Table of Contents
Q.1. Discuss the role of small scale enterprises in the economic development of India. Substantiate your answer with relevant examples from the tourism and hospitality industry. (20)
Role of small scale enterprises in the economic development of a developing country
The case for the development of small-scale industries is particularly strong in under-developed but developing countries like India.
These small-scale industries satisfy many of the investment criteria that one often prescribes for the planned development of the country.
a. Labour-intensive
Small-scale industries are labour-intensive, i.e., labour-investment ratio in their case is quite high. A given amount of capital invested in small-scale industrial undertakings is likely to provide more employment, at least in the short run, than the same amount of capital invested in large-scale undertakings. Hospitality industry creates a huge amount of employment every year.
b. Capital-light
Small-scale industries are capital-light, i.e., they need relatively smaller amount of capital than that required by large-scale industries, since the capital-output ratio is much smaller in the case of the former. Thus, one of the great advantages of small-scale industries is that they make possible economies in the use of capital. Capital is already scarce in an under-developed country like India.
c. Capital Formation
Besides making possible economies in the use of Ike existing stock of capital, small-scale industry may call into being capital that would not otherwise have come into existence. The spreading of industries over the countryside would encourage the habits of thrift and investment in the rural areas. Moreover, the enterprising Small manufacturer has to scrape together capital where he can find it. He often manages to get it from relatives and friends. This capital probably would never have come into existence as productive capital, had it not been for the small enterpriser.
d. Skill-light
The peculiar attraction of small-scale industries lies in their being skill-light. A large-scale industry calls for a great deal of management and supervising skill—foremen, engineers, accountants, and so on. Like capital, these skills are also in very short supply in our country, and it is important to economies as much as possible in their use. Small-scale industry provides a way of doing this and, at the same time, provides industrial experience and serves as a training ground for a large number of small-scale managers.
e. Import-light
Small-scale industries are import-light, i.e., they use a relatively low proportion of imported equipment and materials as compared with the total amount used in them. A low-import intensity in the capital structure of the small-scale industries reduces the need for foreign capital or foreign exchange, and thus obviates the balance of payments difficulties later, and currently retains within the country a large part of whatever induced effects may materialize.
f. Quick Investment
Small-scale industries are of the “quick- Investment type”, i.e., those in which the time-lag between the execution of the investment project and the start of flow of consumable goods is relatively short. In a developing economy, with a high inflationary potential and need for a rapid rise in the living standards, the importance of such quick-investment type industries can hardly be exaggerated. The small-scale industries have a high fruition co-efficient (i.e., a high ratio between planned output and investment) and also a short fruition lag.
g. Decentralisation
The development of small-scale industries will bring about dispersion or decentralisation of industries, and will thus promote the object of balanced regional development. A major drawback in the industrial structure of an under-developed country is that regional distribution of industries is exceedingly uneven.
h. Equal Distribution of Income and Wealth
Small-scale and cottage industries have the additional advantage that, with decentralized industries, they secure a more even distribution of income and wealth. The development of large-scale industries tends to concentrate large incomes and wealth in a few hands.
i. Overcoming Territorial Immobility
By carrying the job to the worker, small-scale industries can overcome the difficulties of territorial immobility. Moreover, unlike large industries, small-scale industries do not create problems of slum housing, health and sanitation, etc., and the attendant disease, misery and squalor. Thus, there is a strong case for encouraging small-scale industries in under-developed countries like India.
Tourism has become an important sector that has an impact on development of country economy. The main benefits of tourism are income creation and generation of jobs. For many regions and countries it is the most important source of welfare.
The industry also helps maintain a positive trade balance with foreign countries as it attracts foreign money. The industry is highly dependent on the promotion of tourist spots. Many countries lacking natural or historical tourist attractions manage to attract tourism just by providing good recreational facilities.
The industry is critical to small nations that does not have much internal economy but the contribution from tourism industry will be a small percentage to a country with a large economy and many core businesses running. That is the reason why tourism is not an important sector in the development of many sectors.
Q.2. Write short notes on the following: (2×10=20)
a. Types of Entrepreneur
Entrepreneurs are classified into different types based on different classifications as mentioned below:
Based on the Type of Business
1. Trading Entrepreneur
As the name itself suggests, the trading entrepreneur undertake the trading activities. They procure the finished products from the manufacturers and sell these to the customers directly or through a retailer. These serve as the middlemen as wholesalers, dealers, and retailers between the manufacturers and customers.
2. Manufacturing Entrepreneur
The manufacturing entrepreneurs manufacture products. They identify the needs of the customers and, then, explore the resources and technology to be used to manufacture the products to satisfy the customers’ needs. In other words, the manufacturing entrepreneurs convert raw materials into finished products.
3. Agricultural Entrepreneur
The entrepreneurs who undertake agricultural pursuits are called agricultural entrepreneurs. They cover a wide spectrum of agricultural activities like cultivation, marketing of agricultural produce, irrigation, mechanization, and technology.
Based on the Use of Technology
1. Technical Entrepreneur
The entrepreneurs who establish and run science and technology-based industries are called ‘technical entrepreneurs.’ Speaking alternatively, these are the entrepreneurs who make use of science and technology in their enterprises. Expectedly, they use new and innovative methods of production in their enterprises.
2. Non-Technical Entrepreneur
Based on the use of technology, the entrepreneurs who are not technical entrepreneurs are non-technical entrepreneurs. The forte of their enterprises is not science and technology. They are concerned with the use of alternative and imitative methods of marketing and distribution strategies to make their business survive and thrive in the competitive market.
Based on Ownership
1. Private Entrepreneur
A private entrepreneur is one who as an individual sets up a business enterprise. He / she it’s the sole owner of the enterprise and bears the entire risk involved in it.
2. State Entrepreneur
When the trading or industrial venture is undertaken by the State or the Government, it is called ‘state entrepreneur.’
3. Joint Entrepreneurs
When a private entrepreneur and the Government jointly run a business enterprise, it is called ‘joint entrepreneurs.’
Based on Gender
1. Men Entrepreneurs
When business enterprises are owned, managed, and controlled by men, these are called ‘men entrepreneurs.’
2. Women Entrepreneurs
Women entrepreneurs are defined as the enterprises owned and controlled by a woman or women having a minimum financial interest of 51 per cent of the capital and giving at least 51 per cent of employment generated in the enterprises to women.
Based on the Size of Enterprise
1. Small-Scale Entrepreneur
An entrepreneur who has made investment in plant and machinery up to Rs 1.00 crore is called ‘small-scale entrepreneur.’
2. Medium-Scale Entrepreneur
The entrepreneur who has made investment in plant and machinery above Rs 1.00 crore but below Rs 5.00 crore is called ‘medium-scale entrepreneur.’
3. Large-Scale entrepreneur
The entrepreneur who has made investment in plant and machinery more than Rs 5.00 crore is called ‘large-scale entrepreneur.’
Based on Clarence Danhof Classification
Clarence Danhof (1949), on the basis of his study of the American Agriculture, classified entrepreneurs in the manner that at the initial stage of economic development, entrepreneurs have less initiative and drive and as economic development proceeds, they become more innovating and enthusiastic. Based on this, he classified entrepreneurs into four types:
1. Innovating Entrepreneurs
Innovating entrepreneurs are one who introduce new goods, inaugurate new method of production, discover new market and reorganise the enterprise. It is important to note that such entrepreneurs can work only when a certain level of development is already achieved, and people look forward to change and improvement.
2. Imitative Entrepreneurs
These are characterised by readiness to adopt successful innovations inaugurated by innovating entrepreneurs. Imitative entrepreneurs do not innovate the changes themselves, they only imitate techniques and technology innovated by others. Such types of entrepreneurs are particularly suitable for the underdeveloped regions for bringing a mushroom drive of imitation of new combinations of factors of production already available in developed regions.
3. Fabian Entrepreneurs
Fabian entrepreneurs are characterised by very great caution and scepticism in experimenting any change in their enterprises. They imitate only when it becomes perfectly clear that failure to do so would result in a loss of the relative position in the enterprise.
4. Drone Entrepreneurs
These are characterised by a refusal to adopt opportunities to make changes in production formulae even at the cost of severely reduced returns relative to other like producers. Such entrepreneurs may even suffer from losses but they are not ready to make changes in their existing production methods.
Following are some more types of entrepreneurs listed by some other behavioural scientists:
1. Solo Operators
These are the entrepreneurs who essentially work alone and, if needed at all, employ a few employees. In the beginning, most of the entrepreneurs start their enterprises like them.
2. Active Partners
Active partners are those entrepreneurs who start/ carry on an enterprise as a joint venture. It is important that all of them actively participate in the operations of the business. Entrepreneurs who only contribute funds to the enterprise but do not actively participate in business activity are called simply ‘partners’.
3. Inventors
Such entrepreneurs with their competence and inventiveness invent new products. Their basic interest lies in research and innovative activities.
4. Challengers
These are the entrepreneurs who plunge into industry because of the challenges it presents. When one challenge seems to be met, they begin to look for new challenges.
5. Buyers
These are those entrepreneurs who do not like to bear much risk. Hence, in order to reduce risk involved in setting up a new enterprise, they like to buy the ongoing one.
6. Life-Timers
These entrepreneurs take business as an integral part to their life. Usually, the family enterprise and businesses which mainly depend on exercise of personal skill fall in this type/category of entrepreneurs.
b. Major Entrepreneurial Competencies
Following is a list of major competencies that contribute towards top performance as per the EDI ( Entrepreneurship Development Institute of India ) research –
1. Initiative
An entrepreneur takes action that go beyond job requirements or the demand of the situation.
• Does things before being asked or forced by the events.
• Acts to extend the business into new areas, products, or services.
2. Sees and Acts on Opportunities
Looks for and takes action on opportunities.
• Sees and acts on opportunities (business, educational or personal growth).
• Seizes unusual opportunities to obtain financing, equipment, land, work space, or assistance.
3. Persistence
Takes repeated action to overcome obstacle that get in the way of reaching goals.
• Takes repeated or different actions to overcome obstacles.
• Takes action in the face of a significant obstacle.
4. Information Seeking
Takes action on own to get information to help reach objectives or clarify problems.
• Does personal research on how to provide a product or service.
• Consults experts for business or technical advice.
• Seeks information or asks questions to clarify what is wanted or needed.
• Personally undertakes research, analysis or investigation.
• Uses contacts or information networks to obtain useful information.
5. Concern for High Quality of Work
Acts to do things that meet or beat existing standards of excellence.
• States a desire to produce work of high quality.
• Compares own work or own company’s work favourably to that of others.
6. Commitment to Work Contract
Places the highest priority on getting a job completed.
• Makes a personal sacrifice or expends extraordinary effort to complete a job.
• Accepts full responsibility for problems in completing a job for others.
• Pitches in with workers or works in their place to get the job done.
• Expresses a concern for satisfying the customer.
7. Efficiency Orientation
Finds ways to do things faster or with fewer resources or at a lower cost.
• Looks for or finds ways to do things faster or at less cost.
• Uses information or business tools to improve efficiency.
• Expresses concern about costs vs. benefits of some improvement, change, or course of action.
8. Systematic Planning
Develops and uses logical, step-by-step plans to reach goals.
• Plans by breaking a large task down into sub-tasks.
• Develops plans that anticipate obstacles.
• Evaluates alternatives.
• Takes a logical and systematic approach to activities.
9. Problem Solving
Identifies new and potentially unique ideas to reach goals.
• Switches to an alternative strategy to reach a goal.
• Generates new ideas or innovative solutions.
10. Self-Confidence
Has a strong belief in self and own abilities.
• Expresses confidence in own ability to complete a task or meet a challenge.
• Sticks with own judgement in the face or opposition or early lack of success.
• Does something that he or she says is risky.
11. Assertiveness
Confronts problems and issues with others directly.
• Confronts problems with others directly.
• Tells others what they have to do.
• Reprimands or disciplines those failing to perform as expected.
12. Persuation
Successfully persuades others.
• Convinces someone to buy a product or service.
• Convinces someone to provide financing.
• Convinces someone to do something else that he or she would like that person to do.
• Asserts own competence, reliability, or other personal or company qualities.
• Asserts strong confidence in own company’s or organisation’s products or services.
13. Use of Influence Strategies
Uses of variety of strategies to affect others.
• Acts to develop business contacts.
• Uses influential people as agents to accomplish own objectives.
• Selectively limits the information given to others.
14. Monitoring
• Develops or uses procedures to ensure that work is completed or that work gets standards or quality.
• Personally supervises all aspects of a project.
15. Concern for Employee Welfare
• Takes action to improve the welfare of employees.
• Takes positive action in response to employees’ personal concerns.
• Expresses concern about the welfare of employees.
Q.3. Write an essay on “Industrial Policy Resolutions”.(20)
After attaining independence in 1947, India adopted economic planning as a method to achieve economic development. The pattern of planning that came to be accepted was of a mixed type meaning thereby that industrial units both in the public and private sector, will be operating in the economy. The mixed nature of the economy meant that on crucial areas the policy of the government was decisive and changes therein were of great relevance to industrial units.
In the field of industry government’s objectives and intentions were announced through five Industrial Policy Resolutions (IPRs). These resolutions were announced in 1948, 1956, 1977, 1980 and 1990.
IPR 1948
The industrial sector in 1948 was not different from the one existing in pre-1947 days and hence the SSI sector meant mainly rural industrial units, small job-cum-repair shops, units making agricultural implements, a few urban small units and handloom units weaving cloth. The greatest economic significance of these units to the Indian economy was their employment potential. It was this potential which called for protection through policy and the main thrust of IPR 1948 as far as the small scale sector was concerned, was protection.
IPR 1956
The second IPR was announced against the background of a bolder Second Five Year Plan, with a long term strategy for industrial and economic development. As to the SSI sector, the resolution envisaged a dual role, viz.
a. manufacture of consumer goods such as cloth and
b. manufacture of components for the newly established industry as part of the programme for long term industrial development.
Thus, to the earlier emphasis of protection was added development. Industrial Policy for SSI aimed at “Protection plus Development”. IPR 1956 in a manner initiated the modern SSI in India.
IPR 1977
The next IPR was announced after a lapse of two decades. During the preceding decades, two major problems had been witnessed. First was the lopsided industrial development — large, medium and small scale industries had become more of an urban phenomena and the other was large scale unemployment – the issues of urban and rural, educated and uneducated unemployed had started becoming difficult.
This situation led to a renewed emphasis on promotion of typical employment generating small scale industry, located in rural areas and small towns. As a formula it was : scale of output should be small, location semi urban/rural and technology, labour intensive.
This was the IPR which assigned a positive role to SSI in terms of wage employment of worker and self-employment of the entrepreneur. This was the IPR which therefore, offered a wider perception to policies and programmes for SSI development. To the earlier thrust of protection (IPR 1948) development (IPR 1956) this resolution added promotion. The SSI sector was thus, to be protected, developed and promoted.
IPR 1980
This IPR re-emphasised the spirit of the IPR 1956 with its strategy of large scale, high technology and heavy investment based key or basic industry. Nevertheless, the SSI sector remained as perhaps the best sector for generating wage and self-employment based opportunities in India.
IPR 1990
This IPR was announced during June 1990. Its basic aim is to introduce measures of economic liberalisation and simplified rules and procedures with a view to enhancing the technological base of industry and accomplishing higher levels of output. It gave a special emphasis on the SSI/SSE sector where employment opportunities are likely to be high. In order to enable the SSI units to update their technology the investment limit of SSI has been raised to Rs. 60 lakhs.
SSI Policy Framework – Latest Amendment
In line with new economic policies, a policy document for SSI was announced on 6 August, 1991. It continued Priority sector lending to SSI by Banks/Financial Institution.
• Excise exemption scheme,
• Reservation of items for exclusive production,
• Price and purchase preference, and
• Uniform package of incentives for the entire sector.
It introduced new measures like:
• Removal of locational restrictions,
• Enhancement of coverage limits,
• Shift towards infrastructural development support,
• Inclusion of services in this sector,
• Allowing equity investment in SSI (upto 24%),
• Shift from protection/regulation to promotion of equality, technology and efficiency, and
• Substantial de-regulation and simplification of roles and procedures.
Recent Government Policies
Among the more recent government policies we can mention the following:
1. The Planning Commission set up a study group on the development of small enterprises.
2. In order to enable the export oriented small units to adjust to the globalisation process, under a new scheme, Technology Development and Modernisation Fund (TDMF) was launched (with a corpus of Rs.200 crores) for modernising and updating of these units. Its scope has been extended to non-export units also.
3. The State Bank of India in coordination with the Small Industries Development Bank of India had launched a programme for modernising and upgrading technological standards of SSIs.
4. The limit for composite loans from SIDBI has been enhanced to Rs.5 lakhs.
Q.4. What is Marketing orientation ? Discuss the variables for determining market demand. (20)
Market orientation is an approach to business that prioritizes identifying the needs and desires of consumers and creating products that satisfy them.
Marketing strategies focus on establishing key selling points to promote existing products rather than designing products that have the qualities consumers say they want.
• Market orientation is a strategic focus on identifying consumer needs and desires in order to define new products to be developed.
• Established businesses like Amazon and Coca-Cola use market orientation principles to improve or expand their products or services.
• Even consumer demands that are impractical today can inform long-range decision-making.
Market orientation is a customer-centered approach to product design. It involves research aimed at determining what consumers view as their immediate needs, primary concerns, or personal preferences within a particular product category.
Additional data analysis may also be employed to reveal trends and consumer desires that are not specifically expressed. A knowledge of these trends ideally can help product developers meet or even anticipate consumer needs. They may even inspire improvements that the consumer was not aware of as being an option.
This allows a company to focus its product development efforts on the characteristics that are most in demand. With an increasingly global economy and the proliferation of choices for consumers, companies adapt to a market orientation in order to stay competitive.
Variables –
There are eight elements or variables which must be understood in order to determine market demand:
1. Product
The class of product has to be clearly defined. For example, a tour operator must decide whether its product is adventure tour, cultural tour, health tour or a combination thereof. Then there are various sizes and other features in each class. Opportunities available to the manufacturer differ according to the exact nature and specifications of the product.
2. Total Volume
We have the question of how total volume is measured. It can be measured in terms of physical volume (i.e. in terms of units sold), in monetary terms, or both. It can also be measured in terms of per cent of total market, i.e., in relative terms. As an illustration, a demand analysis for tours may reveal that in one particular region, the number of tours sold is 100, valued at Rs. 50,000. In another region, the number may be 50, valued at Rs. 25,000. It is evident that depending upon our requirement, the data on total volume must be in appropriate units.
3. Bought
The third element ‘bought’ needs also to be understood. Do we have to assess the volume ordered or booked, despatched, paid for, received, or consumed? The figures may vary according to the basis used. In the case of food grains we normally refer to quantity consumed, and in the case of construction industry we refers to orders booked. The relevance of the correct understanding of the term ‘bought’ becomes clear when we look at the example of the scooter industry in India.
4. Customer group
Market demand for a product should be measured for the customer group that is of interest to the firm. Examples are an airline which estimates the volume to be bought by the high income group people, and a mass tour operator who estimates the demand for its packages from the middle income group.
5. Geographical area
The geographical boundaries within which market demand is to be measured must be clear. This is particularly true for a small enterprise since its operations are usually confined to small areas. Service establishments also have to define their geographical boundaries while estimating market demand. For example a Yoga centre enjoys considerable demand in a metropolitan city but the concept is yet to establish its utility and acceptance in smaller towns and rural areas as a paid service.
6. Time period
Demand estimation must always be for specific time-period – for the next season, for the coming year, for the Plan period, and so on. When the time frame is an year or so, we call it short range forecasting, and when it is in terms of several years ahead, long range forecasting. As we increase the time frame, the forecast becomes more tenuous as the environmental factors may change beyond our present imagination. Thus, for products like computers and fashion goods it is almost futile to make any long range forecasts.
7. Marketing environment
Market demand is influenced by many external environmental factors. These include general economic conditions, technological breakthroughs and developments, government policies, political changes, changes in consumer behaviour and competitive situation, and even natural phenomena like rainfall and weather conditions.
8. Marketing programme
Finally, there are controllable factors which the firms use to influence the demand for their products. These may be termed as marketing efforts or marketing programmes of the sellers. These include pricing strategies, advertising, sales promotion, and personal selling. The marketing efforts proposed or assumed should be specified in order to determine market demand.
Q.5. “Finance is one of the essential requirements of an enterprise”. Justify the statement with suitable examples. (20)
Finance is one of the very subtle sectors of a business that can make or break entrepreneurs. Ideally, all companies need finances for daily operations, and this is what makes the concept of finance very important as an area for all organizations to cover. In South Africa especially, there is an underlying need to keep a business well financed and managed, in alignment with the economic development goals of the country.
Below are some of the reasons finance matters to Enterprise –
1. Profit creation
A popular phrase, ‘money is for making money,’ explains why finance management in business organizations requires the utmost attention. For a business to keep running successfully, the amounts of profits coming in must keep increasing. This means that the initial capital investment must be well managed, with a thin line between debt and equity financing. The profit planning for the finance team should look a lot like determining the profitability of individual products and services that the business offers while weeding out the losers and promoting the winners.
2. Operational expenses
Meeting the operational needs of an organization is what keeps a business going. Finance for most companies, including African businesses, entails some operational costs such as remunerative payments for staff members, raw materials, inventory, interest payments, to mention a few. A proper financial plan provides a form of stability in managing the profits that are coming into the organization, in relation to the operational expenses that need to be met frequently.
3. Asset creation
The primary long-term agenda for company owners is to scale up production by increasing the assets of the business. The finance sector allows companies to have a solid saving plan that is not dependent on short-term finances to meet this need. Investing in items such as land, equipment, and machinery will definitely boost the production scale, but will only happen with intelligent financial management. For the most part, the matter of asset creation goes as far and wide as keeping up with technological advancements that will mean well for the success of the business.
4. New products and markets
The chase for new products and markets is vivid for all businesses. For example, you can engage in mystery shopping so that you find out what commodities are available in the market, and what customers are interested in. Without a proper financial structure, you may not have the financial muscle to get into new spaces and approach a different market with newer solutions or products.
5. Cash Flow Management
Any business big or small anticipates a large sum of cash flowing in and out of the company. These money transactions are necessary to keep a business going. But without a proper system in place, they can be a great source of problems, particularly legal issues. A business organization needs a strong financial team to handle the cash flow of the company, with existing records as a testament to the different transactions. This helps to check out that all necessary expenses are met, including taxations to the government. Ideally, the whole point of cash flow management is to sustain enough liquidity to meet most operational expenses.
6. Financial goals
Among other necessary goals for a business set-up, every organization has a set of financial goals. While most involve hitting a certain profit margin over a specified period, financial goals go as far as catering for the overall economic demands and requirements of the nation.
7. Management of unavoidable risks
Running any company is all about taking risks. Even so, it is not enough to think of your business set up as a risk. Natural phenomena along with human errors can by far be the leading reasons you suffer significant loss in your business. Before that time comes, your financial management techniques will help pull out a contingency plan that will prepare your company to manage unavoidable risks.
Q.6. Write short notes on:(2×10=20)
a. National Small Industries Corporation (NSIC)
The National Small Industries Corporation (NSIC), a public undertaking was set up in 1955, mainly to meet the requirements of ‘term loan’ to the small scale units for purchase of imported and indigenous machinery and supply the same to the entrepreneurs on hire-purchase basis. This scheme of the NSIC was most-popular in 1950s and 1960s because, as stated earlier, prior to the nationalisation of the major commercial banks, this was the only agency rendering the aforesaid service to the small scale units. Commercial banks and other financial institutions had neither the charter of function nor were prepared to consider the small scale entrepreneurs as safe risk for advancing money on long and medium term basis.
Entrepreneurs wishing to avail of this scheme have to pay earnest money varying from 15 to 30% of value of machinery. In addition a service charge varying from 2 to 5%, depending on the value of the machinery and the location of the unit, has also to be paid to the hirer. The full hiring value of the machine along with interest on unpaid amount and service charges is payable in 13 half-yearly installment – first installment falling due after one year of the installation of the machinery. In case of furnaces, boilers, cold storage, plants, tyre retrading, canning, electroplating, etc. the loan has to be returned in 9 installments.
Certain special categories of entrepreneurs, such as, technocrats, physically handicapped persons, defence personnel and those belonging to schedule castes/schedule tribes are charged concessional rate of earnest money, interest and service charges. The entrepreneur is free to make his choice which, of course, is subject to scrutiny about the essentiality of the machine, technical abilities to operate, its capacity and above all, the country of import because at times due to constraints of foreign exchange shortage, NSIC may not be in a position to arrange foreign exchange from the specific country from where the entrepreneur is interested to purchase the machinery.
Prescribed application forms are available form the NSIC and its regional office/branches at the State. These have to be submitted to the NSIC or its branches at the State/District level through the Dy. Director/Regional/Jt. Director of Industries or through the respective District Industry Centre. The application has to be accompanied by latest quotations from the manufacturers of the suppliers of machinery approved by the NSIC. The details about the machinery required for individual product lies under engineering and non-engineering category can be obtained from the Small Industries Services institutes or branches of the institute set up by small scale industries development organisation of the Government of India or through the district Industry Centres.
NSIC also supplies machinery to existing profit making and financially viable small scale units (with permanent registration as an NSSI unit) on easy leasing term. Reputed small scale units or entrepreneurs of proven ability can also get machinery on lease basis from leasing companies on terms agreed to mutually by the parties concerned.
b. State Financial Corporations (SFCs)
State Financial Corporations (SFCs) which exist almost in every State and Union Territory (U.T.) of the country constitute the most important single source of long-term credit to small scale industries. In view of the wide disparities in the levels of industrial development in different states and the vast size of the country in early 1960s it was felt that there was a need to supplement the work of Industrial Finance Corporation of India (a Central Government institution set up for meeting the credit and capital investment needs of large scale corporate bodies) by setting up a SFC in each State and UT for granting term ‘Finance’ and equity capital to small scale and medium scale industries which are mostly either ownership or partnership concerns. Where there are no SFCs the Industrial Development Corporation operating in the states or UTs concerned performs the functions of the SFCs also.
The SFCs have their regional offices, branches and field level offices. The loans granted by these Corporations are payable in equal annual installments spread over a period of 10 to 12 years, the first installment falling due for payment after one or two years of the disbursement of the loan. Generally speaking, advances are made up to 50 to 75% of the value of assets offered as security including those acquired out of the loans. Number of units covered in the scheme has been gradually interesting.
Although there is no statutory debt equity norm (to be followed by these Corporations and Commercial Banks), normally they follow 3:1 debt-equity ratio while evaluating the loan applications from small scale units. This means that the unit is eligible to raise three times of its own resources by way of term “Debt”.
Another norm followed is the rate of promoters’ contribution which is fixed in accordance with the cost of the project. The actual rate applicable would, however, depend upon the location of the project, the class of entrepreneur and the type of scheme under which the loan is sanctioned. In considering the actual amount of loan to be advanced by the SFCs, the latter have prescribed certain upper limits.
The maximum amount of loan which can be sanctioned by NFC is Rs. 60 lakhs in case of limited company or Corporations Societies while the relative limit in other cases including for proprietary and partnership concern is Rs.30 lakhs. SFCs operate various schemes for financial assistance to SSI units, most popular among these is composite loan scheme which covers both term loan and working capital upto a maximum of Rs.50,000 under which no promoters’ contribution is necessary while the integrated loan scheme enables the unit to operate up to Rs. 1 lakh inclusive of working capital component.
Besides, these are other schemes also operated by the SFCs and these are meant for special type of entrepreneurs, women entrepreneurs etc. The seed capital and special capital scheme also in operation by the SFCs are intended for extension of equity types of assistance for new entrepreneurs.
The applications for loans to be submitted to SFCs are to be accompanied by a project report and other relevant information as may be prescribed by the SFCs. The applications are considered for sanction on the basis of the financial viability, technical feasibility and competence of the entrepreneur as assessed by the Corporation.
The financial viability here means the capacity of the product to operate satisfactorily, generate cash surplus, service the loans and other liability and earn a fair return on the capital invested. The technical feasibility of the project comprises the operational efficiency of the unit in terms of plant and machinery installed, spares used, raw material and other inputs, know-how/technology employed, capacity utilisation of the plant, scale of production, quality of the product, cost of production vis-à-vis the norm prescribed for particular process.
On receipt of information about sanction of loan, the entrepreneur has to take steps that may be prescribed by the corporation for completing the documentation requirements to facilitate drawal of loans/installments according to the requirements of the unit. These would comprise execution of loan agreement, irrevocable power of attorney, promotes, deed of undertaking, guarantees, etc. as may be required by the corporation.
Q.7 What are the common errors in Business Plan Formulation ? Elaborate with suitable examples from travel and tourism. (20)
Common Errors in Business Plan Formulation –
1. Capacity-Utilisation Estimates: Gross Unrealism
Over-optimistic and simplistic assumption with reference to utilisation of installed capacity is a pervasive feature of business plans. There are so many entrepreneurs who presume 80% capacity-utilisation in the first year, 90% in the second year and 100% in the third year. The assumption is made in complete disregard of existing enterprise-performance, market conditions, competition-level and possible technical snags. The business plan, in such a case, is reduced to financial jugglery. It is exciting to make such an assumption and derive satisfaction from financial-performance projection. But then, the projection is based on a completely false premises. Avoid this temptation.
2. Capacity Computation: A Miscalculation
The computation of installed capacity is a technical task not always performed competently. There are several finer points – die-changing time, down time, periodic shut-down, capacity of other equipments – which tend to lower the overall installed capacity. An exaggerated statement of overall capacity on account of entrepreneur being unaware of such finer points is rather common place. So, pay attention to capacity-calculation.
3. Market Study: A Neglected Task
Market study continues to be a grey area. It is relatively easy to work out technical arrangement and to make financial-performance projection. Market study, in contrast, entails a less structured probe and contending with less definite variables. So, there are entrepreneurs who pass by this component of business plan completely. They cite demographic (population, income, etc.) statistics, present sketchy and inaccurate information on demand-supply position, produce stray opinions and conclude that market is just there waiting to be tapped. This is an attitudinal block. Make sure you do not develop such a block.
4. Machinery Selection: Serious Errors
This is a subject on which faulty decisions are common. There are machinery-suppliers who may never have made a certain kind of machinery, may not have ability to do so and yet undertake to supply such machinery. The results are sometimes disastrous. There are plastic extruders which can scarcely extrude. These are being sold and bought by entrepreneurs. A small entrepreneur does not have the resources to replace or rectify the machinery. So, take care that you choose sound machines.
5. Technology – Oriented Products : A Shaky Arrangement
There are products which call for sophisticated technology or are not amenable to being produced in the small-scale sector. The entrepreneur is swayed by reported profit margins. He relies on a technician who may have worked in comparable enterprise but does not have the capability to line-up complete technology. Alternatively, it is not possible to set up enterprise within stipulated financial resources. In other words, the technical feasibility is not there. The enterprise is fore-doomed to failure.
6. Project-Pruning and Resource Staining : Safe Limits Exceeded
There is an entrepreneurial tendency to accommodate enterprise-parameters within such limit, even if it is not possible to do so. Thus, an entrepreneur may cut down built-up area or exclude some machinery to keep the project cost down – within his own financial limit. He may make most favourable assumption on means of finance (75% of project cost to come as term-loan) while some amount of economy or optimism may be in order, this is sometimes carried out to such extreme lengths as to render the enterprise-proposal technically unviable (because important facilities are missing) or unrealistic (in terms of proposed financial resource plan). It is better not to pursue such an enterprise-idea. So, do not distort technical viability or pin your hope on the best deal from financial institutions to fit the proposal within resources at your disposal.
7. Project Cost : An Underestimate
The promoters of very small enterprises do not consider P & P expenses and working capital margin. They, consequently, underestimate the project cost and own resource requirement margin. The other tend to play down magnitude of working capital margin.
This is because if the working capital margin is large, financial institution will expect the entrepreneur to raise his own contribution to project cost. Thus, working capital underestimates an error you must guard against.
8. Location Selection : Some Temptations
There are two major errors which an entrepreneur makes in respect of location- selection. First, he is so completely swayed by the offer of financial incentives (subsidy, income-tax concession) that he does not look into other criteria for location-selection. This sometimes becomes the sole and overriding concern. He may, thus, choose a location which, from the standpoint of market-proximity, raw material availability, manpower position and operating cost-structure, is eminently suitable.
Then, there are instances of an entrepreneur choosing a location merely because it is his hometown or he owns ancestral land – though it is not an appropriate location. Do not fall prey to these temptations. If you are selecting a location, take a comprehensive view.
9. Selling Price : Unfounded Optimism
A new enterprise, despite offering comparable quality, may not be able to realise the selling price which established enterprises do. The fact is overlooked. Worse still, entrepreneurs assume a higher than prevailing price because they believe the quality of their product will be superior. An unrealistic selling price estimate is an error. It is comforting to assume such a price since it will make the enterprise look very profitable. The comfort may be short-lived. So, follow a conservative path while estimating selling price.
10. Cashflow in Initial Years : Poor Detail
The cashflow during implementation period and initial years is not charted out in sufficient detail. You will be able to do this only if you ascertain the disbursement modalities of financial institutions completely and work out a thorough cash-plan with built-in contingencies. They may expect you to spend from your own resources in the first place. It may make direct payment to machinery supplier and reduce your flexibility. There are machinery suppliers and others who may expect advance payments from you. If you have not envisaged such payments under your cash plan, your implementation will grind to a halt.
Q.8. Discuss the characteristics of a company. What are the distinctions between a private company and a public company ? (20)
Characteristics of a Company
1. An Artificial Person Created by Law
A company is a creation of law, and is, sometimes called an artificial person. It does not take birth like natural person but comes into existence through law. But a company enjoys all the rights of a natural person. It has right to enter into contracts and own property. It can sue other and can be sued. But it is an artificial person, so it cannot take oath, cannot be presented in court and it cannot be divorced or married.
2. Separate Legal Entity
A company is an artificial person and has a legal entity quite distinct from its members. Being separate legal entity, it bears its own name and acts under a corporate name; it has a seal of its own; its assets are separate and distinct from those of its members.
Its members are its owners but they can be its creditors simultaneously as it has separate legal entity. A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital. The shareholders are not agents of the company and so they cannot bind it by their acts.
3. Perpetual Succession
The life of company is not related with the life of members. Law creates the company and dissolve it. The death, insolvency or transfer of shares of members does not, in any way, affect the existence of a company.
In the case of company it may be said that members may come and members may go but the company goes on. It is a legal person having come into being by law and only law can bring its end and none else.
4. Common Seal
On incorporation a company becomes legal entity with perpetual succession and a common seal. The common seal of the company is of great importance. It acts as the official signature of the company. As the company has no physical form, it cannot sign its name on a contract. The name of the company must be engraved on the common seal. A document not bearing the common seal of the company is not authentic and has no legal importance.
5. Limited Liability
The limited liability is another important feature of the company. If anything goes wrong with the company his risk is only to the extent of the amount of his shares and nothing more. If some amount is uncalled upon a share, he is liable to pay it and not beyond that.
The creditors of a company cannot get their claims satisfied beyond the assets of the company. The liability of members of a company ‘limited by guarantee’ is limited to the amount of guarantee.
6. Transferability of Shares
A shareholder can transfer his shares to any person without the consent of other members. Under Articles of Association, a company can put certain restriction on the transfer of shares but it cannot altogether stop it. Private company can put more restrictions on the transferability of shares.
7. Limitation of Work
The field of work of a company is fixed by its charter. The Memorandum of Association. A company cannot do anything beyond the powers defined in it. Its action is, therefore, limited. In order to do the work beyond the memorandum of association, there is a need for its alteration.
8. Voluntary Association for Profits
A company is a voluntary association of persons to earn profits. It is formed for the accomplishment of some public good and whatsoever profit is divided among its shareholders. A company cannot be formed to carry on an activity against the public policy and having no profit motive.
9. Representative Management
The shareholders of company are widely scattered. It is not possible for all the shareholders to take part in the management. They leave their task to the representatives the Board of Directors and the company is managed by Board of Directors.
10. Termination of Existence
A company is created by law, carries on its affairs according to law and ultimately is affected by law. Generally, the existence of a company is terminated by means of winding up.
Some of the major distinction between a public company and a private company are as follows:
1. Minimum number of members
The minimum number of persons required to form a ‘ public company is seven whereas in a private company it is only two.
2. Maximum number of members
There is no maximum limit on the members of a public company but a private company cannot have more than 50 members excluding employees and ex-employees of the company.
3. Restriction on name
The name of a public company must end with the word, “limited” But in the case of a private company the word private limited must be used at the end of the name.
4. Commencement of business
A public company can commence its business only after getting the certificate of commencement of business. But a private company can commence its business as soon as it is incorporated.
5. Invitation to the public
A public company must issue a prospectus or statement in lieu of prospectus for inviting public to subscribe to its shares or debentures. A private company on the other hand cannot issue such invitation to the public.
6. Transferability of shares
There is no restriction on the transfer of shares in the case of a public company whereas the articles of a private company must restrict its right to transfer its shares.
7. Number of its directors
A public company must have at least three directors whereas a private company must have at least two directors.
8. Restrictions on the appointment of directors
A director of a public company shall file with the Registrar consent to act as a director or sign the memorandum of association or enter into a contract for their qualification shares. The directors of a private company need not do so.
9. Statutory meeting
A public company must hold a statutory meeting and file with the Registrar a statutory report. But a private company has no such obligations.
10. Quorum
If the articles of a company do not otherwise provide five members personally present in the case of a public company are quorum for a meeting of the company. It is two in the case of a private company.
11. Issue of share warrants
A public company can issue share warrants but such a right is denied to a private company.
12. Further issue of capital
A public company proposing further issue of shares must offer them to the existing members. A private company is free to allot new issue to outsiders.
13. Managerial remuneration
Total managerial remuneration in the case of a public company cannot exceed 11% of the net profits but in the case of inadequacy of profits a minimum of? 50,000 can be paid. These restrictions do not apply to a private company.
Q.9. Why should an entrepreneur give attention to Human Resource Development ? What are the problems faced by an entrepreneur in relations to Human Resource Development? Substantiate your answer with suitable examples from hospitality industry. (20)
As an entrepreneur, particularly in small business and that too in the service industry like tourism, it is necessary to create a workforce which not only provides quality service but gives added value to the tourist to maintain the quality of the service and the environment. This means that human resource planning and development need considerable attention of the entrepreneur.
Efficient management of human resources is an important factor in determining the growth and prosperity of business enterprises. This is particularly true in the case of small industry where the owners have a close and more personal association with their employees. Key and important people in small firms are likely to assume more responsibilities than they do in a large-scale organisation. Improper handling of human resources through defective and haphazard personnel policies may compel a small firm to be satisfied with less qualified and less efficient workforce. Personnel and employee relations are too serious to be wished away through unprofessional actions.
In order to build up a loyal, efficient and committed workforce, small business owners must pay adequate attention to hiring, training and employee development activities and undertake systematic human resource management practices on a long term basis.
Problems
• Human resource planning is one of the most frustrating situations which the typical small business owner will encounter. Perhaps the reason is that the small firm is not big enough to hire the exact type and number of people needed. Typically, it lacks facilities for properly recruiting, selecting, developing and utilising its personnel.
• Lack of economies of scale so far as record keeping and administration of a systematic personnel programme may also exist. One disgruntled person represents as much larger percentage of the total workforce in the small firm than in the larger one.
• Therefore, it is important for the small business owner to try to keep from hiring the wrong employee. In actual practice, however, the process of getting the right of number of qualified people into right jobs is thoroughly discounted.
• Lack of adequate resources for initiating systematic personnel programmes is also the reason cited by employers for failure of HRD.
• In many cases owners are compelled to succumb to the pressures brought in by relatives and influential personalities, i.e., DIC officials, Factory Inspectors, Excise Collectors, Managers of Banks and financial institution while appointing people. In the face of these mounting pressures, the decision making capabilities of owners are watered down and they are forced to accommodate ‘misfits’ in their organisations.
• The recent developments in small industry such as modernisation, increased competition from large scale units and the resultant need to maintain quality and precision in their products, the availability of jobs demanding specialised skills demand a serious rethinking on the part of owners with regard to Human Resource Planning in the years ahead.
Q.10. What is a family business ? Discuss the positive and negative aspects of family business. (20)
A family business is a commercial organization in which decision-making is influenced by multiple generations of a family, related by blood or marriage or adoption, who has both the ability to influence the vision of the business and the willingness to use this ability to pursue distinctive goals.
Family business has been as common in the Indian economy like elsewhere in the world, it is perceived in a common sense. Various terms like ‘family-owned,’ family controlled,’ ‘family managed,’ ‘business houses,’ and ‘industrial houses’ are used to refer to family business.
Thus, the term family business conjures up different meanings to different people. While some view it as traditional business, others consider it as community business, and still others mean it as home-based business.
Family firms come with their own set of unique advantages and challenges. In order to be successful, the advantages must be capitalized upon and the challenges overcome.
Advantages of Family Firms
1. Stability
Family position typically determines who leads the business and as a result there is usually longevity in leadership, which results in overall stability within the organization. Leaders usually stay in the position for many years, until a life event such as illness, retirement, or death results in change.
2. Commitment
Since the needs of the family are at stake, there is a greater sense of commitment and accountability. This level of commitment is almost impossible to generate in non-family firms. This long term commitment leads to additional benefits, such as a better understanding of the industry, organization and job, stronger customer relationships and more effective sales and marketing.
Example – Hoshi Ryokan, a Japanese inn keeping business founded in 718, is said to be one of the oldest family businesses in world. Family members have operated the business for 46 that’s right, 46 generations. That level of family commitment has led to an understanding of the business that outsiders, or those relatively new to the business, simply wouldn’t be able to replicate. Ford Motor Company managed to stay afloat during very difficult economic times, when other companies, such as Chrysler and GM, were begging for bailouts. Why? I’m sure when all is said and done there are several reasons, but I don’t think it’s any coincidence that Ford’s family name was literally on the line.
3. Flexibility
You won’t hear, “Sorry, but that’s not in my job description” in a family business. Family members are willing to wear several different hats and to take on tasks outside of their formal jobs in order to ensure the success of the company.
Example – Estee Lauder, who led one of the world’s most famous family businesses and was the only woman on Time magazine’s list of the century’s business geniuses in 1998, said of her company’s success, “I have never worked a day in my life without selling. If I believe in something I sell it, and I sell it hard.” Lauder did everything from cooking up pots of face cream to personally giving free demonstrations, from designing the packaging of her products to training the saleswomen who would sell them.
4. Long-term Outlook
Non‐family firms think about hitting goals this quarter, while family firms think years, and sometimes decades, ahead. This “patience” and long- term perspective allows for good strategy and decision-making. In describing his reasons why he didn’t want to take his company public, Michael Otto, second- generation CEO of Hamburg, Germany’s $18.5 billion retailer Otto Group, said, “We don’t have to come up with a good story every quarter for the investors and the press.”
5. Decreased Cost
Unlike typical workers, family members working at family firms are willing to contribute their own finances to ensure the long‐term success of the organization. This could mean contributing capital, or taking a pay cut. This advantage comes in particularly handy during challenging times, such as during economic downturns, where it’s necessary to tighten the belt or personally suffer in order for the business to survive.
Disadvantages of Family Firms
1. Lack of interest among family members
Sometimes, family members aren’t truly interested in joining the family business, but do so anyway because it’s expected of them. The result is apathetic, unengaged employees. In the public sector, employees that fit into this category would simply be fired. It’s not so simple at the family firm.
2. Family Conflict
Conflict is bound to happen at any firm, but add in long histories, family relationships, and the kind of contempt that comes with familiarity, and the ante has just been upped. Deep-seated, long-lasting bitter fights and quarrels can affect every single person within the firm and can draw divisive lines. Because family members are involved, conflict can be more difficult to solve and can result in difficult endings. In 2005, a famous dispute between the sons of Reliance Industries founder Dhirubhai Ambani, Mukesh and Anil, divided India’s largest petrochemical manufacturer. When all was said and done Mukesh retained control of the petrochemical business, while Anil became chairman of Reliance Capital, Reliance Communications, and Reliance Energy.
3. Unstructured Governance
Governance issues such as internal hierarchies and rules, as well as the ability to follow and adhere to external corporate laws, tend to be taken less seriously at family businesses, because of the level of trust inherent at family firms. Unfortunately, this can be gravely detrimental. Take the example of Samsung Group, whose chairman, Lee Kun-Hee, was forced to resign in 2008 after being indicted for tax evasion and criminal breach of trust charges. While his three- year sentence was suspended, a fine of $109 million was still imposed. In this situation, a little governance would have gone a long way.
4. Nepotism
Some family businesses are reluctant to let outsiders into the top tier, and the result is that people are given jobs for which they lack the skills, education, or experience. This, obviously, has a far-reaching effect on the success of the company. In particular, it’s very difficult to retain good talent at lower levels if their performance, and their ability to succeed in the long run, is consistently being affected by incompetence at higher levels. More family firms are recognizing this issue and are taking care to strategically place outsiders in certain positions when necessary.
5. Succession Planning
Many family firms lack succession plans, either because the leader doesn’t have the desire to admit that he or she will, one day, need to step down, or because there is too much trust in the family to work this out when it becomes necessary. In fact, because of close relationships and long histories, it is of utmost importance in family firms that a strong succession plan is in place.
Risks associated with not having a strong succession plan include poor leadership, family quarrels and often financial or legal trouble for the company.
Example – Founder of Hyundai Motor, Chung Ju-Yung, named his son, Chung Mong-Koo, his successor in 1999. Just a year later, Chung Mong-Koo defied his father’s orders to step down.
In 2007, Chung Mong-Koo was convicted of embezzling funds from the company in order to buy corporate favors from the Korean government. As you can see, a well-run family business is capable of having a positive impact not only on the family involved, but also on the local and global economies. Family businesses are capable of promoting entrepreneurism, generating wealth and security for families and for providing employment opportunities for those in the community.
Some Successful Examples of Family Business in India –
a. TATA Group
b. TVS
c. Aditya Birla Group, etc