing same products, thereby easing out marketing problem of SSI units. The Corporation

explores market and secures orders for bulk quantities. These orders are then farmed out to small

units in tune with their production capacity. Testing facilities are also provided to enable units to

improve and maintain the quality of their products conforming to the standard specifications.


• Participation and Procurement of Orders for bulk quantities.

• SSIs capacity of participating in large tenders enhanced.

• Support testing facility provided by NSIC.

• Financial assistance for Raw Material, Bill discounting etc. provided by NSIC.

• Wherever required, equipment is also financed to the SSI on priority.

• Help in developing / designing of new products and quality enhancement of SSI products.

Marketing Problems of Small Scale Units

All types of business enterprises face marketing problems, but these problems are more severe in

case of small scale units because of lack of knowledge, adequate funds and lack of experience. Some

of the marketing problems commonly faced by the small scale entrepreneurs in India are:

(a) Competition from large scale sector: Because of scarcity of resources, small entrepreneur

usually use inferior technology. As a result their products are not standardized. The obsolete

technology used by them gets translated into inferior quality of products.

(b) Lack of marketing knowledge: Most of the small scale entrepreneurs are not highly

educated or professionally qualified to have knowledge of marketing concept and strategy.

Their lack of expertise further inhibits their understanding of the prevailing trends in the

market.

(c) Lack of sales promotion: Small units lack the resources and knowledge for effective sales

promotion. Large scale units mostly have well-known branded names. They also have huge

amount of resources to spend on advertisement and other sales promotion tools. Small scale

units, on the other hand, have to pay a heavy commission to dealers for their selling efforts,

which reduce profits margins.

110

(d) Weak bargaining power: At the time of purchase of inputs, large scale entrepreneur manage

to get huge discounts and credit. Such facilities are not available to small units.

(e) Product quality: It is costly and difficult for a small unit to have quality testing and

evaluating equipment.

(f) Credit sales: The small scale enterprise is invariably called upon to sell on credit. However,

when it comes to purchasing inputs, they are denied liberal credit facilities. As a result, they

have to borrow excessive working capital than actually needed. This increases the general

cost of production and prices, making it non-competitive.

POLICY SUPPORT TO SMALL SCALE INDUSTRIES

Introduction

After attaining independence in 1947 India adopted mixed economic planning as a method to achieve

economic development. Along with the Large Scale sector the thrust was on the Small Scale sector

because of its decentralized, its small size, use of mainly indigenous, employment intensity and its

suitability for rural areas with limited techno-economic structure.

Industrial policies over the years have focused to promote SSIs through various incentives related to

financial, fiscal and infrastructure measures; along with a heavy industry base.

Objectives

After going through this less you should be able to:

• Explain the various provisions under Industrial Policy Resolution formulated by the Government

in assisting the small scale industry (SSI).

• Discuss the various fiscal incentives for SSIs.

Industrial Policy Resolutions and SSIs

Government’s attitude and intention towards industries in general and SSIs in particular are reflected

in Industrial Policy Resolutions. This sub-sections 20.2.1 to 20.2.11 deal with such resolutions.

Industrial Policy Resolution 1948

The government stressed the role of SSIs for balanced industrial growth. It was stated that SSIs are

particularly suited for the utilization of local resources and creation of employment opportunities.

The primary responsibility for developing small industries by creating infrastructure has been

provided to state governments. Central government frames the broad policies and coordinates the

efforts of State Government for the development of SSIs.


It stated that besides continuing the policy support to cottage, village and small industries by

differential taxation or direct-subsidies, the aim of state policy would be that the development of this

sector is integrated with that of large scale industry. The focus was to improve the competitive

111

strength of SSIs. To achieve this 128 items were exclusively reserved for production in SSIs, and 166

items were reserved for exclusive purchase by government from this sector.

It emphasize that whatever can be produced by SSIs must only be so produced. The main thrust of

policy was effective promotion of cottage, village and small industries widely dispersed in rural

areas and small towns. This thinking specified the following things:

(a) 504 items were reserved for exclusive production in the small-scale industries.

(b) The concept of District Industries Centres (DICs) was introduced so that in each district

single agency could meet all the requirements of SSIs under one roof.

(c) Technological upgradation was emphasigned in traditional sector.

(d) Special marketing arrangement through the provision of services, such as, product

standardization, quality control, market survey, were laid down.


The policy focused on the need of promoting SSIs through integrated industrial development

between large and small sectors. Industrially backward districts were indentified for faster growth of

existing network of SSIs. Following measures were specified in the policy:

(a) Investment limit was raised for tiny, small, and ancillary units to Rs. 2 lacs, Rs. 20 lacs, and

Rs. 25 lacs respectively.

(b) “Nucleus plants” in each industrially backward district replaced the “district industries

centres.” These were to concentrate on assembling the products of SSIs and to produce inputs

needed by large number of small units.

(c) Reservation of items and marketing support for small industries was to continue.

(d) Availability of credit to rowing SS units was continued.

(e) Buffer stocks of critical inputs were to continue.

(f) Agricultural base was to strengthen by providing preferential treatment to agro-based

industries.

(g) An early warning system was to establish to avoid sickness and take appropriate remedial

measures.


Main features of this Resolution are as follows:

(a) It raised the investment ceiling in plant and machinery for SSIs.

(b) It created central investment subsidy for this sector in rural and backward areas. Also,

assistance was granted to women entrepreneurs for widening the entrepreneurial base.

(c) Reservation of items to be produced by SSIs was increased to 836.

(d) Small Industries Development Bank of India was established to ensure adequate flow of

credit to SSIs.

(e) Stress was reiterated to upgrade technology in improve competitiveness.

(f) Special emphasis was laid on training of women and youth under Entrepreneurial

Development Programme.

(g) Activities of Kadhi and Village Industries Commission and Khadi and Village Industries

Board were to expand.

112


The basic thrust of this resolution was to simplify regulations and procedures by delicensing,

deregulating, and decontrolling. Its salient features are:

(a) SSIs were exempted from licensing for all articles of manufacture.

(b) The investment limit for tiny enterprises was raised to Rs. 5 lacs irrespective of location.

(c) Equity participation by other industrial undertakings was permitted up to a limit of 24 percent

of shareholding in SSIs.

(d) Factoring services were to launch to solve the problem of delayed payments to SSIs.

(e) Priority was accorded to small and tiny units in allocation of indigenous and raw materials.

(f) Market promotion of products was emphasized through co-operatives, public institutions and

other marketing agencies and corporations.

Comprehensive Policy Package for SSIs and Tiny Sector 2000

Main focus of this policy is as follows:

(a) The exemption for excise duty limit raised from 50 lakhs to Rs. One crore to improve the

competitiveness.

(b) Credit linked capital subsidy of 12% against loans for technology up gradation was provided

in specified industries.

(c) The third census of small scale industries by the ministry of SSI was conducted, which also

covered sickness and its causes in SSI’s.

(d) The limit of investment was increased in industry related service and business enterprises

from Rs. 5 lacks to Rs. 10 lakhs.

(e) The scheme of granting Rs. 75000 to each small scale enterprise for obtaining ISO 9000

certification was continued till the end of 10th

plan.

(f) SSI associations were motivated to develop and operate testing laboratories. One time capital

grant of 50% was given on reimbursement basis to each association.

(g) The limit of composite loan was increased from Rs. 10 lakhs to Rs. 25 lakhs.

(h) A group was constituted for streamlining of inspection and repeal of redundant laws and

regulations.

(i) The coverage of ongoing Integrated Infrastructure Development (IID) was enhanced to cover

all areas in the country with 50% reservation for rural areas and 50% earmarking of plots for

tiny sector.

(j) The family income eligibility limit of Rs. 24000 was enhanced to Rs. 40000 per annum under

the Prime Minister Rozgar Yozna (PMRY).

Industrial Policy Package for SSI 2001-02

This policy emphasizes the following:

(a) The investment limit was enhanced from Rs. 1 crore to Rs. 5 crore for units in hosiery and

hand tool sub sectors.

(b) The corpus fund set up under the Credit Guarantee Fund Scheme was increased from 125

crore to 200 crore.

113

(c) Credit Guarantee cover was provided against an aggregate credit of Rs. 23 crore till

December 2001.

(d) 14 items were de-reserved in June 2001 related to leather goods, shoes and toys.

(e) Market Development Assistant Scheme was launched exclusively for SSI sector.

(f) Four UNIDO assisted project were commissioned during the year under the Cluster

development Programme.

Industrial Policy on SSIs 2003-04

The following are the highlight of this endeavor:

(a) 73 items reserved for exclusive manufacture in the SSI sector were de-reserved in June 2003.

These consist of chemical and their products, leather and leather products, laboratory reagents

etc.

(b) Selective enhancement of investment in plant and machinery from Rs. One crore to Rs. 5

crore. It was for 13 items in stationary sector and 10 items of drugs and pharmaceuticals

sector from June 2003.

(c) Banks were directed to provide credit to SSI sector within an interest rate band of 2 percent

above and below their Prime Lending Rate (PLR).

(d) The composite loan limit for SSI was raised from Rs. 25 lakhs to Rs. 50 lakhs.

(e) The limit of dispensation of collateral requirement was raised from Rs. 15 lakhs to Rs. 25

lakhs on the basis of good track record and financial position of the unit.

(f) The lower limit of Rs. 5 lakhs on loans covered under the Credit Guarantee Scheme was

removed. All loans up to Rs. 25 lakhs were made eligible for guarantee cover under the

Credit guarantee Scheme.

(g) 417 specialised bank branches were made operational for SSIs.

(h) Third all India census for SSI was conducted throughout the country and its final results were

released on January 17, 2004.

(i) 60 clusters were identified in July 2003 for focused development.

(j) Small and medium Enterprise (SME) fund of Rs. 10000 crore was set up under SIDBI to

solve the problem of inadequate finance for SSIs.

(k) Laghu Udyami Credit Card Scheme was liberalized. Under this scheme, the credit limit was

increased to Rs. 10 lakhs from Rs. 2 lakhs. But, it was only for borrowers with satisfactory

track record.

Policy Initiatives on SSI 2004-05

Policy initiatives for this year are as follows:

(a) The national commission on Enterprises in the Un-organised/Informal Sector was set up in

September 2004. It suggested measures considered necessary for improvement in the

productivity of these enterprises, generation of large scale employment opportunities, linkage

of the sector to institutional framework in areas like credit, raw material supply,

infrastructure, technology up gradation, marketing facilities and skill development by

training.

(b) 85 items were de-reserved in October 2004.

114

(c) The investment limit in plant and machinery was raised from Rs. One crore to Rs. 5 crore in

October 2004, in respect of seven items of sports goods to help to upgrade the technology and

enhance competitiveness.

(d) The Small and Medium Enterprise (SME) fund of Rs. 10000 crore was started by SIDBI

since April 2004, with 80% of the lending for SSI units. The interest rate was 2% below the

prevailing Prime Lending Rate (PLR) of the SIDBI.

(e) The Reserve Bank of India raised the composite loan limit from Rs. 50 lakhs to Rs. One

crore.

(f) Promotional Package for small enterprises was initiated.

Policy Package for SME 2005-06

This policy package contains the following points:

(a) The Ministry of Small Scale Industries has identified 180 items for dereservation.

(b) Small and Medium Enterprises were recognized in the services sector, and were treated on

par with SSIs in the manufacturing sector.

(c) The corpus of the Credit Guarantee Fund was raised from Rs. 1132 crore in March 2006 to

Rs. 2500 crore in five years.

(d) Credit Guarantee Trust for Small Industries (CGTSI) was advised to reduce the one time

guarantee fee from 2.5 per cent to 1.5 percent for all loans.

(e) Insurance cover was extended to approximately 30,000 borrowers, identified as chief

promoters, under the CGTSI. The sum assured would be Rs. 200000 per beneficiary and the

premium will be paid b y CGTSI.

(f) The emphasis was laid on Cluster Development model not only to promote manufacturing

but also to renew industrial towns and build new industrial townships. The model is now

being implemented, in nine sectors including khadi and village industries, handlooms,

handicrafts, textiles, agricultural products and medicinal plants.

Fiscal Incentives

Fiscal incentives are provided through tax concession granted in the form of exemptions of direct or

indirect taxes leviable on production or profits, besides special tax concessions. These incentives

have been provided to promote the SSIs.

Tax Holiday

With effect from financial year 2005-06, deduction in respect of profits and gains for small scale

industrial undertakings is available under Section 80IB.

Small scale industrial undertaking can claim deduction at the following rates:

(a) If SSI unit is owned by a company, the deduction available in 30% for first 10 years,

(b) If SSI unit is owned by a co-operative society, the deduction to be availed is 25% for first 10

years, and

(c) If any other person owns SSI unit, the deduction to be claimed is 25% for first 10 years.

The small scale units can avail this tax exemption facility only after fulfilling the following

conditions.

115

(a) No small scale or ancillary undertaking shall be subsidiary of, or owned or controlled by

other industrial undertaking.

(b) SSI unit can manufacture any nature type of goods article to avail deduction.

(c) The SSI unit should commence business between 1st April 1991 and 31

st March 2002.

(d) They should employ at least 10 workers in a manufacturing process carried out with the aid

of power or at least 20 workers in a manufacturing process carried out without the aid of

power.

(e) This tax exemption from total income is allowed from the assessment year in which unit

begin to manufacture or produce goods or articles.

Excise Concessions

Government of India has provided a major relief by granting full exemption from the payment of

central excise duty on a specified output and thereafter slab-wise concessions. The following

concessions are available to them in this regard:

(a) SSI units producing goods up to Rs. 100 lakhs are exempted from payment of excise duties.

(b) SSI units having turnover less than Rs. 60 lakhs per annum need not have a separate

storeroom for storing the finished products.

(c) SSIs are also not required to maintain any statutory records such as daily stock account of

production and clearances, raw material account, personal ledger account etc. Their own

records are adequate for excise purposes.

(d) There is no distinction between registered and unregistered units for SSI concessions.

Further, the eligibility for excise concessions for SSIs has been based on annual turnover

rather than SSI registration. Duty liability is to be discharged by 15th

of the following month.

(e) The SSI exemption is available for home consumption as well as in respect of goods exported

to Nepal & Bhutan.

(f) Normally, excise officers are not expected to visit SSI units paying less than Rs. 11 lakhs

duty annually.

(g) With effect from 1-4-1994, Gate-Pass System was replaced by manufacturer invoice to cover

clearances of goods as the duty-paying document.

Presently there are two streams of concessions to SSIs. These are as follows:

(a) SSI Scheme (Without CENVAT): This scheme is effective from 1st April 2000. The Table

shows the rate of duty applicable to such manufactures whose turnover does not exceed Rs. 3

crores in the previous financial year in respect clearances of excisable goods for home

consumption (including exports to Nepal or Bhutan) from one or more factories of the same

manufacturer or from factory by one or more manufacturers:

Table: Rate of Duty in Respect of Clearances of Excisable Goods

S.No. Value of Clearance

(Rs.)

Rate of Duty

1 Up to Rs. 100 Lakhs NIL

2 100 – 300 Lakhs Normal Rate of Duty

It may be noted that beyond clearances of Rs. 100 lakhs, the manufacturer is liable to pay

normal rate of duty. The manufacturer may opt for not availing exemption and instead pay

116

the normal rate of duty on the clearances. But once the option is exercised, it shall continue

till the remaining part of the financial year.

Value for purpose of calculating the limit of 100 and 300 lakhs is the ‘Assessable value’ i.e.,

wholesale price at factory gate, exclusive of taxes, where price is the sole criteria.

(b) SSI Scheme (with CENVAT): This scheme is effective from 1st April 2003. It provides the

concessional rate of duty in respect of clearances of specified goods for home consumption

(including exports to Nepal or Bhutan), and also states that all clearances of the specified

goods which are used for captive consumption in production of the specified goods shall be

subjected to ‘nil’ rate of duty. The Table shows the Rate of Duty.

Table: Rate of Duty in Respect of Clearances of Specified Goods


(Rs.)

Rate of Duty

1 Up to Rs. 100 Lakhs 60% of normal rate


A manufacturer can opt for this option any time determining his eligibility for concession and

the concessional rate of duty.

The exemption shall apply only subject to the following conditions:

i. A manufacturer who intends to avail the exemption shall exercise his option in writing to the

jurisdiction Deputy Commissioner or Assistant.

ii. The clearances of specified goods already made during the financial year, prior to the

exercise of such option, shall be taken into account for computing the aggregate value of

clearances. Value of all clearances of all factories should be clubbed.

iii. The aggregate value of clearances of all excisable goods should not exceed Rs. 300 lakhs in

the preceding year.

The exemption contained shall not apply to the specified goods bearing a brand name / trade name

(whether registered or not) of another person, except in some specified cases.

Measures for Promotion and Development of SSIs

Central and State governments have formulated several schemes to make the SSIs vital and

competitive. Some of these schemes are enumerated in sub-section 20.4.1 to 20.4.7.

Reservation Policy

Reservation of items for exclusive manufacture in SSI sector has been one of the important policy

measures for promoting and protecting this sector against competition from medium / large /

multinational companies.

The policy received statutory backing in 1984 under Industries (Development & Regulation) Act,

1951. However with the opening up of Indian trade in 1991, most of reserved items were importable

with the removal of quantitative restrictions. This paved the way to phase out reservation in due

course, and every year some items were dropped from the reserved list. Out of 836 items reserved in

117

1989, 39 items were dereserved in four phases viz., 15 items in 1997, 9 items on 1999, 1 item on

2001 and 14 items on 2001. Subsequently, 51 items were dereserved in 2002, 75 items in 2003 and

85 items in 2004, 108 in March 2005, and 180 in May 2006. Now 298 items stand reserved for this

sector.

It is believed that dereservations will enable medium / large / multinational companies to move out

of capital intensive manufacturing to enter labour-intensive production. This shift over will certainly

create new employment opportunities at rapid rate.

Government’s Purchase Preference Policy for SSI Products

Realizing that small scale units face the problem of marketing their products at remunerative prices,

Government stores purchase programme was initiated to assist small-scale industries in obtaining a

fair share of the total purchases made by the Government and its departments. Bulk and departmental

buyers such as the Railways, Defence and Communication ministries and companies are invited in

participate in buyer-seller meets to enrich SSI unit’s knowledge regarding terms and conditions,

quality standard, etc. required by the buyer. Under the Stores Purchase Policy of the Government 409

items of stores were reserved for exclusive purchase from KVIC / Women’s Development

Corporation / Small Scale units in 1989.

This list was reviewed. In February 2004, the Committee (set up to consider the question of inclusion

of additional items) received list and 358 items were approved, after deleting items having common

nomenclature and addition of some new ones. This list also includes 8 handicraft items reserved for

purchase from the Handicraft Sector.

Governments Price Preference Policy for marketing SSI Products

Assistance under Government Stores Purchase Programme in the form of reservation of products for

exclusive purchase from small scale sector and price preference in one of the major instruments for

providing marketing supports to the small scale industries. These facilities include the following:

(a) Price preference up to 15% in case of selected items.

(b) No registration fee.

(c) A consortium to channelize and identify markets for the products of SSIs both in India and

abroad.

Apart from this, the Single Point Registration Scheme of National Small Industries Corporation

(NSIC) the following benefits are given to SSI units, which get them registered with the NSIC:

(a) Availability of Tender Sets free of cost.

(b) Exemption from payment of Earnest Money Deposit.

(c) Exemption from payment of Security Deposit up to the monetary limit for which the unit ire

registered.

(d) Price preference up to 15% over the lowest quotation of the large scale units (on merits).

The units registered with NSIC under this scheme are given a registration certificate indicating items,

for which registered and monetary limit up to which registered. The Policy of the Price Preference of

15% is a critical benefit available to the SSI sector. The benefit is available to compensate them on

118

account of non-availability of economies of scale, poor resource base, poor access to raw-material

etc. as compared to the large scale sector.

Technical Assistance

Technology is the key to enhance an organisation’s competitive advantage in today’s dynamic

information age. SSIs need to develop and implement a technology strategy in addition to financial,

marketing and operational strategies, and adopt the one that helps integrate their operations with their

environment, customer and suppliers.

National Small Industries Corporation Ltd. (NSIC) offers SSI units the following support and

services through is Technical Services Centre, Extension Centres, Software Technology Parks and

Technology Transfer Centre:

(a) Technology audits and benchmarking.

(b) Technology needs assessment.

(c) Technology sourcing.

(d) Application of new techniques.

(e) Technology acquisition.

(f) Material testing facilities through accredited laboratories.

(g) Product design including computer Aided Designs.

(h) Common facility support in machining.

(i) Energy and environment services at selected centres.

(j) Classroom and practical training for skill upgradation.

Software Technology Parks (STPs) facilitate small industries in setting up 100% export-oriented

units for software export. They also act as major point to activate software exports directly through

NSIC. These STPs extend support in terms of the requisite infrastructure to the SSI units to start

business operations with a minimum lead-time. Following facilities are available at NSIC Software

Technology Park:

(a) Built-up Space: this enables the software industries to commence their operations with

minimum gestation period.

(b) Instant Power Connection: Instant power connections and generator facility is also

available on site, which will allow software units to work without any interruptions.

(c) High Speed Data Link: High-speed data communication facility through satellite connection

is available. The member units can avail 64 kbps to 2 mbps dedicated leased channels.

(d) Business Centre: A business centre comprising of Conference Hall, Photocopier, Fax,

Training aids, etc. is available inside the STP complex for the member units.

(e) Telephones: Each member units will be provided with one telephone line for business

promotion on occupation.

Raw material Assistance

NSIC aims to help SSI units by financing purchase of raw material (both indigenous and imported),

thus allowing them to focus on manufacturing quality product. State Directorate of Industries

119

distributes scarce raw materials to small units. State Small Industries Development Corporations

have set up depots for distribution of raw materials to SSIs. The Central Government has introduced

a buffer stock scheme to ensure availability of scarce raw materials to this sector.

Financial Assistance

Central and State Governments have introduced several schemes to ensure adequate and timely

availability of credit to SSIs through various institutions.

The main features of the financial services offered by institutions are as follow:

(a) Financial assistance for the equipment and marketing activities under one roof with speed and

efficiency.

(b) Prompt clearance of the proposals with minimum processing time and without cumbersome

paper work.

(c) Assistance in preparing the proposals and completion of document formalities.

(d) Market oriented interest rates and service charges with liberal terms of margin, level of

assistance and repayment schedules.

(e) Arrangement with commercial banks for sanction of loan proposals received from small

enterprises.

New Initiatives

The following new initiatives have been taken by the government:

(a) Advisory and Mentoring Services: Inadequate management skills are often the cause of

non-performance of small enterprises. NSIC’s advisory and mentoring services are aimed at

effectively addressing this impediment to growth. It offers mentor-pupil relationship services

in which the Mentor, a person with wide experience in running his own business, will

volunteer his services to individual or a group of units – the pupil. An advisor, a senior

professional, generally retired and a specialist in a specific area will assist in the process.

Mentors and advisor will provide the necessary professional and moral support in the early

lifecycle of an enterprise or to existing units facing critical operational problems.

(b) Technology Business Incubators: Innovative entrepreneurial ideas have to be fostered and

developed in a supportive environment before they become attractive for Venture Capital

Institutions. Incubation centre enable technical entrepreneurs to conduct their Research and

Development programmes in a professional, friendly and supportive environment, without

making any further investment.

Technology Business incubators are an important tool for entrepreneurial development.

Recognizing this need, NSIC has setup the following Technology Business Incubators.

(1) Information Technology

(2) Product Design

(3) Energy and Environment

(4) Bio-Technology

(5) Electronics and Communication.

120

(c) Suppliers Rating Accreditation Services: Accreditation, a necessity for buyer comfort,

speaks of the enterprise’s ability to supply reliably and effectively a product, in accordance

with the customer’s changing needs. NSIC provide accreditation to SSI units by developing

an effective accreditation system process through collaboration with Indian and International

Accreditation agencies. Accreditation is provided at two levels – for all Government

purchases and for private national international buyers.

Summary

Small Scale Industry sector has emerged as India’s engine of growth in the New Millennium. The

SSI sector accounts for nearly 40 percent of value added in the manufacturing sector and 34 percent

of total exports from the country. Through 95 percent of industrial units in the country, the sector

provides employment to about 20 million persons.

The government has recognized its importance for the economy and its intention towards promotion

of SSIs is reflected in various Industrial Policy Resolutions right from the year 1948. The primary

objective of the Small Scale Industrial Policy during the nineties was to impart more vitality and

growth-impetus to the sector to enable it to contribute its mite fully to the economy, particularly in

terms of growth of output, employment and exports. The sector has been substantially delicensed.

Further efforts would be made to deregulate and debureaucratise the sector with a view to remove all

fetters on its growth potential, reposing greater faith in small and young entrepreneurs. All statutes,

regulations and procedures were reviewed and modified, wherever necessary, to ensure that their

operations did not militate against the interests of the small and village enterprises.

Government is aware of the challenges faced by SSIs and has been trying to improve their

competitiveness through various measures. These consist of the following:

(a) Tax concessions have been provided to SSIs to promote investment in this sector and also to

grant relief to small entrepreneurs.

(b) Technological facilities have been increased.

(c) In order to facilitate adequate flow of credit efforts have been done.

(d) Measures have also been taken to improve infrastructure facilities and promote marketing of

products.

1

UNIT 5 LESSON 1

PRODUCT LIFE-CYCLE Dr Hem Chand Jain

Like human beings, products also have a limited life-cycle and they pass through several stages in

their life-cycle. A typical product moves through five stages, namely, introduction, growth, maturity,

saturation and decline.

Fig….. Time (Years) Product Life-Cycle

These stages in the life of a product are collectively known as product life-cycle. The length of the

cycle and the duration of each stage may vary from product to product, depending on the rate of

market acceptance, rate of technical change, nature of the product and ease of entry. But sales

volume and profit level change from stage to stage as shown in Fig…….. Every stage creates unique

problems and opportunities and, therefore, requires a special marketing strategy. A brief description

of each stage and the marketing strategy required for it is given below:

1. Introduction: In the first stage, the product is introduced in the market and its acceptance is

obtained. As the product is not known to all consumers and they take time to shift from the

existing products, sales volume and profit margins are low. Competition is very low,

distribution is limited and price is relatively high. Heavy expenditure is incurred on

advertising and sales promotion to gain quick acceptance and create primary demand. Growth

rate of sales is very slow and costs are high due to limited production and technological

problems. Often a product incurs loss during this stage due to high start up costs and low

sales turnover.

2. Growth: As the product gains acceptance, demand and sales grow rapidly. Competition

increases and prices fall. Economies of scale occur as production and distribution are

widened. Attempt is made to improve the market share by deeper penetration into the existing

market or entry into new markets. The promotional expenditure remains high because of

increasing competiton and due to the need for effective distribution. Profits are high on

account of large scale production and rapid sales turnover.

2

3. Maturity: During this stage prices and profits fall due to high competitive pressures. Growth

rate becomes stable and weak firms are forced to leave the industry. Heavy expenditure is

incurred on promotion to create brand loyalty. Finns try to modify and improve the product,

to develop new uses of the product and to attract new customers in order to increase sales.

4. Saturation: Market peaks and levels off during saturation. Few new customers buy the

product and repeat orders disappear. Prices decline further due to stiff competition and firms

fight for retaining market share or replacement sales. Sales and profits inevitably fall unless

substantial improvements in the product or reduction in costs are made. Product

differentiation, market segmentation and product improvement are the marketing strategies

used in this stage.

5. Decline: The sales and profits of the product fall rapidly due to its gradual displacement by

new products or evolving change in consumer preferences. As cost control becomes essential

to avoid losses, promotion expenditure is considerably reduced. Price becomes the main

weapon of competition. Many firms ultimately abandon the product to make better use of

resources. New product innovations enter the market to take the place of the obsolete and

abandoned products. This is the obsolescence stage. Finns' which fail to develop new or

improved products to arrest continuous decline in sales are forced out of business.

The concept of product life-cycle has important implications. Firstly, the concept indicates that

products have a limited life and management must develop new products or improve existing ones to

replace them to maintain sales and profits. Secondly, the product life-cycle concept shows the

expected sales volume and profit margins for a new product at various stages in its life. It can,

therefore, be used as a tool of business forecasting. Thirdly, the concept serves as a framework for

taking sound marketing decisions at each stage of the product life-cycle. Fourthly, the product life-

cycle points out the need for significant and periodic adjustments in the marketing strategy or

marketing mix of the firm. Emphasis on different elements of the marketing mix varies from one

stage to another. In initial stages, product design and promotion are important considerations. During

the middle phase, skilled distribution and effective dealer control become significant. In the final

stage, operating cost control becomes vital. Timely recognition of the need to change marketing

strategy is essential to maintain growth. In the introductory stage, informative advertising is used to

build up initial demand for the product while during maturity, persuasive advertising is required to

improve the competitive status of the product.

Stages in Product Life Cycles and Corresponding Strategies

Stage Features Possible Strategies

Introduction 1. Product unknown 1. Create favourable first

impression

2. Slow customer acceptance 2. Informative advertising––try

my product.

3. High risk of failure 3. Gifts and discounts to attract

customers

4. Main task is to create primary

demand

4. Maintain close personal

contact

5. Skimming price strategy

lengthens life cycle but brings

3

in competition

Growth 1. Sales run ahead of production 1. ‘Buy my brand’ promotional

strategy

2. Profits and competition rise 2. New versions of basic product

model offered to

accommodate the growing

market

3. New competitors enter the

market

3. Expand distribution channels

4. Distribution becomes more

significant

4. Establish a range of prices

5. Prices fall 5. Persuasive mass advertising

6. Develop brand image and

preferences

7. Focus on customer service

8. Change from skimming price

strategy to competitive pricing

strategy

Maturity 1. Highest degree of competition 1. Try to maintain differential

price advantage

2. Sales rise at declining rate 2. Introduce new features into

the product

3. Extend warranties

4. Very competitive promotion

strategy

Saturation 1. Sales level off 1. Hold or increase market share

2. Supply exceeds demand 2. Focus packaging to create more frequent use

3. Intense price competition 3. Develop new uses of the product

4. Develop new markets

5. Create psychological product

differences

6. Diversify

4

Decline 1. Overcapacity develops 1. Integrate forward

2. Sales and price fall 2. Introduce elements of style

and fashion

3. Selective and specific

promotion

4. Defensive mergers and

acquisitions

5. Repositioning, repackaging to

revive the product

6. Informative advertising.

Product life-cycle analysis is a disciplined and periodic review that provides a profile of a product's

position. Product life-cycle concept does not perfectly explain the behaviour of all products and it

may be difficult to predict the timings of various stages. For instance, salt and sugar have never been

in the decline stage. However, by providing a life-history of a product, life-cycle concept is helpful

in designing appropriate marketing strategies. The life of a product can be prolonged or changed by

developing new uses, reducing prices, using aggressive promotion, changing package, brand or label

and by improving the product. For instance, Dupont, a company of U.S.A. has sustained the sale of

nylon by (1) promoting more frequent use among current users, i.e., necessity of wearing nylon

stockings; (2) developing more varied use of the product, i.e., fashion value of tinted hose; (3)

creating new users, i.e., earl teenagers; and (4) finding new uses for the basic material, e.g., nylon

tyres.

ADVERTISING

Meaning

Mass selling requires quick and economical dissemination of information on a large scale to

potential customers. Advertising is an effective means for this purpose. According to the American

Marketing Association, Advertising is "any paid form of non-personal presentation or promotion of

ideas, goods or services by an identified sponsor." In the words of Stanton, "advertising consists of

all the activities involved in presenting to a group a non-personal, oral or visual, openly sponsored

message regarding a product, service or idea; this message called an advertisement, is disseminated

through one or more media and paid for by the identified sponsor."

Thus, advertising includes all activities required to prepare the message (advertisement) and to get it

to the intended persons to induce action in accordance with the intent of the advertiser.

The main features of advertising are as follows :

(i) It is impersonal form of presentation or promotion of products, services or ideas. There is no

face to face contact with the customers.

(ii) It is paid form of communication. The advertisements are communicated through various

advertising media and the advertiser has to pay for the space or time hired to the owner of the

media.

(iii) It is issued by an identified sponsor. The advertisement contains the name of the advertiser.

(iv) It is a form of mass communication. The message is directed to a large number of persons

simultaneously.

5

Advertising and Publicity

Publicity is any form of commercially significant news about an organisation, a product or service

carried by the press, radio, television, etc. that is not paid for by the sponsor. An organisation may

skillfully promote itself by inducing the news media to carry news favourable to it. These days

business firms commission professional public relations experts for promotion through publicity.

Advertising is different from publicity in the following ways :

(i) Advertising is paid for by its sponsor whereas publicity is usually not paid by its sponsor.

(ii) Advertising is done by an identified sponsor but in publicity the sponsor is not identified.

(iii) Advertising is always impersonal whereas publicity may be both personal and impersonal.

(iv) In advertising the sponsor exercises direct control over the size and frequency of the message.

But in publicity control lies with the news media.

(v) Publicity has greater versatility than advertising. News, stories, editorials and special write

ups about a company or its products appear more authentic to the readers than advertisements

sponsored by a company.

(vi) Publicity is off guard because the news can reach even those who otherwise avoid

advertisement. Advertising is not off guard in this way.

Advertising and Salesmanship

Advertising and salesmanship both are techniques of promoting sales. However, there are following

differences between the two:

(i) Advertising is impersonal and indirect communication whereas salesmanship is direct face to

face and personal communication.

(ii) Advertising is mass communication whereas salesmanship is individualistic communication.

"Advertising is like a shot gun conveying message to masses while personal selling is like a

rifle shooting showing communicating with individuals."

(iii) Advertising is done through written and visual messages while salesmanship involves the use

of spoken word only. Advertising is sometimes described as salesmanship in print. However,

printed word is only one medium of advertising.

Distinction between Advertising and Personal Selling

Point of distinction Advertising Personal Selling

1. Nature of

communication

Impersonal and mass method of

communication — No face to

face interaction

Personal and individualised

communication — Face to face

interaction

2. Payment Direct payment for each advertisement

No direct payment for each contact

3. Cost Less costly and less time

consuming

More costly and more time

consuming

4. Flexibility Less flexible Very flexible

5. Feedback No immediate feedback

available

Immediate feedback available

6

6. Aims To create customers To make sales

7. Completeness Incomplete sales tool Complete sales tool

8. Sales force

management

Recruitment, training and

motivation of sales

persons not required

Requires recruitment, training

and motivation of sales persons

Despite the above differences, advertising and salesmanship are complementary to each other.

Advertising prepares the necessary ground for personal selling by making people aware of a product

and its features. It helps to reduce sales resistance by highlighting the utility and superiority of a

product or service. Advertising is a mass communication that supplements the voice and personality

of the individual seller. Salesmanship converts the potential demand into sales. It completes the task

of advertising by making actual sales to customers attracted through advertising.

To conclude, "salesmanship and advertising are similar in that the main purpose of each is to

persuade individuals outside the company to act in the company's interests. While the salesman uses

the charm of his presence to arouse the customers' interest in the product the advertising man makes

use of his art and copy. They are like cup and saucers or coat and trouser, one being incomplete

without the other."

Objectives and Functions of Advertising

The ultimate objective of advertising is to sell something—a product, service or idea. However,

advertising by itself cannot make sales. Therefore, the real objective of advertising is to influence the

behaviour of prospective buyers in a manner that will lead to higher sales. In addition to this general

objective, advertising is also used for certain specific objectives which are given below:

1. To introduce a new product by creating awareness and interest for it among the prospective

customers.

2. To enter a new market or attract a new group of customers.

3. To fight competition in the market by reminding users to buy the product.

4. To create brand preference and brand loyalty.

5. To support personal selling by opening customer's doors for salesmen.

6. To enhance the goodwill of the firm by promising better quality at fair prices.

7. To improve dealer relations because dealers prefer to sell products which are effectively

advertised.

8. To reach people inaccessible to salesmen.

9. To warn the public against imitations or spurious products.

Utility (Need and Significance) of Advertising

Advertising has become an indispensable function in modem business due to cut-throat competition

and mass production. It pervades our economic and social life. It helps to disseminate information

which is useful to businessmen, consumers and the society in general. Through it one can create an

indirect and impersonal link with his prospects easily, quickly and economically. The benefits of

advertising to various parties are described below :

7

To Producers and Traders: Advertising is helpful to manufacturers and dealers in the following

ways:

(i) Meeting competition: Advertising is an important means for facing competition. By creating

brand loyalty, it helps to maintain sales and market share. It supplements personal selling and

sales promotion. It creates preference for a particular product, opens doors for salesmen and

reinforces point of purchase display, thereby reducing the costs of creating and maintaining

demand.

(ii) Steady demand: Advertising creates regular demand by smoothening out seasonal and other

fluctuations. For instance, advertising is used to emphasise hot and cold uses of coffee to

maintain regular sales both during summer and winter. By suggesting new and more frequent

use of product, advertising helps to maintain demand throughout the year. Steady demand

enables regular production.

(iii) Higher sales volume: Advertising helps to increase demand, expand markets and enhance

sales of existing products. Through repeated advertising, a producer can create new

customers and enter new markets. It creates new wants and increases sales. Advertising is an

essential technique of mass selling.

(iv) Introduction of new product: Advertising is helpful in introducing new products by creating

awareness and gaining their acceptance. By informing consumers about the new product,

advertising stimulates their interest and persuades them to buy it. Effective advertising helps

in over-coming consumers' resistance to new products.

(v) Economies of scale: Advertising facilitates mass distribution of goods. It reduces

dependence on middlemen as dealers are more willing to stock and sell well-advertised

goods. Direct distribution and rapid sales turnover help to reduce costs of distribution. Mass

distribution and steady demand lead to large scale and regular production. As a result, several

economies of scale become available and cost of production per unit is reduced. Investment

in inventories can be reduced.

(vi) Goodwill: Advertising helps in creating a good image of the firm and reputation for its

products. A favourable image increases the capacity of the firm .to survive competition and

depression. It is through effective advertising that Tatas, Birlas, etc. have become household

names. It has rightly been observed that "doing business without advertising is like winking

at a girl in the dark. You know what you are doing but no one else knows". By building

goodwill advertising enables business firms to obtain repeat orders.

(vii) Employee morale: By building reputation of the firm, advertising provides a sense of security

to employees and improves their morale. Salesmen feel happy as their task becomes easier

when the product and its producer are known to customers. In a well reputed firm, executives

have a feeling of pride and job satisfaction which are necessary for better performance.

To Customers: Advertising is beneficial to consumers due to the following reasons :

(i) Convenience: Advertising makes purchasing easy by reducing the time and effort involved

in shopping. People become aware of the source and availability of different products and

need not search them out. They can make better choice among different varieties.

8

(ii) Education of consumers: Advertising provides education and knowledge to consumers about

new products and their diverse uses. Consumers get the benefit of better advice in safe and

proper use of products and develop new ways of life. In this way advertising makes for better

living.

(iii) Lower prices: Effective advertising reduces costs due to large scale production and

elimination of wholesalers. As a result customers get goods at lower prices. Prices of

advertised goods fluctuate less widely and unscrupulous traders cannot easily exploit

consumers by overcharging. Many expensive products of yesteryears have come within reach

of the common man due to continuous advertising and consequent reduction in prices.

Advertising helps to eliminate unnecessary middlemen, thereby making products cheaper for

the consumers.

(iv) Better quality: Advertising is generally done through brand names. Producers try to create

special features in their products to successfully communicate product differentiation. Need

to find arguments in advertising and desire to live upto the image, leads them to improve

quality and product design. Consequently, consumers get better quality and variety of goods.

"Large scale advertising of a product can be really effective if there is a rigid quality control

which enables the customer to buy products of the same standards of performance

anywhere."

(v) Consumers' surplus: Advertising brings the customer closer to the producer so that each can

fully appreciate the needs of the other. Such understanding helps in better matching of

products and services with human needs. Through advertising consumers better appreciate

the utility of products and derive higher satisfaction from their consumption. This satisfaction

and pleasure derived by them from the products is called consumers' surplus.

To Society: Advertising serves the society in the following ways :

(i) Employment: Advertising provides direct employment to a large number of people engaged

in designing, writing and issuing advertisements. Indirectly, advertising increases

employment opportunities by increasing the volume of production and distribution.

(ii) Standard of Living: Advertising improves the standard of living of the people by promoting

variety and quality in consumption. It educates people about new uses of products and

provides information for developing better ways of life. To quote Franklin D. Roosevelt, the

late President of America, "advertising brings to the greatest number of people actual

knowledge concerning useful things, it is essentially a form of education and the progress of

civilisation depends on education."

(iii) Sustains the Press: Advertising provides an important source of revenue to newspapers,

magazines, radio and television. As a result public gets news at lower rates and the

circulation of newspapers and magazines increases. Press is the guardian of public opinion

and by helping it to remain independent, advertising promotes liberty and democracy in the

country. By subsidising the press, advertising serves as a bright symbol of freedom of choice.

(iv) Stimulates Research and Development: Advertising can be successful only when it is

backed by new and better products. To derive maximum benefit from advertising in the

competitive market, every producer tries to differentiate his products from the competitive

products. Big business firms have research and development departments to develop new

9

products and new uses. Research and development becomes necessary also to maximise

.efficiency and to minimise costs of production. In the absence of advertising and mass

distribution, many products would remain confined to the laboratory. By promoting research

and development, advertising helps in the process of rapid industrialisation.

(v) Incentive to Progress: Advertising is a great motivating force. In the words of Sir Winston

Churchill, "Advertising nourishes the consuming power of man. It creates a desire for better

standard of living. It spurs individual exertion and greater production." People are induced to

work hard and earn more to buy new products brought to their knowledge through

advertising.

(vi) Art and Culture: Advertising promotes the creative energies of people required in

designing and developing advertisements. Commercial art is largely the creation of

advertising. Advertising provides a glimpse of national life, a running commentary on the

way people live and work. Advertising also provides entertainment to the public. Many

sponsored programmes on radio and television have become very popular due to their

entertainment and aesthetic value.

Advertising is thus a great force in modem society. It serves as an accelerator of economic progress

by promoting savings and investment. It is the backbone of international trade. In a developing

country like India, it helps to accelerate the rate of capital formation and foreign exchange earnings.

Advertising can be a healing force in a society torn by race, language and caste conflicts, a means of

national integration, civilisation and human welfare. Advertising is to business what steam is to

machinery the great propelling power, the lubricant of the machinery of commerce. It pays to

advertise.

Is Advertising a Social Waste?

Several objections have been raised against advertising and some people criticise advertising as a

social waste. The main points of criticism are as follows:

1. Higher Prices: It is argued that large amounts spent on advertising increase the cost of

distribution which is transferred to customers in the form of higher prices. This objection may

be true in case of inelastic demand when advertising merely transfers demand from one

producer to another. But effective advertising often creates demand and increases the scale of

production. Large scale operations result in lower costs and lower prices. In developed

countries, business have reduced costs and prices while spending millions on advertising

every year. "As a competing tool, advertising is perhaps less costly than many other tools

which will be used to a greater degree if advertising were banned."

2. Wasteful Consumption: Advertising multiplies the needs of people and encourages

unhealthy consumption. By exploiting human sentiments, it persuades people to buy products

which they do not need or cannot afford. Advertising promotes artificial living and

extravagance and creates demand for trivial goods. "Modern society has become a society of

chocolate, Campa Cola and Lolipops instead of natural and wholesome food largely because

of advertising." This allegation may be true to some extent but it is based on the assumption

that satisfaction of psychological needs is not as important as that of physiological needs.

Moreover, new tastes and finer emotional experience of life are necessary for the progress of

civilisation. By itself, advertising cannot force people to buy things which they consider

unnecessary.

10

3. Misleads the Consumer: It is said that advertising is often deceptive and misrepresents

facts to the consumer. Exaggerated or tall claims and flowery language are used to dupe

unwary consumers. They are induced or defrauded through bogus testimonials and false

comparisons to buy goods of doubtful value. There is no denying the fact that some firms

indulge in false and misleading advertising and unscrupulous use of advertising by them

destroys public confidence in advertising. But just because a few people misuse advertising

does not mean that advertising itself is bad and unnecessary.

4. Creates Monopoly: Advertising creates brand preferences and restricts free competition.

Large firms which can afford huge amount of money on advertising eliminate small firms by

creating brand monopoly. Advertising thus encourages the survival of the mightiest rather

than the best. But advertising creates only a temporary brand monopoly as after some time

other brands offer competition. For instance, 'Amul' brand butter enjoys monopoly of brand

but has to face competition from 'Vita' and other brands of butter. In the long run, advertising

"often enables the small businessmen to compete with large concerns as well as to start new

business."

5. Wastage of National Resources: In order to make use of advertising, producers create trivial

differences in their products. Valuable resources that can be used to create new industries are

wasted in the production of needless varieties and designs. Vance Packard, in his book "The

Waste Makers", gives several interesting examples of how producers in America coax

consumers to replace their cars, radios etc., much before their useful life comes to an end.

Appearance, design and style have become more important than the physical utility of the

product. Manipulative and combative advertising leads to criminal wastage of resources.

"The natural resources, capital equipment and labour energy which go into the production of

new items to take the place of the discarded ones amount to waste when measured in terms of

social well-being." Valuable stationery, time and energy used in advertisements go waste as

most of the advertisements either escape the attention of the people or are ignored by them.

6. Undermines Social Values: Modem advertising exerts such a corrupting influence on

cultural and social life that it is not only wasteful but immoral. It degrades ethical and

aesthetic values through nude photographs and indecent language. Many advertisements are

highly objectionable and socially undesirable as they encourage social evils like drinking and

smoking. To some extent advertisements may really be in poor taste but majority of them

help to improve social standards. The improved attitude towards hygiene is attributable in no

small measure to the extensive advertising of detergents.

Despite its limitations, advertising is an essential marketing function in modern business. If

advertising were wasteful and unnecessary, it must have been discarded long ago. It becomes

wasteful and objectionable only when it is used dishonestly for anti-social ends. In fact, advertising

is the cheapest selling tool and its abolition will require use of more expensive selling techniques.

"As long as we insist on 'maintaining competition as the core of our economic system, the

elimination of advertising would increase rather than reduce economic waste."

Money spent on advertising is not wasteful or unnecessary provided it is spent in a scientific and

responsible manner. The drawbacks of advertising can be removed through concerted action on the

part of advertisers, public and the Government. Businessman should avoid wasteful and excessive

advertising. Trade associations and chambers of commerce should set up Better Business Bureaus to

11

exercise self-regulation and control over obscene and deceptive advertising. A suitable code of

conduct may be formulated to ensure that all advertisers follow ethical standards in their

advertisements. Newspapers, radio and television authorities should not accept undesirable

advertisements. Consumers' associations can act as a countervailing force against manipulating and

misleading advertising. Consumers should not get carried away by such advertisements. They should

verify the claims made in advertisements before purchasing a product. Customers' reactions to

advertisements should be invited. Writings on walls and public buildings and noisy advertisements

should be banned. An agency like the Federal Trade Commission of U.S.A. may be constituted to

check deceptive and obscene advertising. “The maintenance of acceptable ethical standards in all

forms of advertising is essential if advertising is to fulfil its proper function as a marketing tool.”

SALES PROMOTION

Sales promotion consists of all promotional activities other than advertising, personal selling and

publicity that help to increase sales through non-repetitive and one time communication. According

to the American Marketing Association, sales promotion includes "those marketing activities other

than personal selling, advertising and publicity that stimulate consumer purchasing and dealer

effectiveness, such as point of purchase displays, shows and exhibitions, demonstrations and various

non-recurring selling efforts not in the ordinary routine."

The ultimate aim of sales promotion is increasing the sales and profits but it is different from

advertising and personal selling in approach and techniques. Personal selling involves face to face

contact with specific individuals while advertising is directed at a large number of potential

customers. Sales promotion serves as a link between the two by focussing selling effort on selected

small groups of people. Sales promotion usually involves non-recurring and non-routine methods, in

contrast to the routine and recurring nature of advertising and personal selling. Under advertising, the

media is not owned and controlled by the advertiser except in direct mail advertisements but sales

promotion methods are controlled by the advertiser. Advertising and personal selling are essential or

basic ingredients of promotion mix while sales promotion is a supporting or facilitating element of

promotional strategy. Sales promotion bridges the gap between advertising and personal selling. It

supplements and reinforces the personal selling and advertising efforts of the firm. Sales promotion

covers miscellaneous stimulants directed to the consumers and dealers. It may stimulate consumer

buying at the point of sale or improve dealer effectiveness at the retail outlets.

Sales promotion is of two kinds — consumer sales promotion and dealer sales promotion. Consumer

sales promotion includes activities designed to inform and educate the consumer and to stimulate

demand. Examples of consumer sales promotion are samples, demonstrations, gift coupons,

premium and price offers, fashion shows or parades, bonus stamps, contests, exhibition-cum-sale,

etc. Dealer sales promotion is used to help dealers and to improve dealer effectiveness. It includes

free display material, free window display services, free demonstrations and trials, trade deals

offering discounts and gifts, sales contests for dealers or salesmen, trade show, dealers' conference,

house organs, training of dealers' sales force, advertising display allowances, etc.

Sales promotion activities are designed to achieve the following objectives :

(a) to introduce new products;

(b) to attract new customers;

(c) to increase sales during slack periods;

(d) to encourage dealers to carry large stocks;

(e) to improve the public image of the firm.

12

Techniques of Sales Promotion

At present a wide variety of devices are available for sales promotion. Some of the important sales

promotion methods are described below:

1. Distribution of Free Samples: Many a times free samples of low priced and repeat sales

items are distributed to selected people to gain consumer acceptance and to popularise the

product. The sample may be distributed in the shop or door-to-door. This is an effective

device of sales promotion as consumers can test the product before buying it. It is particularly

useful in the introduction of new products. Explanatory literature stating the features and uses

of the product can be added to the sample. However, this device is costly and can be used by

big firms. It is not suitable for products which are very expensive or do not give repeated

sales.

2. Coupons: Some firms issue coupons to prospective buyers through newspapers, direct mail,

dealers, package and door-to-door salesman. A coupon is a certificate that entitles its holder

to a specified saving or discount on the purchase of a particular product. The holders of

coupons present their coupons to retailers and get the product at a reduced price. The

manufacturer reimburses the retailers for the value of coupon redeemed by them in addition

to some commission to cover handling costs. Coupons induce the retailers to stock the

product and consumers are stimulated to buy the product.

3. Premiums: A sales premium or bonus offer is the offer of an article free of cost or at a

nominal price on the purchase of a specified product. For instance, one 'Lux' toilet soap may

be given free on the purchase of an economy pack of' Surf detergent powder. A premium is

also known as a combination offer. It is a practical persuasion to buy that helps to increase

immediate sales. Premiums are used in case of convenience goods like detergents, toothpaste,

toilet preparations which are bought frequently. Success of the premium offer depends upon

judicious choice of the bonus item which should be useful and in good taste.

Premiums can be of following types:

(a) With pack premium: In which the bonus item is included either inside or outside the

package, e.g., one spoon free in the packet of Horlicks.

(b) Price off premium: Which implies a reduction in price on the purchase of a large or

economy pack.

(c) Money-refund premium: Wherein the cost of the article is fully or partially refunded

on the presentation of the proof of purchase, e.g., wrapper, cash memo, etc.

(d) Extra-quantity premium: Under which a customer can get one unit of the product

free on the purchase of specified units, e.g., one tooth brush free on the purchase of

six tooth brushes.

4. Trading Stamps: Trading or bonus stamps are issued by retailers to customers who buy

goods from them. The number of stamps given to a buyer depends upon the amount of

purchases made by him. For instance, in India Ramon Bonus Stamps are issued at the rate of

2½ per cent of the purchase amount. These stamps are given free of charge and the customer

can redeem them to obtain products out of the specified list. This technique induces

customers to buy their requirements from the retailers who offer such stamps. The purpose is

to increase customer loyalty.

13

5. Point of Purchase Materials: Such materials include banners, signs, photos, posters, strips,

price cards, racks and other in store promotional tools. They are demonstrated or displayed at

the place where the customer makes actual purchases. Almost every general retail shop

displays posters and signs promoting soft-drinks, cigarettes, confectionery and other

consumer products. The popularity of point of purchase display is increasing due to the

proliferation of brands and expansion of self-service stores with large inventories. Such

materials are an effective device of sales promotion as they remind customers about the brand

name and promote impulsive buying. They should be attractive and self-explanatory. They

are also called dealer aids.

6. Prize Contests: Under this device, consumers are given rewards for analytical or creative

thinking about the product in the form of slogan writing, sentence completion, problem

solving quiz, etc. Rewards are given to successful participants in the form of cash prizes,

merchandise or free travel. Such contests help to create consumers' interest in the product,

provide new ideas for advertising and may reveal buying motives. Contests are generally held

through newspapers, magazines and radio. Such contests may also be organised for salesmen

and dealers to induce them to devote greater effort or to obtain new sales ideas. To be

successful sales contests should be properly planned and objectively executed. The date, time

and period of the contest should be such that all people have equal opportunity. Entries

should be judged by competent people in a fair manner and rewards should be given

promptly.

7. Fairs and Exhibitions: Trade shows, fashion shows, or parades, fairs and exhibitions are an

important technique of sales promotion. They provide a forum for the exhibition or

demonstration of the product. Free literature can be distributed to introduce the firm and its

products to the public. Fairs and exhibitions are organised usually by big firms or trade

associations. At these fairs and exhibitions, business firms are allotted stalls wherein they

display their products. Fairs and exhibitions have wide appeal as several people visit them.

Customers can be attracted through free gifts, special concessions and free demonstrations of

technical and speciality products. They provide an opportunity to the visitors to observe the

competing products and help to promote sales. For instance, the Trade Fair Authority of India

organises trade fairs of various types in New Delhi. The National Book Trust organises after

every two years a World Book Fair at New Delhi where publishers all over the world are

invited to display their publications. Sometimes, sales conventions or conferences of dealers

are held. Producers of garments often organise fashion shows to promote their products.

8. Merchandising Aids: These refer to the services provided to induce commercial buyers to

purchase goods in large quantity. Such aids include training in stores layout and inventory

control, advertising, product demonstrations, etc.

9. Clearance Sale: Sales at reduced prices may be organised at important festivals or other

occasions. Such sales attract a large number of customers and help to clear accumulated

stocks. For instance, the Khadi Gramodyog Bhavan in New Delhi offers special discount on

Khadi goods on Gandhi Jayanti.

10. Public Relations: Public relations activities include greetings or thanks in newspapers,

donating space for noble causes, etc. Their purpose is not to create immediate demand or to

increase sales. They are designed to create a good image of the firm in the society.

14

LESSON 2

CHANNEL DECISIONS Dr Hem Chand Jain

A channel of distribution or trade channel is the path or route along which goods move from

producers to ultimate consumers or industrial users. It is the distribution network through which a

producer puts his products in the hands of actual users. It is the pipeline through which products flow

during their journey to the market. A trade or marketing channel consists of the producer, consumers

or users and the various middlemen who intervene between the two. The channel serves as a

connecting link between the producer and consumers. By bridging the gap between the point of

production and the point of consumption, a channel creates time, place and possession utilities. A

channel of distribution represents three types of flows :

(a) Goods flow downwards from producer to consumers;

(b) Cash flows upwards from consumers to producer as payment for goods; and

(c) Marketing information flows in both directions. The downward flow includes information on

new products, new uses of existing products, etc. The upward flow of information is the

feedback on the wants, suggestions, complaints, etc. of ultimate

consumers or users.

Nature and Significance of Channel Decisions

Channel decisions refer to the managerial decisions concerning the selection of the most suitable

routes or paths for the distribution of goods from the producer to various consumers or users. Such

decisions involve choice of a channel, determination of market coverage (number of middlemen) and

the selection of particular middlemen or dealers.

The choice of a suitable channel for the distribution of the firm's products is an important decision

area in the field of marketing. It is an important policy decision in marketing management due to the

following reasons:

(i) Distribution channel is an important element of the marketing mix of a firm and other

elements are closely interrelated with and interdependent on the channel of distribution.

Therefore, choice of channel influences other marketing decisions like pricing, promotion

and physical distribution. A mistake in the choice of channel may affect adversely the whole

marketing mix of the firm.

(ii) The cost involved in the use of a distribution channel enters the price of the product that the

ultimate consumer has to pay. Due to a wrong decision regarding channel, distribution cost

may be very high and sales might be very limited. On the other hand, a sound channel

decision enables the firm to cut down costs and maximise sales revenue. Thus, channel

influences sales .volume and profits.

(iii) A product or service is really useful to consumers only when it is available at the right time

and place. The channel decision determines where and when the product will be available to

ultimate consumers or users.

(iv) The choice of a marketing channel involves long-term commitment of the firm. The relations

between the manufacturer and the middlemen depend largely upon the choice of appropriate

channels of distribution. Changes in the channel are very difficult and costly.

(v) If the choice of channels is proper, fluctuations in production can be reduced due to

continuous and effective distribution. The stability of production will help to ensure steady

employment and proper budgetary control. The manufacturer can continuously monitor the

15

sales and stock of his middlemen to exercise effective control over distribution network.

Types of Distribution Channels

Several channels are used for the distribution of products of different types. They vary in the number

and types of middlemen. Some channels are short and direct permitting the producer to have a close

touch with the customers while others are long and indirect involving the use of several types of

intermediaries. The various channels of distribution may broadly be classified as under:

Distribution Channels

1. Manufacturer-consumer: This is the shortest and simplest channel involving direct sale of'

goods and services by the producer to the consumers. No middleman or intermediary is

present between the producer and the consumer. The producer may sell directly to consumers

through door-to-door salesman, direct mail and through his own retail stores. For instance,

Bata India Ltd. has set up its own retail shops throughout the country to sell shoes and other

products through direct contact with customers. Industrial products of high value are

generally sold through this channel. Some firms use direct selling to distribute consumer

products like shoes, clothes, books, hosiery goods and cosmetics. Small producers and those

producing perishable commodities also sell directly to the local customers.

This channel is very fast and economical. The producer has direct contact with his customers

and full control over distribution. But the expert services of middlemen are not available and

the producer himself has to perform all the marketing activities. Large investment is required

to create facilities for direct selling. Therefore, this channel is more popular among big and

well-established firms. In recent years, direct selling has become increasingly popular due to

increasing competition, need for control over distribution costs, wide product lines, technical

nature of products, availability of public warehouses and desire to reduce dependence on

middlemen.

2. Manufacturer-retailer-consumer: Under this channel, the manufacturer sells to one or

more retailers who in turn sell to the ultimate consumers. Various marketing functions are

performed by the producer and the retailers. This channel is popular when the retailers are big

and buy in large quantities, e.g., departmental stores, chain stores and super markets. This

channel is often used for the distribution of consumer durables and products of high value.

Automobiles, home appliances, readymade garments, shoes and perishable products are often

sold through this channel. This channel relieves the manufacturer from much burden of

selling and at the same time provides him control over distribution.

16

3. Manufacturer-wholesaler-retailer-consumer: This is the 'traditional' or normal channel for

the distribution of consumer goods. This channel is suitable where the producer has limited

finance and a narrow product line or where the wholesalers are specialised and provided

strong promotional support. Small producers and small retailers find this channel most

convenient especially in case of products with widely scattered markets. This channel is also

used in case of consumer durables which are not subject to frequent changes in fashion.

Producers of industrial goods may use an industrial distributor who serves as a wholesaler as

well as a retailer.

4. Manufacturer-agent-retailer-consumer: When the retailers are few or geographically

concentrated, distribution through agents may be more economical than through wholesalers.

For instance, a manufacturer may employ selling agents and brokers to sell his products to

retailers. Sometimes even the retailer is bypassed and the agent sells directly to institutional

buyers like consumer cooperatives, business firms, educational institutions and government

agencies or departments. This channel is commonly used to sell textiles, agricultural

products, machinery and equipment, etc. In case of industrial goods, an agent may be used in

place of industrial distributor to reach industrial users.

5. Manufacturer-agent-wholesaler-retailer-consumer: This is the longest channel of

distribution. It is used when the manufacturer wants to be fully relieved of the problem of

distribution. The producer hands over his entire output to the selling agent who distributes it

among a few wholesalers. Each wholesaler sells to a number of retailers who in turn sell to

ultimate consumers. In case of cloth this channel is widely used. For the sale of many

industrial products an industrial distributor is employed due to the storage facilities provided

by him. This channel results in wider distribution of the product.

Choice of a Channel of Distribution

Choice of a channel of distribution involves the selection of the best possible combination of

middlemen or intermediaries. The objective is to secure the largest possible distribution at minimum

costs. The channel must be flexible and efficient. It should be consistent with the declared marketing

policies and programmes of the firm. Such a channel can be selected by evaluating alternative

channels in terms of their costs, sales potential and suitability. The factors affecting the choice of

distribution channels may be classified as follows:

1. Product Considerations: The nature and type of the product have an important bearing on

the choice of distribution channels. The main characteristics of the product in this respect are

given below:

(a) Unit value: Products of low unit value and common use are generally sold through

middlemen as they cannot bear the costs of direct selling. Low priced and high

turnover articles like cosmetics, hosiery goods, stationery and small accessory

equipment usually flow through a long channel. On the other hand expensive

consumer goods and industrial products, e.g., jewellery, machines are sold directly by

the producers.

(b) Perishability: Perishable products like vegetables, fruits and bakery items have

relatively short channels as they cannot withstand repeated handling. Same is true

about articles of seasonal nature. Goods which are subject to frequent changes in

17

fashion and style are generally distributed through short channels as the product has to

maintain close and continuous touch with the market. Durable and non-fashion

articles are sold through agents and merchants.

(c) Bulk and weight: Heavy and bulky products are distributed directly to minimise

handling costs. Coal, bricks, stones, etc., are some examples.

(d) Standardisation: Custom-made and non-standardised products usually pass through

short channels due to the need for direct contact between the producer and the

consumers. Standardised and branded goods can be distributed through middlemen.

(e) Technical nature: Products requiring demonstration, installation and after-sale

service are often sold directly. The producer appoints sales engineers to sell and

service industrial equipment and other products of technical nature. Consumer

products like television, refrigerator, electric mixer-grinder, washing machines, etc.,

are sold through retailers but the after-sale service is generally provided by the

manufacturer.

(f) Product line: A firm producing a wide range of products may find it economical to

set up its own retail outlets. On the other hand, firms with one or two products find it

profitable to distribute through wholesalers and retailers.

(g) Age of the product: A new product needs greater promotional effort and few

middlemen may like to handle it. As the producer gains acceptance in the market,

more middlemen may be employed for its distribution. Channels used for competitive

products may also influence the choice of distribution channels.

2. Market Considerations: The nature and type of customers is an important consideration in

the choice of a channel of distribution. Following factors relating to the market are

particularly significant:

(a) Consumer or industrial market: The purpose of buying has an important influence

on channel. Goods purchased for industrial or commercial use are usually sold

directly or through agents. This is because industrial users buy in a large quantity and

the producer can easily establish a direct contact with them. To ultimate consumers,

goods are sold normally through middlemen.

(b) Number and location of buyers: When the number of prospective buyers is small or

the market is geographically located in a limited area, direct selling is easy and

economical. In case of large and widely scattered markets, use of wholesalers and

retailers becomes necessary.

(c) Size and frequency of order: Direct selling is convenient and economical in case of

large and infrequent orders. When articles are purchased very frequently and each

purchase order is small, middlemen may have to be used. A manufacturer may use

different channels for different types of buyers. He may sell directly to departmental

and chain stores and may depend upon wholesalers to sell to small retail stores.

(d) Buying habits: The amount of time and effort which customers are willing to spend

in shopping is an important consideration. Desire for one-stop shopping, need for

18

personal attention, preference for self- service and desire for credit also influence the

choice of a trade channel.

3. Company Considerations: The nature, size and objectives of the firm play an important role

in channel decisions:

(a) Market standing: Well-established companies with good reputation in the market are

in a better position to eliminate middlemen than new and less known firms.

(b) Financial resources: A large firm with sufficient funds can establish its own retail

shops to sell directly to consumers. But a small or weak enterprise which cannot

invest money in distribution has to depend on middlemen for the marketing of its

products.

(c) Management: The competence and experience of management exercises influence

on channel decision. If the management of a firm has sufficient knowledge and

experience of distribution, it may prefer direct selling. Firms whose management

lacks marketing know-how have to depend on middlemen.

(d) Volume of production: A big firm with large output may find it profitable to set up

its own retail outlets throughout the country. But a manufacturer producing a small

quantity can distribute his output more economically through middlemen.

(e) Desire for control of channel: Firms which want to have close control over the

distribution of their products use a short channel. Such firms can have more

aggressive promotion and a thorough understanding of customers' requirements. A

firm not desirous of control over channel can freely employ middlemen.

(f) Services provided by manufacturers: A company that sells directly has itself to

provide installation, credit, home delivery, after-sale service and other facilities to

customers. Firms which do not or cannot provide such services have to depend upon

middlemen.

4. Middlemen Considerations: The cost and efficiency of distribution depend largely upon the

name and type of middlemen as reflected in the following factors:

(a) Availability: When desired type of middlemen are not available, a manufacturer may

have to establish his own distribution network. Non-availability of middlemen may

arise when they are handling competitive products or they do not like to handle more

brands.

(b) Attitudes: Middlemen who do not like a firm's marketing policies may refuse to

handle its products. For instance, some wholesalers and retailers demand sole selling

rights or a guarantee against fall in prices.

(c) Services: Use of those middlemen is profitable who provide financing, storage,

promotion and after-sale services.

(d) Sales potential: A manufacturer generally prefers a dealer who offers the greatest

potential volume of sales.

19

(e) Costs: Choice of a channel should be made after comparing the costs of distribution

through alternative channels.

(f) Customs and competition: The channels traditionally used for a product are likely to

influence the choice. For instance, locks are sold usually through hardware stores and

their distribution through general stores may not be preferred. Channels used by

competitors are also important.

(g) Legal constraints: Government regulations regarding certain products may influence

channel decision. For instance, liquor and drugs can be distributed only through

licensed shops.

Distribution Policy

After selecting the channel of distribution, a manufacturer has to determine the number of

middlemen to be used or the intensity of distribution. This depends on the degree of market coverage

desired for the product. Market coverage reflects the channel strategy and can be of three types:

(i) Intensive Distribution: Under this strategy, a manufacturer tries to sell his product through

every possible outlet in order to obtain the maximum exposure. Such a distribution policy is

usually employed for the marketing of consumer products of everyday use, e.g., toothpaste,

cigarettes, cosmetics, food products, soaps, etc. In the purchase of these convenience goods,

consumers prefer the nearest location. Therefore, an attempt is made through intensive selling

to go as near to the ultimate consumer as possible. Intensive distribution is sometimes used in

case of some industrial goods like spare parts, lubricants and other supplies. Intensive

distribution can be successful when the manufacturer obtains cooperation from all middlemen

and advertises his products on a large scale.

(ii) Selective Distribution: Selective distribution implies the use of a few selected middlemen in

each sales territory. This policy may be employed at both the wholesale and retail levels. This

type of distribution is appropriate in case of speciality goods and accessories. In such

products, consumers generally have a brand preference so that the use of every outlet is not

necessary. Selective distribution is more economical and provides the manufacturer sufficient

control over the distribution of his products. As the number of middlemen is limited, each

one of them gets sufficient sales volume which is helpful in securing their cooperation.

Dealers are likely to take greater interest in the display and promotion of the products.

(iii) Exclusive Distribution: Such distribution involves the use of one dealer in each sales

territory. The dealer is granted the exclusive right to sell the product in the specified territory

through an agreement with the manufacturer. The dealer is prohibited from dealing in the

competitive products. Exclusive selling is adopted in case of shopping and speciality goods

enjoying brand loyalty. In the purchase of such goods, the consumer spends lot of time and

effort. It is also used when the product requires huge investment in stocks and showrooms,

e.g., automobiles and household appliances like mixer grinder, cooking range, etc. Exclusive

distribution provides full control over distribution and reduces distribution costs. It also

increases the prestige of the product. However, this policy is less flexible and does not permit

wide distribution of the product.

20

Choice of Middleman

After deciding the number of middlemen, a manufacturer has to select the particular dealers through

whom he will distribute his products. While selecting a particular wholesaler or retailer, the

following factors should be taken into consideration:

(i) Location of the dealer's business premises;

(ii) Financial position and credit standing of the dealer;

(iii) Knowledge and experience of the dealer;

(iv) Storage and showroom facilities of the dealer;

(v) Ability of the dealer to secure adequate business and to cover the market;

(vi) Capacity of the dealer to provide after-sale service;

(vii) Willingness of the dealer to handle the manufacturer's products;

(viii) The degree of cooperation and promotional service he is willing to provide;

(ix) General reputation of the dealer and his sales force;

(x) Nature of other products (competitive or complementary), if any, handled by the dealer.

POLICY INITIATIVES FOR ENTREPRENEURIAL GROWTH

To mention a few policy measures that have positively created an ideal environment entrepreneurial

growth are:

(a) Identification of backward areas and announcement of a number of concessions

and incentives for the entrepreneurs to start their ventures in such areas;

(b) Change In the attitude of both Central and State Governments towards private

enterprise in general and promotion of small scale industries in particular;

(c) Liberalisation of Industrial Licensing Policy and announcement of special

incentives for NR1 investments and exporting industrial units.

(d) Promoting coordinated development of large and small industries by—

(i) reserving further expansion either exclusively or partly for the small sector in certain

industries.

(ii) developing small industries more vigorously as ancillaries to large industries, and

(iii) encouraging the participation of small industries in the export drive.

Small Scale Industries Policy

In order to give a fillip to small industries development and thereby to entrepreneurial growth, the

Government for the first time announced a separate small scale industries policy in August 1991. The

highlights of this policy are as follows:

• For small scale industries the investment limit (investment in plant and machinery) is raised

to Rs. 75 lakhs for both ancillary and export oriented units and Rs. 60 lakhs to SSI units. Both

these limits were later on raised to Rs. five crores.

• The investment limit for the tiny sector was raised to Rs. 5 lakhs from Rs. 2 lakhs. This limit

has now been raised to Rs. 25 lakhs.

• Hereafter irrespective of their location would be recognised as small scale industries.

• The Small Industries Development Organisation (SIDO) has been recognised as the nodal

agency to support the small scale industries export promotion.

• An export development centre would be set up in SIDO to serve the small scale units through

21

its network of field officers to further augment export activities of the sector.

• A technology development cell (TDC) will be set up in SIDO which could provide

technology inputs to improve quality and competitiveness of products of small scale sector.

• The scheme for the handloom sector which contributed 30 % of the total textile production in

the country would be redesigned keeping in view the local and regional needs. It would be

the policy of the Government to promote handloom to sustain employment In rural areas and

to improve quality of life for handloom weavers.

• The National Small Industries Corporation (NS1C) would concentrate on marketing of mass

consumption items under common brand name and organizational links between NSIC and

SSlDCs would be established.

• The scope of the national equity fund scheme will be widened to cover projects upto Rs. 10

lakhs for Equity Support (upto 15 per-cent).

• The Single Window loan scheme has also been enlarged to cover projects upto Rs. 20 lakhs

with working capital margin upto Rs. 10 lakhs.

• Small Scale units can have equity support to the extent of 24% of the total investment from

the medium and large scale industries, public undertakings. NRIs or foreign Investment.

In conformity with the socio-economic objectives of the national development plans. the

development banks have introduced a number of promotional innovational schemes to be operated

either separately or jointly. Some of the important schemes are soft loan scheme, seed capital

assistance, risk capital assistance, concessional schemes, etc. In addition, 1FC1 is operating different

subsidy schemes for new and small entrepreneurs. Recently, it has introduced eight consultancy

schemes and lour interest subsidy schemes for the benefit of the entrepreneurs.

Meaning of Incentives and Subsidy

The term 'incentive' is a general one and includes concessions, subsidies and bounties. 'Subsidy'

denotes a single lump sum which is given by a government to an industry. It is granted to an industry

which is considered essential In the national Interest. The term 'bounty' denotes bonus or financial

aid which is given by a government to an industry to help it compete with other units in a nation or in

a foreign market. It is given in proportion to its output. Bounty confers benefits on a particular

industry, while a subsidy is given in the interest of the nation.

These subsidies and incentives offer the following advantages:

(a) They act as a motivational force which makes the prospective entrepreneurs to

enter into manufacturing line.

(b) They encourage the entrepreneurs to start industries in backward areas.

(c) By providing subsidies and incentives the Government can—

(i) Bring industrial development uniformly in all regions

(ii) Develop more new entrepreneurs which leads to entrepreneurial development

(iii) Increase the ability of entrepreneurs to face competition successfully

(iv) Reduce the overall problems of small scale entrepreneurs.

Need for Incentives

1. To remove regional disparities in development. While developed regions in a

country are overcrowded with industrial and business activities the backward areas

remain ignored for want of facilities for industrial development. Incentives are used as

baits to lure industrialists to locate their units overlooking such deficiencies. In the long run

the backward areas become developed and regional imbalances are corrected. Such a

22

development may lead to the effective utilisation of regional resources, removal of disparities

in income and levels of living and contribute to a more integrated society.

2. To promote entrepreneur ship and strengthen the entrepreneurial base in the economy. The new entrepreneurs may face a number of problems on account of

inadequate infrastructure facilities and other supporting services such as market

assistance, technical training and consultancy and other institutional services, etc. All

these problems may demotivate them. The various incentives normally tend to mitigate some

or all of the problems by several means. Industrial estates, growth centres, power traiff

concessions, capital investment subsidies, transport subsidy, etc. are a few examples of

incentives and subsidies which are aimed at encouraging entrepreneurs to take up new

ventures without much reluctance.

3. To provide competitive strength, survival and growth. While some incentives

are available at the time of promotion of industrial units, several other incentives are

made available over a long period. Reservation of products to small units, price preferences,

concessional finance, etc. contribute towards the competitive strength.

survival and growth of certain industrial units.

4. To generate more employment and remove under-employment and

unemployment. The proper use of incentives and subsidies will generate more

employment by accelerating the industrial growth. Market adjustments and external

economies play a significant role in economic development. The entrepreneurs will

move from developed to backward areas to start more number of units. This will create more

number of jobs which will help to reduce the problems of unemployment and under-

employment.

Problems of Incentives

1. The antagonists argue that the incentive schemes may deteriorate into useless

tax-give away schemes if they are not implemented properly.

2. Empirical studies reveal that the incentive schemes are being highly misused

rather than properly used. Some of the units are located in backward areas with a view

to mainly avail the subsidies and concessions. The real objective of providing incentives is

hardly achieved.

3. Favouritism and corruption have crept into the administrative machinery which

has caused much financial strain on the exchequer.

Schemes of Incentives in Operation

Different incentive schemes applicable to the industrial sector in India are in operation. These

schemes are offered by Central and State Governments including Union Territories. The list of

incentives offered by either or both the governments are listed below :

(i) Export/Import subsidies and bounties

(ii) Interest free loans

(iii) Subsidy for R & D works

(iv) Capital investment subsidy

(v) Transport subsidy

(vi) Interest subsidy

(vii) Subsidy for power generation

23

(viii) Exemption from property tax

(ix) Subsidies to artisans and traditional industries including handlooms

(x) Incentives to non-resident Indians

(xi) Special incentives to women entrepreneurs

(xii) Exemption from income tax

(xiii) Interest free sales tax loans

(xiv) Sales tax exemptions

(xv) Subsidy for buying test equipment

(xvi) Subsidy for industrial housing

(xvii) Land and building at concessional rates

(xviii) Price preference lo SSI units

(xix) Subsidy/Assistance for technical consultancy

(xx) Exemption from stamp duty

(xxi) Concessional water

(xxii) Provision for seed capital

(xxiii) Allotment of developed/constructed sheds

(xxiv) Allotment of controlled or subsidised raw material

(xxv) Subsidising the cost of market studies/feasibility studies or reports.

Incentives for Development of Industries in Backward Areas

As a part of the measures to ensure balanced regional development. Government of India have

announced a number of concessions and facilities for industries established in selected backward

districts/areas from time to time. The Central Government has declared 247 districts (covering about

70% of the areas in the country) as backward and eligible for the subsidies. Many State Governments

have added to this list for the purpose of State level subsidies. The programme of assistance drawn

up for setting up industries in the selected backward area/district is briefly indicated below:

(i) Concessional Finance: All India financial institutions namely, 1DBI. IFCI and others extend

financial assistance on concessional terms to all. new and existing industrial projects having

expansion schemes irrespective of the project costs located in the 247 districts selected by the

government The concessions given by these financial institutions are in the form of lower

interest rate, viz., 9.5% p.a. against the normal rate of 11%, a reduced commitment charge of

0.5 % (which could be waived in exceptional cases), lower underwriting commission of 1.

25% and 0.75% for shares and debentures respectively, initial moratorium period upto five

years, longer amortisations of 15 to 20 years and participation in the risk capital on selective

basis. Besides these the 1DBI follows a flexible attitude in respect of promoter's contribution

margin requirements, rescheduling of repayments during the currency of the loan. Depending

upon the merits of specific cases in respect of refinance, the IDB1 charges a special rate of

6% with the primary lender's rate being subject to a ceiling of 9.5%. The normal rate of

refinance Is 6% with ceiling of 12.5% by the primary lending institution.

(ii) Central Investment Subsidy: The granting of cash subsidy on the capital investment is

called capital investment subsidy. It will be usually in the form of outright grant of 10 % to

20 % of the amount of capital invested in the industrial units in areas specified to be

backward regions/districts. The government also fixes ceiling above which they could not

avail. It is offered by the Central Government.

Out of the 247 districts declared backward by the planning commission. 101 districts/areas

have been selected to qualify for Central investment subsidy. These districts/areas have been

24

selected on the pattern of six districts/areas for industrially backward states and three

districts/areas for other states. The salient features of the scheme are given below:

(a) Quantum of subsidy: When the scheme was originally announced in 1971 10% of

the investment made on fixed capital investment, viz., land, building and plant and

machinery was to be reimbursed as an outright grant subject to a ceiling of Rs. 15

lacs. This was raised to 15 % with effect from 1.3.1973. The maximum amount

payable is, however, restricted to Rs. 15 lakh per industrial unit.

After the division of backward districts into (A), (B) and (C) categories the subsidy

will be: (A) 25 % subject to a maximum of Rs. 25 lacs; (B) 15 % subject lo a

maximum of Rs. 15 lacs (c) 10 % subject to a maximum of Rs. 10 lacs.

(b) Eligibility: An industrial unit other than those run departmentally which made

investments In land, building, and plant and machinery on or after 1-3-1973 and

located In the above category of districts/areas is eligible to claim subsidies. Existing

units taking into expansion, modernisation and diversification are also eligible to

claim subsidy.

(c) Procedure for Claiming Subsidy: The State Governments/Union Territory

administrations have nominated disbursing agencies to administer the scheme of

investment subsidy. State Financial Corporation and financial institutions such as

IDBI, IFCI, and ICICI are some of the agencies selected fur disbursements of subsidy

under the scheme. Each industrial unit being set up in the specified district/area gets

registered with the Director of Industries for claiming investment subsidy. The units

desirous of getting investment subsidy may approach the disbursing agencies who in

trun make recommendation after verification etc., to the State level committee which

has been appointed in each State Union/Territory.

(iii) Tax holiday to new industrial undertakings set up in backward States and Union

Territories: Under section 80-1A of the Income-tax Act 1961. deduction is allowed, in

computing die taxable income in respect of profits derived from new industrial undertaking

or a ship or the business of a hotel. The deduction under this section is allowed in the case of

companies, at 30 per cent of profits in respect of the assessment year relevant to the previous

years in which the hotel starts functioning or the industrial undertaking starts manufacture or

the ship is first brought to use and nine assessment years immediately succeeding the initial

assessment year. In the case of taxpayers being a co-operative society, similar deduction is

allowed for the initial assessment year and eleven succeeding years, the deduction is allowed

at the rate of 25 % in the case of non-corporate assessees. Likewise in the case of new hotels

set up in a hilly area or a rural area or a place of pilgrimage or such other place as the Central

Government may specify, the deduction is admissible at the rate of 50 per cent of the profits.

Tax Holiday for the Power Sector

With a view to substantially increasing the power generation capacity in the country, the Bill

proposes to provide for a full tax holiday for five years and thereafter a partial tax holiday in respect

of profits and gains of industrial undertakings set up anywhere in India for generation or generation

and distribution of power. Such undertaking which begins to generate power on or after 1.4.1993 will

be allowed deduction under section 80-1A, at the rate of 100 per cent of profits in respect of the first

five assessment years starting from the assessment year relevant to the previous year in which I he

25

undertaking begins generation of power. For the subsequent assessment years, deduction from the

profits from such undertakings will be allowed at the normal rate of 30 per cent in the case of

companies and 25 per cent in the case of non-corporate assessees. The deduction, at the enhanced

rate and the normal rale together, will be limited to twelve assessment years In the case of co-

operative societies and ten assessment years in the case of other assessess, as in the existing

provisions.

Subsidised Consultancy Services

Small entrepreneurs proposing to set up rural, cottage, tiny or small scale units, or to

expand/diversity/modernise their existing units, can get consultancy services at a low cost from the

technical consultancy organisations (TCO's) sponsored by all India and State level financial and

promotional institutions and banks. They have to pay only 20 % of the fees charged by a TCO for

assignments such as preparation of feasibility studies, project reports, market studies, pre-investment

studies, diagnostic studies and special studies and applications for seeking financial assistance from

financial institutions, technical assistance, etc. The entire balance of 18 % or Rs. 5,000 whichever is

lower is subsidised by 1FCI in the case of assignments relating to the use of biogas or

renewable/alternative sources of energy. For units identified or assignments covering physically

handicapaped or scheduled caste/tribe entrepreneurs, 100 % of the fees of the TCO for the

assignment or Rs. 6.000 whichever is lower is subsidised. If any entrepreneur is unable to take

effective steps to set up the project within one year from the date of completion of consultancy

assignments he will not be entitled to prevent the use of the report in any form or manner by the TCO

or other entrepreneurs. An entrepreneur who has already set up a project at one place and wishes to

set up an entirely different project at another place may be considered eligible for subsidy for the

second project also. In any case, the subsidy will not be made available to the same entrepreneur for

more than two projects.

Subsidy for Market Studies

New entrepreneurs (locally based or non resident Indians) entering the field of medium and /or

medium large industry for the first time in the country can have market studies for their products

undertaken by TCO at a cheaper cost. The fee for the preparation of a market study payable to TCO

would be subsidised by IFCI up to 75% of the cost or Rs. 15,000 whichever is lower. The subsidy

will be made available only to the TCO with which one or more financial institutions or development

agencies at the State or all India level are associated as shareholder(s) or member(s) of board of

management. The entrepreneur will have to bear only 25% of the cost of the study.

Adoption of Indigenous Technology

Promoters of project involving commercial exploitation of indigenous technology can get assistance

in the form of subsidy covering the interest payment due to IFCI during the first three years of

operations of the project subject to a ceiling of Rs. 5 lakhs a year. In appropriate cases, the total

subsidy could be upto Rs. 25 lakhs over a period of five years. However, the extent of subsidy would

be determined by IFCI on a case to case basis having regard to the earning potential and projected

cash flow of the project. The subsidy would be reimbursed to the concern after it makes payments of

installments of interest to IFCI on due dates. For being eligible for concessional assistance, the

project should be set up with loan assistance from IFCI and be based on indigenous technology. The

right to use this technology must have been acquired by the agency implementing the project from

the concerned institution, viz. Government laboratories, public sector companies, universities, or any

other institution recognised by the Government of India. The technology should be one which has

26

not already been exploited on a commercial scale in the country, and a certificate to this effect will

have to be obtained from the concerned institution. The technology should be basic to the

manufacture of the proposed product and not merely peripheral and the project must be of national

priority as indicated by government from time to time.

Machinery on Hire Purchase

Small scale industrial units including ancillaries are eligible to procure machinery on hire purchase

basis from the National Small Industries Corporation Ltd. through its libralised terms and conditions

for supplying machinery to .small scale industries located in backward areas which qualify for

investment subsidy.

Transport Subsidy

The transport subsidy scheme envisages grant of a transport subsidy to industrial units in selected

areas to the extent of 50% of the transport costs of raw materials which are brought into and finished

goods which are taken out of the selected areas.

The scheme covers the State of Jammu and Kashmir. Himachal Pradesh, hilly areas of Uttar Pradesh

and North Eastern Region comprising States of Assam. Meghalaya, Nagaland, Tripura and the Union

Territories 'of Arunachal Pradesh, Andaman and Nicobar Islands. Mizorarn and Lakshadweep.

Subsidy is paid on transport costs between the selected railheads and location of the industrial units

in the above states/Union Territories.

The highlights of the scheme are: 1. Industrial units in the above-mentioned areas will be given transport subsidy in

respect of the raw materials brought into and the finished goods which are taken out of such

areas.

2. No transport subsidy will be allowed for the internal movement of raw materials

and finished goods within the State of Jammu and Kashmir and the North-Eastern

Region.

3. In the case of Jammu and Kashmir, the transport subsidy will be given between

the railhead at Pathankot and the location of the industrial unit or between the location

of the industrial unit and Jammu. whichever is nearer.

4. For the other above-mentioned States (except J & K). the transport subsidy will

be given on the transport cost between Siliguri and the location of the industrial unit in

these States. While calculating the transport cost, the cost from Siliguri to the railway

station nearest to the industrial unit will be taken into account in respect of raw

materials and finished goods. If any other mode of transport is used the cost will be

limited to the amount which the industrial unit may have paid, if it had used the above

mode of transport.

5. Freight charges for the movement of goods by road will be determined on the

basis of the transport rates fixed by the government of a State/Union Territory from

time to time, or the actual freight paid, whichever is less.

6. The cost of loading or unloading and other handling charges will be taken into

account for the purpose of determining transport costs.

7. All new industrial units located in the selected areas will be eligible for a

transport subsidy equivalent to B0% of the transport cost of raw materials and finished goods.

8. Existing industrial units are also eligible for a 50% subsidy in respect of

27

additional transport costs of raw materials and finished goods resulting from a

substantial expansion or diversification effected by them after the commencement of the

Transport Subsidy scheme.

9. The transport subsidy will cover 50% of the transport charges on the movement

of steel from the Gauhati Stockyard of Hindustan Steel Limited to the site of an

industrial unit in the North-Eastern Region.

10. The State Government/Union Territories will set up a committee consisting of

the Director of Industries, a representative of each of the State Industrial Departments

or the State Finance Departments and a representative of the Ministry of Industry

Development. The committee will operate at the State/Union Territory level. The

claimants would be asked to submit proof of raw materials "imported" into, and the

finished goods "exported" out of the State/Union Territory from a registered chartered

accountant, in the State/Union Territory.

11. The Directorates of Industries in the States/Union Territories will lay down

system of pre-registration of industrial units which are eligible for the transport subsidy. At

the time of registration, the Director will fix and indicate the capacity of such units, and lay

down the procedure to be followed to ensure a regular inflow regarding the movement of raw

materials and finished goods to and from the industrial units.

12. The Ministry of Industrial Development will periodically review the arrangements

made by the Directorates of Industries of various States and Union Territories and

suggest modification in the Procedure for scrutinising the claims, payment of transport

subsidy, etc.

28

LESSON 3

INCENTIVES AVAILABLE TO SSI UNITS IN

BACKWARD/RURAL INDUSTRIES PROJECT AREAS Dr Hem Chand Jain

Certain special facilities and incentives have been provided to these back-ward districts. Of these,

101 districts/areas have been declared further as specially backward and hence additional incentives

like capital subsidy, special import facilities, etc.. are provided to industrial projects in these 101

districts/ areas over and above what is given in the 247 districts.

In addition, 111 districts in the country have been covered under the Centrally-sponsored Rural

Industries Project Programme. Small-scale units set up in these areas gel other special concessions

and facilities. The various benefits are enumerated below:

1. An outright subsidy of 15% on the fixed capital investment up to a maximum of Rs. 15 lakhs

is admissible to new units being set up in backward areas.

2. Allotment of factory or factory sheds In Industrial estates/areas and industrially developed

colonies on easy terms.

3. Interest-free loans in lieu of inter-state Sales tax paid/payable by SSI units are

available up to 7 years, provided the loan in a particular year will not exceed 8% of the

capital investment.

4. Loans and advances to SSI units under the State Aid to Industries Act and Rules framed

thereunder, for the construction of factory buildings, purchase of machinery and equipment

and working capital on easy terms.

5. The State Financial Corporations grant loans for acquisition of fixed assets up to

Rs. 30 lakhs in the case of limited companies and registered co-operative societies and

up to Rs. 15 lakhs for others at liberalised margins and rate of interest, and this is done over a

longer span of repayment and moratorium period.

6. The Central/State Government directly or through its subsidiary concern—the

Stale Industrial Development Corporation—underwites or participates in the preference

shares of public limited companies on a selective basis for setting up medium and large

industrial units. The State Government also considers cases for setting up of joint ventures

with the private sector.

7. The SSI units in the backward areas and other industries with a capital

investment in plant and machinery upto Rs. 1 lakh are relieved from the following

taxation in some States:

(i) New units established in the districts are completely exempted from the payment of

electricity duty up to a period of 7 years.

(ii) (New units are exempted from property tax for a period of 5 years.

(iii) Industrial units set up within the municipal limits are exempted from octroi on capital

equipment and building materials subject to a maximum period of 3 years from the

date of regular registration.

8. Provision of essential, controlled raw materials to the SSI units on priority and at

very liberal terms.

9. State Governments have set up independent testing laboratories on behalf of the

Indian Standards Institution, the Export Inspection Council, the Department of Defence,

Government of India and various other government organisations for making industrial

products of good quality.

10. In order to provide some important and sophisticated common facilities, a

network of industrial development centres, heat treatment centres and common facility

29

workshops have been set up in the States to equip the SSI units with modern techniques and

process of manufacturing.

Special incentives in the form of transport subsidy to compensate partially for the higher transport

cost of established industries in hilly backward areas is also being provided by the Union

Government.

The small scale units are now permitted to set up consortia to organise the sales of their own

products abroad. Similarly, a co-operative society of small units will also be permitted to do so. Such

consortium or a co-operative society of small scale units will be eligible for grant of an Export House

Certificate on the following basis :

(1) The applicant is a corporate body or a partnership firm or a co-operative society

and is registered as an exporter;

(2) All the members of the applicant consortium are small or cottage units,

(3) The minimum limit prescribed for select products for grant of a certificate will be

Rs. 50 lacs (the minimum exports may be either in the immediately preceding years or

the annual average of the three years of the base period).

For the purpose of granting the first export house certificate to the consortium, the exports made by

its members will be taken into account, if otherwise acceptable. Thereafter, for the purpose of

renewal, the exports made in the name of the consortium alone will be acceptable.

Seed Capital Assistance

One of the constraints faced by the entrepreneurs, especially first generation or technical

entrepreneurs, is the lack of resources to meet the minimum promoter's contribution. To help the

entrepreneurs overcome the problem. IDBI has come up with a scheme which has gained popularity

as the Seed Capital Scheme. If the project is coming up in non-backward areas, then the project

would not be eligible for subsidy. Hence, the entire amount of promoter's contribution would be

brought by the contributor himself. This would be reduced to the extent of the subsidy if the project

is coming up in backward areas like (category A, B, or C). The maximum amount which can be

sanctioned is to the extent of Rs. 5 lacs per project on the fulfillment of certain conditions.

Objectives of the Scheme

The objective of the scheme is to create new generation entrepreneurs who have the requisite traits of

entrepreneurship but whose financial resources are limited. It envisages extension of assistance at a

nominal service charge for meeting the risk capital requirements of entrepreneurs. The scheme is

expected to promote wider dispersal of ownership and control of industrial undertakings.

Agencies for Operating the Scheme

The scheme is operated through the agency of notified SIDCs and SFCs. Assistance under the

scheme will also be given directly by IDBI in exceptional cases. Projects assisted by commercial

banks are also eligible for seed capital assistance. However, the entrepreneurs will have to submit

their applications through SFC/SIDC functioning in the region.

30

Eligibility Criteria

To be eligible for assistance the entrepreneurs should be technically or professionally qualified or

possess relevant experience or skills either in industry, business or trade. The following categories of

entrepreneurs are eligible for assistance under the scheme:

1. New generation entrepreneurs in small scale requiring seed capital of more than

Rs. 4 lacs.

2. Small scale entrepreneurs who undertake expansion/diversification or modernisation.

3. Entrepreneurs intending to graduate from the small scale to medium sector for the first time.

4. Entrepreneurs intending to set up a project in the medium sector for the first time.

5. Entrepreneurs already in medium sector and intending to undertake diversification for

achieving better viability. Entrepreneurs seeking additional seed capital to meet project cost

over-run caused by factors beyond their control.

6. Entrepreneurs intending to take over an existing sick or closed unit. Projects constituted as

public/private limited companies or partnership/proprietary concerns eligible for assistance.

Amounts and Mode for Assistance

The amount of seed capital assistance for project shall not exceed Rs. 15 lacs. However, the actual

amount will be determined on the basis of gap in the equity required for the project as also shortfall

if any in the prescribed minimum promoter's contribution after taking into consideration his own

contribution and from other sources and subsidies and incentives. For deciding the quantum of

assistance, the debt equity norms of 2:1 in the case of SSI units and 1.5:1 in the case of medium scale

units would be adopted.

The assistance will be in the form of soft loans in the case of proprietary and partnership concerns. In

the case of private limited companies the assistance will be by way of soft loans of subscription to

1% cumulative redeemable preference shares. In the case of public limited companies the assistance

will be normally by way of subscription to equity capital or cumulative redeemable preference shares

(at 1%) or both or by way of soft loan.

The soft loan would be interest free which will carry a service charge of 1% per annum. However,

IDBI may have option to charge the interest on soft loan at a different rate. There is no commitment

charge. The repayment period depends upon repaying capacity of the unit with an initial moratorium

period not exceeding 5 years. Now security except the personal guarantee of the promoter is

stipulated.

TAXATION BENEFITS

The taxation benefits available to small scale industries are explained below:

1. Tax Holiday: New small scale industries are exempted from the payment of

income tax under Section 80J of the Act on their profits up to 6% (7.5 % for companies) from

the total income of the units in the assessment year in which the units began manufacture,

provided the small scale units have followed the procedures laid down in Section 80 J. This

tax holiday is available up to 5 years from the commencement ofproduction.

2. Depreciation Allowance: Under Section 32 of the Income Tax Act. a small scale

industry is eligible to get a deduction on depreciation account of plant and machinery.

land and buildings, at the prescribed rates. In the case of small scale industries the

deduction from the actual cost of plant and machinery is allowed up to Rs. 20 lakhs.

31

The depreciation is calculated on the reducing balance system. Full depreciation is available

for a year irrespective of the actual number of days for which the assets have been used.

Sometime, an additional allowance, called extra shift allowance is available to the units. Any

machinery or plant costing less than Rs. 750 is allowed to be written off completely in the

year in which it is first used.

3. Development Rebate: In respect of new plant or machinery other than office

appliance or road transport vehicles of a small scale unit, which is wholly used for the

purpose of production, a sum, by way of development rebate, as specified below, is allowed

under Section 33, in addition to normal depreciation.

(i) In the case of plant and machinery, 35% of the actual cost, if it were installed before

1st April 1970, and 25% of such cost if it were installed after 31st March 1970.

(ii) Where the plant machinery was installed after 31st March 1967, being an asset

representing expenditure of a capital nature on scientific research related to the

business carried on by a unit, development rebate is given at the specified rates.

4. Rehabilitation Allowance: This is granted to small scale units, under Section 33

B. whose business has been disturbed by:

(a) Riot or civil disturbance.(fa) Floods, typhoons, hurricanes, cyclones, earthquakes or

other natural disasters.

(b) Accidental fire or explosion.

(c) Action by an enemy.

The small scale unit re-established, reconstructed or revived, is allowed a deduction of a sum, by

way of rehabilitation allowance, equivalent to 60% of the amount of the deduction allowable to the

unit.

Investment Allowance: The Investment allowance was introduced in 1976 in place of depreciation

allowance. It is allowed at the rate of 25 per cent of the cost of acquisition of new plant or machinery

installed. The benefit of investment allowance is available for the articles or things except certain

low priority items specified in the Eleventh Schedule. However, the Small scale units are eligible for

investment allowance irrespective of whether they are used for the purpose of business of

construction, manufacture or production of low priority items listed in the Eleventh Schedule.

If a small scale industrial unit produces any article or thing (not listed in the XI Schedule) by using

the know-how developed in Government laboratories, public sector companies and universities, the

rate of investment allowance will be 35 per cent. This higher rate may be claimed only if the new

plant or machinery is installed by it after 20-6-1977 but before 1-4-1982.

The Small scale unit can avail of the benefit of investment allowance only when it has put to use the

plant and machinery either in the year of installation or In the immediate following year; otherwise

the benefit will be forfeited.

Conditions to be fulfilled: An Investment Allowance Reserve must be created during the relevant

financial year. This reserve should be utilised for the purchase of plant and machinery for the

business purpose of the small scale unit in India. It cannot be used for any other purpose such as

distribution of dividends or separation of profits or creation of assets outside India.

32

When Withdrawable: The Investment Allowance will be withdrawn:

(i) If plant and machinery is sold or otherwise transferred by the assessee to any person (other

than the Government, a local authority, a corporation or a Government Company) at any time

before the expiry of eight years from the end of the financial year in which it was acquired or

installed. It is not withdrawn if the sale or transfer is made in connection with the

amalgamation of a partnership firm into a company or where a firm is succeeded by a

company in the business carried on by it.

(ii) If a small scale industrial unit ceases to be a small scale unit by virtue of the total value of

plant or machinery installed exceeding the authorised limit.

Publication of Books : A small scale industry engaged in the business of publication of books is

entitled to claim a deduction of a sum equal to 20 per cent of (.lie-profits and gains derived from

such business under section 80 of the Act. "Books" for the purpose of this Section do not include

newspapers, journals. Magazines, diaries, brochures, pamphlets and other publication of similar

nature.

Tax Benefits for Amalgamation of Sick Units: Sickness in an industry, whether large or small. Is

quite widespread in the country and has become a national problem which has caused a great deal of

concern. It is estimated that the aggregate amount involved in the sick units is more than Rs. 2000

crores. The policy of the Government has been to encourage the amalgamation of sick units and

concessions have been announced to induce healthy units to take over sick concerns in the public

interest. Tax concessions are available for the amalgamation of sick units.

Excise Concession: The long term Fiscal Policy has envisaged to provide the best solution for the

problem of cascading effect of taxation of inputs on the value of final product in the Modified Value

Added Tax (MODVAT) Scheme. This scheme provides for the extension of the present system of

proforma credit to all excisable commodities with the exception of a few sectors like petroleum,

tobacco and textile products. The objective of the scheme is to extend the scope of the provisions for

set offs for excise and countervailing duties paid on inputs. This programme will be implemented in

phased manner over a period of years, taking due account of the revenue implications, the need to

revise administrative procedures and the lessons from experience gained in the early stages of the

reform.

The purpose to use MODVAT is not to give substantial net reliefs on excise. The loss of duty on

inputs will be recouped through higher excise taxation of final products. Indeed, shifting the effective

burden of excise taxation away from inputs and on to final products is at the heart of the proposed

reform. Aside from reducing distortionary effects on production and thus increasing the

competitiveness of Indian industry, the shifting of excise burden to final products will help in

tailoring excise duties in such a manner that the well off bear a higher proportionate burden than the

poor.

Tamil Nadu Micro, Small and Medium Industries Policy 2008

This policy is the first-of-its-kind in the country, with a vision to enhance the Competitiveness of the

Micro, Small and Medium Enterprises sector and aim for sustained annual growth rate of over IO per

cent for MSMEs and generate direct and indirect employment opportunities to the tune of 10 lakhs

during the XI Five Year Plan period. The Policy focused on all initiatives to be taken up for the

development of MSMEs in the State including infrastructure development, incentive schemes,

technology development, subsidy schemes for units located in industrially backward areas, skill

33

development, marketing support, deregulation and simplification, administrative reforms and

rehabilitation of sick enterprises in the state, Through this initiative, the Khadi and Village Industries

Commission. I he Khadi and Village Industries Board, Coir Board, Small Industries Development

Bank of India (SIDBI), Tamil Nadu Industrial Investment Corporation Limited. Tamil Nadu

Industrial Cooperative Bank Limited belonging to the Central and Stale Governments facilitate

assistance and loans along with employment opportunities.

Subsidy Schemes

(a) Micro Manufacturing Enterprises

Micro Manufacturing Enterprises established anywhere in the State are eligible for the

following incentives:


maximum of Rs. 3.75 lakhs


commencement of commercial production or from the date of power connection.

whichever is later, after allotment of Entrepreneur Memorandum.

• 100% subsidy on the net value of value added tax (VAT) paid by them for the

first 6 years up to the value of investment made in plant and machinery at the

time of allotment of Entrepreneur Memorandum.

(b) Backward Area Development Subsidies

Micro, Small and Medium manufacturing enterprises established in 251 industrially

backward blocks and all industrial estates promoted by the Government and Government

Agencies like SIPCOT. SIDCO, etc. (excluding industrial estates located within the radius of

50 Kms. from Chennai City center) and agro based enterprises set up in 385 blocks in the

State are eligible for the package of incentives given below:


maximum of Rs. 30 lakhs-

• 5% additional employment intensive subsidy on the value of eligible plant and

machinery for giving employment to 25 workers for 3 years within the first 5

years from the date of commencement of commercial production, subject to a

maximum of Rs. 5 lakhs.

• 5% additional capital subsidy on the value of eligible plant and machinery for

units set up by women, SC/ST. physically disabled persons and transgender

entrepreneurs, subject to a maximum of Rs. 2 lakhs.

• 25% additional capital subsidy on the value of eligible plant and machinery

installed to promote cleaner and environment friendly technologies, subject to a

maximum of Rs. 3 lakhs and certification by Tamil Nadu Pollution Control Board.


commencement of commercial production or from the date of power connection,

whichever is later.

(c) Special Capital Subsidy for Thrust Sector manufacturing enterprises set up

anywhere in the State

Ten thrust-sector manufacturing enterprises viz. Electrical and Electronic Industry. Leather

and Leather goods, Auto parts and components. Drugs and Pharmaceuticals. Solar Energy

34

Equipment, Gold and Diamond Jewellery for exports. Pollution Control equipments. Sports

Goods and Accessories. Cost effective building material and Readymade Garments, set up

anywhere in the State are eligible for a special capital subsidy of 15% on the eligible plant

and machinery, subject to a maximum of Rs. 30 lakhs.

(d) Generator Subsidy

Micro, Small and Medium manufacturing enterprises established anywhere in the State are

eligible for a subsidy of 25% on the cost of Generator set purchased (up to 125 KVA

capacity), subject to a maximum of Rs. 1.50 lakhs.

(e) Back-ended Interest Subsidy

A back-ended Interest subsidy at the rate of 3% (subject to a maximum of Rs. 10 lakhs per

enterprise over a period of five years) will be extended on loans taken up to Rs. 100 lakhs by

Micro. Small and Medium Enterprises for Modernization by induction of well established

and improved technologies in specified sub-sectors/products as listed in the guidelines on

Credit Linked Capital Subsidy Scheme (CLCSS) of Government of India.

Schemes for Technology Development

The following new schemes for Technology Development are announced In the Micro, Small

and Medium Industries Policy 2OOS:

• 50% subsidy on the cost of filing a patent application, subject to a maximum of Rs. 2 lakhs per

application and 50% of the cost of the application for trade mark registration or Rs. 25000

whichever is less for Micro, Small and Medium Manufacturing Enterprises.

• Establishment of industrial clusters and mini tool rooms under Public Private Partnership mode

by providing 25% of the total project cost, subject to a maximum of Rs. 1 crore as assistance.

• Creation of Technology Development Fund for evolving cleaner/energy efficient/lT

enabled technologies for the Micro. Small and Medium Manufacturing Sector.

• Assistance for creation of Centers of Excellence and Technology Business incubators for

introduction of a new production techniques and design Development to the tune of Rs. 50

lakhs per incubator/center of excellence.

Schemes of Skill Development and Training

Reimbursement of 50% of the tuition fees for Skill Development Training schemes for the benefit of

the educated unemployed youth and upgradation of the skills of existing employees of Micro. Small

and Medium Enterprises by the MSME Associations have been announced in the MSMI Policy

2008.

Marketing support

Government has announced the following schemes to provide marketing support to Micro, Small and

Medium Enterprises in the MSMI Policy 2008.

• 15% Price preference for purchase of goods of domestic Micro and Small

Enterprises as provided in the Tamil Nadu Transparency in Tenders Act. 1998.

• Purchase preference for items notified from time to time by the State Government.

• Waiver of Earnest Money Deposit for participation in tenders.

35

• 50% grant on hall rent for participation in exhibitions within the State and also

in other States by MSME Associations.

• Support for marketing under a common banner or brand name.

Credit Linked Capital Subsidy scheme: The Government of India is operating Credit Linked

Capital Subsidy Scheme to facilitate the upgrading of technology in SSI units in respect of 48

specified products/sub-sectors. Under this scheme. 15% capital subsidy is granted for induction of

proven technologies approved under the Scheme.

TUF scheme for textile: Additional option available for Capital subsidy in lieu of interest rebate for

selected sectors. New or existing SME units—including units in cotton ginning and processing

sector—are eligible 5%/4% interest reimbursement and (he interest actually charged.

Mega Projects Subsidy: The Govt. of Tamil Nadu is offering Mega Project Subsidy for the projects

with investment in Fixed Assets above Rs. 5.00 crores and upto 200 crores as back ended ranging

between 30.00 lakhs to 100.00 lakhs depending up to the investment and direct employment to the

workers.

Subsidy of Ministry of Food Processing Industries: The Ministry of Food processing, Government

of India with a view to accelerate the growth in this sector is providing grants for setting up of food

processing units (including meat and fish processing/milk products/spices/coconut/walnut/cashew

nut) or upgradation and expansion of such unit and for establishing Food Parks. Grant is available at

25% of the cost of capital equipment and technical civil works up to a maximum of Rs. 50.00 lakhs.

Employment Incentive Subsidy: Employment Incentive Subsidy of an additional 5% subject to a

maximum of Rs. 5.00 lakhs will be granted, if at least 25 workers have been employed for a

minimum period of 3 years within the first 5 years from the date of commencement of production.

Special Capital Subsidy to thrust sector enterprises : Micro/Small/Medium manufacturing

enterprises in the following Thrust Sectors are eligible plant and machinery subject to a maximum of

Rs. 30.00 lakhs—

1. Electrical & Electronics Industry

2. Leather & Leather Goods

3. Auto Parts and components

4. Drills and Pharmaceuticals

5. Solar Energy Equipments etc.

Low-tension power tariff (LTPT) subsidy: Flat rate of 20% for the first 36 months from the date of

commencement of production or from the date of power connection, after allotment of an

Entrepreneur Memorandum from District Industries Center.

INSTITUTIONAL SET UP

In order to accelerate the small industries development, Governments at the Central and State levels

have set up a number of development agencies/institutions such as District Industries Centres (DICs).

Small Industries Service Institutes (SIS1) and Small Industries Development Organisation, etc. All-

India Financial Insitutions—1DB1, IFC1. 1CICI—have promoted/sponsored a number of Technical

Consultance Organisations (TCOs) to assist small entrepreneurs in different ways. In 1986. the Small

Industries Development Fund was set up in IDBI in order to assist small scale, village and cottage

36

industries and tiny sector units in the rural areas. Recently, the Small Industries Development Bank

of India (SIDBI) has been established to help small scale units. In addition to these institutions there

are agencies like National Science and Technology Entrepreneurship Board, Khadi and Village

Industries Commission, Commercial Banks, EXIM Bank and Co-operative Banks who undertake

promotional activities aiming at facilitating industrial development.

District Industries Centres (DICS)

Governments—both Central and State, have in the past taken a number of measures for the

development of small and village industries, but the actual achievements have been far below the

expectations. Also the focus of attention for industrial development was mainly on large cities and

State capitals to the neglect of district areas. In addition, multiplicity of institutions involved in small

industries development and complicated systems and procedures made the job of promoting the

industrial units an uphill task for small entrepreneurs. Hence, it was felt necessary to establish a

development agency which could provide all services and facilities to village and small industries

under one roof. Accordingly, the DICs were established in May 1978 in order to cater to the needs of

small units.

Each district has a DIG at its headquarters. The main responsibility of DIC is to act as the chief

coordinator or multifunctional agency in respect of various Government departments and other

agencies. The prospective small entrepreneur would get all assistance from DIC for setting up and

running an industry in rural areas. Up to 1991 about 422 DICs have been set up throughout the

country. These DICs have assisted more them 1.5 lakh units generating employment for more than

10.3 lakh persons. The metropolitan cities of-Delhi, Bombay, Calcutta and Madras have been kept

outside the purview of the DIC.

Functions of DIC

Identification of Entrepreneurs: DIC develops new entrepreneurs by conducting entrepreneurial

motivation programmes throughout the district especially in Panchayat Union Headquarters and

small towns.

Selection of Projects: DIC offers technical advice to new entrepreneurs for the selection of projects

suitable to them.

Provisional Registration under SSI: After the selection of projects, entrepreneurs are issued with

provisional SSI Registration which is essential for obtaining, assistance from the financial

institutions.

Purchase of Fixed Assets: DIC sponsors the loan applications to TIIC. S1DCO and banks for the

purchase of land and buildings anti sanctions margin money under Rural industries Project Loan

Scheme payable to other financial agencies for the purchase of plant and machinery.

Clearances from Various Departments: It takes the initiative to get clearances from various

departments and takes follow up measures to gel speedy power connection.

Assistance to Raw Material Supplies: It makes necessary recommendations to the concerned raw

materials suppliers and issues the required certificates for the import of raw materials and machinery

wherever necessary.

37

Assistance to Village Artisans and Handicrafts: DIC arranges for the financial assistance with the

lead bank or nationalised banks of the respective areas.

Interest-Free Sales Tax Loan: SSI units set up in rural areas can get IFST Loan up in a maximum

limit of 8% of the total fixed assets from S1DCO. But the sanction order from the same is being

issued by DIC. The DIC also recommends the SSI units to NSIC for registration for Government

Purchase Programme.

Subsidy Schemes: DIC assists SSI units and rural artisans to get subsidies such as power subsidy,

interest subsidy for engineers, subsidy under IRDP, etc., from various institutions.

Training Programmes: DIC gives training to rural entrepreneurs and also assists other units giving

training to small entrepreneurs.

Self-employment for Unemployed Educated Youth: This scheme was introduced in 1983-84 for

youths between 18 years and 25 years with SSLC, Technocrats and women are given preference.

District Industries Centres are supposed to provide pre-investment, investment and post- investment

assistance to entrepreneurs under one roof. These centres have done commendable work in the

promotion of small industries, development of entrepreneurship and generation of self- employment.

But much is still desired to be done to make the DIC really one-window service. Steps should be

taken to strengthen and suitably restructure the district industries centres for playing a leading role in

district level industrial development

Industrial Estates

Developing countries require institutional arrangements for their rapid industrialisation and balanced

growth. One such institutional measure is industrial estates. The term 'industrial estate' is called by

different names, e.g. industrial park, industrial zone, industrial region, industrial city, industrial area,

industrial township, etc.

An industrial estate has been defined as a method of "organising, housing and servicing industry, a

planned clustering of industrial enterprises offering standard factory buildings erected in advance of

demand and a variety of services and facilities to the occupants". In other words, an industrial estate

is a tract of land sub-divided and developed according to a comprehensive plan for the use of a

community of industrial enterprises. It is a planned clustering of industrial units offering standard

factory buildings and a variety of services and facilities to entrepreneurs.

The main features of an industrial estate are as follows:

(i) It is a tract of land subdivided and developed into factory plots or sheds.

(ii) It provides several common facilities or infrastructural amenities such as water, power,

transport, toolroom, training, bank, post office, repairs and maintenance, etc. to the

occupants.

(iii) It is a planned clustering of industrial units.

(iv) It is designed as a tool of industrialisation and balanced regional development.

(v) It may be developed in urban, semi-urban or rural areas,

(vi) It may be large, medium and small,

(vii) It may be set up the Government or by cooperatives or by private agencies.

38

Types of Industrial Estates

Industrial estates may be classified into the following categories:

1. General Purpose or Composite Industrial Estates: Such an industrial estate

provides- accommodation to all types of smallscale industries.

It consists of a wide variety and range of industrial units. Most of the Industrial estates in

India are of this type.

2. Special Purpose Industrial Estates: This type of industrial estate is particularly

constructed for specified groups of entrepreneurs, e.g., technically qualified persons.

craftsmen or artisans, etc. For example, Industrial estates for artisans and technical

personnel have been set up at Hyderabad.

3. Ancillary Industrial Estates: Such an industrial estate houses manufacturing

units, which produce, parts and components for a large industrial unit. It is generally

set up near the parent unit.

4. Functional Industrial Estates: This type of Industrial estate consists of

industrial units manufacturing the same product. Such estates have been set up for

leather goods, electronics, sports goods, food preservation, ceramics, etc.

5. Flatted Factory Estates: These are multi-storey buildings constructed in big

cities, to provide space to industrial units manufacturing light weight goods with the

help of simple machine tools. They help to conserve space.

Advantages of Industrial Estates

Industrial estates offer the following benefits:

1. Economies of Scale: Location of many medium or small plants within a large

area offers several economies. Economies of scale arise because all the industrial units enjoy

common infrastructural facilities. As the size of an industrial estate increases the costs of

estate development and administration per unit of each facility decline.

2. Economies of Agglomeration: In an industrial estate, several industrial units

are clustered together. They become interrelated and interdependent. This enables them to

enjoy the benefits of agglomeration and external economies. These external economies

include access to better transportation facilities, availability of trained labour, regular supply

of power and water, easy access to testing and repair facilities, availability of raw materials,

etc.

3. Low Investment: A small scale entrepreneur can obtain an Industrial plot or

shed on rent or hire purchase basis. This reduces considerably fixed capital

requirements as well as fixed costs.

4. Less Risk: Industrial estates serve as risk-absorbing device because of low

capital investment and provision of common facilities and services.

39

5. Saving of Time and Effort: An individual entrepreneur is relieved of the trouble

of searching for a suitable space. He need not waste his time and effort in formalities

involved in acquiring land, obtaining the approval of local authorities, securing power

connection, etc.

6. Nursery for New Entrepreneurs: Industrial estates reduce risks and increase

profitability through Internal and external economies. This induces new entrepreneurs

to setup industrial units.

7. Mutual Cooperation: Industrial estates promote the spirit of cooperation and

joint efforts. All industrial units located in an industrial estate face common problems

and seek to achieve common objectives.

8. Balanced Regional Development: By developing estates in relatively backward

regions, the Government can ensure the balanced industrialisation of different parts of

the country. This will also lead to decentralisation of industries.

Thus, an industrial estate serves as a multipurpose arrangement for the growth of entrepreneurship.

By providing the necessary facilities and services at a single place, it provides a congenial climate

for the growth of small scale industries. It encourages the development of new enterprises. Industrial

estates not only accelerate industrialisation but also facilitate decentralisation of industry

40

LESSON 4

SMALL INDUSTRIES DEVELOPMENT ORGANISATION (SIDO) Dr Hem Chand Jain

SIDO is a policy-making, coordinating and monitoring agency for the development of small scale

entrepreneurs. It maintains a close liaison with government, financial institutions and other agencies

which are involved in the promotion and development of small scale units. It provides a

comprehensive range of consultancy services and technical, managerial, economic and marketing

assistance to SSI units. It has a network of 28 Small Industries Service Institutes, 30 branch SISIs, 37

Extension Centres, four Regional Testing Centres, one Product and Process Development Centre,

three Footwear Training Centres and five Production Centres and ten Field Testing Centres.

Functions

The main functions of the SIDO are coordination, industrial development and industrial extension

service. Some important functions are:

(1) To assess the requirements of indigenous and imported raw materials and

components for the small scale sector and to arrange their supplies;

(2) To collect data on consumer items which are imported, and encourage the setting

up of new units by giving them coordinated assistance;

(3) To prepare model schemes, project reports and other technical literature for

prospective entrepreneurs;

(4) To secure reservations of certain products for the SSIs.

(5) To provide consultancy and training services and marketing assistance to

improve the competitive strength of small scale units.

(6) To evolve a national policy for the development of SSIs and coordinate the

policies and programmes of various State Governments

SIDO is now Known as Micro, Small and Medium Enterprises Development Organisation.

NATIONAL SMALL INDUSTRIES CORPORATION LIMITED (NSIC)

The NSIC was set up in 1955 with the objective of supplying machinery and equipment to small

enterprises on a hire-purchase basis and assisting them in procuring Government orders for various

items of stores. NSIC provides a wide range of promotional services to small scale units

The Corporation's Head Office is at Delhi and it has four regional offices at Delhi, Bombay, Madras

and Calcutta, and eleven branch offices. It has one central liaison office at Delhi and depots and sub-

centres. The main functions of NSIC are:

(1) To develop small scale units as ancillary units to large-scale industries:

(2) To provide SSIs with machines on hire-purchase basis;

(3) To assist small enterprises to participate in the stores purchase programme of

the Central Government:

(4) To assist small industries with marketing facilities:

(5) To distribute basic raw materials through their depots:

(6) To import and distribute components and parts to actual small scale users in

specific industries: and

41

(7) To construct Industrial estates and establish and run prototype production-cum-training

centres.

(8) To develop small scale industries in other developing countries on turn key basis

The NSIC has taken up the challenging task of promoting and developing small scale industries

almost from scratch and has adopted an 'integrated approach' to achieve the socio-economic

objectives.

NSIC, in consultation with Rating Agencies and Indian Banks Association, has formulated

Performance & Credit Rating Scheme for Small Industries. The Scheme is aimed to create awareness

amongst small enterprises about the strengths and weakness of their existing operations and to

provide them an opportunity to enhance their organisational strengths and credit worthiness.

NSIC acts as a facilitator to promote marketing efforts and enhance the competency of the small

enterprises for capturing the new market opportunities by way of organizing participating in various

domestic & international exhibitions/trade fairs, buyers-seller meets, intensive campaigns seminars

and consortia formation. NSIC helps small enterprises to participate in International/national

exhibitions/trade fairs at the subsidized rates to exhibit and market their products, participation in

these events provides small enterprises an exposure to the national/international markets.

Buyer Seller Meets are being organized to bring bulk buyers/government departments and micro &

small enterprises together at one platform. This enables micro & small enterprises to know the

requirements of bulk buyers on the one hand and help the bulk buyers to know the capabilities of

micro & small enterprises for their purchases. Intensive campaigns and seminars are organized all

over the country to disseminate/propagate about the various schemes for the benefit of the small

enterprises and to enrich the knowledge of small enterprises regarding latest developments, quality

standards etc.

DIRECTORATES OF INDUSTRIES OF THE STATE GOVERNMENTS

The small-scale Industries is a State subject and. therefore, the development and implementation of

the schemes of assistance to SSIs is the primary responsibility of the State Government. Directorates

of Industries in each State do the work relating to the development of industries in general and small

scale industries in particular. Each directorate is stalled with administration and technical officers at

State headquarters and by a District Industries Officer with supporting staff in each district. The State

Directorates run various training schemes, production schemes and common facilities schemes. They

also provide facilities of developed industrial land and factory sheds in industrial estates, allocate

quotas of scarce raw materials, certify import requirements and organise industrial cooperatives.

Their functions are varied and have grown with the development and diversification of the small

scale sector.

STATE SMALL INDUSTRIES CORPORATIONS

Many State Governments have-set up Small Industries Corporations in order to undertake a number

of commercial activities. The most important of these activities are distribution of scarce raw

materials, supply of machinery on hire-purchase basis, constitution and management of industrial

estates, procurement of orders from Government Departments, assistance in export marketing and in

certain cases provision of financial, technical and managerial assistance to small enterprises.

42

Small Industries Development Corporation (SIDCO)

In Tamilnadu SIDCO is the state small industries corporation. It plays a lead role in developing small

scale sector. It provides the following facilities to small scale units:

(a) Provision of constructed sheds/plots in industrial estates. These are sold to

entrepreneurs on hire-purchase basis or given on rental basis.

(b) Assistance in procuring some scarce key raw materials like iron and steel, paraffin wax,

potassium chlorate, Fatty Acids, etc., through its various distribution centres. Financial

assistance in the form of subsidies to industrial units in back areas like Central Investment

Subsidy, State Capital Subsidy, Interest Sales Tax Loans, Power Tariff Subsidy and Margin

Money Assistance the Rehabilitation of the Sick Small Scale Industries.

(c) Marketing Assistance to small entrepreneurs.

SMALL INDUSTRIES SERVICE INSTITUTES (SISIS)

Established in 1956 this institute—one in each State has been rendering very useful service to small

scale industries. The assistance rendered by the institute and its extension centres in Tamilnadu may

be listed as follows :

1. Technical Consultancy and Advisory Service: This relates to selector of profitable small

enterprises, choice of appropriate machinery and equipment, appraisal of the technique of"

manufacture, processing of raw materials, adoption of recognised standards of testing, quality

performance of the small industry products and encouraging small units to participate in

Governments stores Purchase Programme. The Institute explores the possibility of setting up

small scale units to supply parts/components to large scale industries.

2. Common Facility Service: This includes supply of designs and drawings and

provision of workshop facilities for the manufacture of dies, tools, jigs and fixtures and

components.

3. Training Facilities: Training is provided to workers in basic trades in the workshops

attached to this Institute and its extension centres, to increase their productivity and this helps

to encourage development of small scale industries in rural areas.

Training in various aspects of industrial and business management is also provided for the

benefit of small industrialists.

A training course in small industries entrepreneurship and management to young engineers

with emphasis on the practical aspects of small industries management Is conducted. This has

been Instrumental in creating a new class of qualified entrepreneurs.

4. Testing Facilities: Basic testing facilities (both physical and chemical) are

provided in the laboratories and workshops attached to this institute at concessional

rates.

5. Marketing Assistance: Economic information on the nature and extent of the

market for specific products is collected and furnished to small industrialists at their

request. The institute offers export promotion service by counselling on export

procedures and trends in foreign markets.

43

Market survey for specific products of small enterprises is also undertaken on a regional basis to

enable a small industrialist to increase the sales of his products in the region.

The special information bureau, called the Tamilnadu Sub Contract Exchange, is a Central

Information Centre where machine capacities of small scale industries are registered and enquiries

from large industries for the manufacture of different components are passed on to registered small

scale units having spare capacity, so as to enable them to feed the requirements of large scale units.

The institute conducts economic surveys of particular areas to ascertain their industrial potential.

KHADI AND VILLAGE INDUSTRIES COMMISSION (KVIC)

KVIC was established in 1953 with the primary objective of developing Khadi and Village industries

and improving rural employment opportunities. Its wide range of activities include training of

artisans, extension of assistance for procurement of raw materials, marketing of finished products

and arrangement for manufacturing and distribution of improved tools, equipment and machinery to

producers on concessional terms.

KVIC provides assistance to Khadi and Village industries which are characterised by low capital

intensity and ideally suited to manufacturing utility goods by using locally available resources. There

are about 26 specified village industries such as processing of cereals and pulses, leather, cottage

matches. Gur and Khandsari, palm gur, non-edible oils and soaps, bee-keeping, village pottery,

carpentry and blacksmithy, gobargas, household alluminium utensils, etc.

KVIC's policies and programmes are executed through 30 State Khadi and Village Industries Boards,

2320 institutions registered under the Societies Registration Act. 1960 and about 30,600 Industrial

Cooperative Societies registered under State Cooperative Societies Act. Activities involving

pioneering types of work, such as developing new industries in hilly, backward and inaccessible

areas are undertaken by KVIC directly.

COMMERCIAL BANKS AND ENTREPRENEURIAL DEVELOPMENT

In recent times commercial banks have not confined themselves to mere extension of finance to

small entrepreneurs hut have shown genuine concern for their progress and development. They have

now entered the challenging field of promoting new small scale entrepreneurs through

entrepreneurship development programmes. In their new role as promoters of small scale sector they

have accepted yet another challenging task. They are now holding EDPs in collaboration with

specialised Institutions such as DIG, SIS1, TCOs, etc, with a view to identifying entrepreneurs,

especially in backward areas, and training and monitoring them to start new ventures.

State Bank of India (SBI)

In order to accelerate the development of backward areas by monitoring potential entrepreneurs to

take up risky new ventures, the SBI launched EDPs in 1978. As per the Bank's ventures, the EDPs

consist of one month's intensive training in behavioural science, management aspects, field training.

During the training period, the entire cost of boarding and lodging is borne by the Bank, The Bank's

EDP consists of three phases:

(i) Initiation phase for cretin" awareness about entrepreneurial opportunities.

(ii) Development phase through training programmes in developing motivation and managerial

44

(iii) Support phase counselling, encouragement and infra-structural support for establishing and

running an enterprise.

In 1967 the SBI launched a liberalised scheme for providing financial assistance to technically

qualified or trained entrepreneurs to the extent of 100 per cent, if necessary. The target group is the

technocrats who lack the financial capability to meet the normal margins stipulated by the Bank.

Under its Equity Fund Scheme, the Bank may grant interest-fee loan for the 25% of the project cost

which is the minimum contribution of an entrepreneur.

Recently SBI has set up a Research and Development Fund of Rs. 5 crores for inter-alia. assisting

entrepreneurial development. SBI and its group offer package of financial arrangement and

assistance to small scale units in their promotional and expansion activities and act as banker to

capital issues.

Punjab National Bank

Through its Merchant Banking Division it offers similar package of assistance to small scale units.

The package of measures include the following:

1. The banks study the economic viability and technical feasibility of the proposals

and help in preparation of market-survey report with the assistance of technical consultants.

2. They provide assistance to entrepreneurs in obtaining various government

consents required for industrial projects right from the time the application for letter of intent

is made.

3. They assist the entrepreneur in raising rupee resources in the form of

debentures, term loans, dereferred payment guarantees from financial institutions.

4. They assist in raising foreign exchange resources required for import of plant and

machinery, components, raw materials, etc., by arranging through the Bank's foreign

correspondents, suppliers' credit, buyers' credit and foreign currency loans.

5. They determine the capital structure, assist in obtaining consent of SEB1.

finalisation of syndication of underwriting arrangements, handling of share applications

and relative allotment in consultation with stock exchange, etc.; financing export of

capital equipment on deferred payment terms.

6. They suggest strengthening the capital base of small scale industries, which intend to

expand/diversify by conversion of partnership firms into private limited company, or

conversion of private limited company into public limited company.

Indian Bank—Entrepreneurship Service Cell

The bank provides consultancy services to persons who graduate from colleges and institutions of

engineering, technology, etc. and unemployed engineers, diploma holders and other graduates or

business executives. The consultancy service right from identification of a project to its

implementation and marketing is provided through the personnel of the bank and panels of expert

specialists. For this purpose, the cell after preliminary discussion with a prospective entrepreneur

arranges a meeting with the appropriate panel member. The cell and the appropriate panel member

then assist the entrepreneurs. This service was inaugurated on 3rd October. 1973 and is available

only at Madras and a few other selected centres.

45

Bank of Baroda—Entrepreneurial Banking Service

Bank of Baroda has started what is known as 'Entrepreneurial Banking' in collaboration with Uttar

Pradesh Small Industries Corporation to assist technician entrepreneurs to set up their own units at

Rae Bareli Industrial Complex for building and hardware materials. Under this scheme, the

Corporation assists the technicians with the acquisition of fixed assets, and Bank of Baroda arranges

in-plant training in established industrial units and provides working capital facilities to the

entrepreneurs.

Bank of Baroda has also started a Multi Service Agency at Bombay to provide technical assistance to

self-employed persons about feasibility of their projects/proposals, guide the entrepreneurs in regard

to availability of raw materials, marketing prospects, etc.

Bank of India—Entrepreneurial Clinic-Cum-Guidance Service

With a view to fostering growth of entrepreneurship and economic development, the bank has set up

the cell. The scheme offers;

(i) assistance in selection of industry, preparation and evaluation of project report and market

survey:

(ii) practical training in the line, if necessary;

(iii) assistance in obtaining government clearance, procurement of machinery and equipment and

marketing of product;

(iv) assistance and guidance in implementation of project.

The novel feature of the scheme is the bank will provide from a panel of industrialists a 'foster father'

to guide and assist the budding entrepreneurs.

Canara Bank—Industrial Information and Guidance Service

The bank has set up an industrial information and guidance service to provide information and

advice to its clients on matters, such as scope for establishment of industries, technical and marketing

facilities, taxation, export and imports, accounting and management and to prepare project reports on

proposed industries.

Grindlays Bank Limited

It has two Small Scale Consultancy Service and Merchant Banking Division. Small Scale

Consultancy Service Division is located in Calcutta. This division offers assistance in preparing

project feasibility reports, conducting overall industry studies, marketing and sales, and management

accounting. This division undertakes a detailed in-depth study of the existing system and procedures

in various functional areas for idea problems and other deficiencies, to develop tailor-made solutions.

The Division also helps the management in implementing the suggestions.

The Merchant Banking Division located at Mumbai, Chennai, Calcutta and New Delhi managers

public issues for raising capital, helps to establish liaison with government lending bodies for raising

capital, helps term development finance, assesses the strengths and weaknesses of the company

through management audits and suggests tailor-made solutions to eliminate the weaknesses.

46

Syndicate Bank

Small Scale Industries Department of the Bank with a technical cell of engineers working at the head

office at Manipal (Karnataka) and at different industrial growth centres, besides appraising the

viability of credit proposals from small scale industries sector, offers counselling services to the

entrepreneurs, including helping them to prepare project r ports.

Union Bank of India—General Services Cell

The Bank has opened a General Services Cell at its head office at 66/80 Bombay Samachar Street,

Fort Bombay exclusively for small industrialists and other small borrowers to provide services like

selection of machinery, accounting procedure, financial planning and other matters.

United Bank of India

The Bank's Technical Cell at Calcutta provides assistance to persons about feasibility of their

projects and technical as well as non-technical guidance.

United Commercial Bank

The Bunk has a cell in its head office at Calcutta to provide technical assistance/guidance to self-

employed persons about feasibility of their projects. It also renders them advice in regard to sources

and availability of raw materials, and marketing of their products.

New Entrepreneur Development Agency

The New Entrepreneur Development Agency has been created in order to assist educated

unemployed graduates to set up SSI units in urban and metropolitan areas. The Agency will choose

candidates only from among those sponsored by Government Institutions and Agencies like SISI,

DICs, University Employment Guidance Bureau, etc.

The selected candidates will be assisted in selecting the projects suitable to their aptitude and

backgrounds. The candidates on identifying the projects will undergo an Entrepreneur Development

Programme to be conducted by Agencies like SISI, ITCOT, etc. Practical training will also be

arranged in industries, wherever possible.

Projects with credit requirements up to Rs 5 lakhs are only eligible lor finance under the scheme.

Hundred per cent finance will be provided in the beginning and margin will be built up to 20 per cent

over a period of time depending on the profitability of envisaged project. Assets created with bank

finance and personal guarantees of parents will be sufficient securities for the loans given.

The maximum amount of loan will be Rs. 5 lakhs and the repayment of term loans will be based on

the profitability projection and within seven years. The interest rate for medium term loan is 13.5 per

cent p.a., and for working capital- 14 per cent p.a., up to Rs. 2 lakhs and 15.5 per cent p.a. above Rs.

2 lakhs up to Rs. 5 lakhs.

The candidate will be assisted in getting marketing tie-up with user industries, wherever possible.

Their unit will have to be registered as small scale Industries with the Directorate of Industries and

Commerce, or the DICs as the case may be.

47

Indian Overseas Bank—Bank's Small Business Aid Agency

The agency specialises in the field of small business and offers necessary guidance to those persons

who wish to start the same. It also offers consultancy to professionals, like doctors, engineers,

lawyers, etc. to enable them to start their practice. The operations of this agency are presently

restricted to Madras city and Madurai. though the bank plans to establish similar agencies in other

centres in due course.

SPECIAL ECONOMIC ZONES

In 1980, barely a year after the Chinese strongman Deng Xiaoping initiated his country’s switch to

market economy, a nondescript town in the Guangdong province in southern China, Shenzhen, was

designated a special economic zone (SEZ) by the authorities. It has virtually not modern industries

worth speaking of and had the slow-paced lifestyle that characterizes all backwaters. Today, some 27

years later, Shenzhen is a modern, sprawling metropolis with a population of more than 10.5 million

and home to some elite global brands and Fortune 500 companies. Crammed to the full with

industries of every hue, it is now the economic heartland of China. More importantly, it showcases a

model of growth that leapfrogs the limitations imposed by dirigisme to a high-growth export-led

powerhouse that is the envy of the world.

Today, India Inc. hopes to replicate the Chinese success story by creating its own brand of SEZs.

In simple terms, an SEZ is a designated free trade enclave that is deemed as a “foreign territory’ only

for trade operations’ dukes and tariffs. It has more liberal economic and labour laws than those of the

country and hence has the capacity to attract foreign investments, help promote exports and create a

level-playing field for domestic enterprises and manufacturers to compete in the global market. And

it’s not a new concept either. Since the end of World War II, SEZs, export-processing zones (EPZs)

and free trade zones (FTZs) have been bandied about as a solution to Jump-start economic

development in the developing countries to take on their Western counterparts. Interestingly, it was

the small Latin American country of Puerto Rico that showed the way for SEZs way back in 1947,

when it decided to pass a tax exemption law to attract firms from mainland USA to its shore. But It is

really the success of the five Chinese SEZs—especially Shenzhen in the Guangdong province, which

has attracted more than S 140 billion in FDI since the inception in 1980 and exported goods worth

nearly S 150 billion in 2004 (almost double of India's total exports in 2004-05 of S 80 billion)—that

has made SEZs a global media darling, in fact, China's astounding growth over the last three decades

is largely attributed to SEZs, which contribute more than 45% of the total Chinese exports.

India, too, has along history of dabbling in export promotion schemes. Asia's first EPZ was sent up in

Kandla in 1965, it was followed by the Santa Cruz EPZ in 1973. There were eight EPZs in the

country, but their performance is nothing to talk about.

What thwarted EPZs' progress were multiplicity of controls and clearances, lack of good

infrastructure and an unstable fiscal structure the very bottlenecks the SEZ policy, inspired by the

Chinese model, seeks to remove.

While the EPZs are just industrial estates, SEZs are industrial townships that provide supportive

infrastructure such as housing, roads, ports and telecommunication. EPZs have little protection from

cumbersome procedures and paperwork, while SEZs have single-window clearances that reduce

transaction costs and procedural hassles. But then again, while EPZs enjoy no benefits in terms of

48

relaxation in labour laws, the SEZ Act allows state governments to liberalie the labour laws in SEZs

falling within its jurisdiction.

Considering the country's creaking infrastructure, sorry state of public finances and massive

unemployment, getting private investment in infrastructure and attracting huge amounts of foreign

direct investment (FDI) especially into labour-intensive manufacturing sectors, should be the prime

objectives of the policy makers. After all, India—ranked—ranked at a lowly 134th on the ease of

doing business in the latest World Bank-IMF list—needs radical policy changes to emerge as a

global investment hotspot. And SEZs could just be the perfect tool to woe' all those multinationals

waiting to access our huge pool of cheap labour as well as the big market that India is.

And for one, it will be the private players and not the cash-strapped central government that will be

involved in converting large tracts of land into massive industrial townships.

Incentives for Manufacturers

• Duty-free import of capital goods, raw-materials, consumables and spares.

• 100% exemption on export profits for the first five years.

• 50% tax exemption on export profits for the next five years

• 50% tax exemption for another five years on reinvested profits.

• Exemptions from minimum alternate tax.

• Goods purchased from DTA are exempt from central sales tax.

• Exemption from service tax and capital gains on transfer from an urban area to SEZ.

Incentives for Developers

• No duty on goods imported either from the DTA or abroad.

• Income-tax exemption for the first 10 years.

• Service tax exemption for all services rendered within the SEZ.

• Exemptions from purchase, sale and turnover tax on all transactions.

• Exemption from stamp duty, registration fee and electricity duty.

• No tax on income from dividends and long-term capital gains tax.

• 100% FDI allowed for developers.

Debate over SEZs

The SEZs have been an issue of intense debate. Arguments have been advanced both for and against.

These can be briefly summarised as follows.

Arguments for SEZs

They will:

• Attract global manufacturing companies to set up base here.

• Create world-class infrastructure in the hinterland.

• Help create much-needed jobs across the country.

• Help the Centre save revenue on infrastructure development.

• Ease pressure on metres by creating new centres of employment.

• Ensure that risks of failure are borne entirely by the private sector

• Offer easier access to funds as foreign banks will be allowed in

49

• Bring down transaction costs for companies.

• Make units competitive through flexible labour laws.

• Bring foreign investment, technology and managerial talent.

Arguments against SEZs

They will:

• Lead to exploitation of the policy by fly-by-night developers.

• Could result in significant revenue losses for governments.

• Divert large tracts of farmland into non-performing SEZs.

• Result in domestic markets becoming under-served.

• Not produce world-class facilities in case of smaller size.

• Not guarantee the future of units in unsuccessful zones.

• Distort taxation structure, making units uncompetitive in DTA.

• Not be VITO compatible all the time.

• Lead lo large-scale exodus of industries from DTA.

• Allow the rise of private monopolies that will be against public interest.

50

LESSON 5

MARKETING Dr Hem Chand Jain

Marketing may be narrowly defined as a process by which goods and services are exchanged and the

value determined in terms of money prices. That means marketing includes all those activities

carried on to transfer to goods from the manufacturers of producers the consumers.

We shall be learning later in the lesson that marketing is more than mere physical process of

distributing goods and services. It is the process of discovering and translating consumer wants into

products and services. It begins with the customer (by finding their needs) and ends with the

customer (by satisfying their needs).

The scope of marketing can be understood in terms of functions that an entrepreneur has to perform.

These include the following:

(a) Functions of exchange: which include buying and assembling and selling?

(b) Functions of physical supply: include transportation, storage and warehousing.

(c) Functions of facilitation: product planning and development, marketing research,

standardization, grading, packaging, branding, sales promotion, financing.

The Marketing Concept

The marketing concept holds that the key to achieving organizational goals consists in determining

the needs and wants of target markets and delivering the desired satisfactions more effectively and

efficiently than competitors. Under marketing concept, the emphasis is on selling satisfaction and not

merely on the selling a product. The objective of marketing is not the maximization of profitable

sales volume, but profits through the satisfaction of customers. The consumer is the pivot point and

all marketing activities operate around this central point. It is, therefore, essential that the

entrepreneurs identify the customers, establish a rapport with them, identify their needs and deliver

the goods and services that would meet their requirements.

The components of marketing concept are as under:

(a) Satisfaction of customers: In the modern era, the customer is the focus of the organization.

The organization should aim at producing those goods and services, which will lead to

satisfaction of customers.

(b) Integrated marketing: The functions of production, finance and marketing should be

integrated to satisfy the needs and expectations of customers.

(c) Profitable sales volume: Marketing is successful only when it is capable of maximizing

profitable sales and achieves long-run customer satisfaction.

Marketing versus Selling

The basic difference between marketing and selling lies in the attitude towards business. The selling

concept takes an inside-out perspective. It starts with the factory, focuses on the company’s existing

products, and calls for heavy selling and promoting to produce profitable sales. The marketing

concept takes an outside-in perspective. It starts with a well-defined market, focuses on customer

needs, coordinates all the activities that will affect customers, and produces profits through creating

customer satisfaction.

51

Starting point Focus Means Ends

Selling Concept

Factory Products Selling and Profits through

Promoting sales volume

Marketing Concept

Market Customer Coordinated Profits through

Needs marketing customer satisfaction

Importance of Marketing in Small Business

Since marketing is consumer oriented, it has a positive impact on the business firms. It enables the

entrepreneurs to improve the quality of their goods and services. Marketing helps in improving the

standards of living of the people by offering a wide variety of goods and services with freedom of

choice, and by treating the customer as the most important person.

Marketing generates employment both in production and in distribution areas. Since a business firm

generates revenue and earns profits by carrying out marketing functions, its will engage in exploiting

more and more economic resources of the country to earn more profits.

A large scale business can have its own formal marketing network, media campaigns, and sales

force, but a small unit may have to depend totally on personal efforts and resources, making it

informal and flexible. Marketing makes or breaks a small enterprise. An enterprise grows, stagnates,

or perishes with the success or failure, as the case may be, of marketing. “Nirma” is an appropriate

example of the success of small scale enterprise.

Marketing of Services

The services sector is more than twice the size of the manufacturing sector. The growing competitive

market for services means that a marketing orientation has become essential for the survival for

service industries too.

India’s high capabilities in Information Technology are well known. In addition, there is the most

popular segment of its services sector, the entertainment industry, particularly films and TV happens

to be one of the fastest growing in the world. Indian films are popular across West Asia, Afghanistan,

Central Asia, Russia, South Africa and South East Asia. They are now penetrating the western world.

Market Segmentation

A market consists of large number of individual customers who differ in terms of their needs,

preferences and buying capacity. Therefore, it becomes necessary to divide the total market into

different segments or homogeneous customers groups. Such division is called market segmentation.

They may have uniformity in employment patterns, educational qualifications, economic status,

preferences, etc.

Market segmentation enables the entrepreneur to match his marketing efforts to the requirements of

the target market. Instead of wasting his efforts in trying to sell to all types of customers, a small

52

scale unit can focus its efforts on the segment most appropriate to its market.

A market can be segmented on the basis of the following variables:

1. Geographic Segmentation: The characteristics of customers often differ across nations,

states regions cities or neighbourhoods. The entrepreneur can decide to operate in one or a

few or all the geographic areas, but pay attention to differences in geographic needs and

preferences.

2. Demographic Segmentation: Variables such as age, sex, family size, income, occupation,

education, religion, race and nationality are widely used for market segmentation.

3. Psychological Variables: Personality, life style, social class, etc. can also be used for market

segmentation. For example, some products like pens, watches, cosmetics and briefcases are

designed differently for common men and status seekers.

4. Behavioural Segmentation: Buyers are divided into groups on the basis of their knowledge,

attitude, use or response to a product.

Marketing Mix

In order to cater to the requirements of identified market segment, an entrepreneur has to develop an

appropriate marketing mix. Marketing mix is a systematic and balanced combination of the four

inputs which constitute the core of a company’s marketing system – the product, the price structure,

the promotional activities and the place or distribution system. These are popularly known as “Four

P’s” of marketing.

An appropriate combination of these four variables will help to influence demand. The problem

facing small firms is that they sometimes do not feel themselves capable of controlling each o the

four variables in order to influence the demand.

Product Mix Price Mix Place Mix Promotion Mix

• Features

• Design

• Variety

• Quality

• Brand name

• Packaging

• Sizes

• Services

• Warranties

• List Price

• Discounts

• Allowances

• Payment Period

• Credit Terms

• Location

• Transport

• Channels

• Coverage

• Delivery

• Availability

• Inventory

• Advertising

• Personal selling

• Sales

promotion

• Publicity

A brief description of the four elements of markets mix is as follows:

1. Product: The first element of marketing mix is product. A product is anything that can be

offered to a market for attention, acquisition, use, or consumption that might satisfy a want or

need. Products include physical objects, services, events, persons, places, ideas or maxis of

these. This element involves decisions concerning product line, quality, design, brand name,

label, after sales services, warranties, product range, etc. An appropriate combination of

53

features and benefits by the small firm will provide the product with USP (unique selling

proposition). This will enhance the customer loyalty in favour of its products.

Products and services are broadly classified into consumer products and industrial products.

Consumer products are bought for final consumption; whereas industrial products are bought

by individuals and organisations for further processing or for use in conducting business.

Other ways of classifying products are as follows:

(a) Convenience products: These are consumer products that the customer buys very

frequently, without much deliberation. They are low priced of low value and are

widely available at many outlets. They may be further subdivided as:

• Staple Products: Items like milk, bread, butter etc. which the family consumes

regularly. Once in the beginning the decision is programmed and it is usually

carried on without change.

• Impulse Products: Purchase of these is unplanned and impulsive. Usually when

the consumer is buying other products, he buys these spontaneously for e.g.

Magazines, toffees and chocolates. Usually these products are located where they

can be easily noticed.

• Emergency Products: Purchase of these products is done in an emergency as a

result of urgent and compelling needs. Often a consumer pays more for these. For

example, while travelling if someone has forgotten his toothbrush or shaving it; he

will buy it at the available price.

(b) Shopping products: These are less frequently purchased and the customer carefully

checks suitability, quality, price and style. He spends much more time and effort in

gathering information and making comparisons. E.g. furniture, clothing and sued cars.

(c) Specialty products: These are consumer goods with unique characteristics / brand

identification for which a significant group of buyers is willing to make a special

purchase effort. For example, Mitsubishi Lancer, Ray ban glasses.

(d) Unsought product: These are products that potential buyers do not know exist or do

not yet want. For example Life Insurance, a Lawyers services in contesting a Will.

The above product decisions are very important to ensure the sale of products. A product has

both tangible and intangible components. While buying a product, the customer does not

merely look for the physical product, but a bundle of satisfaction. Thus, the impact that any

product has upon a buyer goes well beyond its obvious characteristics. There is a

psychological dimension to all customer purchases; what a customer thinks about a product is

influenced by far more than the product itself. For example, the buyer of an air conditioner is

not purchasing cooling machine only. He looks for attractive colour and design, durability,

low noise, quick cooling, etc. these influencing factors must be considered by the small firms

to meet the requirements of different kinds of customers.

54

2. Price: The second element is the price, which affects the volume of sales. It is one of the

most difficult tasks of the marketing manager to fix the right price. The variables that

significantly influence the price of a product are: demand of the product, cost competition

and government regulation. The product mix includes: determination of unit price of the

product, pricing policies and strategies, discounts and level of margins, credit policy, terms of

delivery, payment, etc. Pricing decisions have direct influence on the sales volume and profits

of the firm. Price, therefore, is an important element of the marketing mix. Right price can be

determined through pricing research and by adopting test-marketing techniques.

Small firms should think of pricing as a method whereby prices are set with regard to costs,

profit targets, competition and the perceived value of products. Because of their simplicity,

cost-plus-pricing are attractive to small businesses, though this is not the only mode of

pricing utilized by small firms. For example, the profit margin in the cost-plus approach may

well be fixed after examining both the nature of the market and the competitor activity within

it. It is a mistake for small firms to rely wholly on cost-plus, but very small firms do that to

the detriment of profits and market share.

The pricing policies mainly followed by the small firms are:

(a) Competitive pricing: This method is used when market is highly competitive and the

product is not differentiated significantly from the competitor’s products.

(b) Skimming-the-cream pricing: Under this pricing policy, higher prices are charged

during the initial stages of the introduction of a new product. The aim is to recover the

initial investment quickly. This policy is quite effective when the demand for a

product is likely to be more inelastic with respect to price in its early stages; to

segment the market into segments that differ in price elasticity of demand and to

restrict the demand to a level, which a firm can easily meet.

(c) Penetration pricing: Under this policy, prices are fixed below the competitive level

to obtain a larger share of the market. Penetration pricing is likely to be more

successful when the product has a highly elastic demand; the production is carried out

on a large scale to achieve low cost of production per unit; and there is strong

competition in the market.

3. Promotion: Promotion refers to the various activities undertaken by the enterprise to

communicate and promote its products to the target market. The different methods of

promoting a product are through advertisement, personal selling, sales promotion and

publicity.

3. Place or Physical Distribution: This is another key marketing mix tool, which stands for the

various activities the company undertakes to make the product available to target customers.

Place mix or delivery mix is the physical distribution of products at the right time and at the

right place. It refers to finding out the best means of selling, sources of selling (wholesaler,

retailers, and agents), inventory control, storage facility, location, warehousing,

transportation, etc. This includes decisions about the channels of distribution, which make the

product available to target customers at the right time, at the right place and at the right price.

By selecting wrong distribution channels or by using the ones it has traditionally used, a

small firm could be depriving it of new market opportunities.

55

In a situation where a small firm has only one primary product, the general rise and fall of sales will

lead to a rise and fall of the firm, unless the firm learns to consistently adjust its marketing mix to

match consumer demand.

Marketing mix of a firm selling automatic washing machines

Target market Urban household with high income and status

consciousness.

Product Latest technology, automatic washing machines.

Price High, but should not be beyond the low range high-

income groups.

Promotion Heavy advertising through high image magazines and

television stressing the high quality of the machines.

Place (distribution) Though high image retailers.

A marketing mix must be consistent for any product. Pricing, for example, must be consistent with

packaging and perceived product quality. If one of these is not in line with others, then sales might

suffer as a consequence. A manager selecting a marketing mix is like a cook or chef preparing meal.

Each knows through experience that there is no ‘one best way’ to mix the ingredients. Different

combinations may be used depending upon one’s needs and objectives. In the marketing as in

cooking, there is no standard formula for a successful combination or ingredients. Marketing mixes

vary from company to company and from situation to situation. The right marketing mix is important

for any product to have a long life cycle.

Tender Marketing

The Corporation participates in bulk global tender enquiries and local tenders of Central and State

government and Public Sector Enterprises on behalf of small-scale units. It is aimed to assist small

units with ability to manufacture quality products but which lack brand equity and credibility or have

limited financial capabilities. Under this scheme, the Corporation has identified large number of

items for which it actively participate sin tenders of these Departments and Enterprises. On receipt of

the orders, Corporation farms out these orders to the units on whose behalf it has quoted. This

assistance has enabled large number of small units to compete for the orders, which are normally out

of reach of the individual units because of the bulk requirement.


• Small scale units are provided with all requisite financial support depending upon the units’

individual requirements the purchase of raw material and financing of sale bill.

• Enhanced business volume helps small units achieve maximum capacity utilization.

• They are exempted from depositing earnest money.

• Small units are helped to participate in large and global tenders up to its capacity and capability.

• They are also assisted technically for quality upgradation and new product development in

addition to testing facility.

• Ensures fair margin to small units for their production.

56

• Publicity to small 8industries products.

• Production of quality products from the small scale sector.

Consortia Marketing

A small unit in its individual capacity faces problem very often to procure and execute large orders,

which inhibits and restricts the growth of small scale units. National Small Industries Corporation

Limited (NSIC) accordingly adopted Consortia Approach and built groups / consortia of units

manufacturing same products, thereby easing out marketing problem of SSI units. The Corporation

explores market and secures orders for bulk quantities. These orders are then farmed out to small

units in tune with their production capacity. Testing facilities are also provided to enable units to

improve and maintain the quality of their products conforming to the standard specifications.


• Participation and Procurement of Orders for bulk quantities.

• SSIs capacity of participating in large tenders enhanced.

• Support testing facility provided by NSIC.

• Financial assistance for Raw Material, Bill discounting etc. provided by NSIC.

• Wherever required, equipment is also financed to the SSI on priority.

• Help in developing / designing of new products and quality enhancement of SSI products.

Marketing Problems of Small Scale Units

All types of business enterprises face marketing problems, but these problems are more severe in

case of small scale units because of lack of knowledge, adequate funds and lack of experience. Some

of the marketing problems commonly faced by the small scale entrepreneurs in India are:

(a) Competition from large scale sector: Because of scarcity of resources, small entrepreneur

usually use inferior technology. As a result their products are not standardized. The obsolete

technology used by them gets translated into inferior quality of products.

(b) Lack of marketing knowledge: Most of the small scale entrepreneurs are not highly

educated or professionally qualified to have knowledge of marketing concept and strategy.

Their lack of expertise further inhibits their understanding of the prevailing trends in the

market.

(c) Lack of sales promotion: Small units lack the resources and knowledge for effective sales

promotion. Large scale units mostly have well-known branded names. They also have huge

amount of resources to spend on advertisement and other sales promotion tools. Small scale

units, on the other hand, have to pay a heavy commission to dealers for their selling efforts,

which reduce profits margins.

(d) Weak bargaining power: At the time of purchase of inputs, large scale entrepreneur manage

to get huge discounts and credit. Such facilities are not available to small units.

(e) Product quality: It is costly and difficult for a small unit to have quality testing and

evaluating equipment.

57

(f) Credit sales: The small scale enterprise is invariably called upon to sell on credit. However,

when it comes to purchasing inputs, they are denied liberal credit facilities. As a result, they

have to borrow excessive working capital than actually needed. This increases the general

cost of production and prices, making it non-competitive.

POLICY SUPPORT TO SMALL SCALE INDUSTRIES

Introduction

After attaining independence in 1947 India adopted mixed economic planning as a method to achieve

economic development. Along with the Large Scale sector the thrust was on the Small Scale sector

because of its decentralized, its small size, use of mainly indigenous, employment intensity and its

suitability for rural areas with limited techno-economic structure.

Industrial policies over the years have focused to promote SSIs through various incentives related to

financial, fiscal and infrastructure measures; along with a heavy industry base.

Objectives

After going through this less you should be able to:

• Explain the various provisions under Industrial Policy Resolution formulated by the Government

in assisting the small scale industry (SSI).

• Discuss the various fiscal incentives for SSIs.

Industrial Policy Resolutions and SSIs

Government’s attitude and intention towards industries in general and SSIs in particular are reflected

in Industrial Policy Resolutions. This sub-sections 20.2.1 to 20.2.11 deal with such resolutions.


The government stressed the role of SSIs for balanced industrial growth. It was stated that SSIs are

particularly suited for the utilization of local resources and creation of employment opportunities.

The primary responsibility for developing small industries by creating infrastructure has been

provided to state governments. Central government frames the broad policies and coordinates the

efforts of State Government for the development of SSIs.


It stated that besides continuing the policy support to cottage, village and small industries by

differential taxation or direct-subsidies, the aim of state policy would be that the development of this

sector is integrated with that of large scale industry. The focus was to improve the competitive

strength of SSIs. To achieve this 128 items were exclusively reserved for production in SSIs, and 166

items were reserved for exclusive purchase by government from this sector.

It emphasize that whatever can be produced by SSIs must only be so produced. The main thrust of

policy was effective promotion of cottage, village and small industries widely dispersed in rural

areas and small towns. This thinking specified the following things:

58

(a) 504 items were reserved for exclusive production in the small-scale industries.

(b) The concept of District Industries Centres (DICs) was introduced so that in each district

single agency could meet all the requirements of SSIs under one roof.

(c) Technological upgradation was emphasigned in traditional sector.

(d) Special marketing arrangement through the provision of services, such as, product

standardization, quality control, market survey, were laid down.


The policy focused on the need of promoting SSIs through integrated industrial development

between large and small sectors. Industrially backward districts were indentified for faster growth of

existing network of SSIs. Following measures were specified in the policy:

(a) Investment limit was raised for tiny, small, and ancillary units to Rs. 2 lacs, Rs. 20 lacs, and

Rs. 25 lacs respectively.

(b) “Nucleus plants” in each industrially backward district replaced the “district industries

centres.” These were to concentrate on assembling the products of SSIs and to produce inputs

needed by large number of small units.

(c) Reservation of items and marketing support for small industries was to continue.

(d) Availability of credit to rowing SS units was continued.

(e) Buffer stocks of critical inputs were to continue.

(f) Agricultural base was to strengthen by providing preferential treatment to agro-based

industries.

(g) An early warning system was to establish to avoid sickness and take appropriate remedial

measures.


Main features of this Resolution are as follows:

(a) It raised the investment ceiling in plant and machinery for SSIs.

(b) It created central investment subsidy for this sector in rural and backward areas. Also,

assistance was granted to women entrepreneurs for widening the entrepreneurial base.

(c) Reservation of items to be produced by SSIs was increased to 836.

(d) Small Industries Development Bank of India was established to ensure adequate flow of

credit to SSIs.

(e) Stress was reiterated to upgrade technology in improve competitiveness.

(f) Special emphasis was laid on training of women and youth under Entrepreneurial

Development Programme.

(g) Activities of Kadhi and Village Industries Commission and Khadi and Village Industries

Board were to expand.


The basic thrust of this resolution was to simplify regulations and procedures by delicensing,

deregulating, and decontrolling. Its salient features are:

(a) SSIs were exempted from licensing for all articles of manufacture.

59

(b) The investment limit for tiny enterprises was raised to Rs. 5 lacs irrespective of location.

(c) Equity participation by other industrial undertakings was permitted up to a limit of 24 percent

of shareholding in SSIs.

(d) Factoring services were to launch to solve the problem of delayed payments to SSIs.

(e) Priority was accorded to small and tiny units in allocation of indigenous and raw materials.

(f) Market promotion of products was emphasized through co-operatives, public institutions and

other marketing agencies and corporations.

Comprehensive Policy Package for SSIs and Tiny Sector 2000

Main focus of this policy is as follows:

(a) The exemption for excise duty limit raised from 50 lakhs to Rs. One crore to improve the

competitiveness.

(b) Credit linked capital subsidy of 12% against loans for technology up gradation was provided

in specified industries.

(c) The third census of small scale industries by the ministry of SSI was conducted, which also

covered sickness and its causes in SSI’s.

(d) The limit of investment was increased in industry related service and business enterprises

from Rs. 5 lacks to Rs. 10 lakhs.

(e) The scheme of granting Rs. 75000 to each small scale enterprise for obtaining ISO 9000

certification was continued till the end of 10th

plan.

(f) SSI associations were motivated to develop and operate testing laboratories. One time capital

grant of 50% was given on reimbursement basis to each association.

(g) The limit of composite loan was increased from Rs. 10 lakhs to Rs. 25 lakhs.

(h) A group was constituted for streamlining of inspection and repeal of redundant laws and

regulations.

(i) The coverage of ongoing Integrated Infrastructure Development (IID) was enhanced to cover

all areas in the country with 50% reservation for rural areas and 50% earmarking of plots for

tiny sector.

(j) The family income eligibility limit of Rs. 24000 was enhanced to Rs. 40000 per annum under

the Prime Minister Rozgar Yozna (PMRY).

Industrial Policy Package for SSI 2001-02

This policy emphasizes the following:

(a) The investment limit was enhanced from Rs. 1 crore to Rs. 5 crore for units in hosiery and

hand tool sub sectors.

(b) The corpus fund set up under the Credit Guarantee Fund Scheme was increased from 125

crore to 200 crore.

(c) Credit Guarantee cover was provided against an aggregate credit of Rs. 23 crore till

December 2001.

(d) 14 items were de-reserved in June 2001 related to leather goods, shoes and toys.

(e) Market Development Assistant Scheme was launched exclusively for SSI sector.

(f) Four UNIDO assisted project were commissioned during the year under the Cluster

development Programme.

60

Industrial Policy on SSIs 2003-04

The following are the highlight of this endeavor:

(a) 73 items reserved for exclusive manufacture in the SSI sector were de-reserved in June 2003.

These consist of chemical and their products, leather and leather products, laboratory reagents

etc.

(b) Selective enhancement of investment in plant and machinery from Rs. One crore to Rs. 5

crore. It was for 13 items in stationary sector and 10 items of drugs and pharmaceuticals

sector from June 2003.

(c) Banks were directed to provide credit to SSI sector within an interest rate band of 2 percent

above and below their Prime Lending Rate (PLR).

(d) The composite loan limit for SSI was raised from Rs. 25 lakhs to Rs. 50 lakhs.

(e) The limit of dispensation of collateral requirement was raised from Rs. 15 lakhs to Rs. 25

lakhs on the basis of good track record and financial position of the unit.

(f) The lower limit of Rs. 5 lakhs on loans covered under the Credit Guarantee Scheme was

removed. All loans up to Rs. 25 lakhs were made eligible for guarantee cover under the

Credit guarantee Scheme.

(g) 417 specialised bank branches were made operational for SSIs.

(h) Third all India census for SSI was conducted throughout the country and its final results were

released on January 17, 2004.

(i) 60 clusters were identified in July 2003 for focused development.

(j) Small and medium Enterprise (SME) fund of Rs. 10000 crore was set up under SIDBI to

solve the problem of inadequate finance for SSIs.

(k) Laghu Udyami Credit Card Scheme was liberalized. Under this scheme, the credit limit was

increased to Rs. 10 lakhs from Rs. 2 lakhs. But, it was only for borrowers with satisfactory

track record.

Policy Initiatives on SSI 2004-05

Policy initiatives for this year are as follows:

(a) The national commission on Enterprises in the Un-organised/Informal Sector was set up in

September 2004. It suggested measures considered necessary for improvement in the

productivity of these enterprises, generation of large scale employment opportunities, linkage

of the sector to institutional framework in areas like credit, raw material supply,

infrastructure, technology up gradation, marketing facilities and skill development by

training.

(b) 85 items were de-reserved in October 2004.

(c) The investment limit in plant and machinery was raised from Rs. One crore to Rs. 5 crore in

October 2004, in respect of seven items of sports goods to help to upgrade the technology and

enhance competitiveness.

(d) The Small and Medium Enterprise (SME) fund of Rs. 10000 crore was started by SIDBI

since April 2004, with 80% of the lending for SSI units. The interest rate was 2% below the

prevailing Prime Lending Rate (PLR) of the SIDBI.

(e) The Reserve Bank of India raised the composite loan limit from Rs. 50 lakhs to Rs. One

crore.

(f) Promotional Package for small enterprises was initiated.

61

Policy Package for SME 2005-06

This policy package contains the following points:

(a) The Ministry of Small Scale Industries has identified 180 items for dereservation.

(b) Small and Medium Enterprises were recognized in the services sector, and were treated on

par with SSIs in the manufacturing sector.

(c) The corpus of the Credit Guarantee Fund was raised from Rs. 1132 crore in March 2006 to

Rs. 2500 crore in five years.

(d) Credit Guarantee Trust for Small Industries (CGTSI) was advised to reduce the one time

guarantee fee from 2.5 per cent to 1.5 percent for all loans.

(e) Insurance cover was extended to approximately 30,000 borrowers, identified as chief

promoters, under the CGTSI. The sum assured would be Rs. 200000 per beneficiary and the

premium will be paid b y CGTSI.

(f) The emphasis was laid on Cluster Development model not only to promote manufacturing

but also to renew industrial towns and build new industrial townships. The model is now

being implemented, in nine sectors including khadi and village industries, handlooms,

handicrafts, textiles, agricultural products and medicinal plants.

Fiscal Incentives

Fiscal incentives are provided through tax concession granted in the form of exemptions of direct or

indirect taxes leviable on production or profits, besides special tax concessions. These incentives

have been provided to promote the SSIs.

Tax Holiday

With effect from financial year 2005-06, deduction in respect of profits and gains for small scale

industrial undertakings is available under Section 80IB.

Small scale industrial undertaking can claim deduction at the following rates:

(a) If SSI unit is owned by a company, the deduction available in 30% for first 10 years,

(b) If SSI unit is owned by a co-operative society, the deduction to be availed is 25% for first 10

years, and

(c) If any other person owns SSI unit, the deduction to be claimed is 25% for first 10 years.

The small scale units can avail this tax exemption facility only after fulfilling the following

conditions.

(a) No small scale or ancillary undertaking shall be subsidiary of, or owned or controlled by

other industrial undertaking.

(b) SSI unit can manufacture any nature type of goods article to avail deduction.

(c) The SSI unit should commence business between 1st April 1991 and 31

st March 2002.

(d) They should employ at least 10 workers in a manufacturing process carried out with the aid

of power or at least 20 workers in a manufacturing process carried out without the aid of

power.

(e) This tax exemption from total income is allowed from the assessment year in which unit

begin to manufacture or produce goods or articles.

62

Excise Concessions

Government of India has provided a major relief by granting full exemption from the payment of

central excise duty on a specified output and thereafter slab-wise concessions. The following

concessions are available to them in this regard:

(a) SSI units producing goods up to Rs. 100 lakhs are exempted from payment of excise duties.

(b) SSI units having turnover less than Rs. 60 lakhs per annum need not have a separate

storeroom for storing the finished products.

(c) SSIs are also not required to maintain any statutory records such as daily stock account of

production and clearances, raw material account, personal ledger account etc. Their own

records are adequate for excise purposes.

(d) There is no distinction between registered and unregistered units for SSI concessions.

Further, the eligibility for excise concessions for SSIs has been based on annual turnover

rather than SSI registration. Duty liability is to be discharged by 15th

of the following month.

(e) The SSI exemption is available for home consumption as well as in respect of goods exported

to Nepal & Bhutan.

(f) Normally, excise officers are not expected to visit SSI units paying less than Rs. 11 lakhs

duty annually.

(g) With effect from 1-4-1994, Gate-Pass System was replaced by manufacturer invoice to cover

clearances of goods as the duty-paying document.

Presently there are two streams of concessions to SSIs. These are as follows:

(a) SSI Scheme (Without CENVAT): This scheme is effective from 1st April 2000. The Table

shows the rate of duty applicable to such manufactures whose turnover does not exceed Rs. 3

crores in the previous financial year in respect clearances of excisable goods for home

consumption (including exports to Nepal or Bhutan) from one or more factories of the same

manufacturer or from factory by one or more manufacturers:

Table: Rate of Duty in Respect of Clearances of Excisable Goods


(Rs.)

Rate of Duty

1 Up to Rs. 100 Lakhs NIL


It may be noted that beyond clearances of Rs. 100 lakhs, the manufacturer is liable to pay

normal rate of duty. The manufacturer may opt for not availing exemption and instead pay

the normal rate of duty on the clearances. But once the option is exercised, it shall continue

till the remaining part of the financial year.

Value for purpose of calculating the limit of 100 and 300 lakhs is the ‘Assessable value’ i.e.,

wholesale price at factory gate, exclusive of taxes, where price is the sole criteria.

(b) SSI Scheme (with CENVAT): This scheme is effective from 1st April 2003. It provides the

concessional rate of duty in respect of clearances of specified goods for home consumption

(including exports to Nepal or Bhutan), and also states that all clearances of the specified

goods which are used for captive consumption in production of the specified goods shall be

subjected to ‘nil’ rate of duty. The Table shows the Rate of Duty.

63

Table: Rate of Duty in Respect of Clearances of Specified Goods


(Rs.)

Rate of Duty

1 Up to Rs. 100 Lakhs 60% of normal rate


A manufacturer can opt for this option any time determining his eligibility for concession and

the concessional rate of duty.

The exemption shall apply only subject to the following conditions:

i. A manufacturer who intends to avail the exemption shall exercise his option in writing to the

jurisdiction Deputy Commissioner or Assistant.

ii. The clearances of specified goods already made during the financial year, prior to the

exercise of such option, shall be taken into account for computing the aggregate value of

clearances. Value of all clearances of all factories should be clubbed.

iii. The aggregate value of clearances of all excisable goods should not exceed Rs. 300 lakhs in

the preceding year.

The exemption contained shall not apply to the specified goods bearing a brand name / trade name

(whether registered or not) of another person, except in some specified cases.

Measures for Promotion and Development of SSIs

Central and State governments have formulated several schemes to make the SSIs vital and

competitive. Some of these schemes are enumerated in sub-section 20.4.1 to 20.4.7.

Reservation Policy

Reservation of items for exclusive manufacture in SSI sector has been one of the important policy

measures for promoting and protecting this sector against competition from medium / large /

multinational companies.

The policy received statutory backing in 1984 under Industries (Development & Regulation) Act,

1951. However with the opening up of Indian trade in 1991, most of reserved items were importable

with the removal of quantitative restrictions. This paved the way to phase out reservation in due

course, and every year some items were dropped from the reserved list. Out of 836 items reserved in

1989, 39 items were dereserved in four phases viz., 15 items in 1997, 9 items on 1999, 1 item on

2001 and 14 items on 2001. Subsequently, 51 items were dereserved in 2002, 75 items in 2003 and

85 items in 2004, 108 in March 2005, and 180 in May 2006. Now 298 items stand reserved for this

sector.

It is believed that dereservations will enable medium / large / multinational companies to move out

of capital intensive manufacturing to enter labour-intensive production. This shift over will certainly

create new employment opportunities at rapid rate.

64

Government’s Purchase Preference Policy for SSI Products

Realizing that small scale units face the problem of marketing their products at remunerative prices,

Government stores purchase programme was initiated to assist small-scale industries in obtaining a

fair share of the total purchases made by the Government and its departments. Bulk and departmental

buyers such as the Railways, Defence and Communication ministries and companies are invited in

participate in buyer-seller meets to enrich SSI unit’s knowledge regarding terms and conditions,

quality standard, etc. required by the buyer. Under the Stores Purchase Policy of the Government 409

items of stores were reserved for exclusive purchase from KVIC / Women’s Development

Corporation / Small Scale units in 1989.

This list was reviewed. In February 2004, the Committee (set up to consider the question of inclusion

of additional items) received list and 358 items were approved, after deleting items having common

nomenclature and addition of some new ones. This list also includes 8 handicraft items reserved for

purchase from the Handicraft Sector.

Governments Price Preference Policy for marketing SSI Products

Assistance under Government Stores Purchase Programme in the form of reservation of products for

exclusive purchase from small scale sector and price preference in one of the major instruments for

providing marketing supports to the small scale industries. These facilities include the following:

(a) Price preference up to 15% in case of selected items.

(b) No registration fee.

(c) A consortium to channelize and identify markets for the products of SSIs both in India and

abroad.

Apart from this, the Single Point Registration Scheme of National Small Industries Corporation

(NSIC) the following benefits are given to SSI units, which get them registered with the NSIC:

(a) Availability of Tender Sets free of cost.

(b) Exemption from payment of Earnest Money Deposit.

(c) Exemption from payment of Security Deposit up to the monetary limit for which the unit ire

registered.

(d) Price preference up to 15% over the lowest quotation of the large scale units (on merits).

The units registered with NSIC under this scheme are given a registration certificate indicating items,

for which registered and monetary limit up to which registered. The Policy of the Price Preference of

15% is a critical benefit available to the SSI sector. The benefit is available to compensate them on

account of non-availability of economies of scale, poor resource base, poor access to raw-material

etc. as compared to the large scale sector.

Technical Assistance

Technology is the key to enhance an organisation’s competitive advantage in today’s dynamic

information age. SSIs need to develop and implement a technology strategy in addition to financial,

marketing and operational strategies, and adopt the one that helps integrate their operations with their

environment, customer and suppliers.

National Small Industries Corporation Ltd. (NSIC) offers SSI units the following support and

65

services through is Technical Services Centre, Extension Centres, Software Technology Parks and

Technology Transfer Centre:

(a) Technology audits and benchmarking.

(b) Technology needs assessment.

(c) Technology sourcing.

(d) Application of new techniques.

(e) Technology acquisition.

(f) Material testing facilities through accredited laboratories.

(g) Product design including computer Aided Designs.

(h) Common facility support in machining.

(i) Energy and environment services at selected centres.

(j) Classroom and practical training for skill upgradation.

Software Technology Parks (STPs) facilitate small industries in setting up 100% export-oriented

units for software export. They also act as major point to activate software exports directly through

NSIC. These STPs extend support in terms of the requisite infrastructure to the SSI units to start

business operations with a minimum lead-time. Following facilities are available at NSIC Software

Technology Park:

(a) Built-up Space: this enables the software industries to commence their operations with

minimum gestation period.

(b) Instant Power Connection: Instant power connections and generator facility is also

available on site, which will allow software units to work without any interruptions.

(c) High Speed Data Link: High-speed data communication facility through satellite connection

is available. The member units can avail 64 kbps to 2 mbps dedicated leased channels.

(d) Business Centre: A business centre comprising of Conference Hall, Photocopier, Fax,

Training aids, etc. is available inside the STP complex for the member units.

(e) Telephones: Each member units will be provided with one telephone line for business

promotion on occupation.

Raw material Assistance

NSIC aims to help SSI units by financing purchase of raw material (both indigenous and imported),

thus allowing them to focus on manufacturing quality product. State Directorate of Industries

distributes scarce raw materials to small units. State Small Industries Development Corporations

have set up depots for distribution of raw materials to SSIs. The Central Government has introduced

a buffer stock scheme to ensure availability of scarce raw materials to this sector.

Financial Assistance

Central and State Governments have introduced several schemes to ensure adequate and timely

availability of credit to SSIs through various institutions.

The main features of the financial services offered by institutions are as follow:

66

(a) Financial assistance for the equipment and marketing activities under one roof with speed and

efficiency.

(b) Prompt clearance of the proposals with minimum processing time and without cumbersome

paper work.

(c) Assistance in preparing the proposals and completion of document formalities.

(d) Market oriented interest rates and service charges with liberal terms of margin, level of

assistance and repayment schedules.

(e) Arrangement with commercial banks for sanction of loan proposals received from small

enterprises.

New Initiatives

The following new initiatives have been taken by the government:

(a) Advisory and Mentoring Services: Inadequate management skills are often the cause of

non-performance of small enterprises. NSIC’s advisory and mentoring services are aimed at

effectively addressing this impediment to growth. It offers mentor-pupil relationship services

in which the Mentor, a person with wide experience in running his own business, will

volunteer his services to individual or a group of units – the pupil. An advisor, a senior

professional, generally retired and a specialist in a specific area will assist in the process.

Mentors and advisor will provide the necessary professional and moral support in the early

lifecycle of an enterprise or to existing units facing critical operational problems.

(b) Technology Business Incubators: Innovative entrepreneurial ideas have to be fostered and

developed in a supportive environment before they become attractive for Venture Capital

Institutions. Incubation centre enable technical entrepreneurs to conduct their Research and

Development programmes in a professional, friendly and supportive environment, without

making any further investment.

Technology Business incubators are an important tool for entrepreneurial development.

Recognizing this need, NSIC has setup the following Technology Business Incubators.

(1) Information Technology

(2) Product Design

(3) Energy and Environment

(4) Bio-Technology

(5) Electronics and Communication.

(c) Suppliers Rating Accreditation Services: Accreditation, a necessity for buyer comfort,

speaks of the enterprise’s ability to supply reliably and effectively a product, in accordance

with the customer’s changing needs. NSIC provide accreditation to SSI units by developing

an effective accreditation system process through collaboration with Indian and International

Accreditation agencies. Accreditation is provided at two levels – for all Government

purchases and for private national international buyers.

Summary

Small Scale Industry sector has emerged as India’s engine of growth in the New Millennium. The

SSI sector accounts for nearly 40 percent of value added in the manufacturing sector and 34 percent

of total exports from the country. Through 95 percent of industrial units in the country, the sector

67

provides employment to about 20 million persons.

The government has recognized its importance for the economy and its intention towards promotion

of SSIs is reflected in various Industrial Policy Resolutions right from the year 1948. The primary

objective of the Small Scale Industrial Policy during the nineties was to impart more vitality and

growth-impetus to the sector to enable it to contribute its mite fully to the economy, particularly in

terms of growth of output, employment and exports. The sector has been substantially delicensed.

Further efforts would be made to deregulate and debureaucratise the sector with a view to remove all

fetters on its growth potential, reposing greater faith in small and young entrepreneurs. All statutes,

regulations and procedures were reviewed and modified, wherever necessary, to ensure that their

operations did not militate against the interests of the small and village enterprises.

Government is aware of the challenges faced by SSIs and has been trying to improve their

competitiveness through various measures. These consist of the following:

(a) Tax concessions have been provided to SSIs to promote investment in this sector and also to

grant relief to small entrepreneurs.

(b) Technological facilities have been increased.

(c) In order to facilitate adequate flow of credit efforts have been done.

(d) Measures have also been taken to improve infrastructure facilities and promote marketing of

products.

UNIT III - School of Open Learning · UNIT III LESSON 1 BUSINESS GROWTH Structure Seema Sabbarwal...

Documents

Transcript of UNIT III - School of Open Learning · UNIT III LESSON 1 BUSINESS GROWTH Structure Seema Sabbarwal...