SPBA205

POSTGRADUATE COURSE
MBA

SECOND YEAR
THIRD SEMESTER

CORE PAPER - XV

INNOVATION AND ENTREPRENEURSHIP

INSTITUTE OF DISTANCE EDUCATION

UNIVERSITY OF MADRAS
MBA CORE PAPER - XV
SECOND YEAR - THIRD SEMESTER INNOVATION AND
ENTREPRENEURSHIP

WELCOME
Warm Greetings.

It is with a great pleasure to welcome you as a student of Institute of Distance

Education, University of Madras. It is a proud moment for the Institute of Distance education
as you are entering into a cafeteria system of learning process as envisaged by the University
Grants Commission. Yes, we have framed and introduced Choice Based Credit
System(CBCS) in Semester pattern from the academic year 2018-19. You are free to
choose courses, as per the Regulations, to attain the target of total number of credits set
for each course and also each degree programme. What is a credit? To earn one credit in
a semester you have to spend 30 hours of learning process. Each course has a weightage
in terms of credits. Credits are assigned by taking into account of its level of subject content.
For instance, if one particular course or paper has 4 credits then you have to spend 120
hours of self-learning in a semester. You are advised to plan the strategy to devote hours of
self-study in the learning process. You will be assessed periodically by means of tests,
assignments and quizzes either in class room or laboratory or field work. In the case of PG
(UG), Continuous Internal Assessment for 20(25) percentage and End Semester University
Examination for 80 (75) percentage of the maximum score for a course / paper. The theory
paper in the end semester examination will bring out your various skills: namely basic
knowledge about subject, memory recall, application, analysis, comprehension and
descriptive writing. We will always have in mind while training you in conducting experiments,
analyzing the performance during laboratory work, and observing the outcomes to bring
out the truth from the experiment, and we measure these skills in the end semester
examination. You will be guided by well experienced faculty.

I invite you to join the CBCS in Semester System to gain rich knowledge leisurely at
your will and wish. Choose the right courses at right times so as to erect your flag of
success. We always encourage and enlighten to excel and empower. We are the cross
bearers to make you a torch bearer to have a bright future.

With best wishes from mind and heart,

DIRECTOR

(i)
MBA CORE PAPER - XV
SECOND YEAR - THIRD SEMESTER INNOVATION AND
ENTREPRENEURSHIP

COURSE WRITERS

Dr. S. Dhinesh Babu

Assistant Professor in Business Administration
Government Arts College,
Paramakudi,
Chennai - 623 707

COORDINATION AND EDITING

Dr. B. Devamaindhan
Associate Professor in Management Studies
Institute of Distance Education
University of Madras
Chennai - 600 005.

Dr. S. Thenmozhi
Associate Professor
Department of Psychology
Institute of Distance Education
University of Madras
Chepauk Chennnai - 600 005.

© UNIVERSITY OF MADRAS, CHENNAI 600 005.

(ii)
 MBA DEGREE COURSE

SECOND YEAR

THIRD SEMESTER

Core Paper - XV

INNNOVATION AND ENTREPRENEURSHIP

SYLLABUS
UNIT I

Introduction: The Entrepreneur – Definition – Characteristics of Successful entrepreneur.

Entrepreneurial scene in India: Analysis of entrepreneurial growth in different communities
– Case histories of successful entrepreneurs. Similarities and Distinguish between
Entrepreneur and Intrapreneur.

UNIT II

Innovation in Business: Types of Innovation – Creating and Identifying Opportunities for

Innovation – The Technological Innovation Process – Creating New Technological Innovation
and Intrapreneurship – Licensing – Patent Rights – Innovation in Indian Firms

UNIT III

New Venture Creation: Identifying Opportunities for New Venture Creation: Environment
Scanning – Generation of New Ideas for Products and Services. Creating, Shaping,
Recognition, Seizing and Screening of Opportunities.

Feasibility Analysis: Technical Feasibility of Products and Services - Marketing Feasibility:

Marketing Methods – Pricing Policy and Distribution Channels

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UNIT IV

Business Plan Preparation: Benefits of a Business Plan – Elements of the Business

Plan – Developing a Business Plan – Guidelines for preparing a Business Plan – Format
and Presentation.

UNIT V

Financing the New Venture:Capital structure and working capital Management: Financial
appraisal of new project, Role of Banks – Credit appraisal by banks. Institutional Finance
to Small Industries – Incentives – Institutional Arrangement and Encouragement of
Entrepreneurship.

Reference Books

1. Barringer, B., Entrepreneurship: Successfully Launching New Ventures, 3rdEdition,

Pearson, 2011.

2. Bessant, J., and Tidd, J., Innovation and Entrepreneurship, 2nd Edition, John Wiley &
Sons, 2011.

3. Desai, V., Small Scale Industries and Entrepreneurship, Himalaya Publishing House,
2011.

4. Reddy, N., Entrepreneurship: Text and Cases, Cengage Learning, 2010.

5. Roy, R., Entrepreneurship, 2nd Edition, Oxford University Press, 2011.

6. Stokes, D., and Wilson, N., Small Business Management and Entrepreneurship, 6th
Edition, Cengage Learning, 2010.
 MBA DEGREE COURSE

SECOND YEAR

THIRD SEMESTER

Core Paper - XV

INNNOVATION AND ENTREPRENEURSHIP

SCHEME OF LESSONS

Sl.No. Title Page

1 Introduction to Entrepreneurship 1

2 Concept of Entrepreneur 11

3 Entrepreneurial Scene in India 18

4 Entrepreneurial Cases 30

5 Innovation 41

6 Technological Innovation 56

7 Licensing and Patent Rights 63

8 New Venture Creation 75

9 Marketing Method - Place and Pricing 97

10 Business Plan 110

11 Business Plan - Guidelines, Format and Presentaion 129

12 Sources of Capital for Entrepreneurs 136

13 Financing the New Venture 152

14 Working Capital Management 164

15 Incentives to Entrepreneurs 183

16 Institutional Finance to Small Industries 189

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 1

LESSON - 1
INTRODUCTION TO ENTREPRENEURSHIP
Learning Objectives

After completing this lesson, you must be able to

 describe the historical evolution of entrepreneurship.

 list out the key elements of entrepreneurship.

 define entrepreneur.

 differentiate intrapreneur from entrepreneur.

Structure
1.1 Introduction

1.2 Historic Evolution of Entrepreneurship

1.3 Four Key Elements of Entrepreneurship

1.4 Intrapreneurs

1.5 Key Characteristics of Intrapreneurship

1.6 Similarities between an Entrepreneur and an Intrapreneur

1.7 Differences between an Entrepreneur and an Intrapreneur

1.8 Summary

1.9 Keywords

1.10 Review Questions

1.1 Introduction
Entrepreneurship is defined as the process of making money, earning profits and increasing
the wealth while posing characteristics such as risk taking, management, leadership and
innovation. The term Entrepreneurship is a complicated term and gives various meaning
depending on thesituation.

The word entrepreneur has a French origin. It originated during the Middle Ages when the
term entrepreneur was applied to “the man in charge of the great architectural works: castles
2

and fortifications, public buildings, abbeys and cathedrals”. It is derived from the French word,
entreprendre, which means “to undertake.” In a business context, it means to undertake a
business activity or simply to start a business. The Merriamtebster Dictionary defines an
entrepreneur as ‘one who organizes, manages, and assumes the risks of a business or
enterprise’.

The concept of Entrepreneurship has wide range of meanings. On one extreme, an

entrepreneur is a personof very high aptitude who pioneers change, possessing characteristics
found in only a very small fraction of the population. On the other extreme, anyone who wants
to work for himself is considered to be an entrepreneur. That is, entrepreneurship is equated to
simply starting one’s own business. Most economists believe it is more than that. To some
economists, the entrepreneur is one who is willing to bear the risk of a new venture if there is a
significant chance for profit. Others emphasize the entrepreneur plays a role of an innovator
who markets his innovation. Still other economists say that entrepreneurs develop new goods
or processes that the market demands and are not currently being supplied.

The concept of entrepreneurship was first established in the 1700s, and the meaning has
evolved ever since. Various economists and philosophers termed this differently in their own
unique ways.

Cantill on referred entrepreneurs as one of the classes of ‘landowners’ who are financially
independent aristocrats. For him, individuals who purchased a good at a certain price, used
that good to produce a product and then sold that product at an uncertain price could be
considered ‘entrepreneurs’. Risk and uncertainty play central parts in his theory of the economic
system. Successful entrepreneurs were those individuals who made better judgments about
changes in the market and who coped with risk and uncertainty better than their counterparts.
The entrepreneurial motivation is one of the most important factors which accelerate the pace
of economic development by bringing the people to undertake risk bearing activities.

1.2 Historic Evolution of Entrepreneurship

 Entrepreneurial strategies are not a twentieth-century phenomenon.

 The word entrepreneur originates from a 13th century French verb, entreprendre,
meaning “to do something” or ‘to undertake’ (Sobel, 2011, p. 2).

 Marco Polo established trade routes to the Far East, he demonstrated risk-taking
behaviour we associate with entrepreneurship today (Osborne, 1995, p. 4). The ‘fit’
 3

between his skills and the environmental opportunity is a perfect illustration of a

true entrepreneurial strategy, and in particular is more relevant to our understanding
of entrepreneurship, with its increasing global scope (Ibid, p. 4).

Marco Polo’s Trade Routes…

Historical Views from Economics

 Economics tends to marginalize the entrepreneur

 Cantillon and Say (from the perspective of an agrarian economy) – someone who
makes buying and selling decisions and in so doing is the bearer of risk

 ‘Austrian school’: Kirzner – an ‘alert’ middleman who spots opportunities to facilitate

exchange (arbitrage)

 Schumpeter: an innovator – the entrepreneur brings change through the introduction

of new technological processes or products

 Knight: someone who undertakes risk, with profit being the reward for bearing
uncertainty

 Shackle: emphasises the role of creativity in the entrepreneurial process

 Casson: someone with the skills to organise or reallocate resources

4

The Entrepreneurial ProcessEntrepreneurship

1.3 Four Key Elements of Entrepreneurship

 5

- Innovation

- Risktaking

- Vision

- Organizing skills

In many of the developing countries, a lot of attention is being paid to the development of
entrepreneurship because it is not the proprietary qualityofanycasteandcommunity.The
entrepreneurship is usually understood with reference to individual business. Entrepreneurship
has rightly been identified with the individual, as success of enterprise depends upon imagination,
vision, innovativeness and risktaking. The production is possible due to the cooperation of the
various factors of production, popularly known as land, labour, capital, market, management
and of course entrepreneurship. The entrepreneurship is a risk taking factor, which is responsible
for the end result in the form of profit orloss.

The early history of entrepreneurship in India reflects from the culture, customs and tradition
of the India people. The Baliyatra Festival of Cuttack, Oriss are miniscence of past glory of
International trade. The process of entrepreneurship, therefore passed through the potential
roots of the society and all those who accepted entrepreneurial role had the cultural heritage of
trade and business.Occupational pursuits opted by the individual under the caste system received
different meaning of value attached to entrepreneurship, which is based on socialsanctions.

As society grew and the process of business occupation depended and the value work
tended towards change and the various occupational role interchanged with non-role group
and sub-groups. People from different castes and status also entered into the entrepreneurial
role. The emergence of entrepreneurship in this part of the country got localized and spread
effect, took its own time. The concept of growth theory seems to be closely related in explaining
the theory of entrepreneurship development aswell.

In the 20th century, economist Joseph Schumpeter (1883-1950) focused on how the
entrepreneur’s drive for innovation and improvement creates upheaval and change. Schumpeter
viewed entrepreneurship as a force of “creative destruction.” The entrepreneur carries out
“new combinations,” thereby helping render old industries obsolete. Established ways of doing
business are destroyed by the creation of new and better ways to do them. Accordingt oA
Schumpeter “The entrepreneurship is essentially a creative activity or it is an innovative function”.
6

After the Second World War, entrepreneurship received new meaning for attaining
economic development within the shortest possible time; as concern for economic development
became all-pervasive. There was a growing concern for economic development and this
strengthened interest in enterprises. This led to the development of the entrepreneurship in
India.

Business expert Peter Drucker (1909-2005) took this idea further, describing the
entrepreneur as someone who actually searches for change, responds to it, and exploits those
changes as an opportunity. For instance; a change converted from typewriters to personal
computers to the Internet. According to Peter P Drucker, “Entrepreneurship is neither a science
nor an art. It is a practice. It is knowledge based. Knowledge in entrepreneurship is a means to
an end, that is, by thepractice.”

The culture of a community also may influence how much entrepreneurship there is within
it. Different levels of entrepreneurship may stem from cultural differences that make
entrepreneurship more or less rewarding personally. A community that accords the highest
status to those at the top of hierarchical organizations or those with professional expertise may
discourage entrepreneurship. A culture or policy that accords high status to the “self-made”
individual is more likely to encourage entrepreneurship.

In crux these are various interchangeable meanings of what is entrepreneurship.

- A theory of evolution of economic activities.
- A continuous process and an ingredient of economic development.
- Essentially a creative activity or an innovative function.
- A risk taking factor which is responsible for an end result.
- The name given to the factor of production, which performs the functions of
enterprise.
- Creates awareness among people about economic activity.
- Generates self-emplyment and additional employment.
- Generates Self-employment and additional employment.

1.4 Intrapreneurs
The term intrapreneur was coined in USA in the late seventies. Many senior executives
of big companies in America left their jobs and started small business of their own. They left the
 7

organisation because they did not get any opportunity to apply their own ideas and innovative
ability. These entrepreneurs become successful in their own ventures. Some of them caused a
threat to the corporations they left. This type if entrepreneurs have come to be called
Intrapreneurs. They believe strongly in their own talents. They have desire to create something
of their own. They want responsibility and have a strong drive for individual expression and
more freedom in their present organisational structure. When this freedom is not forthcoming,
they become less productive or even leave the organisation to achieve self actualisation
elsewhere.

A dictionary meaning to word provides that,” A person within a large corporation who
takes direct responsibility for turning an idea into a profitable finished product through assertive
risk-takingandinnovationisanintrapreneur.” It is derived as INTRA (corporate) +
(entre)PRENEUR].

The word intrapreneur is the recently coined corporate counterpart to long existing term
entrepreneur. This coinage is generally attributed to management consultant Gifford Pinchot,
author of the 1985 book entitled Intrapreneuring. Since inception of this term in the scant number
of years, intrapreneur has gainedmomentum and currency veryrapidly.

Intrapreneurship is a combination of entrepreneurship and management skills. In simple

words, Intrapreneurship is the practice of entrepreneurship by employees within an organization.
The trend today is such that everyone who is capable of managing others business is himself
indulging in entrepreneurship. This is resulting in inadequacy of management staff. In the
emergence of this changing pattern, the concept of intrapreneurship is originated where the
intrapreneur (i.e. Manager) is made the head of a given business unit and asked to manage it
for the organization while employing innovative skills. As an example, when a company seeks
for diversification options, they can appoint one of their managers as an intrapreneur to launch
the business venture while allowing him to share the part of the profits made by the new business
venture.

1.5 Key Characteristics of Intrapreneurship

An intrapreneur thinks like an entrepreneur looking out for opportunities, which profits the
organization. Intrapreneurship is a novel way of making organizations more profitable where
employees entertain entrepreneurial thoughts. It is in the interest of an organization to encourage
intrapreneurs. Intrapreneurship is a significant method for companies to reinvent themselves
8

and improve performance. Managers would do well to take employees who do not appear
entrepreneurial but can turn out to be good intrapreneurial choices.

- It promotes the managers to be more innovative and take more responsibility while
demonstrating charismatic leadershipqualities.

- Intrapreneurship projects are funded by large business organization and agreed

percentage of profits are remitted to the fund provider/headquarters of thebusiness.

- Intrapreneurship will cultivate entrepreneurial skills/culture within the corporate culture

where managers will be motivated to accept more risk.

- Due to the backing from the headquarters, the chances of failure are low when compared
to startups.

- It adds value to the life of the intrapreneur as he is being given the task of being an
entrepreneur while receiving necessary training from headquarters.

- Business portfolio of funding organization will be expanded creating diversification.

- Finally, it creates wealth for the headquarters as well as for the intrapreneur through its
profit sharing agreement.

1.6 Similarities between an Entrepreneur and an Intrapreneur

Like an entrepreneur, an intrapreneur leads or drives new product or business creation.
They may have similar behavioral skills such as strengths in leadership, observation, networking,
associative thinking, and experimentation. They will use similar tools and methods such as
LEAN or adaptations thereof to incrementally invest in the exploration and validation of new
business opportunities.

1.7 Differences between an Entrepreneur and an Intrapreneur

An entrepreneur takes substantial risk in being the owner and operator of a business with
expectations of financial profit and other rewards that the business may generate. On the contrary,
an intrapreneur is an individual employed by an organization for remuneration, which is based
on the financial success of the unithe is responsible for. Intrapreneurs share the same traits as
entrepreneurs such as conviction, zealand in sight. As the intrapreneur continues to expresses
 9

his ideas vigorously, it will reveal the gap between the philosophy of the organization and the
employee. If the organization supports him in pursuing his ideas, he succeeds. If not, he is
likely to leave the organization and set up his own business.

The words entrepreneur and intrapreneur have acquired special significance in the content
of economic growth in a rapidly changing industrial climate both in developed and developing
countries. Entrepreneur is a key person who envisages new opportunities, new techniques,
new lines of production, new products and coordinates all other activities. He likes to experiment
with new ideas and thus, face uncertainty. He works for himself and for profits.

Key Differences between Entrepreneur and Intrapreneur

The important distinguishing points between entrepreneur and intrapreneur, are given in
the following points:

1. An entrepreneur is defined as a person who establishes a new business with an innovative

idea or concept. An employee of the organisation who is authorised to undertake
innovations in product, service, process, system, etc. is known as Intrapreneur.

2. An entrepreneur is intuitive in nature, whereas an intrapreneur is restorative in nature.

3. An entrepreneur uses his own resources, i.e. man, machine, money, etc. while in the
case of an intrapreneur the resources are readily available, as they are provided to him
by the company.

4. An entrepreneur raises capital himself. Conversely, an intrapreneur does not need to

raise funds himself; rather it is provided by the company.

5. An entrepreneur works in a newly established company. On the other hand, an intrapreneur

is a part of an existing organisation.

6. An entrepreneur is his own boss, so he is independent to take decisions. As opposed to

intrapreneur, who works for the organisation, he cannot take independent decisions.

7. This is one of the salient features of an entrepreneur; he is capable of bearing risks and
uncertainties of the business. Unlike intrapreneur, in which the company bears all the
risks.

8. The entrepreneur works hard to enter the market successfully and create a place
subsequently. In contrast to Intrapreneur, who works for organization-wide change to
bring innovation, creativity and productivity.
10

1.8 Summary
Since, last few decades, it has been noticed that people give more value to innovations,
which lead to the rise in the number of startup companies year on year. This is because the
world is changing rapidly with the advancement in technology. It has also resulted in the
competition among companies. Now, if the enterprise wants to stand in competition with other
enterprises, it should bring something new in their products. Entrepreneur and Intrapreneur
play a major role here, to enter into new business and even markets.

1.9 Keywords
Innovation

Intrepreneur

Entrepreneur

Risk taking

1.9 Review Questions

1. Define and explain the key elements of entrepreneurship.

2. Identify the key characteristics of intrapreneurship.

3. Distinguish between an entrepreneur and an intrapreneur.

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LESSON - 2
CONCEPT OF ENTREPRENEUR
Learning Objectives

After completing this lesson, you must be able to:

 define an entrepreneur.

 sketch out the evolution of the concept of entrepreneur.

 enlist the characteristics of successful entrepreneurs.

Structure
2.1 Introduction

2.2 Meaning and Definition of Entrepreneur

2.3 Concept of Entrepreneur

2.4 Evolution of the Concept of Entrepreneur

2.5 Characteristics of Successful Entrepreneur

2.6 Summary

2.7 Keywords

2.8 Review Questions

2.1 Introduction
In the previous lesson, the elements of entrepreneurship are explained. The differences
between entrepreneur and intrapreneur are listed out. The characteristics of successful
entrepreneur will be explained in this lesson.

2.2 Meaning and Definition of Entrepreneur

An entrepreneur is ordinarily called a businessman. He is a person who combines capital
and labour for the purpose of production. He organizes and manages a business unit assuming
the risk for profit. He is the artist of the business world.
12

In the words of J.B. Say, “An entrepreneur is one who brings together the factors of
production and combines them into a product”. He made a clear distinction between a capitalist
and an entrepreneur. Capitalist is only a financier. Entrepreneur is the coordinator and organizer
of a business enterprise. Joseph A Schumpeter defines an entrepreneur as “ one who innovates,
raises money, assembles inputs and sets the organization going with the ability to identify them
and opportunities, which others are not able to fulfil such economic opportunities”. He further
said, “An entrepreneur is an innovator playing the role of a dynamic businessman adding material
growth to economic development”.

2.3 Concept of Entrepreneur

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

Entrepreneur as risk bearer: Richard Cantilon defined entrepreneur as an agent who

buys factors as production at certain prices in order to combine them into a product with a view
to selling it at uncertain prices in future. He illustrated a former who pays contractual incomes,
which are certain to land owners and laborers, and sells at prices that are ‘uncertain’. He includes
merchants also who make certain payments in expectation of uncertain receipts. Hence both of
them are risk-bearing agents of production.

P.H. Knight described entrepreneur to be a specialized group of persons who bear

uncertainty. Uncertainty is defined as risk, which cannot be insured against and is in-calculable.
He made distinction between certainty and risk. A risk can be reduced through the insurance
principle, where the distribution of outcome in a group of instance is known, whereas uncertainty
cannot be calculated.

Entrepreneur as an organizer: According to J Baptist Say “an entrepreneur is one who

combines the land of one, the labor of another and capital of yet another, and thus produces a
product. By selling the product in the market, he pays interest on capital, rent on land and
wages to laborers and what remains is his/her profit”. Say made distinction between the role of
capitalist as a financer and the entrepreneur as an organizer. This concept of entrepreneur is
associated with the functions of co-ordination, organisation and supervision.

Entrepreneur as an innovator: Joseph A SchumPeter in 1934 assigned a crucial role of

‘innovation’ to the entrepreneur. He considered economic development as a dynamic change
 13

brought by entrepreneur by instituting new combinations of factors of production, i.e. innovations.

The introduction of new combination according to him, may occur in any of the following forms.

(a) Introduction of new product in the market.

(b) Use of new method of production, which is not yet tested.

(c) Opening of new market.

(d) Discovery of new source of raw materials.

(e) Bringing out of new form of organisation.

Schumpeter also made distinction between inventor and innovator. An inventor is one
who discovers new methods and new materials. An innovator utilizes inventions and discovers
in order to make new combinations.

Hence the concept of entrepreneur is associated with three elements risk-bearing,

organizing and innovating. Hence an entrepreneur can be defined as a person who tries to
create something new, organizes production and undertakes risks and handles economic
uncertainty involved in enterprise.

Some more important definitions of entrepreneur

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

2.Marx regarded entrepreneur as social parasite.

3.According to Gilbraith: “An entrepreneur must accept the challenge and should be
willing hard to achieve something”.

4.Peter F. Drucker defines an entrepreneur as one who always searches for change,
responds to it and exploits it as an opportunity. Innovation is the basic tool of entrepreneurs, the
means by which they exploit change as an opportunity for a different business or service.

5.According to E.E.Hagen: “An entrepreneur is an economic man who tries to maximize

his profits by innovation, involve problem solving and gets satisfaction from using his capabilities
on attacking problems”.
14

6. According to Mark Casson: “An entrepreneur is a person who specializes in taking

judgmental decision about the coordination of scarce resources”.

7. Frank Young defined entrepreneur as a change agent.

8. According to Max Weber: “Entrepreneurs are a product of particular social condition

in which they are brought up and it is the society which shapes individuals as entrepreneurs”.

9. International Labour Organization (ILO) defines entrepreneurs as those people who

have the ability to see and evaluate business opportunities, together with the necessary resources
to take advantage of them and to initiate appropriate action to ensure success.

10. Akhouri describes entrepreneur as a character who combines innovativeness,

readiness to take risk, sensing opportunities, identifying and mobilizing potential resources,
concern for excellence, and who is persistent in achieving the goal.

11. Richard Cantillon: Entrepreneurs are non-fixed income earners who pay known costs
of production but earn uncertain incomes.

12. Jean-Baptiste Say: An entrepreneur is an economic agent who unites all means of
production- land of one, the labour of another and the capital of yet another and thus produces
a product. By selling the product in the market he pays rent of land, wages to labour, interest on
capital and what remains is his profit. He shifts economic resources out of an area of lower and
into an area of higher productivity and greater yield.

13. David McClelland: An entrepreneur is a person with a high need for achievement [N-
Ach]. He is energetic and a moderate risk taker.

14. Ronald May: An Entrepreneur is someone who commercializes his or her innovation.

15. Frank H. Knight: entrepreneurship is about taking risk. The behavior of the
entrepreneur reflects a kind of person willing to put his or her career and financial security on
the line and take risks in the name of an idea, spending much time as well as capital on an
uncertain venture. Knight classified three types of uncertainty.

Risk, which is measurable statistically (such as the probability of drawing a red color ball
from a jar containing 5 red balls and 5 white balls).
 15

Ambiguity, which is hard to measure statistically (such as the probability of drawing a

red ball from a jar containing 5 red balls but with an unknown number of white balls).

True Uncertainty, which is impossible to estimate or predict statistically (such as the

probability of drawing a red ball from a jar whose number of red balls is unknown as well as the
number of other colored balls.

2.4 Evolution of the Concept of Entrepreneur

According to George Bernard Shaw, people fall into three categories: (i) those who make
things happen. (2) Those who watch things happen, and (3) those who are left to ask what did
happen. Generally, entrepreneurs fall under the first category.

The word ‘entrepreneur’ is derived from the French word entreprendre. It means ‘to
undertake’. Thus, entrepreneur is the person who undertakes the risk of new enterprise. Its
evolution is as follows.

Early Period: The earliest definition of the entrepreneur as a go-between is Marco Polo.
He tried to establish trade route to the far East. He used to sign a contract with a venture
capitalist to sell his goods. The capitalist was the risk bearer. The merchant adventurer took the
role of trading. After his successful selling of goods and completing his trips, the profits were
shared by the capitalist and the merchant.

Middle Ages: The term entrepreneur was referred to a person who was managing large
projects. He was not taking any risk but was managing the projects using the resources provided.
An example is the cleric who is in charge of great architectural works such as castles, public
buildings, cathedrals etc.

17th Century: An entrepreneur was a person who entered into a contractual arrangement
with the Govt. to perform a service or to supply some goods. The profit was taken (or loss was
borne) by the entrepreneur.

18th Century: It was Richard Cantillon, French Economist, who applied the term
entrepreneur to business for the first time. He is regarded by some as the founder of the term.
He defined an entrepreneur as a person who buys factor services at certain prices with a view
to sell them at uncertain prices in the future
16

19th Century: The entrepreneurs were not distinguished from managers. They were
viewed mostly from the economic perspective. He takes risk, contributes his own initiative and
skills. He plans, organizes and leads his enterprise.

20th Century: During the early 20th century Dewing equated the entrepreneur with
business promoter and viewed the promoter as one who transformed ideas into a profitable
business. It was Joseph Schumpeter who described an entrepreneur as an innovator. According
to him an entrepreneur is an innovator who develops untried technology.

21st Century: Research Scientists like De Bone pointed out that it is not always important
that an individual comes up with an entirely new idea to be called an entrepreneur, but if he is
adding incremental value to the current product or service, he can rightly be called an
entrepreneur.

2.5 Characteristics of Successful Entrepreneur

An entrepreneur is a highly achievement oriented, enthusiastic and energetic individual.
He is a business leader. He has the following characteristics:

1) An entrepreneur brings about change in the society. He is a catalyst of change.

2) Entrepreneur is action-oriented, highly motivated individual who takes risk to achieve

goals.

3) Entrepreneur accepts responsibilities with enthusiasm and endurance.

4) Entrepreneur is thinker and doer, planner and worker.

5) Entrepreneur can foresee the future, seize market with a salesman’s persuasiveness,
manipulate funds with financial talent and smell error, frauds and deficiencies with an
auditor’s precisions.

6) Entrepreneur undertakes venture not for his personal gain alone but for the benefit of
consumers, government and the society as well.

7) Entrepreneur builds new enterprises. He possesses intense level of determination and a

desire to overcome hurdles and solves the problem and completes the job.

8) Entrepreneur finds the resources required to exploit opportunities.

9) Entrepreneur does extraordinary things as a function of vision, hard work, and passion.
He challenges assumptions and breaks rules.
 17

Although many people come up with great business ideas, most of them never act on
their ideas.

2.6 Summary
An entrepreneur is ordinarily called a businessman. He is a person who combines capital
and labour for the purpose of production. He organizes and manages a business unit assuming
the risk for profit. He is the artist of the business world.

In the words of J.B. Say, “An entrepreneur is one who brings together the factors of
production and combines them into a product”. Joseph A Schumpeter defines an entrepreneur
as “ one who innovates, raises money, assembles inputs and sets the organization going with
the ability to identify them and opportunities, which others are not able to fulfil such economic
opportunities”. An entrepreneur is a highly achievement oriented, enthusiastic and energetic
individual. He is a business leader. He has the characteristics such as catalyst of change; takes
risk to achieve goals; accepts responsibilities with enthusiasm and endurance; thinker and
doer, planner and worker; can foresee the future, seize market with a salesman’s persuasiveness,
manipulate funds with financial talent and smell error, frauds and deficiencies with an auditor’s
precisions; undertakes venture not for his personal gain alone but for the benefit of consumers,
government and the society as well; possesses intense level of determination and a desire to
overcome hurdles and solves the problem and completes the job and he challenges assumptions
and breaks rules.

2.7 Keywords
Intrepreneur

Innovation

Organizer

Risk bearer

2.8 Review Questions

1. Give various definitions for the term ‘Entrepreneur’.

2. Detail the evolution of the concept of ‘Entrepreneur’.

3. Bring out the Characteristics of Successful Entrepreneur.

18

LESSON - 3
ENTREPRENEURIAL SCENE IN INDIA
Learning Objectives

After completing this lesson, you must be able to:

 elaborate the entrepreneurial scene in India.

 analyze entrepreneurial growth in different communities

 discuss about various business communities in India.

Structure
3.1 Introduction

3.2 Entrepreneurship during pre-independence

3.3 Entrepreneurship during post-independence

3.4 Analysis of Entrepreneurial Growth in different Communities

3.5 Summary

3.6 Keywords

3.7 Review Questions

3.1 Introduction
Emergence of entrepreneurial class is as old as our ancient history itself. It dates back to
the Pre-Vedic period when Harappan culture flourished in India. History of entrepreneurship
and emergence of entrepreneurial class in India may be presented in two sections viz.
entrepreneurship during pre-independence and post-independence. Analysis of Entrepreneurial
Growth in different Communities in India is also detailed.

3.2 Entrepreneurship during pre-independence

In the excavation in Harappan andMohanjodaro the handcraft items and metal molded
items were found. It is also found that the craftsmen of the time made, handicraft items as part
of their contribution to the society in which they lived. The entrepreneurship to make handicraft
items existed in India around 2500 B.C. People developed their own social system and village
 19

economy in India. India also developed cast-based divisions of work, which helped in the
development of skills of artisans.

The artisans in different parts of India grouped together and developed their own artifacts
and were well known for their quality. The cities like Banaras, Gaya, Puri, Allahabad and Mirzapur,
which were on the banks of Ganga River, established their own type of handicrafts work. The
royal patronage by the local kings of that period helped artisan industries to flourish. The
handicrafts industry of the time was basically skill based and started as tiny sector.

The population in India grew in the middle age and spread to the full geographical area.
The local kings gave patronage to the handicrafts, silk, cotton-ware and development of other
cottage based industries for consumption of higher section of the society. The development of
agriculture products like spices, Ayurvedic medicines also flourished in some parts of the country
and started export them. Spices from kerala, Corah from Bengal, Shawls from Kashmir and
Banaras, brass and Bidriware, Silk from Nagpur and Mysore enjoyed prestigious status in
international market till earlier years of 18th century. The craftsmen gathered together in halls,
which were called ‘Karkhanas’.

Unfortunately the prestigious Indian handicrafts industries which were basically a cottage
and tiny sector declined at the end of 18th century, because of the following reasons.

1. Disappearance of royal patronage to the handicrafts

2. Lukewarm attitude of British colonial towards Indian crafts

3. Imposition of heavy duty on imports of Indian crafts

4. Low priced British made goods

5. Changes in the tastes and habits of developing Indian citizens etc.

In other words, East India Company handicapped Indian cottage and tiny sectors. The
company injected various changes in the Indian economy by exporting raw materials and import
of finished goods in India. ‘Parsis’ established good report with company. The company
established the first shipbuilding industry in Surath and from 1673 Parsis started manufacturing
vessels for the company. In 1677 ManjeeDhanjee was given the contract of building large gun-
powder-mill in Bombay. In 1852 a Parsi foreman who was working in the gun factory started
steel industry in Bombay. That is to say East India Company made some contribution toward
entrepreneurial growth in India.
20

The actual emergence of manufacturing enterprise can be noticed in the second half of
nineteenth century. In 1854 CowasjeeNanabhoy started textile mill at Bombay, R. Chotelal
started textile mill in 1861 in Ahamdabad, and in 1880 NawrojeeWadia opened a mill in Bombay.
Jamshadjee Tata established first steel industry in 1911. Though late, other commercial
community namely jains, vaishyas changed their attitude from commercial entrepreneurship to
industrial entrepreneurship.

The ‘swadeshi’ campaign provided a seed bed for inculcating and developing nationalism
in the country. Jamshadjee Tata was influenced by this and named his first mill ‘swadeshi mill’
and Krishna in its advertisement made the appeal “our concern is financed by native capital and
is under native management throughout”.

After the first world war the Indians agreed to ‘discriminating’ protection to certain industries
and made companies should be registered in India with rupees capital and have a proportion
their directors as Indians. These measures helped in establishing and extending the factory
manufacturing in India during the first four decades of 20th century during which the relative
importance of Parsis declined and Gujarati’s, Marawaris, and Vaishyas gained their importance
in India’s entrepreneurial scene.

The emergence of managing agency system triggered Indian entrepreneurship. In 1936

Carr, Tagore & Co assumed the management of Calcutta steam tug association. Dwarakanath
Tagore encouraged others to form joint-stock companies in which management remains in the
hands of ‘firm’ rather than ‘individual’. The European management agency houses, after East
India Company loosing its monopoly entered business, trade and banking. It is stated that the
managing agency houses were the real entrepreneurs and these agency houses emerged to
overcome the limitations imposed by shortage of venture capital and entrepreneurial acumen.

3.3 Entrepreneurship during post-independence

In 1948 Indian government cameforward with the first Industrial policy, which was revised
from time to time. The government identified the responsibility of the state to promote, assist
and develop industries in the national interest and recognized the role of private sector in
accelerating industrial development.

The government took three important measures namely:

1. To maintain a proper distribution of economic power between private and public

sector.
 21

2. To encourage industrialization from existing centers to other cities, towns and villages.

3. To disseminate the entrepreneurship acumen concentrated in a few dominant

communities to a large number of industrially potential people of varied social state.

To achieve this, government accorded emphasis on development of small scale industries

in the country by providing various incentives and concessions in the form of capital, technical
know-how markets and land to the entrepreneurs in the potential areas to remove the regional
imbalances in development. To facilitate the new entre-preneurs in settings up their enterprises,
Government established several institutions like Directorate of Industries, Financial Corporations,
small scale industries corporations, small industry service institutes etc. Because of this small-
scale units emerged very rapidly and their number increased from 1,21,619 in 1966 to 1,90,727
in 1970. There are also examples that some entrepreneurs grew from small to medium-scale
and from medium to large scale manufacturing units during the period.

With the invention of digital computer, information technology era started in 1970. IBM
was one of the pioneers in this field. The software developments created new opportunities and
the service industries started growing faster than manufacturing industry after 1980. The high
growth of new industries also had high risks. The new top rated entrepreneurship opportunities
arose such as communication, food services, entertainment, merchandising, cosmetics, and
apparel with the electronic communication reducing the distances to a Global Village. The market
size is growing and the entrepreneur has to benchmark himself with the global standards.

3.4 Analysis of Entrepreneurial Growth in different

Communities
In India, a few communities with trading, money lending and financing background
dominated in entrepreneurship. Marwari, Gujarati, and Parsi communities are the dominant
business communities in India. Other active communities include the Punjabis, Chettiars, and
Maharashtrians etc. These communities share their distinctive working styles, for example,
Parsis have been in the role of entrepreneurs handling big industries, while Gujaratis were
traditionally traders. Though Parsis have been small in numbers, their entrepreneurial contribution
to the country is very large. Marwaris from Rajasthan have the most geographically migrated
business community; pursuing businesses all over the country and controlled half of the industrial
assets. The Chettiars from southern parts of India were known for much bigger than the Marwaris
and the Parsis in terms of capital during pre-independence but they could not bring their
investment back to the country for various political reasons of those days.
22

Sindhi Community

Sindhis hail from Sindh prant, which is presently located in Pakistan. During 1947 India-
Pakistan partition, this community struggled a lot. Their population in India is approximately 3.5
million.Sindhis are very hardworking, committed and known for their Sindhayat Culture.They
are very adaptive, intermingle able, and peace-loving. They are resilience and accept other
culture easily which made them diasporic across the world. They are most the successful
community in India. Sindhis have faith in Jhulelal as their Deity. They differ in threeprepositions:

(i) Sindhi’s Nirankari

(ii) Hindu Sindhis

(iii) Sindhis who remained in Pakistan and who adoptedIslam.

Sindhis value for education, hard-work and religion. They like going outside in Hotels for
tastier food. They love to wear beautiful clothes and do fashion. They are moderately political
family oriented, hospitable and embrace all cultures easily. They have a sense of self-respect
and integrity. This generation has grown and prospered in India. As refugee, they have
experienced very hard time and feelings of losing their own belongings and wealth at Sindh. It
keeps them alert in doing something and earning out of whatever they have. Therefore, they
never deviate from their focus. As they have influence of Marwaris, they are entrepreneurial,
economical and saving oriented and like Punjabis hardworking, industrious and even fashionable
also. The overall contribution of Sindhis is 20% in GDP of India, 24% of total Income Tax
collected has been contributed by Sindhis and 62% contribution is in total Charity Fund. 46%
Share Brokers are Sindhis. Their presence in Bollywood, Cloth mercantile, Grocery, Electronic
and Consumer goods is predominant.

Jain Community

Jainism is one of the most ancient religion originated in India around 3000-3500 B.C.
Bhagawan Rishab is known as the first Tirthankar called as Adinatha. Jainism has a fourfold
order of sadhu (monks), sadhvi (nuns), sravaka (layman) and sravika (laywoman). This order is
known as a sangha. Bhagwan Mahavir was the last, 24thTirthankar (prophet) born in northern
part of Bihar around 599 B.C. and contemporary to Lord Buddha. According to 2001 census,
total population of Jain community is 42 million. Jainism is one of the oldest living faiths of India
and worldwide. Jainism believes and preaches on conquering of self-eternal enemies that is
Attachment (Raghav) and Aversion (Dvesha).The Jains have the highest literacy rate, 94.1%
 23

compared with the national average of 65.38%. They have the highest female literacy rate,
90.6% compared with the national average of 54.16%. It is believed that the Jains also have the
highest per capita income in India. Jains follow strict vegetarian diet. Even onion and garlic are
also avoided in their diet. It works on self-realization and salvation through right faith, right
knowledge and right conduct. Jainism prescribes severe discipline, self-control and renunciation.
An orthodox Jain is not supposed to eat or drink anything that has life. Network among the
community is very strong. They have migrated around the world in search of new opportunities
in business. They are known for their entrepreneurial psyche, and they are successful one.
Ahimsa (non-violence) is the most important aspect in every act of Jain religion. The entire
culture has evolved around this belief, and as a result, wherever Jains migrate, they form such
communities Jains believe that they are merely passengers on this planet and should endeavour
to minimize harm and maximize good. Therefore, business is always a means and never an
end. Profit is not the overriding aim; quality service, workmanship and discipline are vitally
important. Business is a means to serve society and, if possible, uplift it. Probably most of the
Jains prefer entrepreneurship rather than doing jobs. Modern education of 21stcentury and
travel has made Jain dominant and competent businessmen. Generally men are involved in the
entrepreneurship.

Chettiar Community

The mercantile cast in South India (Tamil Nadu & Kerala) is known as Chetty or Chettiars.
They were economically well established during the Chola’s dynasty. Mostly they are moneylender
and known as very important in the economic growth of Burma. The major merchant community
of Chettiars faced constraints on repatriation of capital from other parts of the world to India
could have been possible to change economic landscape post-independence. It is observed
that Chettiars are the pioneer in the microfinance. Their family culture for training their siblings
for the business and community networking led them to be successful businessmen even abroad.
They improved their social balance powers in homeland through higher economic overseas
activities. Chettinad is a region of the Sivaganga district, Southern Tamil Nadu. Strategically it is
located at old trade route. Chettiars work as traders and moneylenders in Sri Lanka, Burma,
Malaysia, Singapore, Vietnam, and other south-east Asian countries. 14% population of Tamil
Nadu is of Chettiars. They claim themselves as Vaishya and worship Lord Muruga. The “Kittingi”
is an important social and economic infrastructure of the overseas Chettiar community.
Nagarathars are an exclusive clan, famous for their enterprise, hard work and contributions to
society. They earned money by crossing the seas and their business acumen made them
24

successful and prosperous. Since the 1970s, many have become professionals, entrepreneurs
and industrialists. Their social life is unique. At the apex of the family household, is the “Aachi”
the senior most female in the house. She controls, if not everything, the finances of the household.
While the Nagarathars still see their roots in Chettinad, over the years, they have been moving
away from ancient traditions and customs. As a result of their traveling, the Chettiars integrated
diverse influences into their traditions which contributed to their uniqueness. They started moving
away from the money lending business in favour of other professions. They value money or
business more. Prior to the initial school education some arithmetic is taught at child age as
apprentice to do the money lending business and basic trade. Chettiars are pioneers in
overcoming on liabilities of “newness”, “smallness” and “resource constraint” of Small and Medium
Scale Enterprises through internationalization of firms across the common wealth and Southeast
Asian countries. They follow Hindu values and encourage reading of two major Tamil Savaite
texts, namely Thevaram and Thiruvasagam before formal education. Sons are not allowed to
work in their father’s business unless they get marry. Sons are trained in business and trade
through extended family practices. Chettiars follow best practices and accountability among
extended family networks. Thus Chettiars have one of the well recognized business communities
in the SouthernIndia.

Gujarati Community

The State took its name from the Gujara, the land of the Gujjars, who ruled the area
during the 700s and 800s. Gujarat is a flourishing state with cultural diversity. It is vibrant with its
true colours of rich heritagea nd cultural traditions. The Gujarati culture blends in arts, beliefs,
customs, traditions, institutions, inventions, language, technology and values. The language
spoken is ‘Gujarati - it remains a mother tongue for people of Gujarat and is widely spoken all
over the world wherever a Gujarati exist. Gujarat was the most prosperous region (subah) in
the Mughal period. During this period, urbanization took place due to development of trade and
commerce. Gujaratis have known for diasporic business community migrated all over the world.
During Nizams period Gujaratis were leading Hindu bankers in the state of Hyderabad. Gujarat
has maintained commercial contacts with the outside world since ancient times. The tradition of
sea-faring and overseas contacts goes back many centuries, and the Gujarati diaspora was the
logical outcome of such a tradition. The Gujarati merchant diaspora can still be found in the
littoral cities of West Asia and Africa on the one hand, and in Southeast Asia on the other.

Majority of the Gujaratis are Vegetarian. They are food loving people. A traditional „Gujarati
Thali consisting of dal (lentils), roti, rice and vegetables apart from salads, farsan and sweet
 25

dish followed by chaas, forms the morning meal. Evening food consists of bhakri-shak o rkhichdi
kadhi. Therefore, most of the small-scale entrepreneurship is been developed in eatery domain.
A variety of dishes are prepared by Gujarati women who also add spice to the kitchen with
eateries from other regions like the South Indian food, Continental, Chinese cuisines, etc. Many
Gujarati women are involved in food-related entrepreneurial activities. Gujaratis are workaholics.
Majority of the Gujarati thrive as business persons. However, Gujarat is a leading Industrial
State that ranks its commercial capital and textile city Ahmadabad as 7th in entire India. It
possesses the highest number of operating airports. Gujarat cities are connected worldwide.
Many business opportunities see the way to development with the Vibrant Gujarat in various
sectors. Gujarat has major multicultural religious faith system with the inception of all-embracing
religious faith ranging from caste to caste. The major religions followed are Hinduism, Jainism
and Buddhism. Groups like Bohras and Moresalaamgarasias, Kutchis who had been converted
to Islam still have an equanimeous way of life of a typical Gujarati. Sunni Muslims are the
second largest group, followed by Jains, Parsis of Iranian descent of south Gujarat and Christians.
Gujarati people are God-fearing, friendly and good-natured. They live in harmony; respect each
others beliefs.They often found to mingle and enjoy all religious festivals with no caste/creed
differences.

Parsi Community

The Parsis are followers of - Zoroastrian religion. This religion was established by
Zarathustra in 6thor 7th century BC. The followers of this religion were exiled from Iran in the
7thcentury AD. Because of religious persecutions by the Muslims, they arrived in Gujarat region
of India. Mahatma Gandhi has acknowledged them as Indian pride. They are industrious, peace-
loving and philanthropic person. A small religious community, which exists mostly in Mumbai,
follows Zoroastrianism. The followers are called Parsis because the religion arrived in India
from Persia. 69,000 Parsis in India and of which 40,000 approx. are dwelling in Mumbai city
which is less than 0.02% of total population (Census, 2001). In Telangana (Hyderabad/
Secunderabad) their population is just 1136, and most of them are lawyers, doctors and
businessmen. Parsis were agriculturists in the initial phases in India, but later on, they grew
even more ambitious. They started the trade with China and Burma in the 18th century. The
Parsis believe in the existence of one invisible God. The holiest place for them is the village of
Udvada in Gujarat, India. The holy language of the Parsis is an ancient language spoken in
Iran, Avesta. The Parsis believe that fire, water, air and earth are pure elements to be preserved
and therefore they do not cremate or bury their dead ones but leave them on high towers,
26

specially built for this purpose, to be eaten by hawks and crows. When it comes to Parsis, it
awakens our memories of the Phiroz Shah Mehta, Hon. DadabhaiNauroji, Scientist Dr. Homi
Jahangir Bhabha, JRD Tata, Ratan Tata, Godrej etc. Their contribution to India is enormous.
They believe that there is a continuous war between the good forces (forces of light) and the
evil forces (forces of darkness). The good forces will win if people will think good, speak well
and do good deeds. God is represented in their temples through fire, which symbolizes light.
Industriousness and philanthropy are their priorities. Socially united and there is not much
social division within Parsi Community except priestly class. Western education made them
forward thinkers and entrepreneurs. They were the first to start working with East India Company.
Britishers made them point of contact in India and allowed them to prosper in Indian business
environment.

Marwaris Community

Marwaris has come originally from Marwar, the desert region of Rajasthan. Agarwals,
Oswals and Maheshwaris are main sub-casts among the Marwari mercantile communities in
which first two predominantly Vaishnavis and last one is Jain. The desert land and lack of
natural resources made Marwari persons to become businessmen and industrious who refused
to resign themselves to poverty. They migrated across the world to thrive on the business
opportunities. According to Census of 2001, the Marwari is spoken by 79,36,183 in India and
their majority concentrated in the states of Rajasthan, Maharashtra and Gujarat. Most of the
Marwaris are either Hindus or Jain. The Marwari cuisine is strictly vegetarian and offers a
fabulous variety of mouthwatering dishes. Marwari community was created through trading and
capitalist alliances. The Marwari trading networks themselves created the very possibility of a
public community. In Calcutta, the dominance of Marwaris businessmen are seen since the
17th century. New Marwari arrivals in Calcutta depended upon their linkages with others to start
trade and business, seeking out fellow community members for shelter, food, and guidance.
Marwari traders rely on credit and networks of trust. For Marwari traders, these powerful and
close- knit trading networks extend across Rajasthan, North India, and Bengal. In Marwaris
community network and business preferences are tightly knit together. Their high community
dominance is visible in Trade Channels across India. Creation of wealth is most valued by
Marwari. They are industrious and hardworking persons. New Marwari generation gives utmost
important to modern education. Many Marwari business groups have promoted good educational
institutions in India.
 27

Shettys community

Bunts community popularly known as Shettys, are hailing from Dakshina Kannada District
of Coastal Karnataka, South of Karwar. Bunts community is landowners involved in agriculture
and cultivation of land in Dakshina Kannada district. Some of them due to their economic
backwardness, Bunts migrated to the neighbouring state of Maharashtra particularly to Mumbai
city and settled down almost a century ago in search of employment / business and livelihood.
Due to their hardworking nature and determination to come up in life, they are known as a
progressive community. The mother tongue of this community is “TULU” which does not have
any script. However, Bunts have adapted themselves to their Janmabhoomi in Karnataka where
Kannada is spoken. Bunt surnames include among others - Shetty, Hegde, Rai, Naik, Alva,
Chowta, Arasa, Adhikari, Banga, Bhandary, Kadamba, Adyanthaya, Tholar, and Adappa etc.
LokayuktaSantoshHegde internationally renowned cardio-surgeon, Dr. Devi Prasad Shetty well-
known ophthalmic surgeon, DrBhujangaShetty multi- lingual film artiste, PrakashRai background
music wizard, Gurukiran supermodel and actor AishwaryaRaiBachchan, business tycoon Dr.
R. N. Shetty etc. are famous personalities from this community. Bunts/Shettys are dominant in
Indian Hotel and Food industry. They are hardworking and adaptive people. The young generation
is giving priorities to the education. They are philanthropic like other Indian communities, run
many educational and financial institutions viz. Bharat Co-Op. Bank, Vijay Bank etc. Most hotel
industry of tier I & II cities of India are captured by the Shetty community entrepreneurs. The
following table is depicting the speciality of some communities and reason behind developing
the performance base communityculture.

Table 3.1: Indian entrepreneurial communities and probable reasons

for developing entrepreneurial culture

Name of the Domination Probable reason behind the

Community in Business developing entrepreneurial
culture

Shetty (Bunt) Food Chain / Hotel Business Due to their economic

backwardness, Bunts migrated
to the neighbouring State of
Maharashtra particularly to
Mumbai city and settled down
almost a century ago in search
28

of employment / business and

livelihood. Due to their
hardworking nature and
determination to come up in
life, they are known as a
progressive community.

Sindhis Textile/ Electronics During 1947 India-Pakistan

partition the community
struggled a lot. The community
struggled due to displacement
from their place of origin. They
are one of the most successful
entrepreneurial communities.

Marwaris Finance/Manufacturing etc. Due to geographical reasons

(bare land etc.) community
migrated all over the world.
Their community network and
business preferences are
tightly knit together. High
community dominance
presence in Trade Channels
across India.

Punjabis Automobiles Like Sindhis, they had to leave

Pakistan-occupied Punjab
unwillingly during India-
Pakistan separation during
1947. Due to their strong
physique they were preferred
in hard core machinery/
transportation and automobile
businesses.
 29

Gujaratis Textile/FMCG/ Share market Majority of the Gujarati thrive

as business persons. Gujarat
is a leading Industrial State that
ranks its commercial capital
and textile city.

3.5 Summary
Emergence of entrepreneurial class is as old as our ancient history itself. It dates back to
the Pre-Vedic period when Harappan culture flourished in India. History of entrepreneurship
and emergence of entrepreneurial class in India may be presented in two sections viz.
entrepreneurship during pre-independence and post-independence.The other objective of this
lesson was to understand how the Indian entrepreneurial communities have successfully
developed an entrepreneurial culture and contributed to the economic growth of the country.
The efforts are made to build the consensus that how an emerging form of entrepreneurship,
typically rooted in community culture, integrated and inseparable from economic considerations
of natural and social capital for transforming the community into an entrepreneurial and an
enterprising. It has been observed that the culture of Jain, Gujarati, Marwari and Parsis value
entrepreneurship more. Particularly Jain adopted entrepreneurial culture due to ritualistic reasons,
as only in trading could help them to practice ahimsa, and can help them to refrain from killing
of living things. Sindhis and Punjabis suffered forceful displacement due to India-Pakistan
partition. Marwari and Shettys also migrated due to very social and demographic reasons.

3.6 Keywords
Chettiars, Gujaratis, Jains

Marwaris

Punjabis

Sindhis

3.7 Review Questions

1. Write an essay about Entrepreneurial Scene in India.

2. Name and explain the various Business Communities in India.

3. Write a note on “Indian entrepreneurial communities and probable reasons for

developing entrepreneurial culture”.
30

LESSON - 4
ENTREPRENEURIAL CASES
Learning Objectives

After completing this lesson, you must be able to:

 critically evaluate case study.

 discuss solutions to entrepreneurial cases.

Structure
4.1 Introduction

4.2 Entrepreneurial Cases

4.3 Summary

4.4 Review Questions

4.1 Introduction
A case study is a descriptive and exploratory analysis of a person, group or event. Case
studies can be beneficial because they can provide detailed information and insight into the
feelings, thoughts and behaviours of a person who may be unique in some ways. Case studies
have limitations such as we cannot make causal conclusions from case studies and findings
from case studies may not generalize to other people.

4.2 Entrepreneurial Cases

Case Study 1 Aaka Industries

Mr. Amar Nath, a young man, is full of energy and entrepreneurial zeal. An ex-Army
officer, he carries himself well and is articulate. A systematic person, Mr. Amar Nath entered the
small industry arena after preparing himself thoroughly.

After getting his release from the Army, he took a job with Televista and spent about six
years with them. While with Televista, he familiarized himself with their requirements of all types
of bought- out items. And in due course, he decided that he would be on his own. What better
way to star than by becoming an ancillary to Televista. He knew that the management held him
 31

in high esteem and would be all too willing to help. He knew he was capable of dedicated hard
work, had a disciplined mind and undeterred determination. His only handicap was his lack of
experience as a businessman.

This only strengthened his determination to enter the business venture though the ancillary
route where his lack of experience with the market maneuvering will not come in this way. He
soon decided on the product line, PVC goods. Thus was born Aaka Industries in 1978 in the
Srinivaspuri market. He started producing PVC covers for Televista requirements, and soon,
his clientele grew.

In 1983, Mr.Amar Nath Moved to his present premises, D-155, Okhla Industrial Area,
phase 1, New Delhi Employing about eight persons and with the help of PVC welding and
cutting machines, he is now turning out products worth about Rs.4 lakhs annually. He has plans
to diversify into other products, including some electronic items such as wire-wound resistors.

A self-made man, Mr. Amar Nath attributes his success to a disciplined, well-planned
approach followed by determined hard work. He is a stickler for detailed pre-planning and is
equally rigid about his quality standards; he is just no prepared to compromise on that. Besides,
his amiable temperament has, to no small measure, been responsible for his getting a break
towards self-employment at the hands of his erstwhile employer.

An entrepreneur at heart, Mr. Amar Nath is not satisfied with the limited scope of his
present venture. He has plans to expand and diversify. His wife is also likely to join him in his
future plans. Right now he is in the process of preparing a few project reports and studying the
market potential for different products that are on his list. He feels confident that he would soon
be able to take a decision and then take the plunge.

Case Study 2 Bagade Electrical Industries

Mr. Narayanrao Bagade, who came to Bombay in search of a job with a diploma in
electrical engineering, has risen to the rank of an industrialist engaged in the manufacture of
electric transformers.

During his term with the Maharashtra State Electricity Board as a junior engineer, Mr.
Bagade had gained adequate experience in the field of repairing various kinds of electrical
instruments, transformers and sub-stations.
32

Mr. Bagade had a short stint as a consultant engaged in repairs of electrical transformers
and allied job work before putting up a company under the banner of ‘Bagade Electrical Industries’
for the manufacture of 33 K.V. to 5,000 K.V. transformers.

Aware of the domestic economic constraints, his company also undertakes jobs related
to power distribution transformers, drop –out fuses, operating rods, high tension sub-stations
etc.

Having had his childhood in an area with no supply of electricity in Katarge in Karnataka,
Mr. Bagade had an eye ever since he saw a lit street light at the taluka headquarters at the age
of 14. And, now in the electrical industry, he deploys the experience of darkness felt during his
childhood as a parallel for the economic weaknesses of his colleagues to bring in team spirit in
his company.

By concentrating more on the reasons responsible for absenteeism of any of the members
of his staff than on the managerial action against those who were absent, he has been able to
bring in a small-scale enterprise that functions as a small family striving not merely for their own
growth but also of their clients.

Case Study 3 Dewan Enterprise

R. Suresh Dewan, a pleasant-mannered, soft-spoken young man, is a disillusioned small-

scale entrepreneur, primarily on account of the rather indifferent attitude of his bankers. In spite
of his extremely difficult working capital situation, this young man succeeded in executing an
export order worth about Rs.35,000 soon after setting up[ his unit, with no help from the bank.
However, today he is extremely disenchanted with the so-called assistance to the small-scale
sector.

After having graduated in science from the Delhi University in 1971, Mr. Dewan took up a
job with a distillery as a chemist. Thereafter, he spent some time working on a farm. Finally, in
response to the DSIDC advertisement calling for applications from educated unemployed, he
managed to get a shed in the New Okhla Industrial Complex, phase-II, New Delhi, shed No.34.
And so started his entrepreneurial adventure in the small-scale sector in 1976.

Though his original project report was for PVC pipes, the banks did not approve of the
same on the ground that there was not enough market potential for the product. He ultimately
took up bicycle parts, specifically steel balls, as his product line. He acquired the necessary
 33

equipment, headers, filing machines, grinding machines, etc., worth about Rs.1.5lakhs and
went into production. The very next year, in 1977, he executed the export order mentioned
above.

His problems of working capital paucity soon overtook him. With the price of his raw
material shooting up manifold and the credit limit retained at the original ceiling of Rs.25,000,
he was unable to enhance his production.

Since then, Mr. Dewan has been doing a variety of chores. While he does take on some
jobbing work, he has also been trying his hand in trading activities, especially chemicals. He
has also doing some liaison and consultancy work.

However, this entrepreneur, in spite of his best efforts, has little hope of revival unless and
until he is helped financially. He has to be able to go into full swing in his specialized product
line, bicycle steel balls, to full capacity. And that means working capital. Unless and until that is
forthcoming, this unit is bound to die.

Though frustrated, Mr. Dewan is not totally disheartened. He feels that he could well
revive if his unit can be taken up under the nursing programme. In his case, the nursing
programme does not involve any marketing assistance or technological inputs. His sole
requirement is not enhanced working capital credit.

Case Study 4 Progressive Industries

Located at shed No.18, New Okhla Industrial Complex, Phase II, New Delhi, Progressive
Industries specializes in friction materials for automotive applications such as clutch facings
and break linings, etc. The unit was set up by Mr. Devinder Suri in 1976 against the DSIDS
advertisement calling upon young educated unemployed to enter the field of small-scale
industries.

This young man graduated in 1972 and had been selected for a couple of good job.
However, the lure of being his own master and an urge to accept the challenge of an insecure
market place prevailed upon him to reject service offers and start on his own. His brother, Mr.
Prakash Suri, also joined him in this venture.

Mr. Devinder Suri got selected by DSIDC for this venture in 1974 and it took two years for
him to complete the formalities and get the required facilities and the unit started, in effect, in
34

1976. He started with friction materials for the four-wheeler vehicles but later switched on to
two-wheeler vehicles.

A youngster, Mr. Devinder Suri, has had to do a lot self-training. The product line was new
to him and it took him quite a lot of running around trying to know about the product and the
production know-how. He used to study about the material, visit units in field, consult users and
visit technological institutions to master knowledge of this product line.

The Suri brothers have been marketing their product in and around Delhi through retail
outlets. However, Mr. Devinder Suri, in the last decade or so, has turned into a most disillusioned
entrepreneur. He recalls with considerable bitterness the rough treatment meted out to him and
other entrepreneurs who had entered the small industries line in response to the DSIDC
advertisement

Originally, the DSIDC concept was to extend all facilities to entrepreneurs, starting from
finance right through to setting up of the unit and then marketing. Mr. Suri later found that the
DSIDC manage disappeared. Inadequate financial support was forthcoming from the banks.
Marketing was getting more difficult. For want of working capital it was not possible to enter into
OE supplies arrangement with the vehicle manufacturers.

The result has been a rather depressing existence for the unit. However, the Suri brothers
have not given up hope. They feel confident that given the financial support, they will make
good.

Case Study 5 H.P. Industries

Mrs. H.P. Mazumdar is a young lady with tremendous entrepreneurial zeal. While still in
college, she had set her mind on running an unit of her own. Soon after obtaining her B.A.
degree, she applied for a shed in DSIDC under its scheme for self-employment for educated
unemployed and got one. Thus, in 1978, this young lady, fresh from college and not yet married,
set about establishing and running a small unit.

Surprisingly, she picked on manufacture of PVC electrical cables and wires as her product
line, a line in which she had no background. Right upto her graduation days, she had been an
arts student; her only association with electrical wires was in attending to connecting wires and
plugs onto her table lamp and table fan. However, having decided on PVC cables as her product
line, she was determined to make a success of it. She took a three months’ training course in
 35

the line organized by DSIDC and she was ready to start. Thus was born her unit, H.P. Industries,
located at 38, Okhla Industrial Area Complex, Phase-II, New Delhi, in 1978.

She did remarkably well in achieving a turnover of more than Rs. 2 Lakhs in the very
first year of her operations – 1978-79. By November 1979, her turnover was about Rs. 3 Lakhs.
However, she was in for a severe jolt. On November 3, 1979 her unit was burgled and copper
wires worth about Rs. 35,000 were stolen. And from then on she had been facing all sorts of
problems, primarily with her banker.

She had instructed her banker to get her an insurance cover for her unit including
coverage against theft. The bank officials ignored her instructions regarding insurance against
theft with the result that she had to bear the loss of Rs. 35,000 herself. This, subsequently, led
the bank authorities to apply its clamps on any further credit facilities to her.

Meanwhile, she got married. Between herself and her husband, they sold off their car,
her husband left his job to join her and to put in his provident fund collections in the unit, and
jointly they initiated the process of self-revival, without any support from the bank of any other
financial institution. Most entrepreneurs would have rolled down the shutters in face of such
heavy odds, but she is differently made, she is bent upon reviving her unit, no matter, what the
hardships are.

She is extremely disillusioned with the so called government support to the small-scale
entrepreneurs. She recalls that she was keen to do well in her enterprise. Her first step was to
get her cables and wires approved by the Government Test House, Alipore against ISI standards.
The result was that she was able to secure orders from such large business houses as Rallis
Fans etc. If only there was some guidance, some help and some sympathetic attitude from
financial institutions, she would not have had to spend so many sleepless nights. As for the
banks, she finds their attitude not only unhelpful but positively inimical. She also wonders that
no one in the authority really looks into the problems of the small-scale units seriously.

Questions:

1. What are the factors responsible for the failure of the above entrepreneur?

2. Enlist the entrepreneurial qualities of Mrs. H.P. Mazumdar.

36

Case Study 6 United Pinion

Located at shed No. 50, New Okhla Industrial Complex, phase II, New Delhi, the unit
specialises in watch parts. Among the items, it manufactures are watch dials, key roads, balance-
staff, hour wheels, studs etc. A well-equipped unit with about eight persons working, it has an
annual turnover of about Rs.2 Lakhs. The unit supplies these parts in the market at Delhi and
Bombay.

A partnership concern owned jointly by Mr. Hans Raj Tuteja and his son Mr. Balraj Tuteja,
it started originally at Lajpat Nagar in 1972 with the manufacture of dials. Mr. Hans Raj Tuteja
entered this production venture through the trading route; he earlier had a shop handling watch
sales and service. The unit moved to its present location in 1975.

The unit gradually took on additional parts in its production programme, thanks to the
drive and expertise of young Balraj Tuteja. This youngster spent about two years in Switzerland
as a trainee and learnt a good deal about manufacture of watch parts there.

Balraj Tuteja feels that the growth of the unit could have been much more impressive.
There been a more rational and promotional attitude of the Government towards indigenous
small-scale manufactures of watch parts. He feels that the Government has been rather harsh
towards these units in the matter of customs duty on raw materials, most of which have to be
imported from abroad. The result is that these indigenous manufacturers are unable to compete
with the imported finished parts where the duty element is lesser. One such critical raw material
that is used in most of his components is AP 20 wire.

The unit had some teething troubles. However, the father and son team has resolved the
same and the unit is now at a stage where further growth can well be contemplated and
implemented. There are number of other components that the unit proposes to undertake for
production in the not too distant future. Young Balraj is full of enthusiasm and zeal and with his
self-confidence and his father’s sense of business acumen, this tiny unit will undoubtedly expand
and diversify.

Mr. Balraj Tuteja is a trifle disenchanted with the rather indifferent attitude of the DSIDC
authorities. He feels that with a more positive support from the DSIDC, a number of units could
have shown a much better performance. He feels that DSIDC could well have provided facilities
of getting the critical raw materials to the units through imports which would have been a great
help to them.
 37

Case Study 7 Implementing Changes

“Mr. Rajeev has a business in SIDCO, Mettur and manufactures Magnesium Sulphate.
He adopts a very traditional method of production and he earns good profits also. In order to
speed up the production process, enhance quality and reduce the production cost, he introduces
mechanization in his company. This leaves 10 percent of employees, to be unemployed. So the
casual labours resist this mechanization process. Assume that you are consultant, intervene in
this issue and act as a consultant to both Mr. Rajeev and the employees.

Case Study 8 A Successful Entrepreneur - Shiv Nadar (HCL)

“SHIV NADAR” is the Founder-chairman of HCL (Hindustan Computers Limited), Known

as Father of India’s IT Industry. Native of MOOLAIPOZHI Village In TUTICORIN District (Tamil
Nadu). Went To PSG College of Technology Coimbatore (Graduation). In 1968, He Moved To
Delhi Where He Worked As Engineer With DCM. His Dream Was To Start-up His Own Company
To Manufacture Computer In India. To raise fund initially, he floated a company called “Micro
comp Limited” to sell scientific calculators.

Ventured along with five of his friends (Arjun Malhotra, Subhash Arora, Ajay Chowdhary,
DS Puri & Yogesh Vaidya). Received support from the Uttar Pradesh government to setup their
manufacturing unit in Noida. Mr. Nadar founded HCL in 1976 with dream of making personal
computers. After expansion of business, Mr..Nadar decided to increase demand for IT education
and Computer Training. In 1981, he setup NIIT to impart high quality education. In 1991, HCL
entered partnership with HP(Hewlett-Packard)to form HCL HP Ltd.

Looking beyond PCs, HCL tied up with Nokia for distributing cell phones and with Ericsson
for distributing switches. In 1996, HCL became an enterprise which comprises two companies
listed in India, HCLTechnologies and HCL Infosystems. HCL has been managing orders at
India’s National Stock Exchange. In mid-90?s, HCL automated the NSE across 261 cities through
a network of 3,000 tiny satellites. HCL is involved in the making of Boeing 787-Dreamline. Shiv
Nadar is a member of the Executive Board of the Indian School of Business (ISB), Hyderabad.
He founded the SSN college of Engineering in Chennai which is a premier institute in India.

HCL Infosystem's Leadership Initiatives

They gave the country’s first Desktop PC in 1976. India’ first branded home PC BusyBee
in 1985. Beanstalk was launched in 1995 by HCL. HCL also gave India’s first Pentium 4 based
PC at a sub Rs. 40,000 price mark. They also boast of providing India’s first Media Center PC.
38

Today HCL offers

 Research and Development

 Technology Services

 Enterprise & Application Consulting

 Remote Infrastructure Management

 BPO

 IT Hardware

 System Integration

 Technology & Telecom Product

Nadar an successful Entrepreneur

Mr. Nadar & his team have proven the technological expertise, the ability to scale up
operations or the confident to manage big and critical assignment without a hitch.

HCL today is a conglomerate worth $4.1 billion.

Staff strength of 47,000 in 17 countries.

More than 500 global clients.

Case Study 9 Battery Industry

The market share of alkaline battery in the India is around two percent. High-drain gadgets
(cameras, toys, walkman) in urban cities have been a major factor in launching these kinds of
batteries. Duracell has the ‘Duracell Powerpack’ indicator bywhich a consumer can know the
life of the battery. The battery is priced is priced at Rs. 35 per pair. Some figures indicate that
the market is growing at 40% per annum. The brand is retailed in about 75,000 outlets in
around 1000 towns.

Question

Given the structure of the battery industry in India, how would you apply marketing
orientation to this situation? Analyze if the concept is applicable to the situation for the viewpoint
of the company.
 39

Case Study 10 Fluid Control Device Limited

Fluid Control Device Ltd. is celebrating its Golden Jubilee year in 1998. Fifty years ago,
when the company was started in 1948 for manufacturing pumps, it was considered a pioneering
venture. It concentrated on consolidating its business till 1968. In 1968, out of the total pump
market of Rs. 24 crore, it alone produced pumps worth Rs. 8 crores. However, in 1998, out of
total pump market of Rs. 120 crore, the company’s share is only Rs. 16 crores. This shows that
demand has grown much faster and that Fluid Control has missed the bus. Moreover, users
carry an image about the company as a producer of agricultural pumps, simple in construction
made out of cast iron which three hundred other units can also produce in the country. Though
Fluid’s R&D department has developed alloy steel pumps for industrial applications but company’s
share of the industrial pumps market is very small.

On the export front too, the situation is not at all encouraging as the company has paid
little or no attention to the export sector.

This is reflected in reduced profitability for the company and cash balance. In 1968, on a
turnover of Rs. 8 crores fluid control had a gross profit of Rs. 1.5 crores while in 1998, the gross
profit is only Rs. 60 lakhs on a turnover of Rs. 16 crores. If this trend continues the company will
face losses in the coming year. Fluid control has already started facing the problem of working
capital and payment to its creditors is also being delayed.

The company still has excellent resources which include perhaps the best manufacturing
and testing set up, wide distribution network and trained manpower. Moreover, with 50 years
standing it has generated lot of goodwill in the market. Based on the above credentials, a
complete turnaround may be possible if appropriate strategies are worked out and implemented
at all levels.

Questions
1. Which do you think could be the areas viz., R&D, production, finance, marketing,
exports where the company could be failing?

2. If you are appointed as an advisor to Fluid Control Device Ltd., what comprehensive
strategy would you recommend to its Board of Directors?
40

4.3 Summary
Case study is a documented study of a specific real-life situation or imagined scenario,
used as a training tool in business schools and firms. Students are required to analyze the
prescribed cases and present their interpretations or solutions, supported by the line of reasoning
employed and assumptions made. In this lesson, selective cases are given for the purpose of
making the students to learn, analyze and find out solutions to case study problems.

4.4 Review Questions

1. “Instead of developing new industrial estates, the State and other Entrepreneurial
Promotion Organizations can have better concentration on improving the
infrastructure and other facilities of existing industrial estates/destinations.” Do you
agree with this statement? Give concrete reasons to support your answer.

2. Do SWOT analysis for the Organization of your choice.

3. Using the different measurement scales, prepare a questionnaire, on a topic of

your choice in the context of entrepreneurship and indicate the statistical tools that
can be used for analysis of the questionnaire.

4. Develop an entrepreneurial case.

 41

LESSON - 5
INNOVATION
Learning Objectives

After completing this lesson, you must be able to:

 define innovation.

 relate innovation with entrepreneurship.

 narrate the process of innovation.

 list out the sources of successful innovation.

Structure
5.1 Introduction

5.2 Innovation

5.3 Innovation and Entrepreneurship

5.4 Types of Innovations

5.5 Innovation Process

5.6 Creating and Identifying Opportunities for Innovation

5.7 Innovations in Indian Firms

5.8 Summary

5.9 Keywords

5.10 Review Questions

5.1 Introduction
The word ‘Innovation’ itself gets used all the time in the news, in press releases made by
governments and universities and in company boardrooms around the world – innovation,
innovation, innovation! Not surprisingly, it can bring to mind a variety of meanings depending on
the context. Although often associated with discoveries carried out by white-haired scientist-
types in high tech industry labs or universities, innovation shouldn’t imply only carrying out
research and development. Nor is it usually the responsibility of only a small group within of a
successful company. Rather, innovation has a much broader definition and considerably wider
42

functions, and should touch all of us every day. It’s important to understand that definition and
how the concept is different from the concepts of discovery, invention and creativity. Let’s start
by taking a look at how all of these fit together.

The process of translating an idea or invention into a good or service that creates value or
for which customers will pay. ... In business, innovation often results when ideas are applied by
the company in order to further satisfy the needs and expectations of the customers.

Innovation is: production or adoption, assimilation, and exploitation of a value-added novelty

in economic and social spheres; renewal and enlargement of products, services, and markets;
development of new methods of production; and establishment of new management systems.
It is both a process and an outcome.

5.2 Innovation
Innovation is the implementation of new ideas at the individual, group or organizational
level.

A process of intentional change made to create value by meeting opportunity and seeking
advantage.

• Process: Innovation is a process (implying, among other things, that it can be learned
and managed).

• Intentional: That process is carried out on purpose.

• Change: It results in some kind of change.

• Value: The whole point of the change is to create value in our economy, society and/or
individual lives.

• Opportunity: Entrepreneurial individuals enable tomorrow’s value creation by exploring

for it today: having ideas, turning ideas into marketable insights and seeking ways to
meet opportunities.

• Advantage: At the same time, they also create value by exploiting the opportunities they
have at hand.
 43

5.3 Innovation and Entrepreneurship

Innovation is one of the underlying dimensions of entrepreneurship. It is a key function in
the entrepreneurial process. Without innovation, an entrepreneur cannot survive in the modern
competitive business world. Entrepreneurship is a creative and innovative response to the
environment and an ability to recognize, initiate and exploit an economic opportunity. An
entrepreneur is an innovator who introduces who introduces something new in an economy.

As per the Schumpeter’s view, a person becomes an entrepreneur only when he or she is
engaged in innovation .further, innovation is equal to competitive advantage. The entrepreneurs
today realize the need for innovation. Innovation adds value to the product. It is only through
innovation, the organizations can survive the increasing competition in the market place.

5.4 Types of Innovations

There are four distinct types of innovation, these are as follows:

 Invention - Described as the creation of a new product, service or process. Something

that has not been tried before.

 Extension - The expansion of an existing product, service or process. This would mean
that the entrepreneur takes an existing idea and applies it differently.

 Duplication - Copying (replicating) an existing product or service and then adding the
entrepreneurs own creative touch. In order to improve it.

 Synthesis - A combination of more than one existing products or services in to a new

product. or service. This means that several different ideas are combined in to one new
product or service.

Marquis defines the following different types of innovation:

(a) Radical innovations: Ideas that have impact on or cause significant changes in the
whole industry

(b) Incremental innovations: Small ideas that have importance in terms of improving
products, processes, and services

(c) System innovations: Ideas that require several resources and many labour-years to
accomplish. Communications networks and satellite operations are good examples.
44

Henderson and Clark define the types of innovation as:

1. Incremental: - incremental innovation refines and extends an established design, but

underlying concepts, and links between them, remain the same

2. Architectural: - the essence of architectural innovation is the reconfiguration of an

established system to link together existing components in a new way

3. Modular: - it is an innovation that changes a core design concept, without changing the
products architecture or primary function

4. Radical: - radical innovation establishes a new dominant design and hence a new set
of core design concepts, embodied in components that are linked together in a new architecture.

Types of Innovation which will be discussed further include

1. Revolutionary vs. evolutionary innovation • Modular vs. architectural innovation

2. Process vs. product innovation

3. Procedure vs. service innovation

4. Disruptive vs. sustaining innovation

5. Market pull vs. technology push innovation.

1. Revolutionary versus Evolutionary Innovation

Innovation may be classed into two main categories’, revolutionary and evolutionary, or
often referred to as radical and incremental respectively. Although some extensions to these
categories exist they will be elaborated on at a later stage. Revolutionary or radical innovation
as it is also known, is accompanied by a high degree of change in human behaviour and
paradigms. In essence, radical innovators have a completely different way of thinking and doing
things. Radical innovation is responsible for most discontinuous product or process changes.

Modular versus Architectural Innovation

The terms modular and architectural innovation have been coined to assist understanding
and defining the intermittent ground between revolutionary (radical) and evolutionary
(incremental) innovation. The two extreme cases of innovation, as discussed above, do not
include innovations such as fusion of technology, rearrangement of units or partial radical
 45

innovation. Modular and architectural 9 innovations lie between revolutionary (radical) and
evolutionary (incremental) innovation, but are not necessarily simply a fusion of the two extremes.
They represent a different approach to innovation and could be used as a methodology for
implementing’ innovation, when revolutionary or evolutionary may not fit.

Architectural Innovation occurs when existing knowledge or hardware embodied in a

product, is arranged differently, creating a completely different product and possibly a different
market. The function of the product seldom changes dramatically.

A modular Innovation usually takes place in complex products or processes with many
sub units and functions. This type of innovation can be a radical innovation of a certain part of
a total product. A new personal computer may have a new central processing unit, but without
accompanying software, interfaces, memory and buffer units, it could not be regarded as a
radical new product innovation. In this case a neural network computer or something completely
new, would be considered a radical innovation.

Modular innovation is related to radical innovation in the nature of its implementation. As

proposed above a modular innovation represents a radical innovation in a single part of a
system. Linking modular innovation directly with radical innovation, but in a diminished capacity.

2. Process versus Product Innovation

Innovation at the organizational level involves both the creation of new products, and
improvement in the process of producing these products. These two aspects of innovation can
be actively managed as different but interrelated entities. However, there is a clear time lag
between product and process innovation /different but interrelated entities.

The dominant design innovation-cycle in the figure shows the increasing volume of new
products in the section where a dominant design has yet to emerge. As shown in the figure a
large amount of product innovation occurs until the dominant design is established. This phase
is therefore called the fluid phase.

After the dominant design is establishment, the focus shifts to improving the efficiency of
manufacturing and production of the product. This results in higher product innovation and is
called the transitional phase.

Finally the product enters the specific pattern in its lifecycle, where incremental product
and process innovation occurs. Specializing the product further with regard to customer needs
46

or demands. This phase is highly dangerous since technology lock-in often occurs, resulting in
low firm agility, and ultimately no way of adapting to new demands or technological evolution.

Organizations need to take the nature of product and process innovation into account,
when developing future strategies.

Process Innovation can be described as improving or changing current procedures and

techniques used in the production of products. Any improvement to current manufacturing,
delivery, packaging, marketing, project management, etc., can be considered a process
innovation.

Product innovation is often associated with New Product Development (NPD) and not
necessarily with innovation. However, product innovation forms the core of innovative organization
and offers incredible competitive advantage in new as well as established markets. Although
related to process innovation, product innovation is much more of a process than a single
implementation or improvement. Product innovation is often a shot in the dark with the hope of
hitting the right market with the right product at the right price.

3. Procedure innovation (or process innovation)

Innovation that changes the management procedures is a good example of this kind of
innovation. This innovation has no direct influence on the products size, shape or features but
can cause the process of producing the product to improve. In this way a procedure innovation
is a process innovation since it improves the manufacturing or production process.

Service Innovation (or product innovation)

In a service organization the product is supplying a service to the client. In this regard, the
service becomes the product of the organization, since it generates income. Organizations like
banks and repair service stations have many different types of ‘packages’ they offer, and each
of this represent a certain service to the client.

Procedure and service innovation can clearly be incorporated into the larger picture of
process and product innovation. But they are often difficult to manage or audit due to their
qualitative nature.
 47

4. Disruptive versus Sustaining Innovation

Christensen elaborates on the concept of disruptive and sustaining technologies yet his
conclusions and remarks may be applied in the field of technological innovation as well. He
proposes the existence of disruptive technologies that have the ability to change the industry
paradigm as well as the dominant design. The examples Christensen use, are from the computer
hard disk industry where a simple size reduction, had a major influence. In this example he also
refers to the sustaining technologies which do not necessarily change the current paradigm.

Christensen describes sustaining technologies as those that fall within the limits and
boundaries of the current technology trajectories and therefore only serve to incrementally
improve the product. These technologies build upon the previous ones and are mostly well
known in every organization in the industry. Although many resources are spent on advancing
the current sustaining technologies, they will not enable the organization to break free of the
current paradigm.

For a paradigm breaking technology Christensen propose doing disruptive technology

development. In the Hard Disk Storage industry for instance, the shift from five and a half inch
drives to three and a half inch drives, were such an paradigm shift. Christensen defines disruptive
technologies, as often simpler and of poor quality, than current technology, yet with a definite
niche market. The disruptive technology should also have higher limits than the current one.
Then when disruptive technologies are tumed into disruptive innovation, they often have the
power to unsettle powerful industries.

5. Market Pull versus Technology Push Innovation

In this regard, innovation can be seen in two lights, and the distinction lies between listening
to the market or the scientists. An innovation starting with an identified.

customer/market need, is called a market pull33 innovation, while an innovation ,based

on new technology or ,bright is called a technology push innovation.

Both these innovations occur frequently but usually in different markets and environments.
A technology push innovation, for instance, occurs in a research and development rich
environment. On the other hand, customer based or service based institutions make mostly
use of market pull innovations.
48

Market pull innovation needs a strong customer base and an information gathering
mechanism to qualify their needs. Since the customer/market actually asks for a new innovation,
little in the form of direct radical creativity is needed. A well-oiled research and development
team however, has to translate the needs of the customer/market into practical product proposals.
In this regard the organization doing the innovation has to continually have good contact with
the customer/market to ensure the product meets their expectations.

Technology push innovation on the other hand needs a strong technology base. By doing
basic ‘blue sky’ research, new materials, methods and techniques are discovered. When these
new ideas are incorporated into products, technology push innovation occurs. Although a need
for this new technology driven products often exists, there might not always be one. When this
happens, the customer/market is often ignorant of the characteristics and advantages of the
product, and needs to be educated. A lot of market development is usually required to launch
such a technology driven product

5.5 Innovation Process

1. Analytical planning – Carefully identifying the product or service features, design as
well as the resources that will be needed.

2. Resource organization – Obtaining the required resources, materials, technology,

human or capital resources.

3. Implementation – Applying the resources in order to accomplish the plans

4. Commercial application – The provision of value to customers, reward employees,

and satisfy the stake holders.

5.6 Creating and Identifying Opportunities for Innovation

To be successful entrepreneurs, we need to be continually innovating and looking for
opportunities to grow our startups. Here are four ways to identify more business opportunities.

1. Listen to potential clients and past leads

When any entrepreneur is targeting potential customers, listen to their needs, wants,
challenges and frustrations with the industry. Have they used similar products and services
before? What did they like and dislike? Why did they come to particular entreprenur? What are
their objections to an entrepreneur’s products or services?
 49

This will help an entrepreneur to find opportunities to develop more tailored products and
services, hone the target market and identify and overcome common objections.

2. Listen to customers

When an entrepreneur is talking to his customers listen to what they saying about the
industry, products and services. What are their frequently asked questions? Experiences?
Frustrations? Feedback and complaints?

This valuable customer information will help to identify key business opportunities to expand
and develop an entrepreneur’s current products and services.

3. Look at competitors

Do a little competitive analysis (don’t let it lead to competitive paralysis though) to see
what other startups are doing, and more importantly, not doing? Where are they falling down?
What are they doing right? What makes customers go to them?

Analyzing an entrepreneur’s competitors will help his to identify key business opportunities
to expand his market reach and develop his products and services.

4. Look at industry trends and insights

Subscribe to industry publications, join relevant associations, set Google alerts for key
industry terms and news and follow other industry experts on social media.

Absorb oneself in his own industry and continually educate himself on the latest techniques
and trends.

The 7 Sources of Innovative Opportunity

The 7 sources of innovative opportunity were listed by Peter Drucker in his book “Innovation
and Entrepreneurship. If you’re unaware, Peter Drucker is considered one of the truly great
management consultants. He wrote 39 books and is considered a seminal thinking in the field
of management.

The following are 7 sources of innovative opportunity.

50

The Unexpected

The market place is the number one area to look for opportunities. A good manager
should be constantly studying the market. Is a particular product or service in greater or lesser
demand than anticipated? Why? Is there a way we can exploit this unexpected success? What
has to happen if we want to convert this success into an opportunity?

The Incongruity

There is a discrepancy between what is and what should be. This is a key to developing
wildly successful businesses but it’s tricky. Facebook is a company that nailed it. Prior to the
social network’s prolific rise Myspace was the dominant player, but it had its downfalls.

Facebook wisely noted what Myspace was vs. what should be and built that platform. The
end result? A company that just had an IPO versus. one that has fallen off considerably.

One of the best places to look for incongruity is in your own customers. Their complaints
and unmet wants are all the hints you need.

Process Need

Process need involves identifying your company’s process weak spots and correcting or
redesigning them. This is a task oriented solution meaning that the source of innovation comes
from within your existing capabilities and ways of doing business – not the market. An example
might be a restaurant that identifies that people wait too long for their entrees and so decides to
hire another chef to speed up creation times. Essentially your company will want to look for all
weak links and eliminate them.

Industry and Market Structure Change

Your industry and the market are in continual flux. Regulations change and some product
lines expand while others shrink. Firms should continually be on the watch for this. One example
is deregulation. When a previously regulated industry becomes open there is historical
precedence for companies that enter early to be very successful. Other things to watch out for
are the convergence of multiple technologies and structural problems that occur from time to
time (often immediately following an industry boom).
 51

Demographics

We constantly see changes occur in populations, income levels, human capital (education)
and age ranges. Smart firms are constantly paying attention to this. When it comes to the baby
boomers businesses have been following them constantly as they got older. At present they are
one of the largest as well as the most affluent demographic groups with high levels of disposable
income. Combining demographic data with segmentation and targeting is a powerful method of
accurately meeting a target market’s desires.

Changes in Perception, Meaning, and Mood

Over time populations and people change. The way they view life changes, where they
take their meaning from, and how they feel about things also is modified over time and smart
companies must pay attention to this in order to capitalize (and avoid becoming forgotten, a
relic of ages past).

Here are two really good examples. First is a principle called “downaging” which refers to
people who look at 50 as being 40. Industries have responded to this, most notably in the
cosmetic and personal care industry which provides plenty of solutions to help these people
look younger. Full industries are creeping up that make people feel younger. Have you spotted
any lately? Religion is another example. Across the world we’ve seen Islam and atheism rise.
Companies should adapt as overall meaning changes in culture.

New Knowledge

As the speed of technological revolution increases there will be an ever increasing number
of opportunities that open up. The internet has been the most notable one in the last couple
decades but there have been a plethora of other industries and opportunities pop up as a result
of this technological revolution.

New knowledge is about more than just technology though, it’s about finding better ways
of doing things and improving processes. Your company should look to this new knowledge for
ways it can improve incrementally.

Intel does this constantly and it’s a major part of why they’re the leading processor
manufacturer today. Constantly paying attention to the latest in both academic research as well
as investing heavily in their own R&D, the company has managed to find continual sources of
innovation, driving its success.
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5.7 Innovations in Indian Firms

10 New Innovations that could change the world

Since 2001, the MIT Technology Review has released their list of the 10 most important
technological innovations that emerged each year. The editors selected each item based on its
potential to change the world. Previous years lists included epigenetics, wireless sensor networks,
grid computing, additive manufacturing, smart watches, and mobile 3-D. The 2014 list is just as
exciting.

1. Agricultural Drones

Farmers have begun to use agricultural drones adorned with cameras to improve the
treatment of their crops. The drones allow farmers a unique perspective that previously-used
satellite imagery could not provide. They help to expose issues with irrigation treatment, soil
variation, and distressed plants at a much lower cost than methods like crop imaging with a
manned aircraft. The success of the drones is made possible by technological advances in
GPS modules, digital radios, and small MEMS sensors. Together, these advances allow farmers
to bring greater precision to their craft in order to reap greater rewards.

2. Ultraprivate Smartphones

As concerns over personal privacy grow, particularly in terms of new technology, a

Maryland-based company seeks to provide an alternative. Silent Circle, encrypts clients’ voice
calls, text messages, and file attachments. Encryption prevents potential eavesdroppers from
listening in on phone calls and protects metadata. Silent Circle has big plans for the future
including a secure smartphone called Blackphone. Blackphone will utilize encryption tools
currently used by Silent Circle, as well as other software that will help secure data.

3. Brain Mapping

Neuroscientists have worked for decades to better understand how the brain functions.
Recent advances in brain mapping technology have made that ambitious task easier. An
international team of researchers at the Human Brain Project have created a three dimensional
atlas of the brain. The maps resolution is fifty times better than previous efforts. The atlas
creators digitally stitched together thousands of brain cross-sections. The map shows details
up to 20 micrometers in size—the estimated size of many human cells. While this is a huge
 53

advancement, scientists still aim to create a map that shows details at 1 or 2 micrometers,
rather than 20.

4. Neuromorphic Chips

Many companies around the globe are working towards blurring the lines between biological
systems and man-made creations. Qualcomm is making significant steps in developing artificial
intelligence system with the use of Neuromorphic Chips. These chips blend neurology into
traditional technologies like smartphone chips. Qualcomm is already testing chips in small robots
that allow the machines to perform tasks that typically require a custom computer. The chips
can process sensory data through sight and sound in order to respond in ways that are not
explicitly programmed. For example, the chips could anticipate user needs.

5. Genome Editing

Researchers in China created a pair of monkeys with specific genetic mutations. The
scientists used a new method of DNA engineering known as CRISPR. CRISPR allows scientists
to modify fertilized eggs. This innovation has great implications for the field of biomedicine. The
ability to alter DNA at specific locations on chromosomes makes it easier to study diseases.
Researchers at MIT have expressed interest in studying brain disorders like autism and
Alzheimer’s disease. CRISPR has the potential to aid researchers studying such ailments,
allowing them to identify what genetic mutations actually cause the disorders.

6. Microscale 3-D Printing

The potential of 3-D printing technology has many people excited about new applications.
But current printers have important limitations. Up until recently, most 3-D printers can only use
plastic. A group of researchers at Harvard University, led by Jennifer Lewis, have started to
develop new 3-D printer inks. Her team prints intricate objects using materials that are chosen
based on their mechanical properties, electrical conductivity, or optical traits. Eventually new
inks will enable a wider variety of functions, including artificial organ creation.

7. Mobile Collaboration

The current infrastructure for collaborating in a professional environment can be

counterproductive to getting work done. This problem is one that new apps like Quip aim to
solve. The intent is to develop a system where every step of the collaboration process happens
in the same digital space. It aims to create a more intimate experience by implementing chat
54

features and a Facebook-style news feed, in turn creating a more collaborative experience.
These new platforms aim to improve the efficiency and productivity of current workflows.

8. Oculus Rift

This spring, Facebook bought Oculus Rift for $2 billion, and for a good reason. The
company was born out of the mind of Palmer Luckey, a kid with no engineering education who
built the first prototype for the Rift when he was 16. Now 21, Luckey has created a product that
makes immersive video game play a reality. The Rift is designed to make users feel as though
they are actually inside the world of the game by following your movements in real time. While
video games are the target market for the Rift, the technology also has implications for architecture
design, emergency response training, phobia therapy, and much more.

9. Agile Robots

Taking a single step requires balance, coordination, force, and direction. Each of these
factors has presented unique challenges for engineers designing robots that can walk. Enter
Boston Dynamics who have experimented with the “dynamic balance”—a feature that allows
robots to maintain balance while walking. Recently, they successfully created a robot that can
walk across uneven and unsteady terrain. This new innovation opens doors for the greater use
of robots in emergency operations or helping elderly and disabled individuals with chores and
daily tasks. While the technology is still in the developmental stage, Boston Dynamics knows
that the robots need to walk, before they can run.

10. Smart Wind and Solar Power

One barrier to mainstream use of renewables is integrating sustainable energy sources

into the current power grid. Big data and artificial intelligence have made it easier to predict how
much power wind turbines will produce. Anticipating power fluctuations is key to developing
technologies for integrating wind and solar into the power grid.

5.8 Summary
Innovation is one of the underlying dimensions of entrepreneurship. It is a key function in
the entrepreneurial process. Without innovation, an entrepreneur cannot survive in the modern
competitive business world. Entrepreneurship is a creative and innovative response to the
environment and an ability to recognize, initiate and exploit an economic opportunity. An
 55

entrepreneur is an innovator who introduces who introduces something new in an economy.

There are four distinct types of innovation, Invention - Described as the creation of a new
product, service or process. Something that has not been tried before; Extension - The expansion
of an existing product, service or process. This would mean that the entrepreneur takes an
existing idea and applies it differently; Duplication - Copying (replicating) an existing product or
service and then adding the entrepreneurs own creative touch. In order to improve it; Synthesis
- A combination of more than one existing products or services in to a new product. or service.
This means that several different ideas are combined in to one new product or service.

5.9 Keywords
Extension

Innovation

Invention

Product Innovation

Process Innovation

Synthesis

5.10 Review Questions

1. Define Innovation. Enumerate the types of innovations.

2. Find out the ways to identify business opportunities.

3. Sketch out the process of Innovation.

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LESSON - 6
TECHNOLOGICAL INNOVATION
Learning Objectives

After completing this lesson, you must be able to:

 describe technological innovation.

 narrate the process of technological innovation.

 list out the advantages of technological innovation.

Structure
6.1 Introduction

6.2 Definition

6.3 8 stages of the Technological Innovation Process

6.4 Advantages of Technological Innovation

6.5 How Intrapreneurs use innovation?

6.6 Summary

6.7 Keywords

6.8 Review Questions

6.1 Introduction
Technological innovation is an extended concept of innovation. While innovation is a rather-
well defined concept, it has a broad meaning to many people, and especially numerous
understanding in the academic and business world.

Innovation refers to adding extra steps of developing new services and products in the
marketplace or in the public that fulfill undressed needs or solve problems that were not in the
past. Technological Innovation however focuses on the technological aspects of a product or
service rather than covering the entire organization business model. It is important to clarify
that Innovation is not only driven by technology.
 57

6.2 Definition
Technological innovation is the process where an organization (or a group of people
working outside a structured organization) embarks in a journey where the importance of
technology as a source of innovation has been identified as a critical success factor for increased
market competitiveness. The wording “technological innovation” is preferred to “technology
innovation”. “Technology innovation” gives a sense of working on technology for the sake of
technology. “Technological innovation” better reflects the business consideration of improving
business value by working on technological aspects of the product or services. Moreover, in a
vast majority of products and services, there is not one unique technology at the heart of the
system. It is the combination, the integration and interaction of different technologies that make
the product or service successful.

6.3 8 stages of Technological Innovation Process

1- Basic research

Basic research is that phase of the technological innovation process that only occurs in
large companies, usually in the pharmaceutical, energy and information technology sectors,
which keeps research and development departments continuously abreast of the state of the
art technologies that most impact their organizations.

2- Applied research

When it detects some specific market needs that may represent an opportunity to develop
a sustainable competitive advantage for the business, the company searches among the
technologies that dominate the way to solve this problem. At this point, you can integrate existing
technologies creatively and innovatively or really develop something totally new.

3- Development

When reaching a solution to the market need, it’s time to develop the product, service or
process that will be marketed or employed. For this, a prototype is developed that must be
tested, preferably with the help of the public that will use it. Two interesting approaches to this
stage of the technological innovation process can be used:

 Design thinking, which takes into account how people interact with innovative products
and services
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 Scrum, which promotes small iterations, incremental advances in the prototype and the
rest of the innovation process, always based on the needs of those who will use it.

4- Engineering

With the prototype set, you have to turn it into a scalable product or service that can be
mass-produced or meet the specific needs of an industry. Materials, suppliers, appropriate
forms of storage and transportation are searched, such as connecting parts and benefiting
inputs, defining which professionals will need to be hired and trained, among other measures.

5- Manufacture

This is one of the most important aspects of the technological innovation process. It is
time to define the best way to deliver the solution created to the final customer, with efficiency
and quality.

6- Marketing

With the product or service ready to be released, it’s time to do concept tests, market
research and market testing to see if any adjustments are still required depending on how their
acceptance and distribution is taking place in test markets.

7- Promotion

Once the market tests are done, the product or service is launched nationally or globally,
depending on the markets the company serves. This stage of the technological innovation
process can use agile marketing, which employs Scrum and Kanban methodologies to launch
the products and services rapidly to achieve results as soon as possible.

8- Continuous improvement

Once launched, both the product or service and the process flows used to produce and
deliver them to end customers are constantly measured and analyzed, with the aim of looking
for ways to improve them even more, adding even more perceived value to the final customers.

6.4 Advantages of Technological Innovation

Technological innovation increases knowledge, and makes more options available. On
the whole, evidence suggests that technological innovation has increased GDP and standards
of living worldwide. The following advantages are also listed:
 59

1. Higher Profit

New technologies and innovations can benefit your business in a number of ways. You
can get higher profits as new technologies increase work potency, which in turn, improves
productivity. Cost efficiency is another way innovation results in higher profits. Cost competence
is an advantage in some ways and a disadvantage in others. As technology makes advancements
in existing processes and new ways to achieve tasks, machines can produce at a rate that is
double the amount that humans can in certain businesses. This results in cost savings for
business owners, allowing them to invest in growth in other areas of the firm, which contributes
on an active level to higher profits and the economy as a whole.

2. Fast Access to Information

You can get quick access to information with the aid of a computer and the internet – two
of the most beneficial technological advances in the recent times. The search engines on the
web help you find information on any topic that you are searching for. Follow the popular mantra
when you’re confused and “Google it”. The whole wide world of information is literally at your
fingertips. Gone are the days when you had to write letters to interact with people staying far
away. Now, you have unlimited access in sending emails, texts, tweets, Facebook messages,
Skype messages to people that you miss and you get their reply in seconds.

3. Advancement in All Industries

Technology inventions show people a more practical way to do things, and these methods
get results. For example, education has remained significantly enhanced by the technological
advances of computers. Students can learn on a global scale without ever leaving their
classrooms. Agricultural processes that once needed handfuls upon dozens of individual
employees will now be machine-driven, due to advancing technology, which means cost-efficiency
for farmers. Medical findings occur at a much faster rate, thanks to machines and computers
that help in the research process and allow for more serious educational research into medical
matters. Medical technology is essential to people’s health and improved condition of life.

Disadvantages of Technological Innovation

Technological innovation also, however, poses some risk of negative externalities, e.g., -
pollution;-agricultural and fishing technologies can result in the erosion, elimination of natural
habitats, and the depletion of ocean stocks; -medical technologies can result in unanticipated
60

consequences such as antibiotic-resistant strains of bacteria and viruses, or moral dilemmas

regarding the use of genetic modification such as externalities. Technological innovation may
(or has) lead to the loss of diversity in culture and traditions.

6.5 How Intrapreneurs use Innovation?

You innovation as an intrapreneur is what sets the role apart the most from an entrepreneur.
Entrepreneurs are about solving mass consumer problems in new, creative ways. Intrapreneurs
are about increasing productivity, saving costs, making staff members’ lives easier and making
your boss look good. Your primary customers are your company’s customers (which is actually
a positive thing) and your stakeholders are people you (hopefully) already hold good relationships
with.

Make the Company more Money

Let’s start with the finances. In any corporate job, more money = success. If you can find
a way for your company to squeeze more money out of their existing, market-proven customers
you’re on a sure path to the top. Getting more customers and getting more out of your existing
customers are two very different ball games that feed into each other. Happier, spending
customers will talk to potential customers and more money is made for the company. This
makes everybody up the chain happier and you will receive excellent recognition for your work.

This could be a new product offering, a new feature that can be charged or a new service
offering that is in hot demand. Sometimes the holes in your offerings are glaringly obvious,
sometimes they require a little poking. I recommend trying to find something that’s obvious to
start and tackle the hairier problems later when you’ve got the support of your boss.

Make your Customers Happier

Customer experience is the holy grail of success. Happy customers = lower churn =
higher profits. It’s also a chance to treat your customers like humans instead of numbers from
the deep-department you may work from – removed from the CX team. This is actually my
favourite place to innovate as it’s what can make people smile, boost a brand image and in
general make the world a better place (sorry, I had to).

Look through customer complaints, feedback forms and surveys. Try to find patterns of
things that are making your customers consistently unhappy or are asking for improvement.
You could then use an effort/impact matrix to find the lowest hanging fruit and use that as your
first initiative.
 61

Make your company more productive

Another category of initiatives that will surely garner attention and support is to make the
business more efficient. Find out what is currently slow, repetitive and boring – to which there
will usually be an innovative solution. Look at processes or systems that are time and resource
heavy and figure out how these could be automated, augmented and sped up. Speeding up just
one process can have a huge knock-on effect – and be used as a case study to build your
argument for further innovative initiatives.

With the emergence of new technologies like chatbots and machine learning, this is the
ripest area for disruption. How can these smart technologies be used to make the business
more efficient and save money in the long term? What problems have been unsolved until
now? An added bonus of leveraging new technology is that it gives your brand an edge. It’s a
new marketing tool telling your current and future customers “Hey! We’re innovative, and we’re
not just saying that. We use X to make your life better”.

Most importantly, make your Boss's Life easier

This is really the ticket to getting more freedom from the get-go. You’ve got a winner if
your first innovation initiative is something that directly affects your boss or manager in a positive
way. This might be something as simple as making a positive change to how your team manages
feedback or pre-collecting information for a monthly review via a chatbot. If you can do something
that makes your boss look good to their superiors – even better. This is tricker though, as you
have to work closely with them to figure out what their problems are and what they need to
solve them.

Once you gather the recognition from making their life easier they will give you more
autonomy to make more positive and innovative changes throughout the company. They will
begin to recommend you to their superiors when curly problems arise as the go-to problem
solver. Your recognition will rise up the ranks and you will be rewarded handsomely for your
efforts.

Turn the company into an Innovation 'Future Maker'

This is probably the hardest thing to target. This requires having your finger on the pulse
of your industry and even looking ahead to what the future holds for you and your competitors.
Identifying trends that will change the way your industry works before they happen is the first
step. The second – and hardest step – is making changes within your company to move in that
direction before the competition does.
62

First to market is something that startups deal with once during their lifecycle. Chances
are your company missed the boat or it was so long ago that it’s irrelevant today. Except it’s not!
If you can move an aged business into a new niche giving the company a competitive, first
mover advantage into a new market or technology this benefits everyone involved.

The key here is to look for any problems that the company you work for is having trouble
solving – whether it’s a big or a small issue. It’s generally good to start small though.

6.6 Summary
Technological innovation is the process where an organization (or a group of people
working outside a structured organization) embarks in a journey where the importance of
technology as a source of innovation has been identified as a critical success factor for increased
market competitiveness. Basic research, applied research, development, engineering,
manufacture, marketing, promotion and continuous improvement are the stages of Technological
innovation Process. Technological innovation increases knowledge, and makes more options
available. On the whole, evidence suggests that technological innovation has increased GDP
and standards of living worldwide.

6.7 Keywords
Applied research
Basic research
Development
Engineering
Marketing
Manufacturing

6.8 Review Questions

1. Elaborate the Process of Technological Innovation.

2. What are the advantages of Technological Innovation?

3. How intrapreneurs use innovation to create change from the inside out?
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LESSON - 7
LICENSING AND PATENT RIGHTS
Learning Objectives

After completing this lesson, you must be able to:

 list out the advantages and disadvantages of licensing.

 discuss the features of Patents Act, 1970.

 detail the types of patents.

 explain the procedure to get patents.

Structure
7.1 Introduction

7.2 Licensing

7.3 Patent Act, 1970

7.3.1 What can be patented?
7.3.2 Types of patent
7.3.3 Procedure to get patent

7.4 Revocation of Patents

7.5 Summary

7.6 Keywords

7.7 Review Questions

7.1 Introduction
In the previous lesson, the process of technological innovation was explained. The features
of patent act will be discussed in this lesson. Also the types of patents and procedure to get
patents will be detailed.

7.2 Licensing
The granting of permission to use intellectual property rights, such as trademarks, patents,
or technology, under defined conditions.
64

Patent Licensing

A licensor may grant permission to a licensee to conduct activities which would otherwise
be within the licensor’s patented exclusive rights. Under U.S. patent law, those activities are to
make, use, sell, offer for sale, or import a patented product, or to perform a patented
process.[4] The term of a patent license may be a “fixed” (i.e., specified) term, such as 5 years,
or may be for the life of the patent (i.e., until the patent expires). A patent is by its nature limited
in territorial scope; it only covers activity within the borders of the country issuing the patent.
Accordingly, a patent license does not require a territory provision.

The consideration provided by the licensee in return for the patent license grant is called
a patent royalty payment. In a “paid-up” license, the “lump sum” royalty payment is a specified
monetary amount, typically due shortly after the effective date of the patent (e.g., within 15
business days of the effective date), and no further payments are required. Otherwise, the
royalty payment is a “running royalty,” typically payable on an annual basis. The annual royalty
may be a specified amount (e.g., one million dollars each year), or an amount proportional to
the volume of licensed activity conducted by the licensee (e.g., one dollar per unit of licensed
product sold by the licensee that year, or one percent of the net sales amount of the licensed
products sold by the licensee that year).

A Licensing agreement is an arrangement whereby a licensor grants the right to intangible
property to another entity for a specified period, and in return, the licensor receives a royalty fee
from the licensee. Intangible property includes patents, inventions, formulas, processes, designs,
copyrights, and trademarks.

Advantages of a Licensing Agreement:

 A primary advantage of a licensing agreement, the firm does not have to bear the
development and risks associated with opening a foreign market. It is very attractive for
firms lacking the capital to develop operations overseas. Licensing can be attractive when
a firm is unwilling to commit substantial financial resources to an unfamiliar or politically
volatile foreign market. Licensing is primarily used with a firm wants to participate in a
foreign market but is prohibited because of barriers to investment.

Disadvantages of a Licensing Agreement

 First, it does not give a firm the tight control over manufacturing, marketing, and strategy
that is required for realizing experience curve and location economies.[5]
 65

 Second, competing in a global market may require a firm to coordinate strategic moves
across countries by using profits earned in one country to support competitive attacks in
another. Licensing limits a firm’s ability to do this.[5]

 Lastly, a third problem with licensing is the relationship of the economic theory of FDI.
This is associated with licensing technological know-how foreign companies. Technological
know-how constitutes the basis of many multi-national firms’ competitive advantages.
Most firms wish to control how their know-how is used, because they can lose control
easily. Many firms make the mistake of thinking they could maintain control over their
know-how within the licensing agreement.

Trademark and brand licensing

A licensor may grant permission to a licensee to distribute products under a trademark.

With such a license, the licensee may use the trademark without fear of a claim of trademark
infringement by the licensor. The assignment of a license often depends on specific contractual
terms. The most common terms are, that a license is only applicable for a particular geographic
region, just for a certain period of time or merely for a stage in the value chain. Moreover, there
are different types of fees within the trademark and brand licensing. The first form demands a
fee independent of sales and profits, the second type of license fee is dependent on the
productivity of the licensee.

When a licensor grants permission to a licensee to not only distribute, but manufacture a
patented product, it is known as licensed production.

7.3 Patent Act, 1970

The word Patent originated from the Latin Word “Patene” which means “to open”.

A Patent is a grant of property rights by the government to an inventor. Patent are exclusive
property rights that can be sold, transferred, willed, licensed or use as collateral, much like
other valuable goods.

(OR)

A patent describes an invention for which the inventor claims the exclusive right.

(OR)
66

A Patent is an intellectual property right relating to invention & is the grant of exclusive
right, for limited period, provided by the Government to the patentee

(OR)

A patent is a monopoly right to a person who has invented a new and useful article or it is
an improvement of an existing article or a new process of making an article.

Why patent is necessary ?

To encourage
research and Stimulate capital
development
Encourages
Induce an technology Encourages
inventor to development establishment of
disclose his new industries
invention

N E E D O F P AT E N T

CO P Y
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Invention

Indian Patent Act (Amendment), 2002 define the term invention as:

 “A new product or process involving an inventive step and capable of industrial

application.”

 “Inventive step” is the feature that makes the invention non-obvious (invention should
be sufficiently inventive) to a person skilled in the art.

 “Capable of industrial application” means an invention should have commercial

value in the market.

Who is an Inventor?

Any person who invents or discovers any new and useful:

 Process

 Machine

 Manufacture or

 Composition of matter, or

 Any new and useful improvement thereof, may obtain a patent.

7.3.1 What can be patented?

1. Process:

The word process as used in patents refers to new methods of manufacturing or new
technology procedures that can be validated as unique.

2. Machine :

The word machine in patent law means that the patent application is for a specific physical
item.

3. Manufacture:

The word manufacture refers to physical items that have been fabricated through new
combination of materials or technique applications
68

4. Composition of Matters

The law also permits patenting composition of matter. This category is related to compounds
such as synthetic material, medicines, cosmetics, fertilizing agents and biogenetics catalyst.

7.3.2 Types of Patent

Utility patents

A utility patent is granted for a product process, machine, method of manufacturing and
composition of matter.

Design Patents

Design patent are granted for any new or original ornamental design for an article of
manufacture. A design patent protects only the appearance of the article and not the article
itself. An investor can easily register both the utility patent and a design patent.

Plant Patent

In botanical terms, any new variety of plant that has been reproduced can be granted a
plant patent. The new plant must not exist in nature or in an uncultivated state.

7.3.3 Procedure to get Patent

A patent application can be filed at only of the four patent offices in India (Kolkata, Delhi,
Mumbai and Chennai).

The patent application passes through the following stages:

A. Filing

B. Publication

C. Examination

D. Oppisition

E. Grant

F. Fees for Filing Patent

G. Life & Duration

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(A) Filing

1. Applicant: An application for a patent can be filed by the true and first inventor. It can
also be filed the by the assignee or legal representative of the inventor.

2. Form of Application: Every application shall be accompanied by a provisional or complete

specification.

Provisional Patent Application

 An applicant may file a provisional specification containing incomplete & general description
of the invention.

 Objective of it is to fix the priority date

 Complete specification is to be filed within 12+3 (15 months) from the date of filing
provisional specification.

Complete Specification
 Submission of complete specification is necessary to obtain a patent it must be submitted
within 12 months of filing the provisional specification.

 It is not necessary to file an application with provisional specification before the complete
specification.

 An application with complete specification can be filed right at the first instance.

3. Contents of complete specification would include following

 Title of the invention

 Field to which the invention belongs

 Background of the invention including prior art giving drawbacks of the known inventions
and practices

4. Complete description of the invention along with experimental results

 Drawings (if necessary)

Claims (which are statements of technical facts expressed in legal terms, related to the
invention on which legal proprietorship is being sought. therefore the claims have to be
drafted very carefully).
70

(B) Publication
 A patent application will be published on expiry of eighteen months after the priority date.
It can be published earlier, if such a request is made by the applicant.

 On publication, specification including drawings and deposits shall be open for public
inspection.

 The rights of the patentee start from the date of publication but they cannot be enforced
until after patent grant.

(C) Examination of Patent

Patent Application on method or procedure of manufacturing substance will be examined

only after the request filed to the patent office within 48 months from the date of patent application

(D) Opposition

1. Pre-grant Opposition:-

Any person can file an opposition for grant of patent after the application has been
published.

Opposition may be filed on any of the following grounds:

a. Non-compliance (failure to act) of patentability requirements.

b. Nondisclosure or Wrongful disclosure of genetic resources or traditional knowledge

2. Post-grantOpposition:-

Any person can file an opposition within a period twelve months after the grant of a
patent.

It can be filed based on the following grounds:

a. Wrongful obtainment of the invention by the inventor.

b. Publication of the claimed invention before the priority date.

c. Sale or Import of the invention before the priority date.

d. Public use or display of the invention.

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e. The invention doesn’t satisfy the patentability requirements.

f. Disclosure of false information to patent office.

g. Application for the invention is not filed within twelve months from the date of convention
application.

h. Nondisclosure or wrongful disclosure of the biological source.

i. Invention is anticipated by traditional knowledge.

(E) Grant

 If the application satisfies all the requirements of the patent act, the application is said to
be in order for grant.

 A granted patent gives the patent holder the exclusive right to make, use, sell, offer for
sale and import the product or use the process

(F) Fees For Filing Patent

 The Government fee for filing a patent application in India is Rs.750/- for individuals and
Rs.3,000/- for legal entities.

 No fee for 1st and 2nd year

 Renewal fee, on yearly basis, is required to be paid for 3rd to 20th for keeping the patent
in force.

 Patent lapses if renewal fee is not paid within the prescribed period

(G) Life & Duration

 Term of the patent is 20 years from the date of filling for all types of inventions.

 Priority date- first to file

 The date of patent is the date of filing the application for patent.

 The term of the patent is counted from this date.

Is a Patent Granted in one country enforceable in other countries?

 No, there is nothing like a global patent or a world patent. Patent rights are essentially
territorial in nature.
72

 Granting a patent in one country of the Union does not force other countries to grant the
patent for the same invention.

 The refusal of the patent in one country does not mean that it will be terminated in all the
countries

Patent Holders In INDIA

 The list of top 10 patents holders in India comprises only pharmaceutical and bio-tech
companies.

 In India, 184 patents are held by the Council of Scientific and Industrial Research, followed
by ‘Ranbaxy’

 While the top 10 patents holders across the world are IT companies, in India, no IT firm
has patents.

7.4 Revocation of Patents (Section 64, 66 and 85)

The patent may be revoked on any of the following grounds:

1. Inventions Earlier Claimed

The material date as far as validity of the patent is concerned must be the date on which
the complete specification having been accepted, is finally published and therefore comes to
the notice of the public who are going to perform it.

2. Patentee not Entitled to apply

 That the patent was granted on the application of a person not entitled under the provisions
of this act to apply.

 Provided that a patent granted under the Indian Patents and Designs Act shall not be
revoked on the ground that the applicant was the communicators of the inventions in
India.

3. Patent wrongfully obtained

 That the patent was obtained wrongfully in contravention of the rights of the petitioner or
any person under or through whom he claims (statements of technical facts)
 73

4. Subject claim not an Invention:

 That the subject of any claim of the complete specification is not an invention within the
meaning of this act.

5. Claims (statements of technical facts) not new:

 That the invention so far as claimed in any clam of the complete specification is not new.

6. Inventions is obvious and no Inventive step:

 That the invention so far as claimed in any claim of the complete specification is obvious
or does not involve any initiative step.

7. Invention not useful:

 That the invention, so far as claimed in any claim of the complete specification is not
useful.

8. Invention not sufficiently and fairly described:

 That the complete specification does not sufficiently and fairly describe the inventions
and the method by which it is to be performed, that is to say that the description of the
method or the instructions for the working of the invention as contained in the complete
specification are not by themselves sufficient.

9. Claim not sufficiently and clearly defined:

· That the scope of any claim of the complete specification is not sufficiently and clearly
defined or that any claim of the complete specification is not fairly based on the matter
disclosed in the specification.

10. False Suggestion:

 That the patent was obtained on a false suggestion or representation.

11. Claim not patentable

 That the subject of any claim of the specification is not patentable under this Act.

12. Inventions secretly used before priority date of claim:

l That the invention so far as claimed in any claim of the complete specification was secretly
used in India, before the priority date of the claim.
74

13. Failure to disclose Information:

 That the application for the patent has failed to disclose the required information.

14. Patent has expired:

A patent which has already expired may be revoked.

7.5 Summary
Licensing is the granting of permission to use intellectual property rights, such
as trademarks, patents, or technology, under defined conditions. A licensor may grant permission
to a licensee to conduct activities which would otherwise be within the licensor’s patented
exclusive rights. A Patent is a grant of property rights by the government to an inventor. Patent
are exclusive property rights that can be sold, transferred, willed, licensed or use as collateral,
much like other valuable goods A patent describes an invention for which the inventor claims
the exclusive right A Patent is an intellectual property right relating to invention & is the grant of
exclusive right, for limited period, provided by the Government to the patentee A patent is a
monopoly right to a person who has invented a new and useful article or it is an improvement of
an existing article or a new process of making an article. The types of patents are utility, design
and plant patents. The patent application passes through the stages such as filing, publication,
examination, opposition, grant, fees for filing patent and life and duration.

7.6 Keywords
Invention

Licensing

Patent

Trademark

7.7 Review Questions

1. Bring out the advantages and disadvantages of licensing.

2. Write a detailed note on Patents Act, 1970.

3. Why Patent is needed? Elaborate.

4. Elaborate the procedure to get Patents.

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LESSON - 8
NEW VENTURE CREATION
Learning Objectives

After completing this lesson, you must be able to:

 list out the steps to start new venture.

 identify opportunities for new venture creation.

 describe environmental scanning,

 spell out the need and importance of environmental scanning.

· define feasibility study and enlist the elements and types of feasibility study.

Structure
8.1 Introduction

8.2 How does one start a new venture?

8.3 Identifying Opportunities for New Venture Creation

8.4 Environmental Scanning

8.5 Need for Environmental Scanning

8.6 Environment Scanning for New Venture

8.7 Feasibility Study

8.8 Summary

8.9 Keywords

8.10 Review Questions

8.1 Introduction
A business venture may also be considered as a small business. Many ventures will be
invested in by one or more individuals or groups with the expectation of the business bringing in
a financial gain for all backers. Most business ventures are created based on demand of the
market or a lack of supply in the market.
76

8.2 How does one start a new venture?

 Important issues in new venture creation:

- Does the entrepreneur have good ideas and the courage to give them a chance?

- Is the entrepreneur prepared to meet and master the test of strategy and competitive
advantage?

- Can the entrepreneur identify a market niche that is being missed by other established
firms?

- Can the entrepreneur identify a new market that has not yet been discovered by existing
firms?

- Can the entrepreneur generate first-mover advantage by exploiting a niche or entering a

market before competitors?

 Questions that keep a new venture customer focused …

- Who is your customer?

- How will you reach key customer market segments?

- What determines customer choices to buy or not buy this product or service?

- Why is your product or service a compelling choice for the customer?

- How will you price your product or service for the customer?

- How much does it cost to make and deliver your product or service?

- How much does it cost to attract a customer?

- How much does it cost to support and retain a customer?

8.3 Identifying Opportunities for New Venture Creation

The identification and evaluation of opportunities is one of the entrepreneur’s most
important tasks. Good opportunities address important market needs. Examining social,
technological, and economic trends can lead to the identification of emerging needs.
Entrepreneurs seek to build new ventures and to act on a good opportunity when it matches
their capabilities and interests, exists in a favorable context, exhibits the potential for sustainable
long-term growth, and facilitates the acquisition of required resources. Such opportunities offer
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a reasonable chance of success and require the entrepreneur to make a difficult decision to act
or not act. The choice of an opportunity and the decision to act is a critical juncture in the life of
an entrepreneur. With the decision to act, the entrepreneur prepares a business summary for
the venture that is used to test the new venture with potential investors, employees, and
customers.

In general sense, the term opportunity implies a good chance or a favourable situation to
do something offered by circumstances. In the same vein, business opportunity means a good
or favourable change available to run a specific business in a given environment at a given
point of time.

The term ‘opportunity’ also covers a product or project. Hence, the identification of an
opportunity or a product or project is identical and, therefore, all these three terms are used as
synonyms. The Government of India’s “Look East Policy” through North East is an example of
‘opportunity’ to do business in items like tea, handicrafts, herbals, turmeric, etc.

Opportunity identification and selection are like comer stones of business enterprise.
Better the former, better is the latter. In a sense, identification and selection of a suitable business
opportunity serves as the trite saying ‘well begun is half done.’ But, it is like better said than
done. Why? Because if we ask any intending entrepreneur what project or product he/she will
select and start as an enterprise, the obvious answer he/she would give is one that having a
good market and is profitable. But the question is how without knowing the product could one
know its market?

Whose market will one find out without actually having the product? Whose profitability
will one find out without actually selling the product? There are other problems, besides. While
trying to identify the suitable product or project, the intending entrepreneur passes through
certain processes.

The processes at times create a situation, or say, dilemma resembling ‘Hen or Egg’
controversy. That is, at one point, the intending entrepreneur may find one product or project as
an opportunity and may enchant and like it, but at the other moment may dislike and turn down
it and may think for and find other product or project as an opportunity for him/her. This process
of dilemma goes on for some intending entrepreneurs rendering them into the problem of what
product or project to start. Then, how to overcome this problem of product identification and
selection?
78

One way to overcome this dilemmatic situation is to know how the existing entrepreneurs
identified the opportunity and set up their enterprises. An investigation into the historical
experiences of Indian small enterprises in this regard reveals some interesting factors. To mention
the important ones, the entrepreneurs selected their products or projects based on:

a. Their own or partners’ past experience in that business line;

b. The Government’s promotional schemes and facilities offered to run some specific
business enterprises;

c. The high profitability of products;

d. Which indicate increasing demand for them in the market?

e. The availability of inputs like raw materials, labour, etc. at cheaper rates;

f. The expansion or diversification plans of their own or any other ongoing business known
to them;

g. The products reserved for small-scale units or certain locations.

Now, having gained some idea on how the existing entrepreneurs selected products/
projects, the intending entrepreneur can find a way out of the tangle of which opportunity/
product/project to select to finally pursue as one’s business enterprise. One of the ways employed
by most of the intending entrepreneurs to select a suitable product/project is to firstly generate
ideas about a few products/ projects. Accordingly, what follows next is a discussion idea
generation about products.

Idea Generation:

Sources of Ideas:

In a sense, opportunity identification and selection are akin to, what is termed in marketing
terminology, ‘new product development.’ Thus, product or opportunity identification and selection
process starts with the generation of ideas, or say, ideas about some opportunities or products
are generated in the first instance.

The ideas about opportunities or products that the entrepreneur can consider for selecting
the most promising one to be pursued by him/her as an enterprise, can be generated or
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discovered from various sources- both internal and external.

These may include:

(i) Knowledge of potential customer needs,

(ii) Watching emerging trends in demands for certain products,

(iii) Scope for producing substitute product,

(iv) Going  through  certain  professional  magazines  catering  to  specific  interests  like
electronics, computers, etc.,

(v) Success stories of known entrepreneurs or friends or relatives,

(vi) Making visits to trade fairs and exhibitions displaying new products and services,

(vii) Meeting with the Government agencies,

(viii) Ideas given by the knowledgeable persons,

(ix) Knowledge about the Government policy, concessions and incentives, list of items
reserved for exclusive manufacture in small-scale sector,

(x) A new product introduced by the competitor, and

(xi) One’s market insights through observation.

In nutshell, a prospective entrepreneur can get ideas for establishing his/ her enterprise
from various sources. These may include consumers, existing products and services presently
on offer, distribution channels, the government officials, and research and development.

A brief mention about each of these follows in turn:

Consumers: No business enterprise can be thought of without consumers. Consumers

demand for products and services to satisfy their wants. Also, consumers’ wants in terms of
preferences, tastes and liking keep on changing. Hence, an entrepreneur needs to know what
the consumers actually want so that he/she can offer the product or service accordingly.
Consumers’ wants can be known through their feedback about the products and services they
have been using and would want to use in future.
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Existing Products and Services: One way to have an enterprise idea may be to monitor
the existing products and services already available in the market and make a competitive
analysis of them to identify their shortcomings and then, based on it, decide what and how a
better product and service can be offered to the consumers. Many enterprises are established
mainly to offer better products and services over the existing ones.

Distribution Channels: Distribution channels called, market intermediaries, also serves

as a very effective source for new ideas for entrepreneurs. The reason is that they ultimately
deal with the ultimate consumers and, hence, better know the consumers’ wants.

As such, the channel members such as wholesalers and retailers can provide ideas for
new product development and modification in the existing product. For example, an entrepreneur
came to know from a salesman in a departmental store that the reason his hosiery was not
selling was its dark shade while most of the young customers want hosiery with light shade.
The entrepreneur paid heed to this feedback and accordingly changed the shade of his hosiery
to light shade. Entrepreneur found his hosiery enjoying increasing demand just within a month.

Government: At times, the Government can also be a source of new product ideas in
various ways. For example, government from time to time issues regulations on product
production and consumption. Many a times, these regulations become excellent sources for
new ideas for enterprise formation.

For example, government’s regulations on ban on polythene bags have given new idea to
manufacture jute bags for marketing convenience of the sellers and buyers. A prospective
entrepreneur can also get enterprise idea from the publications of patents available for license
or sale.

Besides, there are some governmental agencies that assist entrepreneurs in obtaining
specific product information. Such information can also become basis for enterprise formation.

Research and Development: The last but no means the least source of new ideas is
research and development (R&D) activity. R&D can be carried out in-house or outside the
organization. R&D activity suggests what and how a new or modified product can be produced
to meet the customers’ requirements.

Available evidences indicate that many new product development, or say, new enterprise
establishments have been the outcome of R&D activity. For example, one research scientist in
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a Fortune 500 company developed a new plastic resin that became the basis of a new product,
a plastic molded modular cup pallet. Most of the product diversifications have stemmed from
the organization’s R&D activity.

Methods of Generating Ideas: As seen above, there could be variety of sources available
to generate ideas for enterprise formation. But, even after generating ideas to convert these
into enterprise is still a problem for the prospective entrepreneur. The reason is not difficult to
seek.

This involves a process including first generating the ideas and then scrutinizing of the
ideas generated to come up with an idea to serve as the basis for a new enterprise formation.
The entrepreneur can use several methods to generate new ideas. However, the most commonly
used methods of generating ideas are: focus groups, brainstorming, and problem inventory
analysis.

These are discussed as follows:

Focus Groups: A group called ‘focus group’ consisting of 6-12 members belonging to
various socio-economic backgrounds are formed to focus on some particular matter like new
product idea. The focus group is facilitated by a moderator to have an open in-depth discussion.
The mode of the discussion of the group can be in either a directive or a non-directive manner.

The comment from other members is supplied with an objective to stimulate group
discussion and conceptualize and develop new product idea to meet the market requirement.
While focusing on particular matter, the focus group not only generates new ideas, but screens
the ideas also to come up with the most excellent idea to be pursued as a venture.

Brainstorming: Brainstorming technique was originally adopted by Alex Osborn in 1938

in an American Company for encouraging creative thinking in groups of six to eight people.
According to Osborn, brainstorming means using the brain to storm the issue/problem.
Brainstorming ultimately boils down to generate a number of ideas to be considered for the
dealing with the issue/problem.

However, brainstorming exercise to be effective needs to follow a modus operandi involving

four basic guidelines:
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1. Generate as many ideas as possible.

2. Be creative, freewheeling, and imaginative.

3. Build upon piggyback, extend, or combine earlier ideas.

4. Withhold criticism of others’ ideas.

There are two principles that underlie brainstorming. One is differed judgment, by which
all ideas are encouraged without criticism and evaluation. The second principle is that quantity
breeds quality. The brainstorming session to be effective needs to work like a fun, free from any
type of compulsions and pressures.

Each member needs to have willingness and capacity to listen to others’ thoughts, to use
these thoughts as a stimulus to spark new ideas of their own, and then feel free to express
them. As such, efforts are made to keep the brainstorming session free from any sort of
dominance and obstruction derailing and inhibiting discussion to proceed in a desired manner
to serve its purpose. A normal brainstorming session lasts for from ten minutes to one hour and
does not require much preparation.

Problem Inventory Analysis: Problem Inventory analysis though seems similar to focus
group method, yet it is somewhat different from the latter in the sense that it not only generates
the ideas, but also identifies the problems the product faces. The procedure involves two steps:
One, providing consumers a list of specific problems in a general product category.

Two identifying and discussing the products in the category that, suffer from the specific
problems. This method is found relatively more effective for the reason that it is easier to relate
known products to a set of suggested problems and then arrive at a new product idea.

However, experiences available suggest that problem inventory analysis method should
better be used for generating and identifying new ideas for screening and evaluation. The
results derived from product inventory analysis need to be carefully screened and evaluated as
they may not actually reflect a genuine business opportunity.

For example, General Foods’ introduction of a compact cereal box in response to the
problem that the available boxes did not fit well on the shelf was not successful, as the problem
of package size had little effect on actual purchasing behaviour. Therefore, to ensure the better
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if not the best results, problem inventory analysis should be used primarily to generate product
ideas for evaluation.

All of above sources and methods may give a few ideas about the possible projects to be
examined as the final project or product. Following are some illustrative sources of generation
of business ideas:

a. Realizing that especially service class people find it inconvenient to take milk pot with
them to office that they need to buy milk while coming back from the office in the evening, to
provide milk in sachets or tetra packs could be a new business idea.

b. Having faced difficulty in finding out accommodation and transport facility while on
visits to a new/tourist place may give one an idea to start a travel agency providing complete
package of facilities to the visitors to a new / tourist place.

c. Knowing that many people have hobby or even develop passion for gardening may
give rise to an idea of setting up one’s own nursery.

d. Seeing that most of the people coming from outside to a particular place buy its unique
items as souvenir like tea from Assam, the Model of Taj from Agra, etc. may give idea to
produce the local item as souvenir.

e. Recognizing the increasing application of computers in offices as well as business

organizations, irrespective of its size, may give an idea to set-up a computer-training centre.

Once ideas have being generated following the above process, the next step comes is
identification of above generated ideas as opportunities.

Opportunity/Product Identification: After going through above process, one might have
been able to generate some ideas that can be considered to be pursued as ones business
enterprise.

Imagine that someone have generated the five ideas as opportunities as a result of above
analysis:

1. Nut and bolt manufacturing (industry)

2. Lakhani Shoes (industry)

3. Photocopying unit (service-based industry)

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4. Electro-type writer servicing (service-based industry).

4. Polythene bags for textile industry (ancillary industry)

An entrepreneur cannot start all above five types of enterprises due to small in size in
terms of capital, capability, and other resources. Hence, he/she needs to finally select one idea
which he/she thinks the most suitable to be pursued as an enterprise. How does the entrepreneur
select the most suitable project out of the alternatives available? This is done through a selection
process discussed subsequently

8.4 Environmental Scanning

Conceptual Framework of Environmental Scanning And Its Dimensions Crux of the
corporate planning system is analysis of strengths, weaknesses, opportunities and threats
(SWOT), which in itself rest upon environmental scanning. Environmental scanning is the process
of monitoring external environment as well as internal environment so as to spot out the
opportunities and threats stored in the development of the external environment and strengths
and weaknesses existing in the internal environment.

Concept of External Environment and Its Dimensions An organization’s external

environment, according to Gerald Bell, “consists of those things outside a company such as
customers, competitors, government units, suppliers, financial firms and labour pools that are
relevant to a company’s operations.”1 Philip Kotler, while defining external environment, observed
that “the environment is the totality of forces and institutions that are external and potentially
relevant to the firm and it consists of four levels-the task environment, the competitive
environment, the public environment and the macro environment.”

Thus, the external environment of a company’s business is the pattern of the external
conditions and influences affecting its life and development and consists of economic,
technological, competitive, political, and socio-cultural environments. External environmental
scanning, as stated above, is the process of evaluating the situation existing currently in the
external environment and the behavioral change likely to take place therein in future so as to
discern the emerging opportunities to be squeezed and the impending threats to be counteracted
through formulation of suitable strategy. Such appraisal is usually made up of economic,
technological, competitive, political demographic and socio-cultural forces of the external
environment. A brief discussion about nature of each of these environmental factors is discussed
in the following paragraphs
 85

I) Concept of External Environment

(a) Economic Environment

Economic environment, the most significant and pervasive component of the external
environment, is concerned with the analysis of all economic developments that directly and
indirectly affect the product-market complex of the company. The economic environment consists
of general economic condition, industrial condition and state of supply of essential resources
for production. The thrust of the appraisal of general condition of the domestic as well as foreign
economies is on gross national product (GNP), per capita income, pattern of income distribution,
consumption pattern and saving habits of the people, price level changes, balance of payments
positions (BPP), exchange rate trends, etc. A perceptive assessment ofthe dynamic environment
ofthe industry the company serves and of the industry it plans to enter demands analysis of the
long-term growth or decline of industry, stability of demand for products and stage in product
life cycle. The economic environment consists of certain major supply factors that directly bear
upon the operation of a company. Network of supplies of inputs such as natural resources,
materials, equipment, capital, labour management and infrastructure facilities constitute the
vital supply factors and visualization of the availability of these resources at reasonable price
forms significant part of the economic environment analysis.

(b) Technological Environment

The technological environment deals with the shape of manufacturing technology, rate of
development of new products and processes and new usage of existing products, rate of
technological obsolescence, etc. There are three major stages in the process of technological
changes viz., invention (the creation of new product or process), innovation (the introduction of
that product or process into use) and diffusion (the spread of the product or process beyond
first use). It is the diffusion ofthe technology, which is more amenable to forecasting than invention
or innovation. There are two major aspects of technological changes, which are relevant to
companies. The first is the change brought about for marketing reasons, often involving the
creation of entirely new products or new uses for existing products. Another aspect is change in
processes, production methods and other technology, which bring about change in the way in
which the existing product is made and packed. The basic content of the product to be offered
for sale may change marginally, but the way it is manufactured, is packed may be totally new,
For instance, production line may be completely automated, size of operations may be increased
and process of production control may be completely computerized. Further, maintenance
86

scenario may undergo drastic change resulting in change in the total cost structure. Technological
obsolescence may creep in very fast leading to under-recovery of the depreciation, increased
capital requirements and even premature scrapping of the plant. The technological change
may also bring dramatic change in the market structure of a company.

(c) Competitive Environment

In recent years, competitive environment the world over has tended to be fierce and
ferocious mainly due to technological restructuring, growing similarity of countries in terms of
available infrastructure, fluid global capital markets, growing adoption by most of the developing
nation the policy of integrating their economies to global economy and consequent liberalization
and deregulation and changing attitudes of the multitudes. Under the situation managers must
be fully aware of the competitive environment and formulate strategy to cope with the forces of
competition. The competitive environment should be studied from the viewpoints of all such
factors as affect the ferocity of competitive behaviour. As such, factors like market share ofthe
participants in the industry, growth rate of the industry, general level of profits, cost of entry into
and exit from an industry, degree of differentiation, economies of scale and nature of product
need to be examined in depth

(d) Political Environment

Political environment part of the external environment, which has an impact on the
operations of a company right from its incorporation to liquidation, is concerned with the study
of attitudes and actions of political and government leaders and legislators. Thus, an enterprise
in its attempt to seize opportunities and meet the threats stemming out of developments in
political environment should study stability of the government, relations between central and
state governments, economic policies and laws ofthe government, foreign policy of the
government, and diverse roles being played by the government. Relations between ruling and
opposition political parties and attitude and role ofthe opposition parties should also form part
ofthe exercise.

(e) Demographic Environment

Corporate planner should also scan the demographic environment and identify the broad
characteristics of the population that affects a company. An alert management will have plenty
of advance notice of potential changes in demographic factors and can start searching for new
product lines and more attractive markets. Major factors in the demographic environment relevant
to companies are trends in size, ageing, geographical shifts and literacy of population
 87

(f) Socio-Cultural Environment

Long-term survival of a company depends, in the main, on its responsiveness to the

socio-cultural environment of the society in which it is operating or proposes to operate. The
socio-cultural environment is concerned with analysis of the attitudes, values, desires,
expectations, degrees of intelligence and education, beliefs and customs of people in a society
traditions and social institutions, class structure and social structure and social group pressure
and dynamics. The management should attempt to prognosticate the changing values and
expectations of different sections of the society and their likely impact on the operations ofthe
enterprise

II) Concept of internal environment

Internal environment refers to the internal condition of a company in respect of marketing,

manufacturing, finance, human resources and management. Thus, it includes factors like product-
mix, management, system, culture, value and norms, manpower knowledge, skills and attitudes,
inventory problems, maintenance scenario, industrial relations, financial aspects like cost of
funds, profitability, liquidity, resource availability, etc. Internal environmental analysis, also known
as internal company analysis, capability or resource audit, position audit and corporate advantage
analysis is the process of evaluating a company’s posture relative to its business, competition
within and outside the country, overall performance and its capability in terms of strengths and
weaknesses.3 This is basically an in depth and dispassionate self-appraisal of a company
intended to determine distinctive capabilities of the company and to see how they are comparable
with those of its competitors. Appraisal of the internal environment should, therefore, be done in
respect of the following aspects;

(a) Marketing

Marketing aspect of the corporate appraisal refers to the market standing of company,
which should be examined in the light of the marketing objectives set by it. Where the objectives
of a company are to increase its sales by augmenting consumption, optimizing its use through
optimum distribution system and need-based market segmentation, marketing standing of the
company should be looked into from these angles. One the contrary, if a company aims at
providing maximum satisfaction to consumers, marketing capability should be viewed in terms
of price, quality, delivery terms and sales service. As such, the market-standing appraisal should
cover assessment of the company’s competitive position, product mix, product life cycle,
marketing research, channels ofdistribution, pricing, sales force and promotional efforts
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(b) Manufacturing

Another crucial aspect of corporate capability analysis is manufacturing position of the

company. Manufacturing activity comprises all such activities as contribute to the conversion of
raw materials into finished products. Accordingly, various factors such as availability of materials,
production technology, operation procedure, cost of production, inventory control system, location
of facilities, capacity utilization, degree of vertical integration, rationalization of resources and
patents need detailed examination to determine the manufacturing strengths and weaknesses
of the company.

(c) Finance

Performance of an enterprise should be examined from the viewpoints of acquisition of

funds and utilization, management of income and profitability, obviously cost control, inventory
control, liquidity of funds, dividend & investment policies, tax planning etc. would be the most
relevant aspects of financial competence analysis.

(d) Human Resource

Long-term productivity of a company depends essentially on its state of human resource.

Most important aspects of human resource, which should be the concern of a corporate planning
while making capability analysis in the area of human resources, are existence of highly talented
people, their commitment to the company, sense of responsibility, morale, feeling of autonomy,
sense of security, safety and labour-management relations

(e) State of Technology

A company should study the existing state of technology and its various potentials and
shortcomings. The organizational competence to adopt the latest technology relevant to the
concerned manufacturing activity should also be scanned.

8.5 Need for Environmental Scanning

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

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

3. Identification of opportunities: Environmental analyses helps to identify the

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

4. Identification of threat: Business is subject to threat from competitors and various

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

5. Optimum use of resources: Proper environmental assessment helps to make optimum

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

6. Survival and growth: Systematic analyses of business environment help the firm to
maximize their strength, minimize the weakness, grab the opportunities and diffuse threats.
This enables the firm to survive and grow in the competitive business world.

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

8. Environmental scanning aids decision-making: Decision-making is a process of

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

What is environmental scan?

An analysis and evaluation process that businesses use to understand their current
environment

Why businesses conduct environmental scans?

The aim is to identify trends, gaps, events, developments, and issues that will impact the
businesses.

What is the nature of the end product?

The identification of a number of broad factors and issues that will have a significant
impact on businesses and their plans for the future

Why are Environmental Scans important?

• Aids in anticipating changes

• Answers the question, “Where are we now?”

• Provides a starting point for businesses’ planning of goals, objectives, and actions.

• Answer the question, “Where do we want to be?”

Questions to ask when conducting an environmental scan

• What is the current external environment? What are the implications of these issues for
business?

• What key forces in the business’s environment need to be addressed and which ones are
less important?

• What trends and issues are affecting business?

• What is the impact of the trends on business?

• How might the environment change in the future? •How will businesses’ decisions and
actions influence this environment?

• How do customers, interest groups, community organizations, agencies or governments

impact the environment?
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• What factors are within a business’s control and which are beyond its influence?

• What could a business do to affect the impact of these factors?

Sources to Use When Conducting an Environmental Scan

Examples:

• Interviews with business officers, owners, managers

• Comments made by business officers, owners, managers National and local newspapers

• Trade publications

• Business magazines

• Websites: Hoover’s, Morningstar, brokerage firms, credible financial sites

• Observations

• Research findings

• Input from professional organizations

8.7 Feasibility Study

Feasibility study determines the likelihood of project success.

Conducting a Feasibility Study

People will gravitate to the ideas they are most interested in. They may need
encouragement to think that they can organize a feasibility study. A feasibility study involves
talking to people, asking hard questions, searching for assistance, applying rational thinking
and not losing sight of the vision that communities can become entrepreneurs. It is best if the
feasibility study is undertaken by those who are interested in participating in the community
enterprise. Doing the feasibility study together gives people the opportunity to see how they can
work alongside each other.

Elements of a feasibility study

 Visits to similar enterprises in the wider region to “see how they do it”

 Interviews with local suppliers of raw materials to investigate volume of supply, seasonality,
prices and price fluctuations, quality issues
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 Research into potential markets, eg interviewing stall holders in the local market,
interviewing other businesses who might buy the product, interviewing consumers directly

 Research the technical production and packaging requirements

 Find out about government health regulations

 Look into different organizational structures for the enterprise and their legal requirements

 Discuss possible ownership and governance structures

 Discuss different options for raising initial capital to get started

Feasibility study for a business

1. Technology and system feasibility

 Whether the technology needed for the system exists, how difficult it will be to build.

 Whether the firm has enough experience using that technology. The assessment is based
on an outline design of system requirements in terms of Input, Processes, Output, Fields,
Programs, and Procedures.

 This can be quantified in terms of volumes of data, trends, frequency of updating, etc. in
order to estimate whether the new system will perform adequately or not.

In technical feasibility the following issues are taken into consideration.

 Whether the required technology is available or not

 Whether the required resources are available -

- Manpower- programmers, testers & debuggers

- Software and hardware

 Once the technical feasibility is established, it is important to consider the monetary factors
also. Since it might happen that developing a particular system may be technically possible
but it may require huge investments and benefits may be less. For evaluating this, economic
feasibility of the proposed system is carried out.

2. Economic feasibility

 Economic analysis is the most frequently used method for evaluating the effectiveness of
a new system. More commonly known as cost and benefit analysis.
 93

 The procedure is to determine the benefits and savings that are expected from a candidate
system and compare them with costs. If benefits outweigh costs, then the decision is
made to design and implement the system.

 For any system if the expected benefits equal or exceed the expected costs, the system
can be judged to be economically feasible. In economic feasibility, cost benefit analysis is
done in which expected costs and benefits are evaluated. Economic analysis is used for
evaluating the effectiveness of the proposed system.

 In economic feasibility, the most important is cost-benefit analysis. As the name suggests,
it is an analysis of the costs to be incurred in the system and benefits derivable out of the
system.

3. Legal feasibility
 Determines whether the proposed system conflicts with legal requirements, e.g. a Data
Processing system must comply with the local Data Protection Acts.

 What are the legal implications of the project?

 What sort of ethical considerations are there?

 You need to make sure that any project undertaken will meet all legal and ethical
requirements before the project is on the table..

4. Operational feasibility
 Is a measure of how well a proposed system solves the problems.

 Takes advantages of the opportunities identified during scope definition and how it satisfies
the requirements identified in the requirements analysis phase of system development.

Operational feasibility is mainly concerned with issues like whether the system will be
used if it is developed and implemented. Whether there will be resistance from users that will
effect the possible application benefits?

The essential questions that help in testing the operational feasibility of a system are
following.

 Does management support the project?

 Are the users not happy with current business practices? Will it reduce the time (operation)
considerably? If yes, then they will welcome the change and the new system.
94

 Have the users been involved in the planning and development of the project? Early
involvement reduces the probability of resistance towards the new system.

 Will the proposed system really benefit the organization? Does the overall response
increase? Will accessibility of information be lost? Will the system effect the customers in
considerable way?

5. Schedule feasibility
 A project will fail if it takes too long to be completed before it is useful.

 Typically this means estimating how long the system will take to develop, and if it can be
completed in a given time period using some methods like payback period.

 Does the company currently have the time resources to undertake the project? Can the
project be completed in the available time?

6. Market and Real estate feasibility

 Market Feasibility Study typically involves testing geographic locations for a real estate
development project, and usually involves parcels of real estate land. Developers often
conduct market studies to determine the best location within a jurisdiction, and to test
alternative land uses for a given parcels.

 Jurisdictions often require developers to complete feasibility studies before they will approve
a permit application for retail, commercial, industrial, manufacturing, housing, office or
mixed-use project.

 Market Feasibility takes into account the importance of the business in the selected area.

 Ex BHEL- Reason for selecting that place.

7. Resource feasibility
 This involves questions such as how much time is available to build the new system,
when it can be built, whether it interferes with normal business operations, type and
amount of resources required, dependencies, etc. Contingency and mitigation plans should
also be stated here.

 Four Ms-should get adequately

 Men

 Machine
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 Material

 Money

8. Cultural feasibility
 In this stage, the project’s alternatives are evaluated for their impact on the local and
general culture.

 For example, environmental factors need to be considered and these factors are to be
well known. Further an enterprise’s own culture can clash with the results of the project.

Example

 Language, Religious, Food,

 For Petrol Bunk- IOC (Indian oil Corp) Price fixation.

 Theme Restaurant

 What will be the impact on both local and general cultures? What sort of environmental
implications does the feasibility study have?

8.8 Summary
A business  venture may  also  be  considered  a  small  business.  Many ventures will  be
invested in by one or more individuals or groups with the expectation of the business bringing in
a financial gain for all backers. Most business ventures are created based on demand of the
market or a lack of supply in the market. The identification and evaluation of opportunities is
one of the entrepreneur’s most important tasks. Good opportunities address important market
needs. Examining social, technological, and economic trends can lead to the identification of
emerging needs. Entrepreneurs seek to build new ventures and to act on a good opportunity
when it matches their capabilities and interests, exists in a favorable context, exhibits the potential
for sustainable long-term growth, and facilitates the acquisition of required resources. Such
opportunities offer a reasonable chance of success and require the entrepreneur to make a
difficult decision to act or not act. The choice of an opportunity and the decision to act is a
critical juncture in the life of an entrepreneur. With the decision to act, the entrepreneur prepares
a business summary for the venture that is used to test the new venture with potential investors,
employees, and customers.
96

Environmental scanning is the process of monitoring external environment as well as

internal environment so as to spot out the opportunities and threats stored in the development
of the external environment and strengths and weaknesses existing in the internal environment.
Environmental scanning -Aids in anticipating changes; Answers the question, “Where are we
now?” ; Provides a starting point for businesses’ planning of goals, objectives, and actions;
Answer the question, “Where do we want to be?”

Feasibility study determines the likelihood of project success. A feasibility study involves
talking to people, asking hard questions, searching for assistance, applying rational thinking
and not losing sight of the vision that communities can become entrepreneurs. It is best if the
feasibility study is undertaken by those who are interested in participating in the community
enterprise. Doing the feasibility study together gives people the opportunity to see how they can
work alongside each other.

8.9 Keywords
Brain Stroming

Environmental Scanning

Feasibiliy Study

New Venture

8.10 Review Questions

1. How does one start a new venture?

2. Identify the sources of Ideas.

3. Enumerate the methods of generating ideas.

3. Discuss the need and importance of Environmental Scanning.

4. What are the types of feasibility? Explain.

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LESSON - 9
PLACE AND PRICING
Learning Objectives

After completing this lesson, you must be able to:

 specify the functions of distribution channels.
 define Price.
 outline the objectives of Pricing.
 explain the Process of Pricing.
 discuss the types of pricing methods.

Structure
9.1 Introduction

9.2 Place or Channel

9.3 Types of Distribution Channels

9.4 Price

9.5 Process of Pricing

9.6 Kinds of Pricing

9.7 Summary

9.8 Keywords

9.9 Review Questions

9.1 Introduction
In the previous lesson, the process of starting a new business feature was discussed. Let
us explain the distribution channel and pricing in this lesson.

9.2 Place or Channel

“Every producer seeks to link together the set of marketing intermediates that best fulfill
the firm’s objectives. This set of marketing intermediates is called the as marketing channel”.
- Philip Kotler
98

 A distribution channel is the network of individuals and organizations involved in getting a
product or service from the producer to the customer.

 Distribution channels are also known as marketing channels or marketing distribution

channels

PLACE (or) DISTRIBUTION CHANNEL

Producer Producer Producer Producer Producer

Agent/Broker

Wholesaler or
Wholesaler Distributor Distributor

Retailer Retailer Retailer Retailer

Consumer Consumer Consumer Consumer Consumer

(a) Consumer marketing channels (b) Industrial marketing channels

0-level 1-level 2-level 3-level 0-level 1-level 2-level 3-level

Manufacturer Manufacturer Manufacturer Manufacturer Manufacturer Manufacturer Manufacturer Manufacturer

Wholesaler Wholesaler Manufacturer’s Manufacturer’s

representative sales branch

Jobber

Industrial
Retailer Retailer Retailer distributors

Industrial Industrial Industrial Industrial

Consumer Consumer Consumer Consumer customer customer customer customer
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Channel Functions

There are ten marketing channel functions:

1. Information Provider: Middlemen have a role in providing information about the

market to the manufacturer.

2. Price Stability: Maintaining price stability in the market is another function a middleman
performs.

3. Promotion: Promoting the products in his territory is another function that middleman
perform.

4. Financing: Middlemen finance manufacturers operation by providing the necessary

working capital in the form of advance payments for goods and service.

5. Title: Most middlemen take the title to the goods, services and trade in their own
name. This helps in diffusing the risks between the manufacturer and middlemen.

6. Help in producing function: The producer can concentrate on the production function
leaving the marketing problem to middlemen who specialize in the profession.

7. Matching Demand and supply: The chief function of intermediaries is to assemble

the goods from many producers in such a manner that a customer can effect purchases with
ease.

8. Pricing: In pricing a product, the producer should invite the suggestion from the
middlemen who are very close to the ultimate users and know what they pay for the product.

9. Standardizing Transactions: Standardizing transactions is another function of

marketing channels.

10. Matching Buyers and sellers: The most crucial activity of the marketing channel
members is to match the needs of buyers and sellers.
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9.3 Types of Distribution Channels

The distribution channels are given as follows:

1. Direct Marketing Channel

2. Indirect Marketing Channel

3. Hybrid Distribution channel or Multi channel distribution channel

TYPES OF DISTRIBUTION CHANNELS

PRODUCER OR MANUFACTURER

Direct Indirect Multi channel or hybrid

Selling at Door to Door Mail Multiple

Manufacturer’s Selling Order Shops
Plant Houses

Wholesaler Retailer

Retailer

CONSUMER

1) Direct Marketing Channel

 This is the shortest channel a producer can adopt for distribution of goods or services.

 In this system goods move directly from the producers to consumers without any
middleman or a merchant.

Under direct channel of distribution the manufacturer can adopt one of the following
methods of selling:
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(i) Selling at manufacturer plant:

· This is otherwise known as direct selling.

· It is one of the earliest and cheapest methods of distribution of goods.

· Under this system the goods are sold by the producer directly to the consumers.

(ii) Door to Door Sales:

· Salesman employed by the manufacturers call at the door of customers.

· They move door to door.

· This system works better when a new product is introduced into the market.

(iii) Sales by Mail order Method:

· It is a system by which producers are sold to consumers.

· The post office plays a significant role.

(iv) Sales by opening Own Shops;

· It is common that producers of perishable and non – perishable goods sell their products
to consumers, by opening their own retail shops.

2) Indirect Marketing channel:

· It means distribution of goods through middlemen or intermediaries.

Typical Indirect Channels of distribution :

(i) One – level Channel:

· In this type of channel there is only one intermediary between producer and consumer.
This intermediary may be a retailer or a distributor.

PRODUCER RETAILER CONSUMER

(ii) Two – level channel:

· This type of channel has two intermediaries namely, wholesaler / distributor / retailer.

PRODUCER WHOLESALER/DISTRIBUTOR RETAILER CONSUMER

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(iii) Three – level Channel:

 This type of channel has three intermediaries, namely, agent, distributor, Wholesaler
and retailer.

 This channel is similar to the previous two.

 This type of channel is used for consumer durable products also.

PRODUCER

AGENT

DISTRIBUTOR

WHOLESALER

RETAILER

CONSUMER

3) Hybrid Distribution Channel or Multi Channel Distribution System:

 Multi-channel distribution systems often called hybrid marketing channels.

 Such multi channels marketing occur when a single firm sets up two or more marketing
channels to reach one or more customer segments.

 The use of hybrid channel systems has increased greatly in recent years.
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Hybrid Distribution Channel or Multi Channel Distribution System :

RETAILER
PRODUCER

DEALER

9.4 Price
“Price may be defined as the exchange of goods or services in terms of money”

Objectives of Pricing
1. To Maximize the Profits :

 The primary objectives of the pricing decision is to maximize profits for the concern and
therefore pricing policy should be determined in such a way so that the company can earn
the maximize profits.

2. Price Stability :

 As far as possible the prices should not fluctuate too often.

 A stable price policy above can win the confidence of the consumers.

3. Competitive Situation :
 One of the objectives of the price decisions is to face the competitive situation in the
market.

 Prices of the commodities should be fixed keeping in the mind the competitive situation.

4. Achieving a Target Return :

 This is a common objective of well-established and reputed firm in the market to fix a
certain rate of return on investment.
104

5. Capturing the market

 One of the objectives of pricing decision may be capturing the market.

 A company especially a big company, at the time of introducing the product in the market
fixes comparatively lower prices for its products, keeping in view the competitive position
with an objectives of capturing a big share in the market.

6. Ability to pay :
 Price decision are sometimes taken according to the ability of customers to pay.

7. Long run welfare of the firm :

 The main aim of some concerns is to fix the price of the product which is in the best
interest of the firm in the long run keeping the market conditions and economic situations
in mind.

8. Margin of profit to middlemen :

 Pricing of the product should be made keeping in view that middlemen get a fair return on
the sale of company’s product.

9. Resource Mobilization ;
 Under this objective, the firms fixes the prices of its products in such a way that it can
accumulate sufficient resources for its expansion.

9.5 Process of Pricing

The procedure for setting pricing policy is as follows :

1. Selecting the Pricing Objectives :

 The company first decides where it wants to position its market offering.

 The clearer a firms objectives, the least difficult it is to set price.

2. Determining Demand :

· The relation between alternative prices and the resulting current demand is captured in a
demand curve.
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3. Estimating Cost :
 Demand sets a ceiling on the price the company can charge for its product.

 Costs set the floor. The company wants to charge a price that covers its cost of production,
distribution and selling the product, including a fair return for its effort and risk.

4. Analyzing Competitors costs, prices and Offers :

 Within the range of possible prices determined by market demand and company costs,
the firm must take the competitors costs, prices and possible price reactions into account.

5. Selecting a pricing method :

While selecting the final price, the companies must decide 3 factors commonly as 3 c’s

(i) Cost Oriented Price : It sets a floor price

(ii)Competitors Oriented Price : It provides orienting point.

(iii)Customers Demand oriented Price : It establishes the ceiling Price.

6. Selecting the final Price :

· Pricing methods narrow the range from which the company must select its final
price.

The company must consider some additional factors that are described below

(i) Psychological Pricing

(ii) Company’s pricing Policy

(iii) Impact of price on other parties

(iv) Influence of other marketing Mix elements

9.6 Kinds of Pricing

1. Premium pricing:

It is a type of pricing which involves establishing a price higher than your competitors to
achieve a premium positioning.
106

One can use this kind of pricing when his product or service presents some unique features
or core advantages, or when the company has a unique competitive advantage compared to its
rivals.

For example, Audi and Mercedes are premium brands of cars because they are far above

the rest in their product design as well as in their marketing communications.

2. Psychological pricing:

Psychological pricing is a pricing/marketing strategy based on the theory that

certain prices have  a psychological impact.   It  makes  a  great  difference  in  the  mind  of  the
customers. This strategy can frequently be seen in the supermarkets and small shops.

(e.g) An article priced at 9.90 will have sales than when it is priced at Rs. 10

Customers are more willing to buy the necessary products at $4,99 than products costing
$5.

3. Customary pricing:

Customers expect a particular price to be charged for certain products.The customers

are familiar with the rates and market condition. Manufacturers cannot control the price. The
firm changes the price by adopting new packages, size etc. (e.g) Confectionary items.

4. Skimmed Pricing;

It involves a high introductory price in the initial stage to skim the cream of demand. The
products, when introduced in the market have a limited period free from others Manufacturers.
During this period it aims at profit maximization, according to the favorable market conditions.
Generally the price moves downwards when competitors enter into the market field. It can be
the case for innovative electronics entering the marketing before the products are copied by
close competitors or Chinese manufacturers. After being copied, the product loses its premium
value and hence the price has to be dropped immediately.

5. Penetrating pricing:

A low price is designed in the initial stage with a view to capture greater market share.
That is the pricing policy is to capture greater market share then is done by adoption of low
prices in the initial stage. Because of the low price, sales volume increased, competition falls
 107

down. The penetration pricing strategy is used in order to attract more customers and to make
the customer switch from current brands existing in the market. The main target group is price
sensitive customers. Once a market share is captured, the prices are increased by the company.

6. Geographical Pricing:

The distance between the seller and the buyer is considered in geographical pricing. In
India, the cost of transportation is an important pricing factor, because of distance between the
production centre and consuming centre. An example of geographic pricing can also be the
sales of heavy machinery, which are sold after considering the transportation cost of different
locations.

7. Administrated Price :

Administrated price is defined as the price resulting from managerial decision, and not on
the basis of cost, competition, demand etc. There are many similar products manufactured by
different firms and more or less the price tends to be uniform. Usually the administrated price
remains unaltered for a considerable period of time.

8. Dual pricing:

Dual Pricing is the technique in which different prices are offered for the same product in
different markets. These different prices for the same products are called dual prices. (e.g)
AIRLINE Industry is a prime example of Dual Pricing.

9. Mark up Pricing:

This method is also known as cost plus pricing. When manufacturers set up the price
initially, a certain percentage is added to cost before marketing the price. (e.g) the cost of an
item is Rs 10 and sold at Rs.13 the mark up is up Rs 3.

10. Price Lining:

This method of pricing is generally followed by the retailers than wholesalers. Pricing
decisions are made initially and remain constant for a long period. (e.g) a shoe firm has several
types of shoes priced at Rs .120,140,170.
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11. Negotiated Pricing:

It is also known as variable pricing. The price is not fixed. The price to be paid on sale
depends upon bargaining.

12. Competitive Bidding:

Big firms or the government calls for Competitive bids when they want to purchase certain
products or specialized items. The probable expenditure is worked out. Then the offer is made
quoting the price, which is also known as contract price the lowest bidder gets the work.

13. Monopoly Pricing:

Monopoly is a competitive market situation and the presence of a few large seller, who
compete for larger market share. None has control over the piece it charges. Any firm may take
initiative in fixing the price of a product and others will follow.

14. Economy pricing:

This type of pricing takes a very low cost approach. Just the bare minimum to keep prices
low and attract a specific segment of the market that is highly price sensitive. Examples of
companies focusing on this type of pricing include Wal-Mart.

15.Bundling price:

Ever hear of the offer of 1 + 1 free? In the supermarket, when two different products are
combined together such as a razor and the lotion for shaving, and they are offered as a deal,
then we get to experience the bundling type of pricing first hand. This strategy is mainly used
to get rid of excess stocks.

16. Promotional pricing:

Promotional pricing strategy is just like Bundling price. But here, the products are bundled
so as to make the customer use the bundled product for the first time. This type of pricing
focuses on buying one, and getting a new type of product for free. Promotional pricing can also
serve as a way to move old stock as well as to increase brand awareness.
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9.7 Summary
A distribution channel is the network of individuals and organizations involved in getting a
product or service from the producer to the customer. The functions of channels are information
provider, price stability, promotion, financing, title, help in producing function, matching demand
and supply, pricing, standardizing transactions and matching buyers and sellers. The distribution
channels are categorized into Direct Marketing Channel, Indirect Marketing Channel and Hybrid
Distribution channel or Multi channel distribution channel.

Price may be defined as the exchange of goods or services in terms of money. The
pricing objectives are maximizing profits, stabiles prices, facing competition, capturing the market,
ability to pay, long run welfare of the firm, middlemen’s profits, resource mobilization. Premium,
penetration, skimming, psychological, customary, geographical, administered, mark up and
dual pricing are some of the important pricing methods.

9.8 Keywords
Buyer

Channel

Demand

Pricing

Promotion

Supply

Seller

9.9 Review Questions

1. Give the functions of channels.

2. Sketch out the types of distribution channels.

3. Define Price. Bring out the Objectives of Pricing.

4. How do companies set the price?

5. Name and explain the various types of Pricing methods.

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LESSON - 10
BUSINESS PLAN
Learning Objectives
After completing this lesson, you must be able to:

 define business plan.

 speak out the scope of usiness plan.

 enlist the benefits of a business plan.

 list out the elements of the business plan.

Structure
10.1 Introduction

10.2 Scope and Value of Business Plan

10.3 Benefits of a Business Plan

10.4 Elements of the Business Plan

10.5 Developing a Business Plan

10.6 Summary

10.7 Keywords

10.8 Review Questions

10.1 Introduction
A business plan is a document that describes a new business, its products or services,
how it will earn money, leadership and staffing, financing, operations model, and other details
that are essential to both operation and success.

A business plan is a formal written document containing business goals, the methods on
how these goals can be attained, and the time frame within which these goals need to be
achieved. It also describes the nature of the business, background information on the
organization, the organization’s financial projections, and the strategies it intends to implement
to achieve the stated targets. In its entirety, this document serves as a road map that provides
direction to the business.
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Written business plans are often required to obtain a bank loan or other kind of financing
A company’s business plan is one of its most important documents. It can be used by managers
and executives for internal planning. It can be used as the basis for loan applications from
banks and other lenders. It can be used to persuade investors that a company is a good
investment. For start-up ventures, the process of preparing a business plan serves as a road
map to the future by making entrepreneurs and business owners think through their strategies,
evaluate their basic business concepts, recognize their business’s limitations, and avoid a variety
of mistakes.

Virtually every business needs a business plan. Lack of proper planning is one of the
most often cited reasons for business failures. Business plans help companies identify their
goals and objectives and provide them with tactics and strategies to reach those goals. They
are not historical documents; rather, they embody a set of management decisions about
necessary steps for the business to reach its objectives and perform in accordance with its
capabilities.

“By its very definition, a business plan is a plan for the business, clarifying why it exists,
who it exists for, what products and services it provides these client groups, how it intends to
develop and deliver these products and services, and where it is headed,” Rebecca Jones
wrote in Information Outlook. ”A business plan is a roadmap for the organization, showing the
destination it seeks, the path it will follow to get there, and the supplies and wherewithal required
to complete the journey.”

10.2 Scope and Value of Business Plan

The scope of the business plan has four elements namely, what is the venture, what is
marketing perspective, the third perspective is what is the investor’s view points and the fourth
is socio-economic issues.

1. The entrepreneur should decide and define what the venture is all about and what the
aims are and objectives of the venture may be given in a written document. The nature of
the product/s may be given.

2. Any new enterprise should have aim to a particular segment of customers without customer
orientation there will not be any viability of any enterprise. It is also seen that many
entrepreneurs are carried away by product or technology and not customer orientation.
The marketing focus and plans may be given. A consumer product or a new e-commerce
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business will have different focus. The size of the market, customer segmentation,
competition and potential growth will have considerable impact on the business plan.

3. Good financial projections by the entrepreneur for the new enterprise attract investors.

4. The business plan also should address the socio-economic impact of the proposed new
venture. To get the general acceptance of the public and government institutions.

The business plan is required to all personnel and organizations that help to build the new
organization namely, the entrepreneur, investors, employees, bankers, government institutions,
customers, suppliers, consultants. The business plan document should be made based on the
questions all these stakeholders may ask and address all their concerns. Each of the group will
have their own view point and questions on the business plan of the proposed venture. The
general questions that occur are : Is this good business? Will it succeed? Who are the customers?
How the competition is met? How the funds are made available? How the business will be
managed? and so on. To answer such issues, an entrepreneur should think from various
viewpoints.

10.3 Benefits of a Business Plan

1. Business Planning helps the Company to formulate objectives and goals clearly. The
company formulates objectives after discussing thoroughly with superiors, colleagues and sub-
ordinates. These objectives help the company to achieve stability of business and maximize
profits.

2. Business planning helps to avoid piece-meal approach and to have integrative approach.

3. Business planning helps to view the organization in total rather than department-wise.

4. Business plan aims at the long-range plan rather than short-range plan.

5. Business plan integrates the company plan with the national plans and priorities.

6. Business plan takes into consideration the environmental factors. Technological factors
influence the business plan significantly. Technology has been upgraded continuously. The
changes in technology are pivotal, resulting in high technology.

Announcement of economic liberalizations, globalization and privatization policies by the

Government of India, in 1991, changed the economic scenario of the country. The changing
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scenario influences the economic environment. Added to this, significant changes have taken
place in social and political environment.

7. Liberalization, Privatization and Globalization not only brought significant changes in

the economy, but they have intensified the competition. Globalization allowed many MNC’s to
enter and operate in India. This resulted in tough competition between domestic and foreign
companies.

The liberalizations policy of the Government allowed for the establishment of a number of
companies. It resulted in severe competition even within the domestic companies. Business
plan should take into consideration, the competition levels among the companies.

8. A good business plan helps an organization to be aware of the changes in political

trends and their impact in business at national and international levels.

9. Effective business plan helps the company to achieve its objectives and goals.

10. Effective business plan certainly contributes for the achievement of high rate of
profits and increases in earning per share.

11. Business plan helps to determine potential growth and profit.

10.4 Elements of the Business Plan

Business plans must include authoritative, factual data, usually obtained from a wide
range of sources. The plans must be written in a consistent and realistic manner. Contradictions
or inconsistencies within a business plan create doubts in the minds of its readers. Problems
and risks associated with the business should be described rather than avoided, then used as
the basis for presenting thoughtful solutions and contingency plans. Business plans can be
tailored to the needs and interests of specific audiences by emphasizing or presenting differently
certain categories of information in different versions of the plan.

Business plans contain a number of specific elements as well as certain general

characteristics. These include a general description of the company and its products or services,
an executive summary, management and organizational charts, sales and marketing plans,
financial plans, and production plans. They describe the general direction of a company in
terms of its underlying philosophy, goals, and objectives. Business plans explain specific steps
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and actions that will be taken as well as their rationale. That is, they not only tell how a company
will achieve its strategic objectives, they also tell why specific decisions have been made.
Anticipated problems and the company’s response to them are usually included. In effect,
business plans are a set of management decisions about how the company will proceed along
a specified course of action, with justifications for those decisions. Listed below are brief
descriptions of the major elements found in business plans.

Executive Summary : This is usually a two-to five-page summary of the entire business

plan. It is an important part of the plan, in that it is designed to capture the reader’s attention and
create an interest in the company. It usually includes the company’s mission statement and
summarizes its competitive advantages, sales and profit projections, financial requirements,
plans to repay lenders or investors, and the amount of financing requested.

Description of business : The business description includes not only a profile of the

company, but also a picture of the industry in which the company operates. Every business
operates within a specific context that affects its growth potential. The description of a company’s
operating environment may cover new products and developments in the industry, trends and
outlook for the industry, and overall economic trends.

The intent of the company profile, meanwhile, is to provide readers with a description of
unique features that give the company an edge in the environment in which it competes. A brief
company history reveals how specific products and services were developed, while descriptions
of pertinent contracts and agreements should also be mentioned (information on contracts and
legal agreements may also be included in an appendix to the business plan). Other topics
covered include operational procedures and research and development.

Description of Products and / or Services: The goal of this section is to differentiate a

company’s products or services from those of the competition. It describes specific customer
needs that are uniquely met by the firm’s products or services. Product features are translated
into customer benefits. Product life cycles and their effects on sales and marketing can be
described. The company’s plans for a new generation of products or services may also be
included in this section.

Description of Management and Organizational Structure: The quality of a company’s

management team can be the most important aspect of a business plan. This section presents
the strengths of the company’s management team by highlighting relevant experience,
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achievements, and past performance. Key areas include management’s ability to provide
planning, organizational skills, and leadership. This section also contains information about the
company’s ownership and work force. It may present an existing or planned organizational
structure that will accomplish the goals set forth in the business plan. Specific management
and control systems are often described as well.

Market Analysis : A thorough market analysis serves as the basis for a company’s sales

and marketing plans. The analysis generally covers the company’s competition, customers,
products, and market acceptance. The competitive analysis details the competition’s strengths
and weaknesses, providing a basis for discovering market opportunities. A customer analysis
provides a picture of who buys and uses the company’s products or services. This section of
the business plan highlights how the company’s products or services satisfy previously unfulfilled
market needs. It also includes evidence of market acceptance of the company’s unique products
or services.

Sales and Marketing Plan : The marketing plan delineates the methods and activities
that will be employed to reach the company’s revenue goals. This section describes the
company’s customer base, products or services, and marketing and sales programs. The latter
is supported by conclusions drawn from the market analysis. Different revenue outcomes may
be presented to allow for contingency planning in the areas of finance and production.

Production Plan : A production plan is usually included if the business is involved in

manufacturing a product. Based on the sales and marketing plan, the production plan covers
production options that are available to produce a desired mix of products. The production plan
contains information that allows for budgeting for such costs as labor and materials. In non-
manufacturing companies, this section would cover new service development.

Financial Plan : This section covers the financing and cash flow requirements implicit in

other areas of the business plan. It contains projections of income, expenses, and cash flow, as
well as descriptions of budgeting and financial controls. Financial projections must be supported
by verifiable facts, such as sales figures or market research. Monthly figures are generally
given for the first two years, followed by annual figures for the next three to eight years. If the
business plan is written for investors or lenders, the amount of financing required may be
included here or in a separate section.
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Implementation Schedule : This  section  provides  key  dates  pertaining  to  finance,
marketing, and production. It indicates when specific financing is needed, when specific aspects
of a particular marketing campaign will take place, and delivery dates based on production
schedules.

Contingency Plans : This section defines problems and challenges that the company

may face and outlines contingency plans for overcoming obstacles that might arise. Specific
topics that may be explored are competitive responses, areas of weakness or vulnerability,
legal constraints, staffing, and continuity of leadership.

Other Details : Most  business  plans  include  a  table  of  contents  and  a  cover  sheet
containing basic information about the company. An appendix may include a variety of
documentation that supports different sections of the business plan. Among the items that may
be found in an appendix are footnotes from the main plan, biographies, graphs and charts,
copies of contracts and agreements, and references.

10.5 Developing a Business Plan

Overview

The importance of planning should never be overlooked. For a business to be successful

and profitable, the owners and the managing directors must have a clear understanding of the
firm’s customers, strengths and competition. They must also have the foresight to plan for
future expansion. Whether yours is a new business or an existing business in the process of
expanding, money is often an issue. Taking time to create an extensive business plan provides
you with insight into your business. This document can serve as a powerful financing proposal.

This article will take you through the step-by-step process of developing a business plan.
A business plan is very specific to each particular business. However, while each business
needs a unique plan, the basic elements are the same in all business plans. To complete an
effective business plan you must dedicate time to complete the plan. It requires you to be
objective, critical and focused. The finished project is an operating tool to help manage your
business and enable you to achieve greater success. The plan also serves as an effective
communication tool for financing proposals.
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At the completion of this exercise, you should be able to:

 Describe the importance of a business plan

 Identify the elements of an effective business plan

 Write a business plan

Outline:
I. Why Write a Business Plan?

II. Who Should Write the Business Plan?

III. Business Plan Components

A. Executive Summary

B. The Product/Service

C. The Market

D. The Marketing Plan

E. The Competition

F. Operations

G. The Management Team

H. Personnel

IV. Financial Data

V. Supporting Documentation

VI. Summary

VII. Resources

I. Why Write a Business Plan?

Why should a business go through the trouble of constructing a business plan? There are
five major reasons:

1. The process of putting a business plan together forces the person preparing the
plan to look at the business in an objective and critical manner.

2. It helps to focus ideas and serves as a feasibility study of the business’s chances
for success and growth.
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3. The finished report serves as an operational tool to define the company’s present
status and future possibilities.

4. It can help you manage the business and prepare you for success.

5. It is a strong communication tool for your business. It defines your purpose, your
competition, your management and personnel. The process of constructing a
business plan can be a strong reality check.

6. The finished business plan provides the basis for your financing proposal.

Planning is very important if a business is to survive. By taking an objective look at your

business you can identify areas of weakness and strength. You will realize needs that may have
been overlooked, spot problems and nip them before they escalate, and establish plans to
meet your business goals.

The business plan is only useful if you use it. Ninety percent of new businesses fail in the
first two years. Failure is often attributed to a lack of planning. To enhance your success, use
your plan! A comprehensive, well-constructed business plan can prevent a business from a
downward spiral.

Finally, your business plan provides the information needed to communicate with others.
This is especially true if you are seeking financing. A thorough business plan will have the
information to serve as a financial proposal and should be accepted by most lenders.

II. Who Should Write the Business Plan?

You, the owner of the business, should write the plan. It doesn’t matter if you are using the
business plan to seek financial resources or to evaluate future growth, define a mission, or
provide guidance for running your business — you are the one that knows the most about the
business.

There are a number of software packages in addition to this article that can assist you in
the formatting process: Business Plan Pro, Palo Alto Software are only two of many available.

Consultants can be hired to assist you in the process of formulating a business plan, but
in reality you must do a majority of the work. Only you can come up with the financial data, the
purpose of your business, the key employees, and management styles to mention a few items.
You may still choose to use a consultant, but realize that you will still need to do most of the
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work, so why not tackle the plan yourself? If you need further help in one area, then seek the
assistance of the consultant.

III. Business Plan Components

The Executive Summary

The first page of your business plan should be a persuasive summary that will entice a
reader to take the plan seriously and read on. The Executive Summary should follow the cover
page, and not exceed two pages in length.

The summary should include:

· A brief description of the company’s history

· The company’s objectives

· A brief description of the company’s products or services

· The market the business will compete in

· A persuasive statement as to why and how the business will succeed, discussing the
business’s competitive advantage

· Projected growth for the company and the market

· A brief description of the key management team

· A description of funding requirements, including a time-line and how the funds will be
used

The Product or Service

It is important for the reader to thoroughly understand your product offering or the services
you currently provide or plan on providing. However, it is important to explain this section in
layman’s terms to avoid confusion. Do not overwhelm the reader with technical explanations or
industry jargon that he or she will not be familiar with.

It is important to discuss the competitive advantage your product or service has over the
competition. Or, if you are entering a new market, you should answer why there is a need for
your offering.
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If appropriate, discuss any patents, copyrights and trademarks the company currently
owns or has recently applied for and discuss any confidential and non-disclosure protection the
company has secured.

Discuss any barriers that you face in bringing the product to market, such as government
regulations, competing products, high product development costs, the need for manufacturing
materials, etc.

Areas that should be covered in this section include:

 Is your product or service already on the market or is it still in the research and development
stage?

 If you are still in the development stage, what is the roll out strategy or timeline to bring
the product to market?

 What makes your product or service unique? What competitive advantage does the product
or service have over its competition?

 Can you price the product or service competitively and still maintain a healthy profit margin?

The Market

Investors look for management teams with a thorough knowledge of their target market.
If you are launching a new product, include your marketing research data. If you have existing
customers, provide an analysis of who your customers are, their purchasing habits, their buying
cycle. For more information, see these companion articles: Conducting a Marketing Analysis
and Prepare a Customer Profile.

This section of the plan is extremely important, because if there is no need or desire for
your product or service there won’t be any customers. If a business has no customers, there is
no business.

This section of the plan should include:

 A general description of your market

 The niche you plan on capitalizing on and why

 The size of the niche market. Include supporting documentation

 A statement and supporting documentation as to why you believe there is a need for your
product or offering by this market
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 What percentage of the market do you project you can capture?

 What is the growth potential of the market? Include supporting documentation

 Will your share of the market increase or decrease as the market grows?

 How will you satisfy the growth of the market?

 How will you price your goods or services in the growing competitive market?

The Marketing Strategy

Once you have identified who your market is, you’ll need to explain your strategy for
reaching the market and distributing your product or service. Potential investors will look at this
section carefully to make sure there is a viable method to reach the target market identified at
a price point that makes sense.

Analyze your competitors’ marketing strategies to learn how they reach the market. If
their strategy is working, consider adopting a similar plan. If there is room for improvement —
work on creating an innovative plan that will position your product or service in the minds of your
potential customers. The most effective marketing strategies typically integrate multiple mediums
or promotional strategies to reach the market. The following are some promotional options to
consider.

 Radio

 Print

 Web

 Direct mail

 Trade shows

 Public relations

 Promotional materials

 Telephone sales

 One-on-one sales

 Strategic alliances

If you have current samples of marketing materials or strategies that have proved
successful, make sure you include them with your plan.
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Developing an innovative marketing plan is critical to your company’s success. Investors

look favorably upon creative strategies that will put your product or service in front of potential
customers. Spend time developing this section.

Once you have identified how you will reach the market, discuss in detail your strategy for
distributing the product or service to your customers. Will you mail order, personally deliver, hire
sales reps, contract with distributors or resellers, etc.?

The Competition

Understanding your competition’s strengths and weaknesses is critical for establishing

your product’s or service’s competitive advantage. If you find a competitor is struggling, you
need to know why, so you don’t make the same mistake. If your competitors are highly successful,
you’ll want to identify why. You’ll also want to explain why there is room for another player in the
market.

Specific areas to address in this section are:

1. Identify your closest competitors. Where are they located? What are their revenues?
How long have they been in business? 

2. Define their target market.

3. What percentage of the market do they currently have?

4. How do your operations differ from your competition? What do they do well? Where
is there room for improvement?

5. In what ways is your business superior to the competition?

6. How is their business doing? Is it growing? Is it scaling back?

7. How are their operations similar to yours and how do they differ?

8. Are there certain areas of the business where the competition surpasses you? If so,
what are those areas and how do you plan on compensating?

Analyzing your competitors should be an ongoing practice. Knowing your competition will
allow you to become more motivated to succeed, efficient and effective in the marketplace.
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Operations

Now that you have had an opportunity to really sell your idea and wow potential investors,
the next question on their mind is how will you implement the idea. What resources and processes
are necessary to get the product to market? This section of the plan should describe the
manufacturing, R&D, purchasing, staffing, equipment and facilities required for your business.

You’ll want to provide a roll out strategy as to when these requirements need to be
purchased and implemented. Your financials should reflect your roll out plan.

In addition, describe the vendors you will need to build the business. Do you have current
relationships or do you need to establish new ones? Who will you choose and why?

The Management Team

For most investors the experience and quality of the management team is the most
important aspect they evaluate when investing in a company. Investors must feel confident that
the management team knows its market, product and has the ability to implement the plan. In
essence, your plan must communicate management’s capabilities in obtaining the objectives
outlined in the plan. If this area is lacking, your chances for obtaining financing are bleak.

If your team lacks in a critical area, identify how you plan on compensating for the void.
Whether it is additional training required or additional management staff needed, show that you
know the problem exists, and provide your options for solutions.

When preparing this section of the business plan you should address the following five
areas:

1. Personal history of the principals:

a. Business background of the principals

b. Past experience — tracking successes, responsibilities and capabilities

c. Educational background (formal and informal)

d. Personal data: age, current address, past addresses, interests, education, special
abilities, reasons for entering into a business

e. Personal financial statement with supporting documentation

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2. Work experience:
f. Direct operational and managerial experience in this type of business

g. Indirect managerial experiences

3. Duties and responsibilities:

h. Who will do what and why

i. Organizational chart with chain of command and listing of duties

j. Who is responsible for the final decisions?

4. Salaries and benefits:

k. A simple statement of what management will be paid by position

l. Listing of bonuses in realistic terms

m. Benefits (medical, life insurance, disability...)

5. Resources available to your business:

n. Insurance broker(s)

o. Lawyer

p. Accountant

q. Consulting group(s)

r. Small Business Association

s. Local business information centers

t. Chambers of Commerce

u. Local colleges and universities

v. Federal, state, and local agencies

w. Board of Directors

x. World Wide Web (various search engines)

y. Banker
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Personnel

The success of a business can often be measured by its employees. Seventy percent of
consumers will go elsewhere if they don’t receive prompt and courteous service. You must
consider the following questions in completing this section of the business plan:

1. What are your current personnel needs (full or part-time)? How many employees do you
envision in the near future and then in the next three to five years?

2. What skills must your employees have? What will their job descriptions be?

3. Are the people you need readily available and how will you attract them?

4. Will you be paying salaries or hourly wages?

5. Will there be benefits? If so, what will they be and at what cost?

6. Will you pay overtime?

IV. Financial Data

At the heart of any business operation is the accounting system. It is important to have a
certified public accountant establish your accounting system before the start of business. At
times there is a tendency to do it yourself. Remember that an incredible number of businesses
fail due to managerial inefficiencies. Leave it to the trained professional to help you in the area
of accounting and legal matters. If your business can’t afford a public accountant to establish
your books, then you are undercapitalized. You need to secure additional resources before
starting.

One of the first steps to having a profitable business is to establish a bookkeeping system
which provides you with data in the following four areas:

 Balance Sheet - indicates what the cash position of the business is and what the owner’s
equity is at a given point (the balance sheet will show assets, liabilities and retained
earnings). 

 Break-Even Analysis - is based on the income statement and cash flow. All businesses
should perform this analysis without exceptions. A break-even analysis shows the volume
of revenue from sales that are needed to balance the fixed and variable expenses.

 Income Statement - also called the profit and loss statement, is used to indicate how well
the company is managing its cash, by subtracting disbursements from receipts.
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 Cash Flow - this projects all cash receipts and disbursements. Cash flow is critical to the
survival of any business.

If the goal of your business plan is to obtain financing, you will be required to generate
financial forecasts. The forecasts demonstrate the need for funds and the future value of equity
investment or debt repayments. This exercise is critical in obtaining capital for your business.
To obtain capital from lending institutions you must demonstrate the need for the funding and
your ability to repay the loan.

The forecast that you generate should cover a three to five-year period. This is a period in
which realistic goals can be established and attained without much speculation. Forecasts should
be broken down in monthly increments.

Projections and forecasts are an integral part of your financial portfolio. Carefully and
accurately state your assumptions. Honesty is the best policy! Over-optimism and over-inflation
can lead to failure. For more help, review the tools Conduct a Sales Forecast and Prepare a
Balance Sheet.

V. Supporting Documentation

You must include any documents that lend support to statements made in the body of
your company’s business plan. The following is a list of some items for your consideration.
Please be aware that this list is not complete and may vary depending on the stage of
development of your business.

1. Resumes 

2. Credit information, include in Appendix

3. Quotes or Estimates

4. Letters of Intent from prospective customers

5. Letters of Support from credible people who know you

6. Leases or Buy/Sell Agreements

7. Legal Documents relevant to the business

8. Census/Demographic data
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VI. Summary

The completed business plan should be bound. For internal purposes three-ring binders
work well. Additions and changes can easily be placed in the binders. For the business plan that
is to be circulated to a lender and/or investor, many types of appropriate folders and binders
can be purchased at office supply stores.

Once the business plan is completed, it should become an operational tool to measure
the success of the business. This plan should be updated as milestones are reached. Often
companies will spend enormous time, energy and financial resources to complete this arduous
task just for the purpose of obtaining additional capital. The companies that shelve the business
plan after its completion and presentation to lenders lose out on the real value of this useful tool
in the growth and development of small and large businesses.

10.6 Summary
A business plan is a document that describes a new business, its products or services,
how it will earn money, leadership and staffing, financing, operations model, and other details
that are essential to both operation and success.

A business plan is a formal written document containing business goals, the methods on
how these goals can be attained, and the time frame within which these goals need to be
achieved. It also describes the nature of the business, background information on the
organization, the organization’s financial projections, and the strategies it intends to implement
to achieve the stated targets. In its entirety, this document serves as a road map that provides
direction to the business. The scope of the business plan has four elements namely, what is the
venture, what is marketing perspective, the third perspective is what is the investor’s view
points and the fourth is socio-economic issues. The Benefits of a Business Plan: Business
Planning helps the Company to formulate objectives and goals clearly. The company formulates
objectives after discussing thoroughly with superiors, colleagues and sub-ordinates. These
objectives help the company to achieve stability of business and maximize profits; Business
planning helps  to  avoid  piece-meal  approach and  to  have  integrative  approach;  Business
planning helps to view the organization in total rather than department-wise; Business plan aims
at the long-range plan rather than short-range plan; and Business plan integrates the company
plan with the national plans and priorities and so on.
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10.7 Keywords
Business Plan

Financial Plan

Marketing Plan

Production Plan

Sales Plan

10.8 Review Questions

1. State the Scope and Value of Business Plan.

2. Bring out the benefits of a Business Plan.

3. Develop a Business Plan.

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LESSON - 11
BUSINESS PLAN – GUIDELINES, FORMAT
AND PRESENTATION
Learning Objectives

After completing this lesson, you must be able to:

 present the guidelines for preparing a business plan.

 design Business Plan format.

 present Business Plan.

Structure
11.1 Introduction

11.2 Guidelines for preparing a Business Plan

11.3 Business Plan Format

11.4 How to Make a Business Plan Presentation?

11.5 Summary

11.6 Keywords

11.7 Review Questions

11.1 Introduction
The guidelines for preparing a business plan will be explained in this unit. Also tips will be
given to make a business plan presentation.

11.2 Guidelines for preparing a Business Plan

The following business plan guidelines have been provided by Business Plan Services in
association with the London Business School.

Overall considerations
 Language must be concise, and written in layman’s prose in the 3rd person

 Each section must stand on its own and clearly define and satisfy its objective.
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 All facts are to be supported with sufficient documentation, quoting the source of research
as a numbered footnote.

 All conclusions drawn from facts are to be reasonable and credible albeit not definitive.

 Where appropriate, facts are to be supported with colour charts and graphs.

Presentation
 Font choice should be readable and suitable, suggested use of Times/Arial – Size 11/12.

 Single spacing should be used between lines.

 Plan should contain subheads.

 Formatting on heads and subheads must be consistent. Heading 1 in black – size 12 font
– and in BOLD CAPITALS. Heading 2 in dark blue – size 12 font – and in Bold Title Case.

 Page numbers to be shown on right hand bottom corner.

 Formatting on page numbers must be consistent.

 Bullet point marks should be used effectively

 Available client branding should be run through the plan as a header in the top right hand
corner of each page

 The plan should contain enough white space for readability.

Cover page / Table of contents

The cover page should detail:

 the name of business;

 the main contact’s name;

 full address details;

 the client’s company logo; and

 reader confidentiality

Table of contents should be auto-generated using the Word tool, identifying 2 Header
type levels. It should also include the following list of appendices:
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1. Executive Summary
The section needs to read well in a positive yet realistic tone.

It must not be too fragmented into subsections to impair overall readability and detract
from the appropriate tone for the target reader type

The length of summary should not exceed two pages, to include:-

 One or two sentences to clearly and succinctly describe the client’s activity

 A brief description of the company’s unique features.

 Any relevant background details including, where relevant,

 Details of when and why the company was formed.

 Details of any IPR

 A description of the marketing history of the product/service.

 Outlines the company’s annual sales, profits and overall performance to date.

 A brief description of key management.

 One or two sentences highlighting the size of the market and its growth potential

 Details of the nature and proposed source of the company’s funding requirement.

2. Background / Introduction (if relevant)

3. The business
 Activities – USP
 Objectives
 Readiness for market
 Future activities
 Mission statement
 Legal and Capital Structure

4. Management, organization and personnel

This section needs to establish the credibility of the management team.

 List key management positions, outlining the primary job duties and responsibilities
assigned to each position.
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 Identify the individuals who are expected to fill each position and summarize each person’s
prior business experience and skills to illustrate how they are suitable for the relevant role

 Provide an explanation of how deficiencies /skills gap will be overcome.

 Identify the future management and personnel requirements to accommodate the business’
growth

 Illustrate the business’ existing structure in an Organization Chart, showing anticipated

changes/migrations within that diagram

 Explain the use of non-Execs, partners and sub-contractors where appropriate

5. The markets

 Target Customers – identify and quantify (if possible)

 Market Trends, Size, Segmentation, Positioning

6. Competitive Analysis

7. Marketing
 Market Strategy, Pricing, Promotional Plans, Selling Channels

 Details of any test marketing

8. Operational Details
 Premises

 Materials and Suppliers

 Equipment

 Staffing

 Transport and Distribution

 Insurance and Legal

9. Financial Overview
Sales, Profit and Cash flow Models
 Sensitivity Analysis
 Notes on Financial Projections, Assumptions
 Funding Requirements
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11.3 Business Plan Format

In reality there is no standard format for the presentation of a good business plan. Business
plans vary in content and size according to the nature and size of the business concerned and
on the emphasis that is placed on certain critical areas as opposed to others.

Contents

Every business plan should address a number of fundamental issues without which it
would not be complete. These issues can be grouped under six major areas that are the pillars
of every business activity whether large or small. These are:

 Sales and Marketing

 Operations

 Human Resources

 Finance

 Information & Communication Technologies (ICT)

 Information Management

Essential contents of a Business Plan

The table below lists the important elements of a business plan and offers some simple
points that need to be taken into consideration in regard to each section. It is worth noting that
these points are by no means exhaustive and are meant to serve only as examples. The table
is intended to provide you with a simple format upon which to base your business plan.

The format provides you with a framework for presenting your thoughts, ideas and
strategies in a logical, consistent and coherent manner. In other words, the business plan format
helps you to clarify your own ideas and present them clearly to others.

1. Executive Summary

2. Enterprise Description

3. Product or Service Description

4. Industry Analysis

5. Competition Analysis
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6. SWOT Analysis

7. Marketing Sub-Plan

8. Operations Sub-Plan

9. Human Resources Sub-Plan

10. The Budget

11. Liquidity

12. Financial Sub-Plan

13. Selected Options and Critical Measures

14. Milestone Schedule

11.4 How to Make a Business Plan Presentation?

Making a presentation to prospective investors is stressful for nearly all entrepreneurs.
Even if they are confident their business plan is well thought out, they still worry that they will not
be able to express the most important aspects of their plan and engage the investors’ interest
in the short time allotted for the in-person presentation. The keys to a successful presentation
are advance preparation and rehearsal until your delivery is smooth and polished.

Preparing the Presentation

1. Outline the presentation. Many times, the presentation is done with computer software
slides. Using these can ensure you don’t forget anything important during the presentation.
Create an outline of what points you want to make on each slide.

2. Introduce yourself, your company and its products. Describe the markets you serve,
the customer issues you solve and why your solution is a significant advancement on anything
else available at the present time. This information should encompass the first two to three
slides.

3. Demonstrate the size of the market for your products; explain that it is a large or rapidly
emerging market and how it will increase within the three to five year time frame of your business
plan.
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4. Show the competitive advantages your venture has that will lead to outstanding revenue
growth and profitability. Include a chart that shows projected revenues and pretax profits for the
next three to five years. These slides get your audience excited about the investment potential
of your venture early in the presentation.

5. Discuss your marketing strategies. Describe your distribution channels, or how you will
get the products to the customers, and sales strategies, or how you will convince the customers
to purchase your products.

6. Introduce the management team and advisory board members. You only have time to
make one or two points about each person’s background and experience. Tell your audience
how each person on the team brings a critical element necessary for your company’s success.

7.Prepare a slide that shows the total amount of capital you need and a short list of major
expenditures.

Rehearsing and Presenting

1. Determine how long the presentation will be, including time for questions. If you are
meeting with venture capitalists, they will provide you with a time frame. If you are presenting to
an angel group or a venture capital forum, they will provide a time limit for your presentation
and, quite often, a suggested outline.

2. Rehearse your presentation with colleagues. Invite members of your management

team or trusted associates into a conference room and conduct a dress rehearsal of the
presentation. Get their feedback on what parts of the presentation might need editing or
clarification. Time your presentation and cut it down if necessary. Rehearse the presentation
several more times on your own.

3. Relax and be yourself at the presentation. The investors want to learn about you as
well as your business plan. Perform deep breathing exercises in order to relax prior to going
into the meeting. Remember to engage potential investors with eye contact. Smile and present
an image of confidence. Be enthusiastic about your venture’s prospects for success. Remember
not to rush your presentation.
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11.5 Summary
The business plan consists of Executive Summary , Enterprise Description, Product or
Service Description, Industry Analysis, Competition Analysis, SWOT Analysis, Marketing Sub-
Plan, Operations Sub-Plan, Human Resources Sub-Plan, The Budget, Liquidity, Financial Sub-
Plan, Selected Options and Critical Measures and Milestone Schedule .Making a presentation
to prospective investors is stressful for nearly all entrepreneurs. Even if they are confident their
business plan is well thought out, they still worry that they will not be able to express the most
important aspects of their plan and engage the investors’ interest in the short time allotted for
the in-person presentation.

11.6 Keywords
Business Plan

Executive Summary

Induction Analysis

SWOT Analysis

11.7 Review Questions

1. Suggest guidelines for preparing a Business Plan.

2. Sketch out the Business Format.

3. How to Make a Business Plan Presentation?

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LESSON - 12
SOURCES OF CAPITAL FOR ENTREPRENEURS
Learning Objectives

After completing this lesson, you must be able to:

 identify the debit sources.

 explain short term and long term financing sources.

 spell out the stages of Venture Capital.

 list out the advantages of Venture Capital fund.

 specify the methods of project appraisal and financial appraisal.

Structure
12.1 Introduction

12.2 Debit Financing

12.3 Sources of Long Term Financing

12.4 Special Financial Institutions

12.5 Leasing Companies

12.6 Foreign Sources

12.7 Short-Term Finance Sources

12.8 Financial Appraisal of a New Project

12.9 Financial appraisal

12.10 Summary

12.11 Keywords

12.12 Review Questions

12.1 Introduction
As Stevenson states entrepreneurship is a concept that broadly came to use in eighteenth
century and has been defined many times by different scholars, for instance, Richard Cantillon
defined it as a risk of buying at a certain price and selling it at an uncertain price. Jean Baptiste
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broadened the definition by including the concept of gathering the factors of production. In
1911, Schumpeter added the concept of innovation to the definition of entrepreneurship, and by
innovation he meant any innovation which applies on process, market, product, factor and even
organization (2006). In all, entrepreneurship is a process of change, vision and creation, or
better to say innovation that needs passion and energy in order to implement these innovative
ideas and solutions. But, according to Hirich, Peters, and Shepherd (2010) says in order to start
a entrepreneurial venture the most difficult problem is obtain financing.

Entrepreneurs in order to finance their ventures rely on different sources of capital.

Generally, sources of capital are divided into ‘debt or equity’ and ‘internal or external’ sources
which include personal funds and friends and families and loans from banks. And, between
these two extreme groups of banks that never are willing to invest in a venture that is bearing
too much risks and entrepreneurs or their families and friends that more support the venture,
lies three other major financial sources; venture capitalists (VCs), business angels (BAs) and
corporate venture capitalists (CVCs). Here in this lesson, we are going to investigate some
various approaches such as what mentioned to enable an entrepreneur to get financial resources
to start and develop his/her venture.

12.2 Debit Financing

Based on Hisrich et al. (2010), debt financing is obtaining funds for the company from
borrowing and paying it back plus a fee. The common debit sources are;

(a) Debit Financing: This source is the main source of short term funds for entrepreneurs
in case of collateral availability. These types of funds are provided to the entrepreneurs if they
offer a tangible guaranty or collateral. This collateral can be personal assets of the entrepreneurs
(such as car, house, stock or bond, or business assets like the building of the venture, equipment).
The principle in getting the fund from bank is that the collateral should worth more than the
amount borrowed from the bank. (Hisrich et al, 2010).

(b) Trade Credit Financing : Based on investopedia.com trade credit is the purchase of
supplies by the costumer on the basis of account, in which the customer pays the supplier later
during a certain period of time. Usually, these time periods are 30, 60, or 90 days. Extending the
payment date is another strategy of the buyer of supplies to sell the goods and proceed to pay
the debt back (2013).
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(c) Account Receivable Financing: Account receivable type of financing is getting the
needed funds by selling the goods or services on credit to the credit worthy costumers and then
ask for the payment later. Sometimes, especially when government is involved, entrepreneur
can get a account receivable loan from a bank, by selling the accounts receivable at a value
below the face value of it. In this case, bank collects the money from accounts and if there is a
loss or inability to collect the accounts receivable, it is the bank who undertake the loss not
entrepreneur.

(d) Factoring Financing : According to entrepreneurs.com, factoring is one of the oldest

forms of getting finance for ongoing businesses. In factoring process, the accounts receivables
are sold to a third party and is being entitled with the right of collecting it ( in cases that, the
entrepreneur or the business owner can not get a loan through it). The process, similar to
account receivable financing is based on selling the accounts at a lower value of the face value
(2013).

(e) Cash Flow Financing : Another source of debit financing that is regularly provided
for entrepreneurs by commercial banks and financial institutions, is cash flow financing. According
to Hisrich et al. (2010), the standard ways banks lend money to entrepreneurs and companies
is called “Conventional bank loans”. These conventional bank loans cover credit financing,
installment loans, straight commercial loans, long term loans, character loans, and character
loans. Here we explain some of this loans briefly;

(f) Installment Loans: These kinds of loans can be given to a venture which has a clear
recordof sales and profit. These types of loans are often spent in working capital needs for
specific period of time like seasonal financing. Duration of installment loans is as long as 30 to
40 days.

(g) Straight Commercial Loans: These self-liquidating loans similar to installment loans
areused for specific periods of time like seasonal financing and for providing inventory which
straightly goes to the company for 30 to 90 days.

(h) Long Term Loans: These types of loans which is normally available just for large, big
andmature companies can last up to 10 years. The incurred debt to the company is repaid
based on a fixed interest rate and specific and constant schedule. Sometimes, the payment
schedule starts from the second or third year of the loan with profit only on the first year.
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(i) Character Loans: These kinds of loans are used when the venture has not the required
assetsto support the loan, so entrepreneur in order to get the loan needs a character or better
to say personal loan. In this type of loan, entrepreneur’s or another individual’s assets should
be pledged in bank as collateral in order to get the loan. These pledged asset are mostly, cars,
houses, and lands.

(j) Equity Financing: Equity financing is defined as getting funds for the company in
exchange for ownership (Hsrich et al, 2010). As Advani states, talking about popularity of
financing, equity financing for sure is in vogue. Various articles in mainstream media regarding
ventures, have glamorized the concept of selling stocks at the start up, so many entrepreneurs
prefer to raise money through equity rather than debt. It is appealing, since it feels like free
money at the start up. Furthermore, there is no need for collateral and usually no obligation to
repayment. And interest payment. Besides, there are more advantages of using equity funding
such as, having the equity investors’ business experiences and lessons, having trusted mentors
and advisors and a good potential board member (2006).

Most frequently source of fund is internal source which is generated within several channels
such as profit, sale of assets, accounts receivables, extending payback periods, and reduction
in working capital. External sources are the other channel for getting funds for the venture.
Before adopting these kinds of sources, they should be evaluated based on three bases of; the
length of time that the fund will be available to the venture, the amounts of cost involved, and
the amount of company control lost. The major issue involved in getting materials external to
the firm, especially, people and institutions that are potential stakeholders, is ethical dilemma
(Hisrich et al, 2010).

(k) Personal Funds, friends and family :Entrepreneurs rely on various sources of capital
to finance their venture, but they as Aldrich says mostly rely on personal funds which are least
expensive in terms of cost and control (1999). Using personal funds is very important in attracting
external financial resources such as banks, privates investors, venture capitalists. A major source
for personal funds can be savings, life insurance, or mortgages on houses or cars. It is very
important for venture capitalists to see the entrepreneurs start their venture on their own personal
funds, since it shows and will guarantee the commitment of the entrepreneurs to the venture
(Hisrich et al, 2010). Friends and families are another conventional source of fund that is limited
and their expectation of getting back a good return is set in an informal way (Harrison &Dibben,
1997).
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Friends and families are labeled as informal investors that often arereferred as three Fs
which are friends, families, fools (Clercq, Freid, Lehtonen, and Spienza, 2006).

(l) Business Angels : According to Hisrich et al. (2010), business angles (BAs) or private
investors are those who can be wealthy friends and families, or another individual. Those who
are looking for investment opportunities and use advisors and experts to make their investment
decisions. As Clercq et al. (2006) have stated, Business angels are those who invest their
capital in fresh ventures, and are commonly entrepreneurs who have liquidated their company
and are willing to invest their money or are the retired high executives of the large companies.
BAs, share the VC’s profit and interest in equity development and expand, however, some of
the BAs get involve in the venture to get a chance to leverage their industry contacts and
expertise or hatching the growth of a potentially successful entrepreneur (Harrison & axon,
1996). The important point here for entrepreneur is to determine whether the BAs’ main interest
is to make profit or to perform as a mentor as well. BAs, as Clercq et al. (2006) argue, don’t
compete with venture capitalists (VCs) on deals, however, they invest in seeding stage1 hoping
to enable the venture to attract future capital from VCs. Or, They invest in ventures whose
growth rate is too slow to attract the VCs. BAs are very proper for those entrepreneurs who are
seeking for informal relationship and a light system of reporting requirements to the investors.
BAs are divided into different types such as, corporate angels, entrepreneurial angels, enthusiast
angels, micromanagement angels, and profession angels. Typical deal size as Hisrich et al.
(2010) stated is $250,000, Seeding stage is a stage in which funds are used for developing the
business concepts and related parts at the start up to enable it attract start up finance.and the
time frame determined for cash out is about five to seven years, and at last but not the least, the
expected return is 35 to 50%.

12.3 Sources of Long Term Financing

The various sources are as follows –

• Shares: These are issued to the general public. The holders of shares are the owners of
the business. These may be of two types:

– Equity shares and

– Preference shares.

• Debentures: These are also issued to the general public. The holders of debentures are
the creditors of the company.
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• Public Deposits: General public also likes to deposit their savings with a popular and well
established company which can pay interest periodically and pay-back the deposit when
due.

• Retained Earnings: The company may not distribute the whole of its profits among its
shareholders. It may retain a part of the profits and utilize it as capital.

• Term Loans from Banks: Many industrial development banks, cooperative banks and
commercial banks grant medium term loans for a period of 3-5 years.

• Loan from Financial Institutions: There are many specialized financial institutions
established by the Central and State governments which give long term loans at reasonable
rates of interest.

12.4 Special Financial Institutions

• There are many all-India institutions like Industrial Finance Corporation of India (IFCI);

• Industrial Credit and Investment Corporation of India (ICICI);

• Industrial Development Bank of India (IDBI) , etc. At the State level, there are

• State Financial Corporations (SFCs) and

• State Industrial Development Corporations (SIDCs). These national and state level
institutions are known as ‘Development Banks’.

• Besides the development banks, there are several other institutions called as ‘Investment
Companies’ or ‘Investment Trusts’ which subscribe to the shares and debentures offered
to the public by companies.

• These include the Life Insurance Corporation of India (LIC); General Insurance Corporation
of India (GIC); Unit Trust of India (UTI) , etc

12.5 Leasing Companies

• Manufacturing companies can secure long-term funds from leasing companies. For this
purpose a lease agreement is made whereby plant, machinery and fixed assets may be
purchased by the leasing company and allowed to be used by the manufacturing concern
for a specified period on payment of an annual rental.

• At the end of the period the manufacturing company may have the option of purchasing
the asset at a reduced price. The lease rent includes an element of interest besides
expenses and profits of the leasing company.
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12.6 Foreign Sources

• Foreign Collaborators:- If approved by the Government of India, the Indian companies
may secure capital from abroad through the subscription of foreign collaborator to their
share capital or by way of supply of technical knowledge, patents, drawings and designs
of plants or supply of machinery.

• International Financial Institutions:- like World Bank and International Finance Corporation
(IFC) provide long-term funds for the industrial development all over the world.

• The World Bank grants loans only to the Governments of member countries or private
enterprises with guarantee of the concerned Government.

• IFC was set up to assist the private undertakings without the guarantee of the member
countries. It also provides them risk capital.

• Non-Resident Indians :- Persons of Indian origin and nationality living abroad are also
permitted to subscribe to the shares and debentures issued by the companies in India

12.7 Short-Term Finance Sources

Trade Credit
• It is the credit which the firms get from its suppliers. It does not make available the funds
in cash, but it facilitates the purchase of supplies without immediate payment.

• No interest is payable on the trade credits.

• The period of trade credit depends upon the nature of product, location of the customer,
degree of competition in the market, financial resources of the suppliers and the eagerness
of suppliers to sell his stocks.

Installment Credit
• Firms may get credit from equipment suppliers. The supplier may allow the purchase of
equipment with payments extended over a period of 12 months or more.

• Some portion of the cost price of the asset is paid at the time of delivery and the balance
is paid in a number of installments.

• The supplier charges interest on the installment credit which is included in the amount of
installment.
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• The ownership of the equipment remains with the supplier until all the installments have
been paid by the buyer.

Customer Advance
• Manufacturers of goods may insist the customers to make a part of the payment in advance,
particularly in cases of special order or big orders. The customer advance represents a
part of the price of the products that have been ordered by the customer and which will be
delivered at a later date.

Bank Credit
• Commercial Banks play an important role in financing the short-term requirements of
business concerns. They provide finance in the following ways :-

• Loans: - When a bank makes an advance in lump sum, the whole of which is withdrawn
to cash immediately by the borrower who undertakes to repay it in one single installment,
it is called a loan. The borrower is required to pay the interest on the whole amount

• Cash credit:- It is the most popular method of financing by commercial banks. When a
borrower is allowed to borrow up to a certain limit against the security of tangible assets
or guarantees, it is known as secured credit but if the cash credit is not backed by any
security, it is known as clean cash credit. In case of clean cash credit the borrower gives
a promissory note which is signed by two or more sureties. The borrower has to pay
interest only on the amount actually utilized.

• Overdrafts: - Under this, the commercial bank allows its customer to overdraw his current
account so that it shows the debit balance. The customer is charged interest on the
account actually overdrawn and not on the limit sanctioned.

• Discounting of bills: - Commercial banks finance the business concern by discounting

their credit instruments like bills of exchange, promissory notes and hundies. These
documents are discounted by the bank at a price lower than their face value.

12.8 Financial Appraisal of a New Project

Project Appraisal
Project appraisal means “the assessment of a project”. It is made for both proposed (Ex-
ante analysis) and executed projects (Post-ante analysis). For an financial institution project
appraisal “is a process whereby a leading financial institution makes an independent and objective
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assessment of the various aspects of an investment proposition for arriving at a financial decision
and is aimed at determining the viability of the project”

Methods of Project Appraisal

Appraisal of a proposed project includes,

1. Economic Analysis

2. Financial Analysis

3. Market Analysis

4. Technical Feasibility

5. Managerial Competence

1. Economic analysis: Requirement of raw materials, level of capacity utilization,

anticipated sales, anticipated expenses and the probable profits, location of the enterprise.

2. Financial Analysis :

1. Assessment of the financial requirements both- fixed and working capital

2. Working capital means excess of current assets over current liabilities.

3. Market Analysis

The methods to estimate the demand for a product are

a. Complete Enumeration method: All probable customers of the product are approached
and their probable demands for the product are estimated and then summed.

b. Sample Survey: Some number of consumers out of their total population is approached
and data on their probable demands for the product during the forecast period are collected
and summed. The total demand of sample customers is finally blown up to generate the
total demand for the product.

c. Sales Experience Method: Sample market is surveyed before the new product is offered
for sale. The results of the market surveyed are then projected to the universe in order to
anticipate the total demand for the product.

d. Vicarious method: The consumers of the product are not approached directly but indirectly
through some dealers who have a feel of their customers.
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Life Cycle Segmentation Analysis: Divided into 5 stages,

 Introduction

 Growth

 Maturity

 Saturation

 Decline

4. Technical Feasibility

While assessing the technical feasibility of the project, the following inputs covered in the
projects should also be taken into consideration,

i. Availability of land and site

ii. Availability of water, power, transport, communication facilities

iii. Availability of servicing facilities like machine shops, electric repair shops

iv. Coping with anti-pollution law

v. Availability of required raw material as per quality and quantity.

5. Managerial Competence

12.9 Financial appraisal

It is an objective evaluation of the profitability and financialstrength of a Business unit.

Methods of Financial Appraisal

Net Present Value Method (NPV)

In the NPV method, the revenues and costs of a project are estimated and then are
discounted and compared with the initial investment. The preferred option is that with the highest
positive net present value. Projects with negative NPV values should be rejected because the
present value of the stream of benefits is insufficient to recover the cost of the project.

Compared to other investment appraisal techniques such as the IRR and the discounted
payback period, the NPV is viewed as the most reliable technique to support investment appraisal
decisions. There are some disadvantages with the NPV approach. If there are several
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independent and mutually exclusive projects, the NPV method will rank projects in order of
descending NPV values. However, a smaller project with a lower NPV may be more attractive
due to a higher ratio of discounted benefits to costs (see BCR below), particularly if there
affordability constraints.

Using different evaluation techniques for the same basic data may yield conflicting
conclusions. In choosing between options A and B, the NPV method may suggest that option A
is preferable, while the IRR method may suggest that option B is preferable. However in such
cases, the results indicated by the NPV method are more reliable. The NPV method should be
always be used where money values over time need to be appraised. Nevertheless, the other
techniques also yield useful additional information and may be worth using.

The key determinants of the NPV calculation are the appraisal horizon, the discount rate
and the accuracy of estimates for costs and benefits.

Discount rate

The discount rate is a concept related to the NPV method. The discount rate is used to
convert costs and benefits to present values to reflect the principle of time preference. The
calculation of the discount rate can be based on a number of approaches including, among
others:

 The social rate of time preference

 The opportunity cost of capital

 Weighted average method

The same basic discount rate (usually called the test discount rate or TDR) should be
used in all cost-benefit and cost-effectiveness analyses of public sector projects.

The current recommended TDR is 5%. However, if a commercial State Sponsored Body
is discounting projected cash flows for commercial projects, the cost of capital should be used
or even a project-specific rate.

Internal Rate of Return (IRR)

The IRR is the discount rate which, when applied to net revenues of a project sets them
equal to the initial investment. The preferred option is that with the IRR greatest in excess of a
specified rate of return. An IRR of 10% means that with a discount rate of 10%, the project
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breaks even. The IRR approach is usually associated with a hurdle cost of capital/discount rate,
against which the IRR is compared. The hurdle rate corresponds to the opportunity cost of
capital. In the case of public projects, the hurdle rate is the TDR. If the IRR exceeds the hurdle
rate, the project is accepted.

There are disadvantages associated with the IRR as a performance indicator. It is not
suitable for the ranking of competing projects. It is possible for two projects to have the same
IRR but have different NPV values due to differences in the timing of costs and benefits. In
addition, applying different appraisal techniques to the same basic data may yield contradictory
conclusions.

Benefit / Cost ratio (BCR)

The BCR is the discounted net revenues divided by the initial investment. The preferred
option is that with the ratio greatest in excess of 1. In any event, a project with a benefit cost
ratio of less than one should generally not proceed. The advantage of this method is its simplicity.

Using the BCR to rank projects can lead to suboptimal decisions as a project with a
slightly higher BCR ratio will be selected over a project with a lower BCR even though the latter
project has the capacity to generate much greater economic benefits because it has a higher
NPV value and involves greater scale.

Payback and Discounted payback

The payback period is commonly used as an investment appraisal technique in the private
sector and measures the length of time that it takes to recover the initial investment. However
this method presents obvious drawbacks which prevent the ranking of projects. The method
takes no account of the time value of money and neither does it take account of the earnings
after the initial investment is recouped. For example, a project requires a €3 million investment
and Option 1 returns €2 million in the first year and Option 2 returns €3 million for the same
year. On this basis Option 2 is the preferred option as the payback period is shorter but if the
cash flows changed in subsequent years and Option 1 returned €2 million annually while Option
2 only earned €1 million annually, the chosen option would have been incorrect. The ordinary
payback period should not be used as an appraisal technique for public investment projects.

A variant of the payback method is the discounted payback period. The discounted payback
period is the amount of time that it takes to cover the cost of a project, by adding the net positive
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discounted cash flows arising from the project. It should never be the sole appraisal method
used to assess a project but is a useful performance indicator to contextualise the project’s
anticipated performance.

Sensitivity analysis

An important feature of a comprehensive CBA is the inclusion of a risk assessment. The

use of sensitivity analysis allows users of the CBA methodology to challenge the robustness of
the results to changes in the assumptions made (i.e. discount rate, time horizon, estimated
value of costs and benefits, etc). In doing so, it is possible to identify those parameters and
assumptions to which the outcome of the analysis is most sensitive and therefore, allows the
user to determine which assumptions and parameters may need to be re-examined and clarified.

Sensitivity analysis is the process of establishing the outcomes of the cost benefit analysis
which is sensitive to the assumed values used in the analysis. This form of analysis should also
be part of the appraisal for large projects. If an option is very sensitive to variations in a particular
variable (e.g. passenger demand), then it should probably not be undertaken. If the relative
merits of options change with the assumed values of variables, those values should be examined
to see whether they can be made more reliable. It can be useful to attach probabilities to a
range of values to help pick the best option.

Sensitivity analysis requires a degree of exploratory analysis to ascertain the most sensitive
variables and should lead to a risk management strategy involving risk mitigation measures to
ensure the most pessimistic values for key variables do not materialise or can be managed
appropriately if they do materialize. It is important to take into account the level of disaggregation
of project inputs and benefits – sensitivity analysis based on a mix of highly aggregated and
disaggregated variables may be misleading.

Scenario analysis

The scenario analysis technique is related to sensitivity analysis. Whereas the sensitivity
analysis is based on a variable by variable approach, scenario analysis recognizes that the
various factors impacting upon the stream of costs and benefits are inter-independent. In other
words, this approach assumes that that altering individual variables whilst holding the remainder
constant is unrealistic (i.e. for a tourism project, it is unlikely that ticket sales and café-souvenir
sales are independent). Rather, scenario analysis uses a range of scenarios (or variations on
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the option under examination) where all of the various factors can be reviewed and adjusted
within a consistent framework.

A number of scenarios are formulated – best case, worst case, etc – and for each scenario
identified, a range of potential values is assigned for each cost and benefit variable. When
formulating these scenarios, it is important that appropriate consideration is given to the sources
of uncertainty about the future (i.e. technical, political, etc). Once the values within each scenario
have been reviewed, the NPV of each scenario can then be recalculated.

Switching values

This process of substituting new values on a variable-by-variable basis can be referred to

as the calculation of switching values. These can provide interesting insights such as what
change(s) would make the NPV equal zero or alternatively, by how much must costs or benefits
fall or rise, respectively, in order to make a project worthwhile. The switching value is usually
presented as a % i.e. a 20% increase in investment costs reduces project NPV to 0.

This is very useful information and should be afforded a prominent place in any decision-
making process. Moreover, given the importance of this information the switching values chosen
should be carefully considered and should be realistic and justifiable. For example, for capital
projects requiring an Exchequer commitment over the medium to long-term, operating and
maintenance costs should always be examined. Similarly, any project reliant upon user charges
should always examine the impact of changes in volumes and the level of charges.

Finally, the European Commission have suggested that when undertaking a sensitivity
analysis a useful determinant of the most critical variables is those for which a 1 per cent
variation (+/-) produces a corresponding variation of 5 per cent or more in the NPV.

Distributional Analysis The calculation of NPV’s makes no allowance for the distribution
of costs and benefits among members of society. This is an important drawback if the intended
objectives of a programme/project aimed at specific income groups. Differential impact may
arise because of income, gender, ethnicity, age, geographical location or disability and any
distributional effects should be explicit and quantified where appropriate. A common approach
to take account of distributional issues is to divide the relevant population into different income
groups and analyze the impact of the programme/project on these groups. Weights can be
attached to the different groups to reflect Government policy. Carrying out a distributional analysis
can be a difficult task because costs and benefits are redistributed in unintended ways.
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12.10 Summary
Entrepreneurs in order to finance their ventures rely on different sources of capital.
Generally, sources of capital are divided into ‘debt or equity’ and ‘internal or external’ sources
which include personal funds and friends and families and loans from banks. And, between
these two extreme groups of banks that never are willing to invest in a venture that is bearing
too much risks and entrepreneurs or their families and friends that more support the venture,
lies three other major financial sources; venture capitalists (VCs), business angels (BAs) and
corporate venture capitalists (CVCs).

12.11 Keywords
Cash Flow Financing

Debit Financing

Equity Financing

Learning

Project Appraisal

12.12 Review Questions

1. Write notes on “Debit Financing”.

2. What is Cash Flow Financing? What is Equity Financing?

3. Describe Long term Financing Sources.

4. Name and explain the various methods of Project Appraisal.

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LESSON - 13
FINANCING THE NEW VENTURE
Learning Objectives

After completing this lesson, you must be able to:

 detail the history of Venture Capital in India.

 sketch out the structure of Venture Capital.

 spell out the stages of Venture Capital.

 list out the advantages of Venture Capital fund.

Structure
13.1 Introduction

13.2 History of Venture Capital in India

13.3 Venture Capital Structure

13.4 Stages of Venture Capital

13.5 Venture Capital Investment Criteria

13.6 Advantages of Venture Capital Fund

13.7 SWOT Analysis of Indian Venture Capital

13.8 Summary

13.9 Keywords

13.10 Review Questions

13.1 Introduction
A Venture Capitalist is a person or investment firm that makes venture investments, and
these Venture Capitalists are expected to bring managerial and technical expertise as well as
capital to their investments. A Venture Capital fund refers to a pooled investment vehicle that
primarily invests the financial capital of third-party investors in enterprises that are too risky for
the standard capital markets or bank loans. Venture Capital firms typically comprise small teams
with technology backgrounds (scientists, researchers) or those with business training or deep
industry experience.
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A core skill within VCs is the ability to identify novel technologies that have the potential to
generate high commercial returns at an early stage. By definition, VCs also take a role in
managing entrepreneurial companies at an early stage, thus adding skills as well as capital,
thereby differentiating VC from buy-out private equity, which typically invests in companies with
proven revenue, and thereby potentially realizing much higher rates of returns. Inherent in
realizing abnormally high rates of returns is the risk of losing all of one’s investment in a given
startup company. As a consequence, most Venture Capital investments are done in a pool
format, where several investors combine their investments into one large fund that invests in
many different startup companies. By investing in the pool format, the investors are spreading
out their risk to many different investments versus taking the chance of putting all of their
money in one startup firm.

13.2 History of Venture Capital in India

History of Venture Capital in India dates back to early 1970 when government of India
appointed a committee laid by Late Sri R.S. Bhatt to find out the ways to meet a void in
conventional financing for funding start-up companies based on absolutely new innovative
technologies. Such companies either did not get any financial support or the funding was
inadequate which resulted into their early mortality. The committee recommended starting of
Venture Capital industry in India. In mid 80s three all India financial institutions viz. IDBI, ICICI,
IFCI started investing into the equity of small technological companies.

In November 1988, Govt. of India decided to institutionalize Venture Capital Industry and
announce guidelines in the parliament. Controller of Capital issues implemented these guidelines
known as Controller of Capital Issues (CCI) for Venture Capital (VC). These guidelines were
very restrictive and following a very narrow definition of Venture Capital (VC). They required
Venture Capital to be invested in companies based on innovative technologies started by first
generation entrepreneur. This made VC investment highly risky and unattractive. Nonetheless
about half a private initiative were taken. At the same time World Bank organized a VC awareness
seminar and selected 6 institutions to start VC investment in India. This included Technology
Development and Information Company of India Ltd. (TDICI), Gujarat Venture Finance Limited
(GVFL), Canbank Venture Capital Fund,

Andhra Pradesh Industrial Development Corporation Limited (APIDC), Risk Capital and
Technology Finance Corporation Ltd. (RCTFC), and Pathfinder. The other significant
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organizations in private sector were ANZ Grindlays, 3i Investment Services Limited, IFB, and
Jardine Electra.

After the reforms were commenced in 1991, CCI guidelines were abolished and VC Industry
became unregulated. In 1995, Government of India permitted Foreign Finance companies to
make investments in India and many foreign VC private equity firms entered India. In 1996,
after the lapse of around 8 years, government again announced guidelines to regulate the VC
industry. There were many shortcomings in these guidelines at the starting point. These guidelines
did not create a homogeneous level playing field for all the VC investors. This impeded growth
of domestic VC industry. Lack of incentives also made Indian Corporate and wealthy individuals
shy of VC funds. With the result, VC scene in India started getting dominated by foreign equity
fund.

In 1997, IT boom in India made VC industry more significant. Due to symbiotic relationship
between VC and IT industry, VC got more prominence as a major source of funding for the
rapidly growing IT industry. Indian Venture Capitalist’s (VC’s) which were so far investing in all
the sectors changed their focus to IT and telecom industry.

The recession during 1999-2002 took the wind out of VC industry. Most of the VC either
closed down or wound-up their operations. Most of them with the exception of one or two like
Gujarat Venture Finance Limited (GVFL) changed their focus to existing successful firms for
their growth and expansion. VC firms also got engaged into funding buyouts, privatization and
restructuring. Currently, just a few firms are taking the risk of investing into the start-up technology
based companies.

The Development of Venture Capital In India Can Be Summarized Into Four Phases:

Phase I Formation of TDICI in the 80s and regional fund as GVFL and
APIDC in the early 90s.

Phase II Entry of Foreign Venture Capital funds (VCF) like Draper, Warburg
Pincus between 1995-1999

Phase III 2000 onwards, Emergence of successful India-centric VC firms

like Helion, Infinity, Chryscapital, Westfridge, etc.

Phase IV (Current) Global VCs and PE actively investing in India

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13.3 Venture Capital Structure

Venture Capital firms are typically structured as partnerships, the general partners of
which serve as the managers of the firm and will serve as investment advisors to the Venture
Capital funds raised. Venture Capital firms in the United States may also be structured as
limited liability companies, in which case the firm’s managers are known as managing members.
Investors in Venture Capital funds are known as limited partners. This constituency comprises
both high net worth individuals and institutions with large amounts of available capital, such as
State and Private pension funds, University financial endowments, insurance companies and
pooled investment vehicles, called funds.

Structure of Venture Capital Fund

Most Venture Capital funds have a fixed life of 10 years, with the possibility of a few years
of extensions to allow for private companies still seeking liquidity. The investing cycle for most
funds is generally three to five years, after which the focus is managing and making follow-on
investments in an existing portfolio. This model was pioneered by successful funds in Silicon
Valley through the 1980s to invest in technological trends broadly but only during their period of
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ascendance, and to cut exposure to management and marketing risks of any individual firm or
its product.

In such a fund, the investors have a fixed commitment to the fund that is initially unfunded
and subsequently “called down” by the Venture Capital fund over time as the fund makes its
investments. There are substantial penalties for a limited partner (or investor) which fails to
participate in a capital call.

Normally can take anywhere from a month or so to several years for Venture Capitalists
to raise money from limited partners for their fund. At the time when all of the money has been
raised, the fund is said to be closed, and the 10-year lifetime begins. Some funds have partial
closure when one half (or some other amount) of the fund has been raised. “Vintage year”
generally refers to the year in which the fund was closed and may serve as a means to stratify
VC funds for comparison. This shows the difference between a Venture Capital fund management
company and the Venture Capital funds managed by them.

From investors point of view funds can be traditional where all the investors invest with
equal terms or asymmetric where different investors have different terms. Typically the asymmetry
is seen in cases where there’s an investor that has other interests such as tax income in case
of public investors.

Venture Capitalist firms differ in their approaches. There are multiple factors, and each
firm is different. Some of the factors that influence VC decisions include:

 Some VCs tend to invest in new ideas, or knowledge based companies. Others prefer
investing in established companies that need support to go public or grow.

 Some invest solely in certain industries.

 Some prefer operating locally while others will operate nationwide or even globally.

 VC expectations often vary. Some may want a quicker public sale of the company or
expect fast growth. The amount of help a VC provides can vary from one firm to the next.

13.4 Stages of Venture Capital

Venture Capital may take various forms at different stages of the project. There are four
successive stages of development of a project viz. development of a project idea, implementation
of the idea, commercial production and marketing and finally large scale investment to exploit
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the economics of scale and achieve stability. Financial institutions and banks usually start
financing the project only at the second or third stage but rarely from the first stage. But Venture
Capitalists provide finance even from the first stage of idea formulation. The various stages in
the financing of Venture Capital are described below:

Development of an Idea - Seed Finance: In the initial stage, Venture Capitalists provide
seed capital for translating an idea into business proposition. At this stage investigation is made
in depth which normally takes a year or more.

Implementation Stage - Start up Finance: When the firm is set up to manufacture a product
or provide a service, startup finance is provided by the Venture Capitalists. The first and second
stage capital is used for full scale manufacturing and further business growth.

Fledging Stage - Additional Finance: In the third stage, the firm has made some headway
and entered the stage of manufacturing a product but faces teething problems. It may not be
able to generate adequate funds and so additional round of financing is provided to develop the
marketing infrastructure.

Establishment Stage - Establishment Finance: At this stage the firm is established in the
market and expected to expand at a rapid pace. It needs further financing for expansion and
diversification so that it can reap economies of scale and attain stability. At the end of
establishment stage, the firm is listed on the stock exchange and at this point the Venture
Capitalist disinvests their shareholdings through available exit routes.

Before investing in small, new or young hi-tech enterprises, the Venture Capitalist look for
percentage of key success factors of a Venture Capital project. They prefer projects that address
these problems. After assessing the viability of projects, the investors decide for what stage
they should provide Venture Capital so that it leads to greater capital appreciation. All the above
stages of finance involve varying degrees of risks and Venture Capital industry, only after
analyzing such risks, invest in one or more. Hence they specialize in one or more stages but
rarely all.

13.5 Venture Capital Investment Criteria

Venture Capital investment refers to the capital invested into “risky” ventures to obtain a
very high rate of returns. Venture Capital is invested into equities rather than loans to get a
good rate of return. The Venture Capital is provided to companies in the various stages of
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development and Venture Capital investment criteria are the methodologies followed by Venture
Capitalists to select appropriate ventures for investment.

Venture Capital investment criteria is not just meant for small and mid-sized businesses
but it can be an investment into a project of a large business, or into a startup company aiming
to grow significantly. The Venture Capital investment criteria are based on the potential of the
company to grow fast within a limited time period and resources. The Venture Capital investment
criteria define the set of rules for investment in ventures to get a high growth potential. The
ventures which can provide great returns and the ventures where the investor can have a
successful “exit “ within the desired time period of investment varying from three to seven years
is considered to be an ideal Venture Capital investment option. The startup company which is
based on innovative structure and a well-designed business model supported by a strong
management team attracts Venture Capitalists. The Venture Capitalists ensure stocks follow
the desired Venture Capital investment criteria to make mature investment in stocks to get high
returns.

Venture Capitalists should follow the some of the basic Venture Capital investment criteria
before making any investment. The basic Venture Capital investment criteria are “never pay
with pay off” and “keep an exit plan.” The Venture Capitalists should never pay with pay off and
always keep money for personal needs before spending on Venture Capital because the failure
rate in venture investment can be more than 50%. In some stocks it can more than 90% and if
the venture fails, the entire funding is written off.

The Venture Capitalists spend money to raise more money and the Venture Capital
investment criteria help them to make the right options. Some significant Venture Capital
investment criteria are as follows:

Criteria 1: More Risk More Returns

One of the main - Venture Capital investment criteria is “more risk gives more returns.”
Investment in risky ventures can get higher returns if the ventures are selected carefully. The
investor should know for which stage of development the investment is needed. It will provide a
basic idea of the risk factor involved and time period of investment. There are different options
to make venture money – IPO, and Merger and Acquisition. The initial public offering or IPO of
a large company is most attractive of Venture Capital investments because it comes with a low
risk.
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Criteria 2: Company’s Profile

The Venture Capital investment criteria are mostly based on the company’s profile. The
company should be a fast growing company which has a huge market presence and the company
should have abundant intellectual property to be able to put barrier to its competitor’s growth.
The company should be large or reputed enough to be able to grow fast. The company should
be into a promising business field.

Criteria 3: Company’s Development Stage

Venture Capital investment criteria are designed to know the stage of growth of the company
and the risk involved. Generally, Venture Capital investment is needed for four different stages
of the company’s development - Idea generation, Start up, Ramp up and Exit (ISRE). The
Venture Capital can be for getting the “seed money” for introducing a new idea in the market.
Since the risks involved in new venture is high, the profits are also high in new ventures. It can
be for start up of a company, or the company may need funds for marketing and development.
Some companies require Venture Capital for first round – early sales and manufacturing, and
some companies may need working capital. The company may require money for expansion or
for going public.

Criteria 4: The business model

Venture Capital investment criteria are about secure and high returns, and the business
model of the company enables it to grow fast. A company fulfills the Venture Capital investment
criteria if the products sold by the company have a high market demand. The company should
be able to deliver products to make customers repeat customers. The company should be able
to generate more revenues with limited resources. The business model should fulfill the Venture
Capital investment criteria. It should have the potential to attract customers and stay ahead of
competitors.

Criteria 5: Management team

A strong management team is needed for a company to sustain for long. If a company is
not supported by a strong management, it will not be able to deliver its plans and the company
may not perform well, therefore, a good management team is one of the most important Venture
Capital investment criteria. There are many companies which fail to deliver the expected results
because there are clashes within the top management. The leading management of the company
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should be strong, professional and expert at its job. The management team should have skilled,
realistic, honest and seasoned group of people who have the capability to turn plans into reality.
The company should have people to be able to anticipate the problems and prevent the company
from dangers. Both the top management and the marketing teams of a company should be
strong to keep it going.

Criteria 6: Company’s Valuation

The market valuation of company in term of investments and equity should be attractive
because a good valuation reduces the risks involved in the investment.

Criteria 7: The Exit Plan

Venture Capitalists mostly hold the stocks for three to seven years and they should have
a proper “exit plan” to opt out of investment.

13.6 Advantages of Venture Capital Fund

(i) Advantages to Investing Public

 The investing public will be able to reduce risk significantly against unscrupulous
management, if the public invest in venture fund who in turn will invest in equity of new
business. With their expertise in the field and continuous involvement in the business
they would be able to stop malpractices by management.

 Investors no means to vouch for the reasonableness of the claims made by the promoters
about profitability of the business. The venture funds equipped with necessary skills will
be able to analyze the prospects of the business.

 Investors do not have any means to ensure that the affairs of the business are conducted
prudently. The venture fund having representatives on the Board of Directors of the
company would overcome it.

(ii) Advantages to promoters

 The entrepreneur for the success of public issue is required to convince tens of
underwriters, brokers and thousands of investors but to obtain Venture Capital assistance;
he will be required to sell his idea to justify the officials of the venture fund. Venture
Capital provides a solid capital base for future growth by injecting long-term equity financing.
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 Public issue of equity; shares has to be preceded by a lot of efforts. Necessary statutory
sanctions, underwriting and brokers arrangement, publicity of issue etc. the new
entrepreneurs find it very difficult to make underwriting arrangements require a great deal
of effort. Venture fund assistance would eliminate those efforts by leaving entrepreneur to
concentrate upon bread and butter activities of business.

 Costs of public issues of equity share often range between 10 percent to 15 percent of
nominal value of issue of moderate size, which are often even higher for small issues.
The company is required, in addition to above, to incur recurring costs for maintenance of
share registry cell, stock exchange listing fee, expenditure on printing and posting of
annual reports etc. These items of expenditure can be ill afforded by the business when
it is new. Assistance from venture fund does not require such expenditure.

 Business partner: the Venture Capitalists act as business partners who share the rewards
as well as the risks.

 Mentoring: Venture Capitalists provide strategic, operational tactical and financial advice
based on past experience with other companies in similar situations.

 Alliances: the Venture Capitalists help in recruitment of key personnel, improving

relationship with international markets, co-investment with other VC firms and in decision
making.

(iii) Advantages to Society in General

 A developed Venture Capital institutional set-up reduces the time lag between a
technological innovation and its commercial exploitation.

 It helps in developing new process/products in conducive atmosphere, free from the dead
weight of corporate bureaucracy, which helps in exploiting full potential.

 Venture Capital acts as a cushion to support business borrowings, as bankers and investors
will not lend money with inadequate margin of equity capital.

 Once Venture Capital funds start earning profits, it will be very easy for them to raise
resources from primary capital market in the form of equity and debts. Therefore, the
investors would be able to invest in new business through venture funds and, at the same
time, they can directly invest in existing business when venture fund disposes its own
holding.This mechanism will help to channelize investment in new high-tech business or
the existing sick business. These business will take- off with the help of finance from
venture funds and this would help in increasing productivity, better capacity utilization etc.
162

 The economy with well-developed Venture Capital network induces the entry of large
number of technocrats in industry, helps in stabilizing industries and in creating a new set
of trained technocrats to build and manage medium and large industries, resulting in
faster industrial development.

 A Venture Capital firm serves as an intermediary between investors looking for high returns
for their money and entrepreneurs in search of needed capital for their startups.

 It also paves the way for private sector to share the responsibility with public sector.

13.7 SWOT Analysis of Indian Venture Capital

Strengths
 One of the fastest growing economies; high domestic consumption-driven growth

 Strong entrepreneurial ecosystem and private sector

 VCPE investmentsgrowingatof63% (fromUS$1billionin2002toUS$ 51.6 billion by 2010)

 High intellectual capital, leading to emergence of VC hotspots (E.g., Bangalore)

 Active equity capital and transaction markets facilitating exit options

 Vibrant VCPE market with more than 250 GPs and most of the large global funds

Weaknesses
 Regulatory restrictions on foreign investment in certain sectors, albeit easing gradually

 Lack of availability of debt for transactions

Opportunities

 Significant growth in dispensable income and hence demand for products and services

 Capital is required for core sectors (e.g., infrastructure, manufacturing, health care)

 Stable government with a long-term secular and growth-oriented outlook

Threats

 Competition from emerging nations (e.g., Brazil, China) to attract foreign VCPE funds.

 The impact of proposed widespread changes in regulatory and tax policy is not fully clear
outlook.
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 Heightened PE interest and activity levels are expected as a result of broad- based
economic growth, stable government and strong capital markets.

 Growth capital minority deals are expected to remain the major theme with buyouts still
rare.

13.8 Summary
A Venture Capitalist is a person or investment firm that makes venture investments, and
these Venture Capitalists are expected to bring managerial and technical expertise as well as
capital to their investments. A Venture Capital fund refers to a pooled investment vehicle that
primarily invests the financial capital of third-party investors in enterprises that are too risky for
the standard capital markets or bank loans. Venture Capital firms are typically structured as
partnerships, the general partners of which serve as the managers of the firm and will serve as
investment advisors to the Venture Capital funds raised. Venture Capital may take various
forms at different stages of the project. There are four successive stages of development of a
project viz. development of a project idea, implementation of the idea, commercial production
and marketing and finally large scale investment to exploit the economics of scale and achieve
stability.

13.9 Keywords
Business model

Seed Finance

Venture Capital

13.10 Review Questions

1. Write an essay about the history of Venture Capital in India.

2. Structure of Venture Capital – Explain.

3. Enumerate the stages of Venture Capital.

4. Specify the advantages of Venture Capital Fund.

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LESSON - 14
WORKING CAPITAL MANAGEMENT
Learning Objectives

After completing this lesson, you must be able to:

 define Working Capital Management..

 elaborate the functions of Cash Management.

 specify the costs of maintaining receivables.

 explain the factors influencing the size of receivables.

 state the scope of Receivables Management.

 discuss Inventory Management.

Structure
14.1 Introduction

14.2 Cash Management

14.3 Receivables Management

14.4 Inventory Management

14.5 Summary

14.6 Keywords

14.7 Review Questions

14.1 Introduction
Working capital management is concerned with making sure we have exactly the right
amount of money and lines of credit available to the business at all times.

Working Capital is the money used to make goods and attract sales. The less Working
Capital used to attract sales, the higher is likely to be the return on investment.

Working Capital = Current Assets - Current Liabilities

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Working Capital Management

 Cash Management

 Receivables Management

 Inventory Management

(a)Cash Management
· Identify the cash balance which allows for the business to meet day to day expenses
reduces cash holding costs

(b)Receivables Management
· Money which is owed to a company by a customer for products and services provided
on credit

· Identify the appropriate credit policy

(c)Inventory Management
· Identify the level of inventory which allows for uninterrupted production

· Reduces the investment in raw materials, minimizes reordering costs and hence
increases cash flow.

14.2 Cash Management

Cash management is the corporate process of collecting and managing cash, as well as
using it for short-term investing. It is a key component of a company’s financial stability
and solvency. Corporate treasurers or business managers are frequently responsible for overall
cash management and related responsibilities to remain solvent.

Example

A computer manufacturing company, Techno Ltd., uses supplier Beta & Co. to purchase
its core materials. Beta & Co. has the policy of allowing its customers who buy on credit to pay
within 30-days period. At the moment Techno Ltd. has $20 million cash resources available and
has to pay $5 million to Beta & Co. after 30-day period for the purchases. However, after 30-day
period Techno Ltd. has an investment opportunity requiring use of the full $20 million cash
resources.
166

If the company is able to renegotiate its terms with suppliers allowing 60-day period, the
delay in payment will allow the company to benefit by using current funds for the investment
and paying suppliers with cash generated next month from other projects. Thus, by properly
managing its funds, Techno can take advantage of investment opportunities while maintaining
its operations.

The concept of cash management can be further understood in terms of the cash
management cycle. The sales generate cash, and this has to be disbursed out. The firm invests
the surplus cash or borrows cash in case of deficit. Thus, it tries to achieve this cycle at a
minimum cost along with the liquidity and control. An optimum cash management system is one
that not only prevents the insolvency but also reduces the days in account receivables, increases
the collection rates, chooses the suitable investment vehicle that improves the overall financial
position of the firm.

The importance of the cash management can be understood in terms of the uncertainty
involved in the cash flows. Sometimes the cash inflows are more than the outflows, or sometimes
the cash outflows are more. Thus, a firm has to manage cash affairs in a way, such that the
cash balance is maintained at its minimum level while the surplus cash is invested in the profitable
opportunities.

Functions of cash management

In an ideal scenario, an organization should be able to match its cash inflows to its cash
outflows. Cash inflows majorly include account receivables and cash outflows majorly include
account payables.
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Practically, while cash outflows like payment to suppliers, operational expenses, payment
to regulators are more or less certain, cash inflows can be tricky. So the functions of cash
management can be explained as follows :

(a) Inventory management

Higher stock in hand means trapped sales and trapped sales means less liquidity. Hence,
an organization must aim at faster stock out to ensure movement of cash.

(b) Receivables Management

An organization raises invoices for its sales. In these cases, the credit period for receiving
the cash can range between 30 – 90 days. Here, the organization has recorded the sales but
has not yet received cash for the transactions.

So the cash management function will ensure faster recovery of receivables to avoid a
cash crunch. If the average time for recovery is shorter, the organization will have enough cash
in hand to make its payments. Timely payments ensure lesser costs (interests, penalties) to the
organization.

Receivables management also includes a robust mechanism for follow-ups. This will ensure
faster recovery and it will also assist the business to predict bad debts and unforeseen situations.

(c) Payables Management

While receivables management is one of the primary areas in the cash management
function, payables management is also important. Payables arise when the organization has
made purchases on credit and needs to make payments for the same within a fixed time.

14.3 Receivables Management

A sound managerial control requires proper management of liquid assets and inventory.
These assets are a part of working capital of the business. An efficient use of financial resources
is necessary to avoid financial distress. Receivables result from credit sales. A concern is required
to allow credit sales in order to expand its sales volume. It is not always possible to sell goods
on cash basis only. Sometimes, other concerns in that line might have established a practice of
selling goods on credit basis. Under these circumstances, it is not possible to avoid credit sales
without adversely affecting sales. The increase in sales is also essential to increase profitability.
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After a certain level of sales the increase in sales will not proportionately increase production
costs. The increase in sales will bring in more profits.

Thus, receivables constitute a significant portion of current assets of a firm. But, for
investment in receivables, a firm has to incur certain costs. Further, there is a risk of bad debts
also. It is, therefore, very necessary to have a proper control and management of receivables.

Meaning of Receivables

Receivables represent amounts owed to the firm as a result of sale of goods or services
in the ordinary course of business. These are claims of the firm against its customers and form
part of its current assets. Receivables are also known as accounts receivables, trade receivables,
customer receivables or book debts. The receivables are carried for the customers. The period
of credit and extent of receivables depends upon the credit policy followed by the firm. The
purpose of maintaining or investing in receivables is to meet competition, and to increase the
sales and profits.

Costs of Maintaining Receivables

The allowing of credit to customers means giving funds for the customer’s use. The
concern incurs the following cost on maintaining receivables:

(1) Cost of Financing Receivables: When goods and services are provided on credit
then concern’s capital is allowed to be used by the customers. The receivables are financed
from the funds supplied by shareholders for long term financing and through retained earnings.
The concern incurs some cost for collecting funds which finance receivables.

(2) Cost of Collection: A proper collection of receivables is essential for receivables

management. The customers who do not pay the money during a stipulated credit period are
sent reminders for early payments. Some persons may have to be sent for collection these
amounts. All these costs are known as collection costs which a concern is generally required to
incur.

(3) Bad Debts: Some customers may fail to pay the amounts due towards them. The
amounts which the customers fail to pay are known as bad debts. Though a concern may be
able to reduced bad debts through efficient collection machinery but one cannot altogether rule
out this cost.
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Factors influencing the size of receivables

Besides sales, a number of other factors also influence the size of receivables. The following
factors directly and indirectly affect the size of receivables.

(1) Size of Credit Sales: The volume of credit sales is the first factor which increases or
decreases the size of receivables. If a concern sells only on cash basis as in the case of Bata
Shoe Company, then there will be no receivables. The higher the part of credit sales out of total
sales, figures of receivables will also be more or vice versa.

(2) Credit Policies: A firm with conservative credit policy will have a low size of receivables
while a firm with liberal credit policy will be increasing this figure. If collections are prompt then
even if credit is liberally extended the size of receivables will remain under control. In case
receivables remain outstanding for a longer period, there is always a possibility of bad debts.

(3) Terms of Trade: The size of receivables also depends upon the terms of trade. The
period of credit allowed and rates of discount given are linked with receivables. If credit period
allowed is more then receivables will also be more. Sometimes trade policies of competitors
have to be followed otherwise it becomes difficult to expand the sales.

(4) Expansion Plans: When a concern wants to expand its activities, it will have to enter
new markets. To attract customers, it will give incentives in the form of credit facilities. The
period of credit can be reduced when the firm is able to get permanent customers. In the early
stages of expansion more credit becomes essential and size of receivables will be more.

(5) Relation with Profits: The  credit policy  is followed  with  a view  to increase  sales.

When sales increase beyond a certain level the additional costs incurred are less than the
increase in revenues. It will be beneficial to increase sales beyond the point because it will bring
more profits. The increase in profits will be followed by an increase in the size of receivables or
vice-versa.

(6) Credit Collection Efforts: The  collection  of  credit  should  be  streamlined.  The
customers should be sent periodical reminders if they fail to pay in time. On the other hand, if
adequate attention is not paid towards credit collection then the concern can land itself in a
serious financial problem. An efficient credit collection machinery will reduce the size of
receivables.
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(7) Habits of Customers: The paying habits of customers also have bearing on the size
of receivables. The customers may be in the habit of delaying payments even though they are
financially sound. The concern should remain in touch with such customers and should make
them realize the urgency of their needs.

Meaning and Objectives of Receivables Management

Receivables management is the process of making decisions relating to investment in

trade debtors. We have already stated that certain investment in receivables is necessary to
increase the sales and the profits of a firm. But at the same time investment in this asset
involves cost considerations also. Further, there is always a risk of bad debts too. Thus, the
objective of receivables management is to take a sound decision as regards investment in
debtors. In the words of Bolton, S.E., the objectives of receivables management is “to promote
sales and profits until that point is reached where the return on investment in further funding of
receivables is less than the cost of funds raised to finance that additional credit.”

Dimensions of Receivables Management

Receivables mangament involves the careful consideration of the following aspects:

1. Forming of credit policy.

2. Executing the credit policy.

3. Formulating and executing collection policy.

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1. Forming of Credit Policy

For efficient management of receivables, a concern must adopt a credit policy. A credit
policy is related to decisions such as credit standards, length of credit period, cash discount
and discount period, etc.

(a) Quality of Trade Accounts of Credit Standards: The volume of sales will be influenced
by the credit policy of a concern. By liberalising credit policy the volume of sales can be increased
resulting into increased profits. The increased volume of sales is associated with certain risks
too. It will result in enhanced costs and risks of bad debts and delayed receipts. The increase in
number of customers will increase the clerical wok of maintaining the additional accounts and
collecting of information about the credit worthiness of customers. There may be more bad
debt losses due to extension of credit to less worthy customers. These customers may also
take more time than normally allowed in making the payments resulting into tying up of additional
capital in receivables. On the other hand, extending credit to only credit worthy customers will
save costs like bad debt losses, collection costs, investigation costs, etc. The restriction of
credit to such customers only will certainly reduce sales volume, thus resulting in reduced
profits.

   A finance manager has to match the increased revenue with additional costs. The credit
should be liberalized only to the level where incremental revenue matches the additional costs.
The quality of trade accounts should be decided so that credit facilities are extended only upto
that level. The optimum level of investment in receivables should be where there is a trade off
between the costs and profitability. On the other hand, a tight credit policy increases the liquidity
of the firm. On the other hand, a tight credit policy increases the liquidity of the firm.

(b) Length of Credit Period: Credit terms or length of credit period means the period allowed
to the customers for making the payment. The customers paying well in time may also be
allowed certain cash discount. A concern fixes its own terms of credit depending upon its
customers and the volume of sales. The competitive pressure from other firms compels to
follow similar credit terms, otherwise customers may feel inclined to purchase from a firm which
allows more days for paying credit purchases. Sometimes more credit time is allowed to increase
sales to existing customers and also to attract new customers. The length of credit period and
quantum of discount allowed determine the magnitude of investment in receivables.
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(c) Cash Discount: Cash discount is allowed to expedite the collection of receivables.
The concern will be able to use the additional funds received from expedited collections due to
cash discount. The discount allowed involves cost. The discount should be allowed only if its
cost is less than the earnings from additional funds. If the funds cannot be profitably employed
then discount should not be allowed.

(d) Discount Period: The collection of receivables is influenced by the period allowed for
availing the discount. The additional period allowed for this facility may prompt some more
customers to avail discount and make payments. This will mean additional funds released from
receivables which may be alternatively used. At the same time the extending of discount period
will result in late collection of funds because those who were getting discount and making
payments as per earlier schedule will also delay their payments.

2. Executing Credit Policy

After formulating the credit policy, its proper execution is very important. The evaluation
of credit applications and finding out the credit worthiness of customers should be undertaken.

(a) Collecting Credit information: The first step in implementing credit policy will be to
gather credit information about the customers. This information should be adequate enough so
that proper analysis about the financial position of the customers is possible. This type of
investigation can be undertaken only upto a certain limit because it will involve cost.

The sources from which credit information will be available should be ascertained. The
information may be available from financial statements, credit rating agencies, reports from
banks, firm’s records etc. Financial reports of the customer for a number of years will be helpful
in determining the financial position and profitability position. The balance sheet will help in
finding out the short term and long term position of the concern. The income statements will
show the profitability position of concern. The liquidity position and current assets movement
will help in finding out the current financial position. A proper analysis of financial statements will
be helpful in determining the credit worthiness of customers. There are credit rating agencies
which can supply information about various concerns. These agencies regularly collect
information about business units from various sources and keep this information upto date. The
information is kept in confidence and may be used when required.

Credit information may be available with banks too. The banks have their credit departments
to analyze the financial position of a customer.
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In case of old customers, business own records may help to know their credit worthiness.
The frequency of payments, cash discounts availed, interest paid on overdue payments etc.
may help to form an opinion about the quality of credit.

(b) Credit Analysis: After gathering the required information, the finance manager should
analyze it to find out the credit worthiness of potential customers and also to see whether they
satisfy the standards of the concern or not. The credit analysis will determine the degree of risk
associated with the account, the capacity of the customer borrow and his ability and willingness
to pay.

(c) Credit Decision: After analyzing the credit worthiness of the customer, the finance
manager has to take a decision whether the credit is to be extended and if yes then upto what
level. He will match the creditworthiness of the customer with the credit standards of the company.
If customer’s creditworthiness is above the credit standards then there is no problem in taking
a decision. It is only in the marginal case that such decisions are difficult to be made. In such
cases the benefit of extending the credit should be compared to the likely bad debt losses and
then decision should be taken. In case the customers are below the company credit standards
then they should not be out rightly refused. Rather they should be offered some alternative
facilities. A customer may be offered to pay on delivery of goods, invoices may be sent through
bank. Such a course help in retaining the customers at present and their dealings may help in
reviewing their requests at a later date.

(d) Financing Investments in Receivables and Factoring: Accounts receivables block a

part of working capital. Efforts should be made that funds are not tied up in receivables for
longer periods. The finance manager should make efforts to get receivables financed so that
working capital needs are met in time. The quality of receivables will determine the amount of
loan. The banks will accept receivable of dependable parties only. Another method of getting
funds against receivables is their outright sale to the bank. The bank will credit the amount to
the party after deducting discount and will collect the money from the customers later. Here too,
the bank will insist on quality receivables only. Besides banks, there may be other agencies
which can buy receivables and pay cash for them. This facility is known as factoring. The factoring
may be with or without recourse. It is without recourse then any bad debt loss is taken up by the
factor but if it is with recourse then bad debts losses will be recovered from the seller.
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Factoring is collection and finance service designed to improve he cash flow position of
the sellers by converting sales invoices into ready cash. The procedure of factoring can be
explained as follows:

1. Under an agreement between the selling firm and factor firm, the latter makes an appraisal
of the credit worthiness of potential customers and may also set the credit limit and term
of credit for different customers.

2. The sales documents will contain the instructions to make payment directly to factor who
is responsible for collection.

3. When the payment is received by the factor on the due date the factor shall deduct its
fees, charges etc., and credit the balance to the firm’s accounts.

4. In some cases, if agreed the factor firm may also provide advance finance to selling firm
for which it may charge from selling firm. In a way this tantamount to bill discounting by
the factor firm. However factoring is something more than mere bill discounting, as the
former includes analysis of the credit worthiness of the customer also. The factor may
pay whole or a substantial portion of sales vale to the selling firm immediately on sales
being effected. The balance if any, may be paid on normal due date.

Benefits and Cost of Factoring

A firm availing factoring services may have the following benefits:

§  Better Cash Flows

§  Better Assets Management

§  Better Working Capital Management

§  Better Administration

§  Better Evaluation

§  Better Risk Management

However, the factoring involves some monetary and non-monetary costs as follows:

Monetary Costs

a) The factor firm charges substantial fees and commission for collection of receivables.
These charges sometimes may be too much in view of amount involved.
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b) The advance fiancé provided by factor firm would be available at a higher interest
costs than usual rate of interest.

Non-Monetary Costs

a)  The factor firm doing the evaluation of credit worthiness of the customer will be primarily
concerned with the minimization of risk of delays and defaults. In the process it may over look
sales growth aspect.

b)  A factor is in fact a third party to the customer who may not feel comfortable while
dealing with it.

c)  The factoring of receivables may be considered as a symptom of financial weakness.

Factoring in India is of recent origin. In order to study the feasibility of factoring services
in India, the Reserve Bank of India constituted a study group for examining the introduction of
factoring services, which submitted its report in 1988.On the basis of the recommendations of
this study group the RBI has come out with specific guidelines permitting a banks to start
factoring in India through their subsidiaries. For this country has been divided into four zones.
In India the factoring is still not very common. The first factor i.e. The SBI Factor and Commercial
Services Limited started working in April 1991. The guidelines for regulation of a factoring are
as follows:

(1)    A factor firm requires an approval from Reserve Bank of India.

(2)    A factor firm may undertake factoring business or other incidental activities.

(3)    A factor firm shall not engage in financing of other firms or firms engaged in factoring.

3. Formulating and Executing Collection Policy

The collection of amounts due to the customers is very important. The collection policy
the termed as strict and lenient. A strict policy of collection will involve more efforts on collection.
Such a policy has both positive and negative effects. This policy will enable early collection of
dues and will reduce bad debt losses. The money collected will be used for other purposes and
the profits of the concern will go up. On the other hand a rigorous collection policy will involve
increased collection costs. It may also reduce the volume of sales. A lenient policy may increase
the debt collection period and more bad debt losses. A customer not clearing the dues for long
may not repeat his order because he will have to pay earlier dues first, thus causing.
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The objective is to collect the dues and not to annoy the customer. The steps should be
like (i) sending a reminder for payments (ii) Personal request through telephone etc. (iii) Personal
visits to the customers (iv) Taking help of collecting agencies and lastly (v) Taking legal action.
The last step should be taken only after exhausting all other means because it will have a bad
impact on relations with customers.

14.4 Inventory Management

A company’s merchandise, raw materials, and finished and unfinished products which
have not yet been sold. These are considered liquid assets, since they can be converted into
cash quite easily. Policies, procedures, and techniques employed in maintaining the optimum
number or amount of each inventory item. The objective of inventory management is to provide
uninterrupted production, sales, and/or customer-service levels at the minimum cost.

Why is inventory management important?

A retail business is useless without its inventory. Yet holding this inventory ties up a lot of
cash and resources. Being able to manage it effectively and efficiently is therefore vitally important
to cash flow and a great way to save money.

(a) Save on storage costs

 Warehousing costs tend to fluctuate based on how much product is being stored and for
how long. The longer an item sits on a shelf without being sold, the more it costs a
business.

 Good inventory management results in items spending less time sitting in the warehouse
before being sold. And this means reduced costs for storing them.

(b) Avoid spoilt or dead stock

 It’s not just storage costs where a retailer is potentially losing money from poor inventory
management. Perishable items will be entirely wasted should too much be ordered at
one time or it isn’t stored sufficiently.

 Too much stock that becomes ‘dead’ due to going out of season or style is similarly wasteful.
Better managing of inventory helps avoid wasting money on too much spoilt or dead
stock.
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(c) Improve cash flow

 Any inventory is likely to have been paid for upfront. But until this stock is sold, it’s just a
hole in the bank balance and a dip in cash flow.

Techniques of Inventory Management

ABC Analysis

This enables a retailer to analyze all current on-hand inventory by dividing it into three
categories - A, B and C. Which category a particular item falls into is based on inventory value
and cost significance.

 A Items: Are of high value with low sales frequency.

 B Items: Are of moderate value with moderate sales frequency.

 C Items: Are of low value with high sales frequency.

ABC Analysis allows a retailer to prioritize how they manage different inventory items. It
works well alongside the Just in Time technique as it allows to point focus at items that need
more attention.

For example, A items are of high value but stock levels will be kept lower so maintaining
a close eye on these is essential. Whereas C items are relatively high in number and so don’t
need such tight observation. While this is a popular method, it’s worth noting that its analysis
is based purely on monetary value and doesn’t take any other factors into account.

Drop shipping

Drop shipping effectively removes the task of inventory management from a retail business.
A customer would place an order and then have it fulfilled straight from the manufacturer or
wholesaler. A premium is usually added on top of bulk buying any stock, but this can be offset
by the complete lack of warehouse or storage costs.

Drop shipping can be a great option for startups or smaller businesses. But order processing
can prove tricky and the lack of control over customer experience means it’s something to think
twice about for high-growth and larger retailers.
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Inventory management forecasting

A phenomenal amount of good inventory management comes down to being able

to forecast future demand for specific items. And to put it plainly - this is no easy task.

There are a multitude of variables that can affect demand and it’s impossible to know for
certain exactly what’s round the corner. Thankfully though, there are some ideas to consider to
help predict as closely as possible.

Set forecasting boundaries

It’s essential to set certain boundaries when forecasting in order to give the most reliable
and accurate outcome:

 Forecast period. This is the specific amount of time into the future that a forecast will be
attempting to predict.

 Trend in demand. The increase or decrease in demand over a certain period of time.
Trends over the short, medium and long term past should be considered in order to make
future projections easier.

 Base demand. This is simply the exact current demand for a product at the specific point
a forecast is due to start from.

Know reorder points

Setting a clear reorder point for each item allows retailers to know exactly when to order new
stock. It is a specific point that acts as a trigger as soon as stock has diminished to that certain
level. It’s important to consider the lead time for new stock to be delivered when setting reorder
points. Enough stock should be leftover to keep up with demand before the new inventory is
available.

Economic Order Quantity (EOQ)

After deciphering the exact point new orders need to be placed, it’s time to consider how
much stock to actually order. This is where the Economic Order Quantity (EOQ) formula takes
prime position.

EOQ is a calculation that helps work out the ideal quantity of inventory to order for a
specific product while minimizing carrying costs. The three variables involved are:
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 Demand. The number of units sold over a given time period, usually a year.

 Relevant ordering cost. Total ordering cost per purchase order. This includes all staff,
transportation and any other costs associated with making each purchase order.

 Relevant carrying cost. Assume the item is in stock for the entire time period in question
and decipher the carrying cost per unit.

Then put these into the following formula:

EOQ 
2  Demand  Order Cost
Carrying Cost per Unit

For example, a business sells 2,400 office chairs a year (200 a month) with ordering
costs of each purchase order being £100. If the carrying cost per unit is worked out at £5, then
the formula turns into this:

Economic Order Quantity = square root of ((2 x 2,400) x £100) ÷ £5)

Economic Order Quantity = square root of 96,000

Economic Order Quantity = 310

In this example, we’ve determined that the perfect order quantity for this specific item is
310 units. Try the calculator below to play around with some different figures:

Inventory turnover

Inventory turnover gives an indication of how quickly stock is sold and shipped once it
has been received into a warehouse. The faster stock is moved, the less it costs to store it and
the more profit can be made on each sale. Keeping track of this enables greater insight into the
popularity of certain items to help gauge future buying practices. Use the following formula to
calculate inventory turnover:

Cost of Goods Sold

Inventory Turnover 
Average Inventory Value
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Safety stock

Safety stock is the backup stock needed to meet unexpected occurrences and sudden
changes in demand.

For example, an unexpected heat wave could see retailers selling barbecue equipment
experience a sudden rush in demand. The stock needs to be there to meet this, but they also
don’t want to keep too much on hand at any one time.

This is where the following formula can be useful to ensure a healthy balance:

 Sales Volume of Top 3 days 

Safety Stock     Ave Daily Sales Volume
 3 

Reorder point

As mentioned earlier, reorder points are vital in order to know exactly when to order new
stock for a specific item.

In essence, an item’s reorder point needs to be as soon as its safety stock levels are hit.
But the lead time between ordering and receiving the order needs to be taken into account.

Use the following formula for a simple way to calculate specific reorder points:

Re order Po int  Lead time in days  Ave daily sales volume  Safety Stock

Backorder rate

Keeping an eye on backorder rate is an excellent way of analyzing forecasting success.

A high backorder rate means a lot of orders are coming in for items that aren’t in stock. Of
course, sudden unexpected rises in demand can account for this. But if backorder rate is
consistently high then it’s likely a result of poor planning and forecasting.

Work out backorder rate with the following formula:

Orders unfulfilled at time of purchase

Backorder Rate 
Total Orders
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Carrying cost of inventory

The carrying cost of inventory is basically the cost a business pays for holding goods in
stock over a given time period. This can include storage costs, insurance, depreciation, staff
costs, taxes and any other expenses relating to holding inventory.

Businesses use this data to determine the amount of profit that can be made on current
inventory. It’s also useful to help determine how much inventory to keep on hand.

This is then usually expressed as a percentage of the mean inventory value over the
same time period:

 Average Inventory Value 

Carrying Cost of Inventory    100
 Total Carrying Costs 

14.5 Summary
Working capital management is concerned with making sure we have exactly the right
amount of money and lines of credit available to the business at all times. Working Capital is
the money used to make goods and attract sales. The less Working Capital used to attract
sales, the higher is likely to be the return on investment.

Working Capital is the difference between Current Assets and Current Liabilities.

Working Capital Management comprises of Cash Management, Receivables Management

and Inventory Management.

14.6
Cash Management

Inventory Management

Receivebles Management

Working Capital
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14.6 Review Questions

1. Write notes on “Working Capital Management”.

2. Sketch out Cash Management Cycle.

3. Find out the functions of Cash Management.

4. List and explain the factors influencing the size of receivables.

5. Why is inventory management important?

6. State and explain the techniques of Inventory Management.

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LESSON - 15
INCENTIVES TO ENTREPRENEURS
Learning Objectives

After completing this lesson, you must be able to:

 define incentive, subsidy and bounty.

 outline the advantages of incentives.

 list out the types of incentives.

Structure
15.1 Introduction

15.2 Advantages of providing Incentives to Entrepreneurs

15.3 Major Incentives to Enterprises

15.4 Summary

15.5 Review Questions

15.1 Introduction
The term “incentive’, generally means encouraging productivity. It is a motivational force,
which encourages an entrepreneur to take a right decision and act upon it. The objective of
providing incentives is to motivate an entrepreneur to set up a new venture in the larger interest
of the nation and the society. Broadly, incentives include concessions, subsidies and bounties.
Incentives may be financial or non-financial. Non-financial incentives push an entrepreneur
towards decision and action. Entrepreneurs in India are offered a number of incentives. These
incentives normally aim at reducing some of the problems faced by small scale industrialists.
Subsidy is a financial assistance or a sum of money provided by a government, to an industry
for public welfare or interest. It is any financial aid, grant, or contribution.

“Subsidy” means a single lump sum of money that is given by a Government to an

entrepreneur to cover the cost. Bounty: The term “bounty” denotes a bonus or financial aid given
to an industry to help it to compete with other units established in country or in a foreign market.
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Examples of Incentives

Industrial estates, industrial complexes, availability of power, concessional finance, capital

investment subsidy, transport subsidy, are few examples of incentives to solve constraints faced
by entrepreneurs in small scale sector.

15.2 Advantages of providing Incentives to Entrepreneurs

Following are the advantages of providing incentives to entrepreneurs.

1. Decentralization of economic power

Incentives encourages prospective entrepreneurs to take up industrial ventures and results

in decentralization of economic power in few hands.

2. Balanced regional development

Incentives are given to entrepreneurs establishing industries in backward areas. Hence,

it results in the dispersal of industries over India’s geographical area and contributes to regional
balanced development.

3. Transformation of Technology

Incentives help in the transformation of traditional technology into modern technology.

Traditional technology is characterized by low skill; low productivity and low wages, whereas
modern technology is subsequently characterized by improved skills, high productivity, raising
wages and a higher standard of living.

4. Overcomes Difficulties

The package of incentives and concessions are given to entrepreneurs for setting up
units both in backward as well as developed districts. But generally it is given for setting up units
in backward area. It is provided to offset the disadvantages prevailing in such places.

5. Generates Industrialization

Industrial policy uses incentives both to correct the market imperfections and to accelerate
the process of industrialization in the country. Regional balances can also lead to effective
utilization of regional resources, removal of disparities in income and levels of living and contribute
to a more integrated society.
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6. Encourages Entrepreneurship

The new entrants in the field face many obstacles on account of inadequate infrastructures.
The new entrepreneur is supported by the government agencies through various incentives.
Being a new entrant, an entrepreneur may lack marketing and entrepreneurial skills. An
entrepreneur requires support from government agencies to compete with competitors. The
subsidies and concessions motivate the entrepreneur both financially and non-financially and
promotes entrepreneurship in the country by removing economic constraints.

7. Helps to Overcome Competition

Incentives help the entrepreneur to survive and compete with the competitors. Some of
the incentives are concerned with the survival and growth of industries. Several incentives are
confined to the first few years of the establishment of the unit while a few of them are made
available over a long period.

15.3 Major Incentives to Enterprises

Some of the major incentives to enterprises in India that deserves special mention are as
follows:

An incentive is a motivational factor which induces a person to work hard or to do his work
more efficiently.

Many incentives are provided both by the Central and State Governments to pro-mote the
growth of small-scale industries and also to protect them from the onslaught of the large-scale
sector. Among the various incentives given to small-scale industries the following deserve special
mention:

1. Reservation:

To protect the small-scale industries from the competition posed by large-scale industries,
the Government has reserved the production of certain items exclusively for the small-scale
sector.  The  number  of  items  exclusively  re-served  for  the  small-scale  sector  has  been
considerably increased during the Five Year Plan Periods and now stands at 822. However,
prior to the 1997 – 98 Budget the number of items reserved for the small-scale sector stood at
836. The Finance Minister de-reserved 14 items in the 1997 – 98 Budget.
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2. Preference in Government purchases:

The Govern-ment as well as Government organizations shows preference in procuring
their requirements from the small-scale sector. For instance, the Director General of Supplies
and Disposals purchases 400 items exclusively from the small-scale sector. The National Small-
Scale Industries Corporation assists the SSI units in obtaining a greater share of Government
and defence purchases.

3. Price preference:

The SSI units are given price preference up to a maximum of 15 per cent in respect of
certain items purchased both from small-scale and large-scale units.

4. Supply of raw materials:

In order to ensure regular supply of raw materials, imported components and equipment’s,
the Government gives priority allocation to the small-scale sector as compared to the large-
scale sector. Further, the Government has liberalized the import policy and streamlined the
distribution of scarce raw materials.

5. Excise duty:

In respect of SSI units excise duty concessions are granted to both registered and
unregistered units on a graded scale depending upon their production value. Full exemption is
granted up to a production value of Rs.30 lakhs in a year and 75 % of normal duty is levied for
production value exceeding Rs.30 lakhs but not exceeding Rs.75 lakhs. If the production value
exceeds Rs.75 lakhs, normal rate of duty will be levied.

6. RBI’s credit guarantee scheme:

In 1960, the RBI introduced a Credit Guarantee Scheme for small-scale industries. As
per the Scheme, the RBI takes upon itself the role of a guarantee organization for the advances
which are left unpaid, including interest overdue and recoverable charges. This scheme covers
not only working capital but also advances provided for the creation of fixed capital.

7. Financial assistance:

Small-scale industries are brought under the priority sector. As a result, financial assistance
is provided to SSI units at concessional terms by commercial banks and other financial institutions.
With a view to providing more financial assistance to the small-scale sector, several schemes
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have been introduced in the recent past the Small Industries Development Fund (SIDF) in
1986, National Equity Fund (NEF) in 1987 and the Single Window Scheme (SWS) in 1988.

SIDF provides refinance assistance to small-scale and cottage and village industries and
the tiny sector in rural areas. NEF provides equity type support to small entrepreneurs for
setting up new projects in the tiny/small-scale sector. In 1996, the small-scale sector received
42.3 per cent of the total priority sector advances from public sector banks.

8. Technical consultancy services:

The Small Industries Development Organization, through its network of service and branch
institutes, provides technical consultancy services to SSI units. In order to provide the necessary
technical input to rural industries, a Council for Advancement of Rural Technology was set up in
October, 1982.

The Technical Consultancy Organization renders consultancy services to SSI units at a

subsidized rate. Many financial institutions are also providing subsidies to SSI units for availing
of consultancy serv-ices. For instance, small entrepreneurs proposing to set up rural, cottage,
tiny or small-scale units, can get consultancy services at a low cost from the Technical Consultancy
Organizations approved by the All-India and State-level financial institutions.

They have to pay only 20% of the fees charged by a technical consultancy organization.
The entire balance of 80% or Rs.5, 000 whichever is lower is subsidized by the Industrial
Finance Corporation of India.

9. Machinery on hire purchase basis:

The National Small Industries Corporation (NSIC) arranges supply of machinery on hire
purchase basis to SSI units, including ancillaries located in backward areas which qualify for
investment subsidy. The rate of interest charged in respect of technically qualified persons and
entrepreneurs coming from backward areas are less than the amount charged to others. The
earnest money payable by technically qualified persons and entrepreneurs from backward areas
is 10% as against 15% in other cases.

10. Transport subsidy:

The Transport Subsidy Scheme, 1971 envisages grant of a transport subsidy to small-
scale units in selected areas to the extent of 75 % of the transport cost of raw materials which
are brought into and finished goods which are taken out of the selected areas.
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11. Training facilities:

The Entrepreneurship Development Institute of India, financial institutions, commercial

banks, technical consultancy organizations, and NSIC provide training to existing and potential
entrepreneurs.

12. Marketing assistance:

The National Small Industries Corporation (NSIC), the Small Industries Development
Organization (SIDO) and the various Export Promotion Councils help SSI units in marketing
their products in the domestic as well as foreign markets. The SIDO conducts training
programmes on export marketing and organizes meetings and seminars on export promotion.

13. District Industries Centres (DICs):

The 1977 Industrial Policy Statement introduced the concept of DICs. Accordingly a DIC
is set up in each district. The DIC provides and arranges a package of assistance and facilities
for credit guidance, supply of raw materials, marketing etc.

15.4 Summary
The term “incentive’,generally means encouraging productivity. It is a motivational force,
which encourages an entrepreneur to take a right decision and act upon it. The objective of
providing incentives is to motivate an entrepreneur to set up a new venture in the larger interest
of the nation and the society.Broadly, incentives include concessions, subsidies and bounties.
Incentives may be financial or non-financial. Non-financial incentives push an entrepreneur
towards decision and action. Entrepreneurs in India are offered a number of incentives. These
incentives normally aim at reducing some of the problems faced by small scale industrialists.

15.5 Keywords
Bounty

Incentives

Subsidy

15.5 Review Questions

1. What is Incentive? Give examples for incentives.

2. Bring out the advantages of providing Incentives to Entrepreneurs

3. Describe the types of Incentives.

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LESSON - 16
INSTITUTIONAL FINANCE TO SMALL INDUSTRIES
Learning Objectives

After completing this lesson, you must be able to:

 identify the Central level Institutions supporting Entrepreneurs.

 list out the State level Institutions supporting Entrepreneurs.

 role of banks in promoting entrepreneurship in India.

Structure
16.1 Introduction

16.2 Central Level Institutions supporting Entrepreneurs

16.3 State Level Institutions

16.4 Role of Banks

16.5 Summary

16.6 Keywords

16.7 Review Questions

16.1 Introduction
Entrepreneurs get finance from both central level Institutions and State Level institutions.
The functions of both the institutions are explained in this lesson.

16.2 Central Level Institutions supporting Entrepreneurs

Small Scale Industries Board (SSIB)

The government of India constituted a board, namely, Small Scale Industries Board(SSIB)
in 1954 to advice on development of small scale industries in the country. The SSIB is also
known as central small industries board. The range of development working small scale industries
involves several departments / ministries and several organs of the central/state governments.
Hence, to facilitate co-ordination and inter-institutional linkages, the small scale industries board
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has been constituted. It is an apex advisory body constituted to render advice to the government
on all issues pertaining to the development of small-scale industries. The industries minister of
the government of India is the chairman of the SSIB.The SSIB comprises of 50 members
including state industry minister, some members of parliament, and secretaries of various
departments of government of India, financial institutions, public sector undertakings, industry
associations and eminent experts in the field.

National Small Industries Corporation (NSIC)

 Established in 1955 by GOI with the main objectives to promote, aid and foster the growth
of SSIs in the country

 Over four decades of transition and growth in the SSI sector, NSIC has provided strength
through a progressive attitude of modernization, up gradation of technology, quality
consciousness, strengthening linkages with large and medium-scale enterprise and
boosting exports of products from small enterprises

Main services provided by NSIC are:

 Machinery and Equipment (Hire Purchase / Lease scheme)

 Financial Assistance Scheme

 Assistance for Procurement of Raw Material

 Government Store Purchase Program

 Technology Transfer Centre (TTC)

 Marketing Assistance

The National Small Industries Corporation (NSIC), an enterprise under the union ministry
of industries was set up in 1955 in New Delhi to promote aid and facilitate the growth of small
scale industries in the country. NSIC offers a package of assistance for the benefit of small–
scale enterprises.

1. Single point registration: Registration under this scheme for participating in government
and public sector undertaking tenders.

2. Information service: NSIC continuously gets updated with the latest specific information
on business leads, technology and policy issues.
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3. Raw material assistance: NSIC fulfills raw material requirements of small-scale industries
and provides raw material on convenient and flexible terms.

4. Meeting credit needs of SSI: NSIC facilitate sanctions of term loan and working capital
credit limit of small enterprise from banks.

5. Performance and credit rating: NSIC gives credit rating by international agencies
subsidized for small enterprises up to 75% to get better credit terms from banksand export
orders from foreign buyers.

Small Industries Development Organization (SIDO)

SIDO is created for development of various small scale units in different areas. SIDO is a
subordinate office of department of SSI and ARI. It is a nodal agency for identifying the needs
of SSI units coordinating and monitoring the policies and programmes for promotion of the
small industries. It undertakes various programmes of training, consultancy, evaluation for needs
of SSI and development of industrial estates. All these functions are taken care with 27 offices,
31 SISI (Small Industries Service Institute) 31 extension centres of SISI and 7 centres
related to production and process development.

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

 Coordination activities of SIDO:

Ø To coordinate various programmes and policies of various state governments pertaining
to small industries.

Ø To maintain relation with central industry ministry, planning commission, state level
industries ministry and financial institutions.

Ø Implement and coordinate in the development of industrial estates.

 Industrial development activities of SIDO:

Ø Develop import substitutions for components and products based on the data available
for various volumes-wise and value-wise imports.

Ø To give essential support and guidance for the development of ancillary units.

Ø To provide guidance to SSI units in terms of costing market competition and to encourage
them to participate in the government stores and purchase tenders.
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Ø To recommend the central government for reserving certain items to

Ø produce at SSI level only.

 Management activities of SIDO:

Ø To provide training, development and consultancy services to SSI to develop their

competitive strength.

Ø To provide marketing assistance to various SSI units. To assist SSI units in selection of
plant and machinery, location, layout design and appropriate process.

Ø To help them get updated in various information related to the small-scale industries
activities.

Khadi and Village Industries Commission (KVIC)

 Statutory body created by an act of Parliament

 It is charged with planning, promotion, organization and implementation of the program

for the development of Khadi and other village industries in the rural areas in coordination
with other agencies engaged in rural development

 KVIC’s functions also comprise building up a reserve of raw materials and implements for
supply to producers, creation of common service facilities for processing of raw materials
and provision of marketing of KVIC products

 KVIC is entrusted with the task of providing financial assistance to institutions or persons
engaged in the development and operation of Khadi and village industries and guide
them through supply of designs, prototypes and other technical information

National Science and Technology Entrepreneurship Development Board

(NSTEDB)
 Established in 1982 by GOI, is an institutional mechanism to help promote knowledge-
driven and technology-intensive enterprises

Major objectives are:

 promote and develop high-end entrepreneurship for S&T manpower as well as self-
employment by utilizing S&T infrastructure and by using S&T methods
facilitate and conduct various informational services relating to promotion of
entrepreneurship -
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 network agencies of support system, academic institutions and R&D organizations to

foster self -employment using S&T with special f ocus on backward areas
- act as a policy advisory body with regard to entrepreneurship

National Productivity Council (NPC)

Autonomous institution functioning under the overall supervision of the Ministry of Industry, GOI

 Primary objective is to act as a catalyst in enhancing the productivity of all sectors of the
economy, including industry and agriculture

 Administered by a tripartite Governing Council (GC) which has equal representation from
the government, industry and trade unions

 Active in the field of consultancy and training and has a number of specialized divisions to
provide tailor-made solutions to agriculture and industry. These divisions, manned by
trained consultants, deal with issues related to industrial engineering, plant engineering,
energy management, HRD, informal sector, agriculture and so on

 NPC is a member of the Asian Productivity Organization (APO), Tokyo, an umbrella body
of all productivity councils in Asian region

 To channelize expertise of NPC to small-scale and informal sector, SIDBI has tied-up with
NPC for enhancing technology in small units

National Institute for Small Industry Extension and Training (NISIET)

 Set up in early 1950s, NISIET acts an important resource and information centre for small
units and undertakes research and consultancy for small industry development

 An autonomous arm of the Ministry of Small Scale Industries, the institute achieves its
objectives through training, consultancy, research and education, to extension and
information services

 In 1984, UNIDO has recognized NISIET as an institute of meritorious performance under

its Centre of Excellence Scheme to extend aid.

National Institute for Entrepreneurship and Small Business Development

(NIESBUD)
 NIESBUD is an autonomous body under the administrative control of the Office of the DC
(SSI)
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 NIESBUD established in 1983 by the Ministry of Industry, GOI, as an apex body for
coordinating and overseeing the activities of various institutions/agencies engaged in
Entrepreneurship Development particularly in the area of small industry and business

 The policy, direction and guidance to the institute is provided by its Governing Council
whose chairman is the Minister of SSI.

 Besides conducting national and international training programs, the institute undertakes
research studies, consultancy assignments, development of training aids, etc.

Entrepreneurship Development Institute of India

The Entrepreneurship Development Institute of India (EDI), an autonomous and not-for-

profit Institute, set up in 1983, is sponsored by apex financial institutions - the IDBI Bank Ltd.,
IFCI Ltd., ICICI Bank Ltd. and State Bank of India (SBI). The Government of Gujarat pledged
twenty-three acres of land on which stands the majestic and sprawling EDI campus.

To pursue its mission further, EDI has helped set up twelve state-level exclusive
entrepreneurship development centres and institutes. One of the most satisfying achievements,
however, was taking entrepreneurship to a large number of schools, colleges, science and
technology institutions and management schools in several states by including entrepreneurship
inputs in their curricula. In view of EDI’s expertise in Entrepreneurship, the University Grants
Commission appointed the EDI as an expert agency to develop curriculum on Entrepreneurship.

Objectives
 Augment the supply of trained entrepreneurs through training
 Generate multiplier effect on opportunities for self-employment
 Improve managerial capabilities of small scale industries
 Contribute to dispersal of business ownership and thus expand social base of the Indian
entrepreneurial class
 Contribute to the creation and dissemination of new knowledge and insight into
entrepreneurial theory and practice through research.
 The Augment supply of trainers motivators for entrepreneurship and development
 Participate in institutional
 Promote micro enterprise at rural level
 Inculcate the spirit of entrepreneurship among youth.
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Indian Institute of Entrepreneurship

The erstwhile Ministry of Industry set up the Indian Institute of Entrepreneurship in the
year 1994 in the city of Guwahati in the north eastern state of Assam. The national institute is
an autonomous body functioning on its own in developing the skills in entrepreneurship. The
institute operates under the management committee, which is headed by the chairman who is
also the secretary to the Ministry of Small Scale Industries of the government of India The
objective of the institute is to develop the skills and train the entrepreneur. The institute also
designs strategies that are propitious to the various target groups. Documentation for formulation
of policy is also a part of the activity of the institute. The research-based institute organizes
seminars and conducts discussions to promote and exchange the views of the different groups
that lead to improvement through interaction. The institute also publishes literature for
development of the entrepreneur and his industry. The small-scale industries sector has benefited
from the research and training programs undertaken by the Indian Institute of Entrepreneurship in
Guwahati. The institute helps in planning and organizing the promotion of this sector of the
economy.

16.3 State Level Institutions

Directorate of Industries (DIs):At the State level, the Commissioner/ Director of Industries
implements policies for the promotion and development of small-scale, cottage, medium and
large scale industries. The Central policies for the SSI sector serve as guidelines but each State
evolves its own policy and package of incentives. The Commissioner/ Director of Industries in
all the States/UTs, oversee the activities of field offices, that is, the District Industries Centers
(DICs) at the district level.

District Industries Centers (DICs): In order to extend promotion of small-scale and

cottage industries beyond big cities and state capitals to district headquarters, DIC program
was initiated in May, 1978, as a centrally sponsored scheme. DIC was established with the aim
of generating greater employment opportunities especially in rural and backward areas in the
country. At present DICs operate under respective Sate budgetary provisions. DICs extend
services of the following nature – (i) economic investigation of local resources (ii) supply of
machinery and equipment (iii) provision of raw materials (iv) arrangement of credit facilities (v)
marketing (vi) quality inputs (vii) consultancy.
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State Financial Corporation’s (SFCs): Main objectives are to finance and promote small
and medium enterprises in their respective states for achieving balanced regional growth, catalyze
investment, generate employment and widen ownership base of industry. Financial assistance
is provided by way of term loans, direct subscription to equity/debentures, guarantees, discounting
of bills of exchange and seed capital assistance. SFCs operate a number of schemes of refinance
of IDBI and SIDBI and also extend equity type assistance. SFCs have tailor-made schemes for
artisans and special target groups such as SC/ST, women, ex-servicemen, physically challenged
and also provide financial assistance for small road transport operators, hotels, tourism-related
activities, hospitals and so on. Under Single Window Scheme of SIDBI, SFCs have also been
extending working capital along with term loans to mitigate the difficulties faced by SSIs in
obtaining working capital limits on time.

State Industrial Development / Investment Corporation(SIDC/SIIC): Set up under the

Companies Act, 1956, as wholly owned undertakings of the State governments, act as catalysts
in respective states. SIDC helps in developing land providing developed plots together with
facilities like roads, power, water supply, drainage and other amenities. They also extend
assistance to small-scale sector by way of term loans, subscription to equity and promotional
services. 11 out of 28 SIDCs in the country also function as SFCs and are termed as Twin-
function IDCs.

State Small Industrial Development Corporations (SSIDC):Established under

Companies Act, 1956, as State government undertaking, caters to small, tiny and village industries
in respective states. Being operationally flexible undertakes the activities like (i) procure and
distribution of scarce raw materials, (ii) supply of machinery to SSI units on hire-purchase
basis, (iii) product marketing assistance, (iv) construction of industrial estates, allied infrastructure
facilities and their maintenance (v) extending seed capital assistance on behalf of State
government and (vi) providing management assistance to production units.

Small scale industries development of India: The SIDBI was established in 1990 as
the apex refinance bank. The SIDBI is operating different programmes and schemes through 5
Regional Offices and 33 Branch Offices. The financial assistance of SIDBI to the small scale
sector is channelized through the two routes – direct and indirect.

1. Indirect assistance

a) SIDBI’s financial assistance to small sector is primarily channelized through the existing
credit delivery system, which consists of state level institutions, rural and commercial banks.
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b) SIDBI provides refinance to and discounts bills of Primarily Lending Institutions (PLI).

c) The assistance is available for

 Marketing of SSI product

 Setting up of new ventures

 Availability of working capital

 Expansion

 Modernization

 Human resource development

 Diversification of existing units for all activities

2. Direct assistance

a) The loans are available for new ventures, diversification technology up gradation,
modernization and expansion of well-run small scale enterprises. Assistance is also available
for private sector.

b) Small scale sector is eligible for maximum debt-equity ratio of 3:1

c) Foreign currency loan for import of equipment are also available to export oriented
small scale enterprises.

d) SIDBI also provide venture capital assistance to the entrepreneurs for their innovative
ventures if they have a sound management team, long term competitive advantage and a
potential for above average profitability leading to attractive return on investment.

New Initiatives of SIDBI

a) Two Subsidiaries viz. SIDBI Venture Capital Limited and SIDBI Trustee Company Limited
formed to oversee Venture Capital.

b) Technology Bureau for Small Enterprise formed to oversee Technology Transfer, Match
making Services, Finance Syndication and facilitating Joint Ventures.

c) SIDBI Foundation for Micro Credit has been launched to provide financial assistance
to the poor and to meet emerging needs of the micro finance sector especially in rural areas.
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National Bank for Agriculture and Rural Development (NABARD) is an apex

development bank in India having headquarters based  in Mumbai (Maharashtra) and other
branches are all over the country. It was established on 12 July 1982 by a special act by the
parliament and its main focus was to uplift rural India by increasing the credit flow for elevation
of agriculture & rural non-farm sector and completed its 25 years on 12 July 2007 It has been
accredited with “matters concerning policy, planning and operations in the field of credit for
agriculture and other economic activities in rural areas in India”. RBI sold its stake in NABARD
to the Government of India, which now holds 99% stake.

Role

NABARD is the apex institution in the country which looks after the development of the
cottage industry, small industry and village industry, and other rural industries. NABARD also
reaches out to allied economies and supports and promotes integrated development. And to
help NABARD discharge its duty, it has been given certain roles as follows:

1. Serves as an apex financing agency for the institutions providing investment and production
credit for promoting the various developmental activities in rural areas

2. Takes measures towards institution building for improving absorptive capacity of the credit
delivery system, including monitoring.

3. Co-ordinates the rural financing activities of all institutions engaged in developmental

work at the field level and maintains liaison with Government of India, State
Governments, Reserve Bank of India (RBI) and other national level institutions concerned
with policy formulation

4. Undertakes monitoring and evaluation of projects refinanced by it.

5. NABARD refinances the financial institutions which finances the rural sector.

6. The institutions which help the rural economy, NABARD helps develop.

7. NABARD also keeps a check on its client institutes.

8. It regulates the institution which provides financial help to the rural economy.

9. It provides training facilities to the institutions working the field of rural upliftment.

10. It regulates the cooperative banks and the RRB’s.

NABARD’s refinance is available to State Co-operative Agriculture and Rural Development

Banks (SCARDBs), State Co-operative Banks (SCBs), Regional Rural Banks (RRBs),
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Commercial Banks (CBs) and other financial institutions approved by RBI. While the ultimate
beneficiaries of investment credit can be individuals, partnership concerns, companies, State-
owned corporations or co-operative societies, production credit is generally given to individuals.
NABARD has its head office at Mumbai, India.

NABARD operates throughout the country through its 28 Regional Offices and one Sub-
office, located in the capitals of all the states/union territories. Each Regional Office [RO] has a
Chief General Manager [CGMs] as its head, and the Head office has several Top executives
like the Executive Directors[ED], Managing Directors[MD], and the Chairperson. It has 336
District Offices across the country, one Sub-office at Port Blair and one special cell at Srinagar.
It also has 6 training establishments.

NABARD is also known for its ‘SHG Bank Linkage Programme’ which encourages India’s
banks to lend to self-help groups (SHGs). Because SHGs are composed mainly of poor women,
this has evolved into an important Indian tool for microfinance. As of March 2006 2.2 million
SHGs representing 33 million members had to been linked to credit through this programme.

NABARD also has a portfolio of Natural Resource Management Programmes involving

diverse fields like Watershed Development, Tribal Development and Farm Innovation through
dedicated funds set up for the purpose

Industrial development bank of India: is an Indian financial service company headquartered

Mumbai, India. RBI categorized IDBI as an “other public sector bank”. It was established in
1964 by an Act of Parliament to provide credit and other facilities for the development of the
fledgling Indian industry.

It is currently 10th largest development bank in the world in terms of reach with 1514
ATMs, 923 branches including one overseas branch at DIFC, Dubai and 621 centers including
two overseas centres at Singapore & Beijing.

Some of the institutions built by IDBI are the Securities and Exchange Board of
India (SEBI), National  Stock  Exchange  of  India (NSE),  the National  Securities  Depository
Limited (NSDL), the Stock Holding Corporation of India Limited (SHCIL), the Credit Analysis &
Research Ltd, the Exim Bank (India)(Exim Bank), the Small Industries Development Bank of
India(SIDBI), the Entrepreneurship Development Institute of India, and IDBI BANK, which is
owned by the Indian Government.
200

IDBI Bank is on a par with nationalized banks and the SBI Group as far as government
ownership is concerned. It is one among the 26 commercial banks owned by the Government
of India.

The Bank has an aggregate balance sheet size of Rs. 2,53,378crore as on March 31,
2011. IDBI Bank’s operations during the financial year ended March 31.

Role of IDBI

In order to increase its customer base, the Industrial Development Bank of India offers a
number of customized and innovative banking services. The services are meant to offer cent
percent satisfaction to the customers. Some of the well-known services offered by the bank
are:

Wholesale Banking services: The wholesale banking services form a major part of the

banking services of the bank. The services that are offered under the wholesale division are:

Cash Management
· Transactional services

· Finance of working capital

· Agro based business transactions

· Trade services

The wholesale banking services are an important source of income in a number of

infrastructure projects such as power, transport, telecom, railways, roadways, and logistics and
so on.

Retail Banking Services: The Industrial Development Bank of India is also a leader in

the retail banking services. The Net Interest Income amounted to around ‘ 2166 Crores while
the Net Profit amounted to around ‘ 187 Crores. The main objective of the retail services is to
provide high quality financial products to the target market to give that one-stop-solution to the
banking needs. The retail products offered by the bank include:

Housing loans
· Personal loans

· Securities loans
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· Mortgage loans

· Educational loans

· Merchant establishment overdrafts

· Holiday travel plans

· Commercial property loans

16.4 Role of Banks

Some of the major important role of banks in a developing country is as follows:

Besides performing the usual commercial banking functions, banks in developing countries
play an effective role in their economic development. The majority of people in such countries
are poor, unemployed and engaged in traditional agriculture

There is acute shortage of capital. People lack initiative and enterprise. Means of transport
are undeveloped. Industry is depressed. The commercial banks help in overcoming these
obstacles and promoting economic development. The role of a commercial bank in a developing
country is discussed as under.

1. Mobilizing Saving for Capital Formation:

The commercial banks help in mobilizing savings through network of branch banking.
People in developing countries have low incomes but the banks induce them to save by
introducing variety of deposit schemes to suit the needs of individual depositors. They also
mobilize idle savings of the few rich. By mobilizing savings, the banks channelize them into
productive investments. Thus they help in the capital formation of a developing country.

2. Financing Industry:

The commercial banks finance the industrial sector in a number of ways. They provide
short-term, medium-term and long-term loans to industry. In India they provide short-term loans.
Income of the Latin American countries like Guatemala, they advance medium-term loans for
one to three years. But in Korea, the commercial banks also advance long-term loans to industry.

In India, the commercial banks undertake short-term and medium-term financing of small
scale industries, and also provide hire- purchase finance. Besides, they underwrite the shares
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and debentures of large scale industries. Thus they not only provide finance for industry but
also help in developing the capital market which is undeveloped in such countries.

3. Financing Trade:

The commercial banks help in financing both internal and external trade. The banks provide
loans to retailers and wholesalers to stock goods in which they deal. They also help in the
movement of goods from one place to another by providing all types of facilities such as
discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts, etc.
Moreover, they finance both exports and imports of developing countries by providing foreign
exchange facilities to importers and exporters of goods.

4. Financing Agriculture:

The commercial banks help the large agricultural sector in developing countries in a
number of ways. They provide loans to traders in agricultural commodities. They open a network
of branches in rural areas to provide agricultural credit. They provide finance directly to
agriculturists for the marketing of their produce, for the modernization and mechanization of
their farms, for providing irrigation facilities, for developing land, etc.

They also provide financial assistance for animal husbandry, dairy farming, sheep breeding,
poultry farming, pisciculture and horticulture. The small and marginal farmers and landless
agricultural workers, artisans and petty shopkeepers in rural areas are provided financial
assistance through the regional rural banks in India. These regional rural banks operate under
a commercial bank. Thus the commercial banks meet the credit requirements of all types of
rural people.

5. Financing Consumer Activities:

People in underdeveloped countries being poor and having low incomes do not possess
sufficient financial resources to buy durable consumer goods. The commercial banks advance
loans to consumers for the purchase of such items as houses, scooters, fans, refrigerators, etc.
In this way, they also help in raising the standard of living of the people in developing countries
by providing loans for consumptive activities.
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6. Financing Employment Generating Activities:

The commercial banks finance employment generating activities in developing countries.

They provide loans for the education of young person’s studying in engineering, medical and
other vocational institutes of higher learning. They advance loans to young entrepreneurs,
medical and engineering graduates, and other technically trained persons in establishing their
own business. Such loan facilities are being provided by a number of commercial banks in
India. Thus the banks not only help inhuman capital formation but also in increasing
entrepreneurial activities in developing countries.

7. Help in Monetary Policy:

The commercial banks help the economic development of a country by faithfully following
the monetary policy of the central bank. In fact, the central bank depends upon the commercial
banks for the success of its policy of monetary management in keeping with requirements of a
developing economy.

Thus the commercial banks contribute much to the growth of a developing economy by
granting loans to agriculture, trade and industry, by helping in physical and human capital
formation and by following the monetary policy of the country.

Credit Appraisal of Term Loans by Financial Institutions like Banks

Credit appraisal of a term loan denotes evaluating the proposal of the loan to find out
repayment capacity of the borrower. The primary objective is to ensure the safety of the money
of the bank and its customers. The process involves an appraisal of market, management,
technical, and financial.

Getting term loans from a financial institution is not so easy. The corporate asking for the
term loan has to go through several tests. The bank follows an extensive process of credit
appraisal before sanctioning any loan. It analyses the loan proposal from all angles. The primary
objective of credit appraisal is to ensure that the money is given in right hands and the capital
and interest income of the bank is relatively secured.

While appraising term loans, a financial institution would focus on evaluating the credit-
worthiness of the company and future expected stream of cash flow with the amount of risk
attached to them. Credit worthiness is assessed with parameters such as the willingness of
promoters to pay the money back and repayment capacity of the borrower.
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16.5 Summary
The central level institutions supporting entrepreneurs are small scale industries board,
National small Industries corportaion, Small industries Development Organisation, Khadi and
Village. Industries Communion, National Science and Technology Entrepreneurship Development
Board, National Productivity council, National Institute for Small Industry Extension and Trainig,
National institution for Entrepreneurship and Small Business Development, Indian Institute of
Entrepreneurship. The state level institutions are Directorate of Industries, District industries
centrers, State Financial Corporations, State Industrial Development, State Small Industrial
Development Corporations and Small Scale Industries Development of india. Also, the banks
play a major role in supporting entrepreneuship.

16.6 Keywords
DIC

KVIC

NPC

NSIC

SIDO

SSIB

SFC

16.7 Review Questions

1. State the assistance offered by NSIC.

2. Categorize the activities of SIDO.

3. Outline the objectives of Entrepreneurship Development Institute of India.

4. Describe the roles of NABARD.

5. Analyze the role of banks in promoting entrepreneurship in India.

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Model Question Paper

MBA Degree Examination
Second Year – Third Semester
Paper - XV
INNOVATION AND ENTREPRENEURSHIP
Time : 3 Hours Maximum : 80 Marks

SECTION - A

Answer any TEN out of TWELVE Questions (10 x 2 = 20 Marks)

1. Who is an Entrepreneur ?

2. What is a patent ?

3. What is Invention ?

4. What is Creativity ?

5. What is Licencing ?

6. What is Business Environment ?

7. What is a Business Plan ?

8. What is Environmental Scanning ?

9. What is a Prototype ?

10. What is Feasibility Analysis?

11. What is a New Venture ?

12. What is Working Capital Management ?

SECTION - B

Answer any FIVE out of Seven Questions ( 5 x 6 = 30 Marks)

13. Distinguish Intrapreneur and Entrepreneur.

14. What are the characteristics of successful Entrepreneur ?

15. Distinguish Inventions and Innovation.

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16. How will the Credit Appraisal take place ?

17. List out the importance of Working Capital Management.

18. What are the innovations in Indian firms ?

19. Write a note on pricing policy.

SECTION - C

Answer any THREE out of FIVE questions (3 x 10 = 30 Marks)

20. Explain the cases of successful Entrepreneurs.

21. Discuss the steps in Technological Innovation Process.

22. How will you generate new areas for products and services ?

23. Explain the elements of Buiness Plan.

24. Discuss the instrumental arrangement for encouraging Entrepreneurships.