Only when the entrepreneur is able to fulfil these two criteria, he/she can be successful.

Quite
often, a question arises - Can all ideas be converted into opportunities? Mostly entrepreneurs
conceive an idea and start their business without even analysing the market which often leads to
satisfying their own ego, and the result is that they launch a product that has very few customers.

Elements of a business opportunity

A business opportunity may be described as an attractive economic idea which could be
implemented to create a business, earn profits and ensure further growth. A business
opportunity has five elements which are as follows:
Assured market scope
An attractive and acceptable rate of return on investment
Practicability of the idea
Competence of the entrepreneur to encash it
Potential of future growth

Case Study-II
Meals-on-Wheels

✁✂✄ ☎✆✝✞ ✂✟ ✞✂✠ ✡✆☛☞ ✌✍✆☛☞✎✎☞✏ ✎✂✝✑ ✏✒✓✌✆✝✔☞ ✒✝ ✕✝✏✒✆✝ ✌✍✆✒✝✓✖ ✗✂✠✎✏✝✘✌ ✒✌ ✙☞ ✑✍☞✆✌ ✌✂ ✂✍✏☞✍ ✟✂✂✏ ✂✟
your choice online while booking your train ticket so that it can be delivered at your seat in the train?
✚✡✆✌✘✓ ☞✛✆✔✌✎✞ ✌✡☞ ✓☞✍☛✒✔☞ ✚✍✆☛☞✎✜✡✆✝✆ ✂✟✟☞✍✓ ✌✂ ✌✍✆✒✝ ✌✍✆☛☞✎✎☞✍✓✢

The Idea

Travel is a passion for the founders of TravelKhana and there is considerable work done in the Indian
internet space in this sector. However, they felt, once a passenger buys a ticket, there is very little that
✌☞✔✡✝✂✎✂✑✞ ✡✆✓ ✌✂ ✂✟✟☞✍ ✒✝ ✌☞✍☎✓ ✂✟ ✌✡☞ ✣✆✓✓☞✝✑☞✍✘✓ ✝☞☞✏✓ ✙☞✒✝✑ ✟✠✎✟✒✎✎☞✏ ✟✂✍ ✟✂✂✏✤ ✎✂✔✆✎ ✌✍✆✝✓✣✂✍✌ ✆✝✏ ✎✂✔✆✎
lodging. This is an even bigger problem for the train passengers and there is a huge gap between demand
and supply. Being someone who has suffered several times while travelling, Pushpinder came up with
this idea of capitalizing on this opportunity.

TravelKhana is a marketplace that connects passengers with several restaurants on the Indian rail
network. It offers a variety of choices to a railway passenger so that the passengers can order food as per
their liking and at their price point while they are travelling. Travelkhana.com is a Service for
transforming the experience of the railway passenger. TravelKhana ✆✒☎✓ ✌✂ ✓✂✎☛☞ ✆ ✥✟✂✂✏-on-the-☎✂☛☞✦
✒✓✓✠☞ ✙✞ ☎✆✧✒✝✑ ✆☛✆✒✎✆✙✎☞ ✟✍☞✓✡✤ ✌✆✓✌☞✟✠✎ ✟✂✂✏ ✌✂ ✕✝✏✒✆✝ ★✆✒✎✄✆✞✓✘ ✔✂☎☎✠✌☞✍✓✢ ✚✍✆☛☞✎ ✒✝ ✕✝✏✒✆
inefficiency and their mission is to remove those inefficiencies through operational excellence.

The Founder

Pushpinder Singh, CEO & Chief Architect of TravelKhana has a Masters degree in Computer Science
from BITS-Pilani and a B.Tech from IT-BHU. He has over 15 years of software and technology industry
experience, particularly focused around the product industry, besides having played the role of CTO in 2
of his earlier successful ventures.

3
Pushpinder was most recently the V.P Technology and acting CTO for INCA
Informatics. He has, in the past, provided sustenance, continuity and providing
thrust to an existing world leading product (Quark Xpress). Creation &
contribution has been a hallmark of his career and he has been instrumental in
creating and taking to market multiple products of repute at Quark, ARI Labs and
Aplion Networks.

Start-up and Growth Pushpinder Singh

We all know that Indian Railway ✁ ✂✄☎ ✂✆ ✝✞☎ ✟ ✠✠☎✁✝ ✄☎✝✡✂☛☞✁ ✄ ✝✞☎ ✡✂☛✌✍✎ ✏✝✑✁ ✟☎☎✄ ✒ ✟✒✓☞✟✂✄☎ ✂✆
Indian transport for more than 50 years and will always be. There are new trains launched after every
budget, along with new or extended train routes. 8 billion people travel in India by train annually and of
them 10% are premium users.

The TravelKhana automated platform, tracks trains in real time across India and ensures that fresh food
is delivered to the passenger as per their choice in real time. It also helps vendors and restaurants in
terms of effective and efficient fulfilment. Additionally, it completes an entire fulfilment cycle right from
the point of ordering to delivery, customer feedback and reconciliation.

TravelKhana currently operates by offering a call center interface as well as a web interface to
passengers. The web version is currently in beta and still undergoing changes. These interfaces will be
followed with a Mobile App and an SMS versions. TravelKhana will take your order with a minimum of
one hour of lead time before the train arrival at a particular station.

The company tied up with travel agents who sell railway tickets. Travelkhana.com provides them free
paper to print their tickets in return for advertisement space on the back of the ticket. What better way to
reach out to your target audience! Travelkhana.com also offers each agent a login ID to the
travelkhana.com website in case passengers want to book their meals while booking their tickets.

TravelKhana currently operates in 30 cities and is rapidly expanding across the railway network. Now,
they are looking at adding several cities across the Indian map and increasing the market size. They also
plan to focus on acquiring the Internet customer using a focused marketing campaign and to work along
with vendors such that a delightful customer experience can be provided to the customers each time with
reliable deliveries and excellent quality of products each time an order is placed. This will require
efficient logistics as well managing that the quality of food is consistent with each delivery. TravelKhana
has tie-ups with about 200 vendors across 50 railway stations in the north and west and has plans to
expand to other regions by pulling in venture capital. Once the rail business stabilises, Singh also
intends to extend the convenience to bus passengers.

Funding

The founders have invested ` 20 lakhs (approximately) so far in addition to the accrued revenues from
services. The promoters have further committed ` 30 Lakhs to the venture. They are also looking for
raising an angel round now and are at various stages of discussions with potential investors.

4
their vision to convert the solution into business opportunity helps them to move forward,
overcoming all the obstacles. They constantly
a) overcome adversity
b) exercise control over the business
c) make a significant difference.

Environment scanning
Business environment may be defined as all those conditions and forces external to a business
unit under which it operates. Entrepreneurship does not emerge and grow spontaneously.
Rather, it is dependent upon several economic, social, political, legal and other factors.

What is environment scanning?

Careful monitoring of an organization's internal and external environment for detecting early
signs of opportunities and threats that may influence its current and future plans.

Why do we need to scan our environment?

In a rapidly changing environment, one rule of thumb applies: If you don't adapt, you don't
endure. This is the core idea behind environmental scanning. Definitions of the term refers to the
means by which organizations gather information on changing conditions and incorporate those
observations into a process where necessary changes are made. The right information, combined
with the right adaptations, can determine an organization's future viability. If an entrepreneur is
not aware of the environment surrounding his/her business, he/she is sure to fail.

Importance of environment
Sensitivity to environmental factors is crucial for an entrepreneur. If a company is able to adapt
to its environment, it would succeed in the long run. For example, Sony is failing to understand
✁✂ ✄✁☎✆✝✞✆✝ ✟✂✆✠✡ ✞✆ ☛☞✌✞✍✂ ✎✁☞✆✂✡ ☎✆✠ ✁✂✟✂✏☞✟✂ ✍☞✡✞✆✝ ✞ ✑✡ ☛☎✟✒✂ ✡✁☎✟✂✓ ✔✁✂ ✌✂✆✂✏✞ ✡ ☞✏

understanding the relevant environment of business are:

i) Identification of opportunities to get first mover advantage:
By keeping in touch with the changes in the external environment, an enterprise can
identify opportunities and find strategies to capitalise on the opportunities at the earliest.
For example, Volvo, the Swedish brand, has 74% share in the luxury bus segment as it had
entered India earlier.
ii) Formulation of strategies and policies:
It helps in identifying threats and opportunities in the market. These can serve as the basis
of formulation of strategies to counter threats and capitalise on opportunities in the
market.
iii) Tapping useful resources:
If the company has a thorough knowledge of the external environment, it can tap raw
materials, technology and even financial resources from the market at economical prices,
at the right time.

7
The micro factors have been discussed in class XI, so we move on to factors affecting the macro
environment.

The PESTEL Model

Political: The political environment includes taxation policy, government stability and foreign
trade regulations.
Economic: The economic environment includes interest rates, inflation, business cycles,
unemployment, disposable, income, energy, availability and cost.
Social: The social/cultural environment includes population demographics, social mobility, income
distribution, lifestyle changes, attitudes to work and leisure, levels of education and consumerism.
Technological: It is influenced by government spending on research, new discoveries and
development, government and industry focus of technological effort, speed of technological
transfer and rates of obsolescence.
Ecological: It considers the ways in which the organisation can produce its goods or services
with minimum environmental damage.
Legal: It covers areas such as taxation, employment, law, monopoly, legislation and
environmental protection laws.

For example, an airline is planning to expand over the next five years. The following would be
some of the PESTEL factors it should consider:
Political: Political unrest, terrorism, landing rights in foreign countries.
Economic: Oil prices, exchange rates, taxation (For example, VAT on fuel), economic boom or
depression (airline revenues are very sensitive to business traffic)
Social: Change in population size, fashion (For example, increasing willingness to go on short
breaks)
Technological: Engine efficiency, new aircraft being planned, better and cheaper video
conferencing.
Ecological: Concern about the impact of carbon emissions from jet engines, noise, resistance to
airport expansion.
Legal: Health and safety regulations, consumer legislation (For example, compensation for
cancelled flights), safety and security legislations.

Problem identification
A problem is a roadblock in a situation, something that sets up a conflict and forces you to find a
solution. When an entrepreneur identifies such a road block, he/she is said to have identified
the problem.

Objectives of problem identification:

It should clearly state the problem
Identify target group facing the problem

10
 businesses find a need and fill it by providing a service or product. Entrepreneurs who
look at ways to make an existing product or service better can be as successful as those
who create or invent products.

There is a constant and consistent effort on the part of all entrepreneurs to improve the
products and services already existing in the markets.

Often, a company will improve or change its existing products. There are many reasons
for doing this. It can make a substantial difference in the success of the company and even
take it in a whole new direction. However, it can also spell disaster if not done correctly.

How do you improve or change existing products? Change or improvement can come
about in many ways. Perhaps you sell a skincare line and would like to change the
ingredients around a little. Or maybe you run a math tutoring business and would like to
expand into other subjects, like science or commerce.

While it may seem like only good can come from improving, adding to, or changing
different products around, this is not always the case. It must be done skillfully, or else
other problems can arise. There are a number of pros to changing or improving your
existing product line, including:
Keep up with the competition: If you provide services or products in an industry that is
constantly changing, it's important to stay aware of the latest in industry trends so you can
continue to be competitive; for example, you own a hair product supply store that
sells flat irons for straightening hair. More and more places are selling ceramic irons
as hair experts say they are better for hair. In this case, it would be advantageous to
update the products to reflect the latest in technology.
Increase sales: The main reason people will change and improve their existing product
line is to increase their sales and ultimately, their revenue. By adding to the product line,
you can take your company in a new direction by increasing sales. Let's take the example
of the tutoring business. While you may have a good number of clients, they are all math
students. Just as many students will need extra help in other disciplines. Expanding the
existing service will only result in increased profits.

So thinking about existing product and service can generate a number of ideas to improve
them or to provide cheaper substitutes or to bring about a reduction in price.

c) Market driven or demand driven ideas

We have already seen that one of the important methods for generating ideas is to carry
out a market research. Such a study yields valuable data about trends of supply, demand
and consumer preferences.

Market research is any organized effort to gather information about target markets or
customers. It is a very important component of business strategy. The term is commonly
interchanged with marketing research; however, expert practitioners may wish to draw a

13
 distinction, in that marketing research is concerned specifically about marketing
processes, while market research is concerned specifically with markets.
Market research is a key factor to maintain competitiveness over competitors. Market
research provides important information to identify and analyze the market need, market
size and competition.
Market research, which includes social and opinion research, is the systematic gathering
and interpretation of information about individuals or organizations using statistical and
analytical methods and techniques of the applied social sciences to gain insight or support
decision making.
Whatever the source of information about the market, it is a promising field for generation
of ideas. Idea generation is knowledgeable, creative and systematic. It develops from
knowledge of the consumer, the market, the technology and the general environment, and
it creates newness in product, production and marketing. It systematically develops
product ideas to satisfy the aim of the project and therefore the business strategy.

d) Trading related ideas

Trading these days is not limited to ordinary grocer or distributor outlets. With increasing
consumerism, the scope and nature of trade has enlarged; local trade, import and export,
e-commerce are all making trading a very wide area of enterprise. Trade, in simple terms,
is buying goods and services and selling them to consumers at a profit. One big advantage
that trading has over other types of businesses is that, it is easier to launch and less risky.
It is however, necessary for a prospective trader to be aware of the trends in an economy.
With the opening of the market to International Companies, large size departmental stores,
chain shops and umbrella markets have become omnipresent; competition has become
intense and to survive in the market, new entrants will have to acquire skills, competencies
and knowledge required to launch, manage and expand business opportunities.

e) Service sector ideas

Entrepreneurial opportunities are not only restricted to the manufacturer. Service sector is
the most growing field these days, the world over, thanks to emerging knowledge
societies and advancements in Information and Technology. So, new opportunities can be
identified by understanding the linkages to different business activities.
The list of opportunities ready for the taking in the food and other service areas is rather
long. Amongst the most interesting ones in the food sector are the following:
✁ Indian fast food/finger food: While 'pizzas' and 'burgers' and popcorn may find a lot
of favour from Indians across India, and across all age and income groups, the fact
remains that almost all regions of India still have their own local fast food options and
far outsell the "imports".
McDonald's and Pizza Hut can be the role models in terms of efficiency of service,
hygiene, quality, and overall value, but the menu should be "Indian" rather than
Indianised version of American food.

14
Family dinner: These can be based on the ubiquitous American Dinner concept or
even the Indian version like Nirula's offering Indian style "Plated or Combo" meals,
with table service and overall good price-value equation.
Sandwich and salad parlours: Subway's success in select locations, despite somewhat
inconsistent product quality, poor service, and high prices, indicates the tremendous
opportunity in this segment. Prêt a Manger (A McDonald business, operating largely
in the UK) seems like an interesting format for India.
Ice-cream and juice/beverage parlours: Sadly, there have been many start-ups and
some continue to do well. However, there is a glaring gap between the appropriate
price/value, need and the available options.
Lack of success in the recent past of some of the start-ups only highlights the need for
better conceptualisation and execution of the format, rather than a lack of market
opportunity.
Indian "desserts" and "snack food" chains: Lastly, in the genre of food and food
service chains, one of the biggest opportunities remains in starting national or at least
regional chains offering Indian sweets, namkeen/farsans, and snack-foods such as
pakodas and samosas. Haldiram's success should certainly put any doubt on this
opportunity to rest. What is needed is a belief that the Haldiram business model can
be replicated (and certainly improved upon from the customer service perspective) by
even large business houses such as ITC and others.
Speciality tourism: India is incredibly blessed with one of the most diverse set of
options when it comes to tourism. Fortunately, the perception of India as a tourist
destination is also undergoing a very big positive change outside India.
Creating specialised options for high-end tourists (from abroad) offers a tremendous
potential, with many segmentation possibilities based on the target market as well as
special interests.
Personal grooming salons: It may surprise some that the biggest organised player for
personal grooming, with focus on hair care, example, Habib's to talk about.
Career counselling centres: With over 25 million births per year, and at least 3 million of
these likely to go for studies beyond the 12th grade, but having little idea about the job
and vocation trends in India and beyond, this is one sector that is poised for rapid
growth.
Chain of repair and maintenance services for electrical/electronic products: India is
seeing a massive increase in the penetration of electrical/information technology
products.
Yet, the ambient infrastructure, as well as relatively low income levels, requires most
of these gadgets to be given for repair unlike the more affluent countries where many
faulty appliances/gadgets may just be "written off" by the consumer in view of the
high cost of repairs.
India's low labour✁related service costs can provide a cost-effective solution to the
millions, while generating good returns on investment for the entrepreneur.

15
f) Creative efforts
We have seen that creativity is an important and key component of the talents and abilities
needed for an entrepreneur. Apart from applying creativity to spot and harness
opportunities, it can also be applied to develop new products and services.
There are basically five ways in which creative ideas can be generated:
1. Develop a new product or service.
2. Improve an existing product or service
3. Find a new process or resource for manufacturing a product.
4. Find new markets for existing products or services.
5. Find a new use of an existing product or service.

A very useful concept to bear in mind is that, most often creative products and services
are born as results of problem solving. Someone found that while tightening screws, over
tightening often resulted in damage to the fixtures. Here was a problem and the solution
came in the form of a self-adjusting screwdriver which prevented over tightening.
Similarly when doctors found monitoring of dosage of medicine to be administered to
patients on a regular basis through traditional methods using a syringe cumbersome, a
pharmaceutical firm developed a new process of implanting the required medicine in the
patient for constant discharge of regulated and required dosage in to the blood stream.

Bill Gates, who as an undergraduate at Harvard, developed BASIC for the first microcomputer. He
later found Microsoft in 1975. During the 1980s, IBM contracted with Gates to provide the
operating system for its computers, a system now known as MS-DOS. Gates procured the software
from another firm, essentially turning the thirty-dollar pair of jeans into a multibillion-dollar
✁✂✄☎✆✝✞ ✟✠✆✁✂✡✂☛✝☞✡ ✌☛☛✠✆✍ ✎✏✄ ✑✠✏✄✂✒✡ ✂ ✍✁✎✝✠✏✓ ✡✂☛✝✒✎✁✍ ✏✂✒ ✁☎✏ ✂✏ ✎✔✂☎✝ ✕✖ ✍✁✆✍✏✝ ✂☛ ✝✗✍
✒✂✁✘✄☞✡ ✆✂✙ ☎✝✍✁✡✞ ✚✛ ✙✎✜✠✏✓ ✡✂☛✝✒✎✁✍ ✝✗✎✝ increases human productivity, Gates expanded our
ability to generate output (and income), resulting in a higher standard of living for all.

Sam Walton, the founder of Wal-Mart, was another entrepreneur who touched millions of lives in
a positive way. His innovations in distribution warehouse centers and inventory control allowed
Wal-Mart to grow, in less than thirty years, from a single store ✠✏ ✢✁✜✎✏✡✎✡ ✝✂ ✝✗✍ ✏✎✝✠✂✏☞✡ ✘✎✁✓✍✡✝
✁✍✝✎✠✘ ✆✗✎✠✏✞ ✣✗✂ ✍✁✡ ✔✍✏✍☛✠✝ ☛✁✂✙ ✝✗✍ ✘✂✒ ✁✠✆✍✡ ✎✏✄ ✆✂✏✤✍✏✠✍✏✝ ✘✂✆✎✝✠✂✏✡ ✝✗✎✝ ✑✎✘✝✂✏☞✡ ✑✎✘ -
Marts provide. Along with other entrepreneurs such as Ted Turner (CNN), Henry Ford (Ford
✎☎✝✂✙✂✔✠✘✍✡✥✦ ✧✎✛ ★✁✂✆ ✩✟✆✪✂✏✎✘✄☞✡ ☛✁anchising), and Fred Smith (FedEx), Walton significantly
improved the everyday life of millions of people all over the world.

Product identification
After opportunity spotting and scanning of the environment, an entrepreneurial idea should
lead to a definite product.
Transformation of ideas into opportunities
While the initial spotting of ideas (i.e., basic idea) is of a random nature, the development of ideas
after scanning the environment (i.e., post scanning) idea is a more purposeful activity. Thus the

16
2. Application and use
Ideas should be examined for their real life use and application. If it already exists in the
market, we will have to find out its present use, then we may think of modifying it for
better use. In the above mentioned example, we can clearly see that even though there are
many companies manufacturing pendrives, the latest will be in consonance with the
upcoming trends.

3. Level of operation
This is a crucial test for product/service identification. Depending on the use of the
product/service the entrepreneur will produce it in a cottage industry or a small scale
industry or a large scale industry.

4. Cost
What is the per unit cost of the product at particular level of operation? Whether this cost
is comparable with that of other competitive products? These are some of the questions
that have to be answered. This will ultimately decide the sale price.

5. Competition
Any product or service will face market competition at some stage. So market competition
should be assessed through a study of the trends in demand and supply.

6. Technical complexity
What type of technology is required to produce the product? Whether training and
application of such technology will be locally available or will it have to be supported
from other places? What would be the position of supply of plant and machinery for such
a technology? These are important issues that have to be resolved.

7. Annual turnover and profit margin

Ideas should also have to be examined on the basis of expected annual turnover. This will
also indicate the market share of the product or service.
Once the entrepreneur has assessed the opportunities on these basis he/she should go
ahead and assess the market also.

Market assessment
Selection of a product or service will depend upon many factors. While assessing the market, an
entrepreneur has to prepare details on the following lines:

1. Demand
The demand assessment will be based on the size of market being targeted, i.e., local
markets, market at state level or national/international market. It will also involve a study
of the target groups of consumers, their preferences, tastes and other related variables.

18
2. Talk trends
Talking to people is an equally important trend-spotting tactic. They get involved in
✁✂✄☎✆☎✄ ☎✝✞✟ ✠✡☛☞ ✠✡✌✞✂ ✌ ✍✄☎✌✠☎✍✝ ✌✝✞ ✌✠✠✂✝✞☎✝✎ ✂✏✂✝✠ ✑✍✠✒ ✍✝✓☎✝✂ ✌✝✞ ✍✆✆✓☎✝✂✔ ✕✒✂☛
also take advantage of social networking tools like social network websites and forums.
They even start or join groups on the networks and see what people are buzzing about
and about the latest trends.
It's also important to talk to customers and prospective customers, both online and offline.
They use social media or online surveys to get input on what customers are thinking,
buying, craving and doing. They also use social network websites and forums to identify
key influencers and trendsetters in their target markets. In addition, they pay attention to
ratings and review sites -- not just what customers are saying about the business, but what
they☞✡✂ ✌☛☎✝✎ ✌✑✍✟✠ ✠✒✂ ✄✍✖✁✂✠☎✠✍✡☞ ✑✟ ☎✝✂ ✔

3. Watch trends
✕✒✂✡✂☞ ✝✍ ✟✑ ✠☎✠✟✠✂ ✆✍✡ ✎✂✠✠☎✝✎ ✍✟✠ ☎✝ ✠✒✂ ✖✌✡✗✂✠✁✓✌✄✂✔ They make it a point to regularly
go where their target customers hang out. If the customers are teenagers, that might be the
local mall. If they are business ✁✂✍✁✓✂✘ ☎✠ ✖☎✎✒✠ ✑✂ ✠✒✂ ✡✂✎☎✍✝☞ "power lunch" restaurant or
office park restaurant center. The entrepreneur spends some time simply watching and
observing. What are people eating, doing, wearing, using? What stores or restaurants draw
crowds and which sit empty? Trade shows are a great place to get trend ideas, too even if
✠✒✂☛ ✌✡✂ ✝✍✠ ✓✍✍✗☎✝✎ ✠✍ ✑✟☛ ✁✡✍✞✟✄✠✘ ✠✒✂☛ ✌✠✠✂✝✞ ✖✌✝☛ ✒✍✙ ☎✖✁✓☛ ✠✍ ✂✂ ✙✒✌✠☞ ✒✍✠✔

4. Think trends
As an entrepreneur begins gathering all these information regularly, they will start to
✞✂✏✂✓✍✁ ✌ ✚✠✡✂✝✞ - ✁✍✠✠✂✡ ✖☎✝✞✔✛ ✜ ✠✒✂☛ ✌✑ ✍✡✑ ✌✝✞ ✖✟✓✓ ✌✑✍✟✠ ✙✒✌✠ ✠✒✂☛☞✏✂ ✡✂✌✞✘ ✒✂✌✡✞
✌✝✞ ✍✑ ✂✡✏✂✞✘ ✠✒✂☛☞✓✓ ✠✌✡✠ ✠✍ ✖✌✗✂ ✄✍✝✝✂✄✠☎✍✝ ✌✝✞ ✍✑ ✂✡✏✌✠☎✍✝ ✠✒✌✠ ✙☎✓✓ ✓✂✌✞ ✠✍
business-boosting insights. The news about rising shrimp prices, the lines out the door at
the Asian-fusion restaurant downtown, and something one of the customers said last
✙✂✂✗ ✙☎✓✓ ✌✓✓ ✄✍✖✂ ✠✍✎✂✠✒✂✡ ✌✝✞ ✠✒✂☛☞✓✓ ✒✌✏✂ ✌ ✎✡✂✌✠ ☎✞✂✌ ✆✍✡ ✌ ✝✂✙ ✖✂✝✟ ☎✠✂✖✘ ✌ ✝✂✙
product line or even a whole new business.

Creativity
Creativity is important to entrepreneurs because it is the first stage in the process of innovation,
providing the stimulus for opportunity discovery and new venture creation. As new entrants,
entrepreneurs often justify themselves upon the same dimensions as creativity: novelty,
usefulness, and appropriateness. Arguably, one of the first tasks demanded of an entrepreneur
is to manifest creative ability through the conceiving of new product-market opportunities and
unique value propositions. From these initial acts of creativity, entrepreneurs must build
effective organizations that can repeatedly bring ideas to commercially valuable forms in order
to survive and grow.

20
 Level of operation Cost
Competition Technical complexity
Annual turnover and profit margin
Factors to be kept in mind while assessing the market
Demand Supply and nature of competition
Cost and price of product Project innovation and change
Ways to spot trends
Read trends Talk trends
Watch trends Think trends
Creative process
Idea germination Preparation
Incubation Illumination
Verification
Innovation process
Analytical planning Organising resources
Implementation Commercial application

✁✂✄☎✆ ✝✞✟✠ ✄✡ ☛✠☞✠✌✍✎✄✠ ✆✏☛☛✠✆✆, ✌✏✄ ✞✄ ✞✆ ✑✡✍✠ ✞✑✒✡✍✄✎✟✄ ✄✡ ✓✠✠✔ ✄✓✠ ☞✠✆✆✡✟✆ ✡✝ ✝✎✞☞✏✍✠✕✖

✗ Bill Gates

25
 REVIEW CROSSWORD PUZZLE

1.C

3 4R

A 7

5.F

6O P R

Y 9.C

10

8 13. E O 11

14.V

L 12 I

Across:
1. The recipient of a service/product obtained from a seller.
3. Someone who organizes a business venture and assumes the risk for it.
6. Set of circumstances that make it possible to do something.
9. Process through which something becomes different.
12. Make changes in something established, especially by introducing new methods.
13. Synonym for feasible.
14. The ability to plan the future with wisdom/imagination.

Down:
2. Synonym of inventiveness.
4. An economic or productive factor required to accomplish an activity.
5. A sum of money saved or made available for a particular purpose.
7. Financial gain.
8. The ability to do something well; expertise.
9. Synonym of rivalry.
10. Something that can be offered to a market that might satisfy a want or need.
11. Amount invested in business.

26
 ✁✂✄☎ ✆✁✝✞☎✁
A. Very short answers. Answers to these questions should not exceed 15 words.
1. What is a business opportunity?
2. What factors are involved in the process of sensing an entrepreneurial opportunity?
3. Define the term environment scanning.
4. List the environmental factors affecting external environment.
5. What is the meaning of trend spotting?
6. What is required to convert an idea into opportunity?
7. What is Idea generation?

B. Short answers. Answers to these questions should not exceed 50 words.

1. What is the purpose to scan the environment?
2. What are the factors involved in sensing opportunities?
3. Draw the enterprise process diagram.
4. What is PESTEL model? Explain it.

C. Short answers. Answers to these questions should not exceed 75 words.

1. Enlist the various sources which lead to the emergence of basic ideas.
2. Write the meaning of product identification in terms of business opportunity.
3. What are the factors an entrepreneur has to keep in mind whilst assessing the
market?
4. What are the various ways in which an entrepreneur spots trends?

D. Long answers. Answers to these questions should not exceed 150 words.
1. "✟✠ ✡☛☛✡☞✌✍✠✎✌✏ ✑✒✏ ✓✔ ✕✔☞✎✖✔✕ ✗☞✡✑ ✌✘✔ ✠✔✔✕✙ ✒✠✕ ☛☞✡✓✚✔✑✙ ✡✗ ✌✘✔ ✙✡✛✎✔✌✏✜✢ "
Comment
2. ✣✤✔✠✙✎✌✎✖✎✌✏ ✌✡ ✔✠✖✎☞✡✠✑✔✠✌✒✚ ✗✒✛✌✡☞✙ ✎✙ ✔✙✙✔✠✌✎✒✚ ✗✡☞ ✒✠ ✔✠✌☞✔☛☞✔✠✔✍☞✜✥ In light of
above statement explain the importance of environment scanning.
3. Entrepreneurship does not emerge and grow spontaneously. Rather it is dependent
upon several various environmental factors. Explain them.
4. Explain creative process.
5. What is Innovation and explain the elements of innovation process?

E. Very long answers. Answers to these questions should not exceed 250 words.
1. Elaborate the factors involved in sensing opportunities.
2. Examine the sources from where business ideas emerge.
3. Discuss the steps involved in the investigation of ideas.

27
 4. What do you understand by Trend Spotting? What are the ways by which
entrepreneurs can spot trends?
5. Explain in detail Idea Fields.

F. Higher Order Thinking Skills (HOTS) questions:

1. Aditi started her boutique business near an industrial area and she was not getting
clients as she had expected. What are the factors which have been ignored before
starting the boutique? Suggest the various factors that she has to look into before
venturing into business.
2. Mr. Raghav had always wanted to manufacture an innovative, energy efficient fan.
He was looking into various options and has finally narrowed it down to one option.
He understands that the entire idea would have to follow a process. Identify and
explain the process.
3. ✁✂✄✂ ☎✆✂ ✝✞✟✠✡✂✠☛✂✠☞ ✌✆☎✍✂✄ ✟✌ ✆✂✌erence for streamlining the process of generation
✟✌ ☛✎✂☎✄✏✑ ✒✎✂✠☞☛✌✓ ☞✁✂✍ ☎✠✎ ✂✔✕✖☎☛✠ ☎✠✓ ☞✁✆✂✂ ✗✆☛✂✌ly.
4. Varun decided to start his own venture and was looking into various ideas. Explain
to him various sources from where he can get some good business ideas.

G. Evaluation and multi-disciplinary - (appraise, judge, and/or justify the value or worth
of a decision or outcome, or to predict outcomes based on values)
1. 'Environmental factors exert influence upon each other and do not operate in
isolation? Discuss.
2. "If you don't adapt, you don't endure" Evaluate the validity of the statement.

H. Application✘based questions:
1. Vinay was a young entrepreneur who wanted to start a new business with an initial
investment of 25 lakhs. He was not sure of what business he has to undertake. His
friend suggested seeking the help of professionals who would spot the latest trends
in the market and give him an idea, but Vinay decided to do it by himself. Suggest
the various ways by which he can do it.

I. Activities:
1. Interview an entrepreneur, ask him/her the keys to successful entrepreneurship.
Also ask him/her whether he/she attributes the success of his business to luck or
hard work.
2. Conduct a survey in your colony by asking people if they face any particular
problem and see if you can find a solution to that problem.
3. Think of an innovative product and conduct a survey in your colony and analyse
whether it will be accepted in your neighbourhood. (For example, new Idea for
waste disposal)

✙✙✙

28
1) Profession
"Profession is that occupation in which one professes to have acquired specialized knowledge,
which is used either in instructing, guiding or advising others," says the Webster's Dictionary.
Examples: Lawyers, Doctors, Chartered Accountants, Company Secretaries, etc. Thus, the
occupation/activity which requires an individual to apply special knowledge and skills is
said to be a profession.

2) Employment
An activity in which an individual works regularly for others and get remuneration in
return, undertaking personal services as per the agreement of employment.

3) Business
This is our key area of study. 'A state of being busy or occupied', is what 'Business literally
means'. In a way all economic activities related to the production and distribution of
goods and services undertaken for monetary gains, are said to be business.

Activities which are inspired mainly by economic consideration can be classified in three broad
categories:
1) Manufacturing
2) Service
3) Trading

1) Manufacturing:
Production of merchandise for use or sale using labour and machines, tools, chemical and
biological processing, or formulation, may also refer to a range of human activity,
from handicraft to high tech, but is most commonly applied to industrial production, in
which raw materials are transformed into finished goods on a large scale. Such finished
goods may be used for manufacturing other, more complex products, such
as aircrafts, house hold appliances or automobiles, or sold to wholesalers, who in turn sell
them to retailers, who then sell them to end users the "CONSUMERS".
Manufacturing takes turns under all types of economic system. In a free market economy,
manufacturing is usually directed toward the mass production of products for sale to
consumers at a profit. In a collectivist economy, manufacturing is more frequently
directed by the state to supply a centrally planned economy. In mixed market economies,
manufacturing occurs under some degree of government regulation.
2) Service:
An intangible commodity a type of economic activity that is intangible is not stored and
does not result in ownership. A service is consumed at the point of sale. Services are one
of the two key components of economics, the other being goods. Examples of services
include the transfer of goods, such as the postal service delivering mail, and the use of
expertise or experience, such as a person visiting a doctor.

30
 Service sector includes commercial firms engaged in banking, communication, transport,
insurance, warehousing etc. This sector constitutes the basic infrastructure which is a must
for smooth flow of business activities. In the recent past, the role of service sector in the
Indian economy is growing faster than agriculture and industry.

3) Trading:
Not a new phenomenon we've been doing it for centuries! The trade that occurred among the
most primitive humans has evolved considerably over time. Trading is;
the activity or process of buying, selling, or exchanging goods or services
the amount of things or services that are bought and sold : the money made by buying
and selling things or services
the act of exchanging one thing for another

Thus, in nutshell, our key area of study is - BUSINESS. 'A state of being busy or occupied',
is what 'Business literally means'. In a way all economic activities related to the
production and distribution of goods and services undertaken for monetary gains are said
to be business.

Different Authors, Different Opinions

Business is "whole complex field of commerce and industry, the basic industries, process and
manufacturing and the network of ancillary services, distribution, banking, insurance, transport
and so on which serve and interpenetrate the world of business as a whole." ✁ F.C. Hooper
Business may be defined as "an activity in which different persons exchange something of value
whether goods and services for mutual gain or profit." ✁ Peterson and Plowman
"An institution organized and operated to provide goods and services to the society under the
incentive of private gain", is said to be business. ✁ Wheeler

Business is a continuous human economic activity with an objective to earn profit by

producing, buying and selling of goods and services. Irrespective of size, nature, scale or
ownership, an activity is referred as business if it exhibits the following essential
characteristics:

1) Entrepreneur's presence
There must be someone/person to take initiative for establishing a business and
undertake the risk associated with the same.

2) Economic activity
All those activities related to the production and/or distribution of goods and services,
with economic motive i.e. profit can form part of business.

3) Production or procurement of goods and services

A business which either produces or procures goods and services for offering them to
consumers, could be:

31
 a) Consumer's goods
b) Producer's goods
c) Services

4) Sale or exchange of goods and services

A business must involve sale, exchange or transfer of goods and/or services for the
satisfaction of human needs against a value/price. Goods/services purchased or
produced for personal/self-consumption, is not a business.

5) Regularity
One time transaction or dealing in goods and services is not business, even if one earns
profit in return. Business must be done regularly.

6) Utility creation
Business activities result in creation of utilities i.e.
a) Form utility Changing the form of raw material into finished product creates form
utility.
b) Place utility From the place of production, transporting goods to the place of
consumption results in place utility.
c) Time utility The process of storing the goods when not required to supplying them
when required generates time utility.

7) Profit earning
Profit is the reward for undertaking a business activity as no business can survive for long
without earning profits.

8) Uncertainty of return
Business does not guarantee for the return of either principal amount invested in the
business or the profit.

9) Element of risk
Business involves risk i.e., uncertainty. 'Higher the risk, higher the profit' goes the old
proverb. The actual business situation is affected by a variety of uncontrollable external
factors casting favourable or unfavourable impact on business. Thus, the risk element
keeps a businessman vigilant and going.

Forms of business organisation

Setting-up a business is not an easy task. An enterprise is a separate and distinct unit,
institutionally arranged to conduct any type of business activity.
It needs to combine the necessary things such as materials, tools, equipment, working space and
bring together all of them in a systematic and effective manner to accomplish the entrepreneur's
desired objective.

32
Thus, every business entity needs to select an appropriate legal structure or framework to work
in. This legal structure determines the extent of ownership and responsibility of proprietor(s).
Appropriate form of organisation strongly influences the enterprise's success and future
prospects.
Once selected, changing the 'form' is quite a complex, time consuming and costly affair.

Forms of enterprises
From the point of view of ownership and management, business enterprises may be broadly
classified under three categories.
1) Private sector enterprises
2) Public sector enterprises
3) Joint sector

1) Private sector enterprises

Sole
Proprietorship

Partnership

Joint Stock
Private Sector
Company

Hindu
Undivided
Family

Co-operative
Forms of Society
Business
Enterprise Departmental
Undertaking

Public
Public Sector
Corporations

Statutory
Joint Sector
Corporation

The enterprises which are owned, controlled, and managed by private individuals, with
the main objective of earning profit comes under this category.
Private individuals thus could start a venture as:
a) Sole-proprietorship
b) Partnership
c) Joint Hindu family business

33
 d) Co-operative
e) Company

2) Public sector enterprises

When business enterprises are owned, controlled and operated by public authorities, with
welfare as primary and profit as secondary goals, they are called as public sector enterprises.
Either the whole or most of the investment in these undertakings is done by the
Government(s). These enterprises have the following forms of organisation:
a) Departmental undertaking
b) Public corporations
c) Government companies

3) Joint sector enterprises

Joint sector is a form of partnership between the private sector and the government where
management is generally in the hands of private sector, with enough representation on
Board of Directors by the Government too. Resources are mostly borne equally.
Thus, one of the first decisions that an entrepreneur will have to make for his new venture
is how the business should be structured. We know all businesses must adopt some legal
configuration that defines the:
a) Control,
b) Personal liability,
c) Rights and liabilities of participants in the business's ownership
d) Life span
e) Financial structure.

This decision will have long-term implications. So an entrepreneur may consult experts
and professionals and seek help to select the form of ownership that is right for him/her.
In making a choice, entrepreneur will want to take into account the following:
1) Vision regarding the size and nature of the business.
2) The level of control the entrepreneur wishes to have.
3) The level of "structure" entrepreneur is willing to deal with.
4) The business vulnerability to lawsuits.
5) Tax implications of the different organizational structures.
6) Expected profit (or loss) of the business.

From the entrepreneur's point of view the most commonly opted out forms for starting a
new venture are:
1) Sole proprietorship
2) Partnership

34
 3) Company
As entrepreneurs are strongly motivated by monetary gains and independence, these
three forms fulfill the basic requirement of entrepreneurs well, making them the most
desirable structure to commence a venture.

An overview of the five basic legal forms of organization is as follows:

I. Sole proprietorship
"The one-man control is the best in the world if that man is big enough to manage everything."
W.R. Basset.

One Man Show

Tom Monaghan, the founder of Domino's Pizza, had a tough childhood, was
raised in orphanages and foster homes. In 1960, Monaghan and his brother
Jim BORROWED $ 900 and bought a foundering Pizzeria in Ypsilanti,
Michigan.
Jim left within the year, but Tom hung on, surviving two near - bankruptcies
and a fire.
Monaghan worked eighteen hours a day seven days a week, whole heartedly making Domino's
Pizza A GIANT MNC world over a household name. Started as sole and today a MNC a long
successful journey of 'one big man'.

Historically, it appears that business first started with this form of organization. One of the
oldest, simplest and most commonly used forms of business organization which is owned
financed, controlled and managed by only one person is called as sole proprietorship,
single entrepreneurship or Individual proprietorship.

"Sole proprietorship is a business initiated, and operated by one individual who carries all
financial and administrative responsibilities, employing such assistants as may be necessary.
✁ E.T. Elbourne
"Sole proprietorship is a business unit whose ownership and management are vested in one
person. The individual assumes all risks of loss or failure of the enterprise and receives all profits
from its successful operations.
✁ Edward Elbourne.

Characteristics of sole proprietorship:

As 'sole' means single and 'proprietor' means owner, this type of business is one person
show exhibiting following features:
1) Individual ownership: This business is exclusively owned by a single person.

35
2) Individual management and control: "What is to be done, how it is to be done, and
when it is to be done - all affairs are managed and controlled by the sole proprietor.
Though, competent people can also be employed for efficient management.
3) Individual financing: All investment is made by the proprietor. Though, if required
he/she has access to loans and debts to procure funds for business.
4) No separate legal entity: Legally, the proprietor and proprietorship are one and the
same business and owner exists together, thus with owner's death, business too dies.
5) Unlimited liability: The proprietor is liable/responsible for all losses arising from
business. In case the business assets are insufficient to pay off liabilities, his/her
personal property can be called upon to pay his business debts.
6) Sole beneficiary: The sole proprietor alone is entitled to all the profits and losses of
business. So he/she puts his/her heart and soul to increase his/her profits.
7) Easy formation and closure: Sole proprietorship is subjected to minimum legal
formalities and regulations both at the time of commencing and/or closing.
8) Limited area of operation: This form of business generally has a limited area of
operation due to:
✁ limited finance availability
✁ limited managerial abilities

Suitability of sole proprietorship form of business

The success or failure of an enterprise depends upon the intelligence, competence and
sensible decision making capacity of the entrepreneur. Before opting for sole
proprietorship, an entrepreneur should carefully compare and evaluate pros and cons of
this form. Basically, this type of form is suitable when:
1. Capital requirement is limited
2. Confidentiality / secrecy is important
3. Market is local
4. Goods are of artistic nature or demands customized approach
5. Quick decision✂making is necessary
6. Size of the venture is small.

Every Big Business Started Small

Shipping tycoon Aristotle Onassis, was one of the richest men in the world in the 1960s. As a
youngster, Onassis had immigrated to Argentina from Greece. He learned Spanish at night and
sold tobacco by day.
At merely 15, he landed a big tobacco order and reinvested in his petty business. As he
accumulated more money, his small business was eventually built into his great financial empire.

36
Legal formalities involved
Sole proprietorship registration procedure
A sole proprietorship does not need to be registered (so yes, 'registration of a sole
proprietorship' is a wrong thing to say) and is therefore an inexpensive manner of
commencing business.
However, in order to start a sole proprietorship an entrepreneur requires certain industry
specific licenses. A few general factors are:
1. Business name: Sole proprietors are under no obligations to select a trade name for
their business. How so ever they are free to do so if they desire to.

2. Service tax registration: Form ST 1 is to be filled for registration if the taxable

services are more than 10 lakh for a financial year.
3. VAT/CST registration: If proprietorship is selling tangible goods within a state then
VAT applies, if it is inter-state then CST applies. The threshold for registration for
VAT varies depending on the city in which entrepreneur commences business but a
CST registration is imperative if he/she affect an inter-state transfer.
4. Others: PAN Card no. of the sole proprietor, bank account no. in the name of sole
proprietorship business, Shops & Establishment License, Employee Provident Fund
Registration or Importer Exporter Code (if in export-import business) as and where
applicable, have to be complied with.

5. Payment of taxes: A sole trader has to ensure his/her business meets the state and
federal taxation requirements. Due to the fact that legally, a sole tradership and a
sole trader are a single entity, the sole trader bears the taxes of the business.

Case Study-I
Satya Barta Dey: SHREE LEATHERS
Satya Brata Dey
Ever seen a long time outside a shoe store? People waiting in the scorching heat just to buy
✁ ✂✄ ☎✆ ✝✞☎✟✝✠ ✡✆ ☛☎☞ ✞ ✌✟✍✎✏✑ ☛☎☞✎✒✒ ✝✟✟ ✂✏ ☎☞✏✝✂✓✟ ✔ ✏☛ ✕✄ ✏ ✖✟☛✎✝ ✔✞✄✟✟ ✗✟ ✏✞✟✄ ✔✞☎✟
Stores in Calcutta.
From Rags to Riches
One dreary November morning in 1986, Satya left his home in Jamshedpur and came to
Calcutta with little more than the clothes on his back. He wore a pair of corduroy pants, a
shirt and a pair of sturdy shoes made by his father. Before he left home, his mother had
pressed in his hands a few hundred-rupee notes, which he brought with him. Today, Satya
Brata Dey is a millionaire, a crorepati. And what gives him the greatest satisfaction is that,
he provides jobs for people in Wes t Bengal-a state where there are very few industries and
over five million unemployed.

37
Parents had a strong influence on his life
✁✂✄✁☎✆ ✝✞✂✟✠✡ ☛✁✆ ✁☞☛✁✄✆ ✁ ✆✂✡✞✌✍ ☛✞✝✁✌ ✁✌✎ ✆✂✏☞☞ ✏✆✑ ✠✒✠✌ ✁✂ ✁✍✠ ✠✏✍✟✂✄✓ ✟✠ ✔✠☞✏✠✒✠✎ ✏✌
herself and encouraged Satya to do the ✆✁✝✠✓ ✕ ✞✌✑ ✆✟✠ ☛✞✖☞✎ ✆✁✄ ✆✂✡✞✗✏✌✍ ✟✏✆ ✖✌✡✖☞✄ ✟✁✏✡
✏✌✂✞ ✘☞✁✙✠✑ ✕✚✞ ✝✁✂✂✠✡ ☛✟✁✂ ✄✞✖ ✎✞✑ ✁☞☛✁✄✆ ☛✏✌✓ ✛✠✝✠✝✔✠✡ ✂✟✁✂✓ ✜☞☛✁✄✆ ☛✏✌✓✢ ✁✂✄✁
learned his lesson well. He won. And he won against great odds.
✁✄✁☎✆ ✣✁✂✟✠✡ ✞☛✌✠✎ ✁ ✆✝✁☞☞ ✆✟✞✘ ✏✌ ✤✁✝✆✟✠✎✘✖✡ ☛✟✠✡✠ ✟✠ ✝✁✎ e shoes. His shoes were so
✆✂✖✡✎✄ ✂✟✁✂ ✂✟✠✄ ✙✞✖☞✎ ☞✁✆✂ ✂☛✠✌✂✄ ✄✠✁✡✆✓ ✜✆ ✁ ✂✠✠✌✁✍✠✡✑ ✁✂✄✁ ✞✣✂✠✌ ☛✠✌✂ ✂✞ ✟✏✆ ✣✁✂✟✠✡☎✆ ✆✟✞✘
✁✌✎ ✟✠☞✘✠✎ ✟✏✝ ✝✁✗✠ ✆✟✞✠✆✓ ✥✟✁✂☎✆ ☛✟✠✡✠ ✟✠ ☞✠✁✡✌✠✎ ✂✟✠ ✣✏✌✠ ✁✡✂ ✞✣ ✝✁✗✏✌✍ ✆✂✖✡✎✄✑ ✍✞✞✎
looking shoes at a reasonable cost. It was this apprenticeship under a master shoemaker like
his father that taught Satya very early in life, a priceless craft. Little did he know then, that
☛✟✁✂ ✟✠ ☛✁✆ ☞✠✁✡✌✏✌✍ ✏✌ ✟✏✆ ✣✁✂✟✠✡☎✆ ✟✖✝✔☞✠ ✆✟✞✘ ✏✌ ✤✁✝✆✟✠✎✘✖✡✑ ☛✞✖☞✎ ✆✞✝✠✎✁✄ ✝✁✗✠ ✟✏✝
✁ ✝✏☞☞✏✞✌✁✏✡✠✑ ✁ ✕✙✡✞✡✠✘✁✂✏☎ ✏✌ ✦✁☞✙✖✂✂✁✓ ✧✠ ☛✞✖☞✎ ✟✁✒✠ ☞✁✖✍✟✠✎ ✏✣ ✆✞✝✠✞✌✠ ✟✁✎ ✂✞☞✎ ✟✏✝ ✔✁✙✗
then, that someday, he would create jobs for hundreds of people with this priceless craft that
he learned from his father. When he remembers his father bending over his worktable making
shoes day after day, tears glisten in his eyes. Tears of love and pride. He remembers his
✣✁✂✟✠✡☎✆ ✟✁✌✎✆ ✂✟✁✂ ✟✁✎✑ ✞✒✠✡ ✂✟✠ ✄✠✁✡✆ ✔✠✙✞✝✠ ✟✁✡✎ ✁✌✎ ✂✞✖✍✟ ☞✏✗✠ ✂✟✠ ☞✠✁✂✟✠✡ ✟✠ ☛✞✡✗✠✎
with. Today, Satya would give anything to be able to hold those callused, wrinkled hands in
✟✏✆ ✞☛✌ ✁✌✎ ✏✌✒✏✂✠ ✟✏✝ ✂✞ ✙✞✝✠ ✁✌✎ ✆✠✠ ✂✟✠ ☞✏✂✂☞✠ ✔✞✄✓ ★✖✂ ✁✂✄✁☎✆ ✣✁✂✟✠✡ ✏✆ ✌✞ ✝✞✡✠✓
Whereas Satya manages a business worth crores, what he is most proud of is that even today
he can make shoes with his own hands.
From his beloved father, Satya learned another important lesson that would come in very
handy for him later in life ✩ the dignity of labour. The value and worth of working with
✞✌✠☎✆ ✞☛✌ ✟✁✌✎✆✓ ★✠✙✁✖✆✠ ✞✣ ✟✏✆ ✔✁✙✗✍✡✞✖✌✎✑ ✁✂✄✁ ✟✁✆ ✍✡✠✁✂ ✡✠✆✘✠✙✂ ✣✞✡ ✂✟✠ ☛✞✡✗✏✌✍ ✝✁✌✓
In his business, he treats his employees and workmen like family members and they in turn
give him their undying loyalty. That is one of the secrets of his success.
✪✫✬✭✮ ✯✭✬✰✭ ✱✲✳✰ ✲✴✵ ✶✳✷✸✵✹✷✷✮ ✺✫✬✭✻✷ ✼✹✷✽✸✾✬✶✿✹
❀✌ ✁✂✄✁☎✆ ★✠✌✍✁☞✏ ✙✞✝✝✖✌✏✂✄✑ ✡✖✌✌✏✌✍ ✞✌✠☎✆ ✞☛✌ ✔✖✆✏✌✠✆✆ ☛✁✆ ✌✞✂ ✝✖✙✟ ✡✠✆✘✠✙✂✠✎✓
Starting a business was looked down upon. Businessmen were seen as people who amassed
wealth at the cost of others. They took too much risk. What if the business failed? What
would you do then? On the other hand, a secure government job was quite another thing.
★✠✙✞✝✏✌✍ ✁ ❁✔✁✔✖☎ ✏✌ ✁ ✍✞✒✠✡✌✝✠✌✂ ✎✠✘✁✡✂✝✠✌✂ ☛✁✆ ✙✞✒✠✂✠✎✓ ❂✌✙✠ ✄✞✖ ✍✞✂ ✄✞✖✡ ✣✞✞✂ ✏✌ ✂✟✠
door, nobody could fire you and whether you worked or not the government paid you and
even when you retired the government paid you and even when you retired the government
took care of you. It gave you a pension. It was like your father-in-☞✁☛☎✆ ✟✞✖✆✠✓ ❃✞✖ ☛✠✡✠
always a well-looked after guest.
The second best thing to being a government employee was being in ❁✆✠✡✒✏✙✠✑☎ ✍✠✂✂✏✌✍ ✁ ❄✞✔
✏✌ ✆✞✝✠✞✌✠ ✠☞✆✠☎✆ ✔✖✆✏✌✠✆✆✓ ❂✣ ✙✞✖✡✆✠✑ ✏✣ ✄✞✖ ✟✁✎ ✁ ❄✞✔ ✏✌ ✆✞✝✠✔✞✎✄☎✆ ✘✡✏✒✁✂✠ ✔✖✆✏✌✠✆✆
enterprise, you did not get good marriage proposals as the government employee would, but
there was still hope for you. You had a job.
Making shoes was low in the prestige ladder
❀✂ ☛✁✆ ✔✁✎ ✠✌✞✖✍✟ ✂✞ ✎✞ ✁ ✡✏✆✗✄ ✂✟✏✌✍ ☞✏✗✠ ✡✖✌✌✏✌✍ ✞✌✠☎✆ ✞☛✌ ✔✖✆✏✌✠✆✆✑ ✔✖✂ ✝✁✗✏✌✍ ✆✟✞✠✆❅
That was truly low down in the prestige ladder of the community. Satya had faced this kind

38
of prejudice b ✁✂✄ ☎ ✆ ✄ ✝ ✝✞ ✄✟ ✠ ✡✡ ☛☞ ✌✍✎✟ ☞ ✏✟ ✌ ☛✂ ✑✂ ☛✂ ☞✒✟ ✁✍☛☞ ✄✓✟ ✟☞✂✔ ✍✁☛ ✄ ✟✕☞✂✂✡
☛✂ ☞ ✡✔ ✂✏☛☎ ✖✗ ✌✍✎ ☞✒✟ ✁✍☛☞ ✄✓✟ ✁✄✒ ✗✌ ✟✍✒✌ ☛✂ ☞✒✝✘ ✙✚☞✎ ✌✂ ✎✂✏ ✡ ☛ ✎✂✏✄ ✟✂✗ ✕✂✝ ☞ ✄ ✍✗✌
✠✍✟☛ ☞✒✟ ☛✒✝ ✛ ✜✂ ✟✗✓☛ ☞ ☞✍✢ ✍✗✎☛☞✒✗✑ ✞ ☛☛ ✄ ☛✂ ✌✂✛ ✆ ✟☞✂✏✡✌ ✡ ✍✄✗ ✟✣✒✡✡✟ ☛☞✍ t would get
☞✒✝ ✍ ✤✂✞ ✒✗✟☛ ✍✌ ✂✁ ✌✂✒✗✑ ☛☞✒✟☎✓

✥✍☛✎✍ ✄ ✝ ✝✞ ✄ ✌ ☛☞✒✟ ✕✂✝✝ ✗☛ ✝✍✌ ✞✎ ☞✒✟ ✁✍☛☞ ✄✓✟ ✁✄✒ ✗✌ ✍✟ ☞ ✠✍✗✌ ✄ ✌ ✌✂✠✗ ☛☞ ✟☛✄ ☛✟
of Calcutta looking for a place where he could start a business making shoes. Thank
goodness he had learned the trade and art of making good shoes. There were no jobs available
and last thing he wanted to do was join the ranks of the unemployed. But Satya had never
considered looking for a job.
Satya dreamed big but reality hit hard
Ever since Satya was four or five he knew he wanted to have his own business. In
Jamshedpur he would look at the TISCO (Tata Iron and Steel Company) Plant and say to
☞✒✝✟ ✡✁✘ ✙✥✂✝ ✌✍✎ ✦ ✠✒✡✡ ☞✍✢ ✍ ✁✍✕☛✂✄✎ ✡✒✣ ☛☞✒✟☎✧

Hot, tired and hungry, Satya wandered down the streets of Calcutta looking for a place that
✕✂✏✡✌ ✞ ☞✒✟ ✙✟☞✂✠✄✂✂✝✧ ✂✄ ✟☞✂✔☎ ★☛ ☛☞ ✕✂✄✗ ✄ ✂✁ ✍ ✌ ✟ ✄☛ ✌ ✟☛✄ ☛✘ ☞ ✟✔✂☛☛ ✌ ✍ ✄✏✗✌✂✠✗
showroom that was for rent. He used the money his mother gave him to pay the rent and
✝✂✢ ✌ ✒✗☎ ✦☛ ✠✍✟ ☞✒✟ ☞✂✝ ✍✗✌ ✩✟☞✂✠ ✄✂✂✝✓ ✄✂✡✡ ✌ ✒✗ ✂✗ ☎ ✪☞ ✩✟☞✂✠ ✄✂✂✝✓ ✠✍✟ ✄✍☛ ✍✗✌
cockroach infested. The paint on the walls was peeling. It was dingy, dirty and dimly lit. The
windows were filthy and you could hardly see through them. The floor had several layers of
dust caked with moisture. But for Satya, it was his dream showroom. It was his place.
Every night Satya washed his pants and shirt and hung them to dry. Often his corduroy
pants were still wet in the morning. He wore the wet pants anyway and hoped that his body
heat would dry them during the course of the ✌✍✎☎ ✙✦ ✠✍✟ ✟✠ ✔ ✄✘ ✔✍✒✗☛ ✄✘ ✟✍✡ ✟✝✍✗✘ ✂✠✗ ✄
✢ ✄✎☛☞✒✗✑ ✄✂✡✡ ✌ ✒✗☛✂ ✂✗ ✘ ✙✟✍✎✟ Satya.

✫ ✢ ✄ ✞ ✍✁✄✍✒✌ ☛✂ ✌✄ ✍✝ ✞✒✑✘ ✙☞ ✍✌✢✒✟ ✟☎ ✙✬✂✏ ✕✍✗ ✝✍✣ ✎✂✏✄ ✌✄ ✍✝✟ ✕✂✝ ☛✄✏ ☎✧

Even as he dreamed his big dreams, he continued to live in the filthy, run-✌✂✠✗ ✙✟☞✂✠
ro✂✝☎✧ ✆ ✟ ☛ ✍✞✂✏☛ ✕✡ ✍✗✒✗✑ ✍✗✌ ✁✒✭✒✗✑ ✒☛☎ ✆ ✟✠ ✔☛ ✍✗✌ ✝✂✔✔ ✌ ✏✗☛✒✡ ☛☞ ✁✡✂✂✄ ✟☞✂✗ ☎
Then he cleaned the windows with soap and water until they sparkled and finally he painted
☛☞ ✠✍✡✡✟ ✏✗☛✒✡ ☛☞ ✙✟☞✂✠✄✂✂✝✧ ✡✂✂✣ ✌ ✞✄✒✑☞☛ ✍✗✌ ✍☛☛✄✍✕☛✒✢ ✍✗✌ ✄ ✍✌✎ ✁✂✄ ✞✏✟✒✗ ss.

Satya Starts his business

✥✍☛✎✍ ✟☛✍✄☛✟ ☞✒✟ ✞✏✟✒✗ ✟✟ ✢ ✗☛✏✄ ✠✒☛☞ ✞✏✎✒✗✑ ✟✒✭ ✔✍✒✄✟ ✂✁ ✡✍✌✒ ✟✓ ✕☞✍✔✔✍✡✟☎ ✆ ✠✍✟
determined not to borrow money from anybody. He sold the chappals at Rs. 69 each and
made a little profit, which he invested to buy more chappals. After a few months Satya made
a profit of Rs. 300 which thrilled him to no end. Now he was really in business
✮✯✰✱✯✲✳ ✴✵✳✶✷✸✳✳ ✹✺✶✻✼✳✼✹✺✱ ✽✸✾✸✻✼✹✳

✥✍☛✎✍✓✟ ✟☞✂✠✄✂✂✝ ✠✍✟ ✒✗ ✫ ✠ ✿✍✄✣ ☛☎ ✦✗ ☛☞✂✟ ✌✍✎✟ ✫ ✠ ✿✍✄✣ ☛ ✏✟ ✌ ☛✂ ✕✡✂✟ ✞✎ ❀ ✔✝☎

After 6 or 7 pm the whole area used to be dark and deserted. But Satya opened his shop
before anyone else and kept it open long after others had closed theirs. He did this even if
there were no customers. What if there was one customer who needed shoes late in the day
when the other shops were closed?

39
Gradually over a period of time, Satya started to manufacture the shoes that he sold in his
✁✂✄☎✆ ✝☎ ✞✂ ✟✁✟✂✠☎✡ ☛✟ ☛✂☎ ☞ ✞✂✂✄ ✌☞✠✍ ☛✂☎ -good quality and inexpensive. He kept his
margins low so that he could attract a large number of customers. Even though his shoes
were meant to attract the low-income customers, many ministers and businesspeople also
bought his shoes. Soon satisfied customers brought their friends and family and his business
started to grow by leaps and bounds. He had a winning combination for success-the quality
was good and the price was right.
A shrewd businessman that Satya is, he kept other manufacturers products as well, so the
customers could compare and see that sreeleathers shoes were cheaper and better.
Customer service is of prime importance
Customer service is always very important at Sree leathers stores. Satya offers his customers
tea, coffee or coke at his stores so that they would sit, spend some time and buy more than
they had originally come to buy. Satya told me the story of a woman who was standing
outside his store one day waiting for a sari shop across the street to open. His salesman
invited her in and asked her to sit and wait in the store. She came in and sat down in the
comfortably air-conditioned store. The salesman offered her coffee. She had some. She started
to look at the different shoes displayed in the store. Without anyone trying to sell her
anything, she ended up buying 12 pairs of shoes.
✎✏☎ ✡✂✠✍✁ ✑✒ ✁ ☎✓✓ ☛✂☎ ✆ ✏☎ ✌☞✔☎ ✂✒✄ ✕✒ ✁✂✌☎✄ ✖☎☎✓ ✗✂✂✡✆ ✘☛☞✁✍ ✙☛☞✁ ✚✄✟✠✗ ✁☛☎✌ ✚☞✕✔✛✍
says Satya Brata Dey.
One day a man was in a hurry to catch a train to Raipur. He came to the store bought his
shoes and rushed to the train station. But soon he came back and bought four more pairs. He
✕✂✠✁✟✠✒☎ ✁✂ ✕✂✌☎ ✚☞✕✔ ✁✂ ✁☛☎ ✁✂✄☎ ☎✜☎✄✢ ✁✟✌☎ ☛☎ ✟ ✟✠ ✣☞✓✕✒✁☞ ☞✠✡ ✟ ✂✠☎ ✂✖ ✤☞✁✢☞✍ ✚☎ ✁
customers. About 15% of his customers are from out of town.
Cut out the middleman
Since Satya manufactures his own shoes there are no middlemen to pay. He can afford to sell
his shoes at a lower price than Bata and other large companies who have huge overheads. If
he has to import something from abroad such as material for soles, which he gets from the
UK, he imports it directly from the manufacturer there. Thus once again he avoids paying
the middlemen.
He keeps his employees happy and motivated
Satya firmly believes that motivating the staff and keeping them happy is critical for the
success of any business. A disgruntled or unhappy employee will not provide good customer
service. And customer service is what keeps people coming back and that is what makes the
business successful.
✎✝✂✙ ✡✂ ✢✂✒ ✌✂✁✟✜☞✁☎ ✢✂✒✄ ✁☞✖✖✥✦ ✧ ☞ ✔☎✡

✎✧ ☛☞✜☎ ✁☞✖✖ ✙☛✂ ☛☞✜☎ ✚☎☎✠ ✙✟✁☛ ✌☎ ✄✟✗☛✁ ✖✄✂✌ ✁☛☎ ✜☎✄✢ ✚☎✗✟✠✠✟✠✗✆ ✧ ✁✄☎☞✁ ✁☛☎✌ ✓✟✔☎family.
I keep them in good humour. I spend time talking with them and help solve their problems.
★✢ ✁☞✖✖ ✌☎✌✚☎✄ ✡✂✠✍✁ ✖☎☎✓ ✓✟✔☎ ☎✌✞✓✂✢☎☎ ✆ ✘☛☎✢ ✖☎☎✓ ✓✟✔☎ ✁☛☎✢ ☞✄☎ ✁☛☎ ✂✙✠☎✄ ✆✦

40
Satya has a small team of dedicated managers who work long hours, sometimes as much as
from 6 a.m until midnight
The third important key to a successful business is paying the vendors and suppliers on
time, says Satya. He loses his temper if his vendors and suppliers are not paid on time.
Sources of stress
✁✂✄ ✁☎ ✆✝✞✆✟✠ ✡☛☞☞✄✠✝ sources of stress are government authorities. The small bureaucrats
and government employees harass for no reason whatsoever, he says. To illustrate his point
he told me the following story.
Satya was getting a new showroom constructed. He had taken permission from the Calcutta
Municipal Corporation and everything was legal and above board. The construction started
and then one day out of the blue, some policemen arrived and ordered the work to be stopped.
✌✍✄✞ ✎✄✂✆✏✎✄✎ ✆ ✍✑☞✄ ✡✒☛✡✄✓ ✆✝✞✆✟✠ ✂✆✏✆☞✄✒ ✏✄☞✁✝☛✆ted and settled for a lower sum. But
when Satya came to know of it he was furious and refused to pay a single paisa. He said he
✔✆✠✏✟✝ ☞✁☛✏☞ ✝✁ ✡✒☛✡✄✓ ✕✄ ✖✁✏✝✆✖✝✄✎ ✠✁✂✄ ✍☛☞✍✄✒ ✆✑✝✍✁✒☛✝☛✄✠ ☛✏ ✝✍✄ ✗✁✘☛✖✄ ✎✄✗✆✒✝✂✄✏✝ ✆✏✎ ✝✍✄
government and the policemen left. The work continued. Then one day a couple of the
Calcutta municipal corporation employees arrived. They started finding faults with the
construction. Now they wanted a bribe. Once again he had to approach the higher
authorities to solve the problem. These kinds of harassment and hassles cause unnecessary
delays and make doing business stressful.
Growing, growing ,franchising
Sree leathers has about 15 outlets in Eastern India. He has only one showroom of his own;
the rest are all franchises. There is such a great demand for his franchises that people come
with recommendations from the Prime Minister and the Finance Minister. Some people
come with briefcases full of money requesting a franchise. But Satya Brata is very choosy
about giving franchises because the quality and his hard won reputation are very important
to him.
✆✝✞✆✟✠ ✠✍✁✄✠ ✆✒✄ ✠✁✘✎ ☛✏ ✂✆✏✞ ✖✁✑✏✝✒☛✄✠ ✆✡✒✁✆✎ ✠✑✖✍ ✆✠ ✙✒✄✄✖✄✚ ✛✑✠✝✒☛✆✚ ✜✄✝✍✄✒✘✆✏✎✠✚
Germany, UK, USA, Singapore and Saudi Arabia. But in these countries they are sold as
non-brand name shoes.
Satya has reached a point in life when expansion has taken on a new meaning and purpose.
✢✣✗✆✏✠☛✁✏ ☎✁✒ ☛✝✠ ✁✔✏ ✠✆✤✄ ✎✁✄✠✏✟✝ ✂✄✆✏ ✂✑✖✍ ✝✁ ✍☛✂✓ ✕✄ ✂✆✤✄✠ ✄✏✁✑☞✍ ✂✁✏✄✞ ✆✏✎
expansion would only mean more stress for him. But creating jobs is important to him.
✥✄✠✝ ✦✄✏☞✆✘ ✎✁✄✠✏✟✝ ✍✆✧✄ ✂✆✏✞ ☛✏✎✑✠✝✒☛✄✠ ✆✏✎ ★✁✡✠ ✆✒✄ ✠✖✆✒✖✄✓ ✕✄ ☎✄✄✘✠ ✝✍✆✝ ☛✝ ✔✁✑✘✎ ✡✄
selfish of him not to expand. He wants to create as many jobs as he can. He believes that
creating jobs is the best service he can do for the society. He employs about 150 people in his
factory and outlets and in addition, if each of his fifteen franchises employs about ten people,
✝✍✄✏ ✆✝✞✆ ✍✆✠ ✖✒✄✆✝✄✎ ✄✂✗✘✁✞✂✄✏✝ ☎✁✒ ✆✝ ✘✄✆✠✝ ✩✪✪ ✗✄✁✗✘✄✓ ✫✝✟✠ ✆ ✔☛✏ -win situation.
Sree leathers is worth several crores today. The young man who came to Calcutta with only
the clothes on his back and a fistful of money has come a long way. His secret? Hard work,
dignity of labour and big dreams.

41
Characteristics of partnership:
The essential features of partnership are as follows:
1) Two or more persons:
Partnership is the outcome of a contract. Thus:
a) There must be at least 2 persons to enter into contract to form partnership.
b) Minors cannot form a partnership firm as they are incompetent to enter into
contract but can be admitted to the benefits of a running firm.
c) If these people intend to do banking business, the maximum number can be ten
otherwise twenty for the other business.

2) Agreement:
The relation of partnership arises from contract and not from status. Though oral
agreement is even acceptable but in practice written agreement is much more
advisable as disputes can be resolved better with it.

3) Profit sharing:
The objective of the business is to make profits and distribute the same amongst
partners. Any association initiated to do charity work is not partnership.

4) Unlimited liability:
Mostly, the liability of the partners of a firm is unlimited. Their personal properties can
be disposed off to pay the debts of the firm if required. The creditors can claim their
dues from any one of the partner or from all of them, meaning partners are liable:
Individually
Collectively

5) Implied authority:
There is an implied authority that any partner can act on behalf of the firm. The firm
stands bound by the acts of partners.

6) Mutual agency:
The business of partnership can be carried on by all the partners or any one of them
acting for all. Thus, every partner is principal as well as agent of other partners and
of the firm. Thus, (i) Each partner is liable for acts performed by other partners, (ii)
Each partner can bind other partners and the firm by his acts done in the ordinary
course of business.

7) Utmost good faith:

Every partner is supposed to act honestly and give proper accounts to other
partners. Thus, mutual faith and confidence in one another is the main strength of
partnership.

43
8) Restriction on transfer of shares:
No partner can sell or transfer his share to anybody else without the consent of the
other partners. By giving a notice for dissolution of the firm, a partner can show
intention to discontinue as partner.

9) Continuity:
A partnership continues up to the time that all partners desire to continue it. Legally,
a firm dissolves on the retirement, death, bankruptcy lunacy, or disability of a
partner if not otherwise provided for in the partnership deed.

Take a Partner when you trust your Partner

Steve Perlman, the inventor of Web TV, built his first home computer when he was only fifteen
years old. In 1995, he created a working prototype of the Web TV box.
He and a fried Bruce Leak, started a firm with another friend Phil Goldman and began to sell Web
TV out of the guest bedroom in Perlman's house.
Perlmann, being something of a mad scientist, buried himself in development and let his partners
worry about the money. By 1997, Perlman had raised and burned through $ 46 million developing
Web TV. Luckily, that's when Microsoft's came calling. Joining Microsoft's team netted Perlman
and his two partners around $ 70 million apiece.
TRUST AND CONFIDENCE ARE THE PILLARS FOR GREAT PARTNERSHIP.

Suitability
The use of better sophisticated production techniques has necessitated more investments.
Complex nature of businesses needs expert managerial hands. Thus, partnership form of a
business is an ideal choice for starting a new venture, if the entrepreneur's
1) capital and managerial requirements are higher as compared to that of sole
proprietorship,
2) enterprise falls in the category of either being a small or a medium scale enterprise,
3) direct contact with the customers is essential.

Consequences for non✁registration of a partnership firm:

Partnership firms in India are governed by the Indian Partnership Act, 1932. While it is
not compulsory to register your partnership firm as there are no penalties for non-
registration, it is advisable since the following rights are denied to an unregistered firm:
1) A partner cannot file a suit in any court against the firm or other partners for the
enforcement of any right arising from a contract or right conferred by the
Partnership Act.
2) A right arising from a contract cannot be enforced in any Court by or on behalf of the
firm against any third party.

44
3) Further, the firm or any of its partners cannot claim a set off (i.e. mutual adjustment
of debts owned by the disputant parties to one another) or other proceedings in a
dispute with a third party.

Drafting of partnership deed:

Partnership is an agreement between persons to carry on a business, entered into either
orally or in writing. It is always desirable to have a written agreement so as to avoid
misunderstandings and unnecessary litigations in future. When the agreement is in
written form, it is called a 'Partnership Deed'. It must be duly signed by the partners,
stamped and registered. Any alteration in one partnership deed can be made with the
mutual consent of all the partners.

Although it is left to the choice of the partners of the firm to decide themselves as to what
should be mentioned in their partnership deed, yet a partnership deed generally contains
the following:
1. Name of the firm.
2. Nature of the business.
3. Name of partners.
4. Place of the business.
5. Amount of capital to be contributed by each partner.
6. Profit sharing ratio between the partners.
7. Loans and advances from the partners and the rate of interest thereon.
8. Drawings allowed to the partners and the rate of interest thereon.
9. Amount of salary and commission, if any, payable to the partners.
10. Duties, powers and obligations of partners.
11. Maintenance of accounts and arrangement for their audit.
12. Mode of valuation of goodwill in the event of admission, retirement and death of a
partner.
13. Settlement of accounts in the case of dissolution of the firm.
14. Arbitration of case of disputes among the partners.
15. Arrangements in case a partner becomes insolvent.

Registration procedure
A partnership firm can be registered whether at the time of its formation or even
subsequently. Entrepreneur needs to file an application with the Registrar of Firms of the
area in which his/her business is located.

Step: 1
Application for partnership registration should include the following information:

45
 1) Name of the firm
2) Name of the place where business is carried on
3) Names of any other place where business is carried on
4) Date of partners joining the firm
5) Full name and permanent address of partners.
6) Duration of the firm

Step: 2
Every partner needs to verify and sign the application. Ensure that the following
documents and prescribed fees are enclosed with the registration application.
a) Application for registration in the prescribed form-I.
b) Duly filled specimen of affidavit
c) Certified copy of the partnership deed
d) Proof of ownership of the place of business or the rental/lease agreement thereof

It may be noted here that, the name of the partnership firm should not "contain any words
which may express or imply the approval or patronage of the government except where
the government has given its written consent for the use of such words as part of the
firm's name."
Once the Registrar of Firms is satisfied that the application procedure has been duly
complied with, he/she shall record an entry of the statement in the Registrar of Firms and
issue a Certificate of Registration.

III. Joint Stock Company

ONCE "ILLEGAL .... TODAY LEGALLY MOST DESIRABLE!!!

Joint stock company organisation was started first in Italy in the thirteenth century. During
seventeenth and eighteenth centuries, joint stock companies were formed in ENGLAND under
ROYAL CHARTER OR ACTS OF PARLIAMENT.
The joint stock company form of organisation got a great set back when "BUBBLES ACT OF
1720" declared promotion of companies as ILLEGAL by ENGLAND'S PARLIAMENT.
It was much later in 1844, that the company form regained status after passage of THE JOINT
STOCK COMPANIES ACT IN 1844 and LIMITED LIABILITY granted only in 1855.
The first Companies Act was passed in India in 1850 and the principle limited liability was
introduced only in 1857.
Much later in 1956, a comprehensive bill was passed and any firm incorporated under this Act
was started to be referred as "COMPANY".

46
 Because like a human being it can buy, sell and own property, sue others, be sued by
others, its called as an artificial person.

3) Separate legal entity

A company has an independent status, different from its members. This implies that
a company cannot be held liable for the actions of its members and vice-versa.
Company has a distinct entity separate from its members.

4) Common seal
Being an artificial person, company cannot sign the documents. Hence, it uses a
common seal on which its name is engraved. Putting the common seal on papers, is
equivalent to that of signatures of a human being, making them binding on the
company.

5) Limited liability
The liability of the shareholders of a company is normally limited to the amount of
shares held or guarantee given by them.

6) Transferability of shares
No shareholder is forever wedded to the company. Subject to certain conditions, the
shares are freely transferable. The private companies do impose some restrictions on
the transfer of shares.

7) Diffusion of ownership and management

In this form of organisation, entrepreneur should clearly understand there exists
separation of ownership from management.
As the shareholders could be scattered across country here, they give the right to the
directors to manage the company's affairs.

8) Number of members
Private company:
Minimum required members : 2
Maximum members : 50 (excluding employees)
Public company:
Minimum requirement : 7
Maximum number : No limit

9) Limitation of action
The scope of this artificial person is determined by:
a) The Indian Companies Act
b) Memorandum of Association
c) Articles of Association

48
 Any work done beyond what is stated in these documents can lead to winding up of
the process of the company.

10) Winding up
The mode of incorporation and termination (winding up) is both as per the
Companies Act only. It's born out of law and can be liquidated only by law.

Choice to be made:
An entrepreneur, under the 'Company' form of organisation has a further choice to incorporate
an enterprise either as either a:
a) Private company or,
b) Public company
A) Private company
A private company:
1) has a minimum of two and a maximum of fifty members excluding its past and
present employees.
2) restricts the right of its members to transfer shares.
3) prohibits an invitation to the public to subscribe for any shares or debentures of the
company, or accept any deposits from persons other than its directors, members or
relatives.
4) has a minimum paid up capital of one lakh rupees (subject to change)
5) uses the word 'Pvt. Ltd.' at the end of its name.

B) Public company
Under Section 3(i) (ii) of the Companies Act, a public company is a company which is not
a private company. By implication, a public company:
1) has minimum seven people to commence with no upper limit to membership
2) does not restrict any transfer of shares
3) invites public to subscribe for its shares, debentures and public deposits.
4) has a minimum paid up capital of five lakh rupees.
5) uses the word 'Ltd.' at the end of its name.

Why private company is more desirable

Inspite of certain restrictions imposed on a private company, it enjoys certain privileges under
the Companies Act. A substantial number of entrepreneurs prefer to form a private company
because of the following important privileges:
1) Only two members are required to form a private company.
2) Only two directors are required to constitute the quorum to validate the proceedings of
the meetings.

49
3) Such company can file a statement in lieu of prospectus with the Registrar of Companies.
4) It can commence its business immediately after incorporation.
5) Holding of a statutory meeting or filing of a statutory report is required by a private
company.
6) A non-member cannot inspect the copies of the profit and loss A/c filed with the
Registrar.
7) Limit on payment of maximum managerial remuneration does not apply to a private
company.
8) Restrictions on appointment and reappointment of managing director do not apply.
9) Maintaining of index of members is not required by a private company.
10) Directors of the private company need not have qualification shares.
The company form of organisation has shown phenomenal increase in almost all countries of
the world in the twentieth century.

Case Study-II
Quest for Independence effects Form's Selection
William C. Durant, the founder of General Motors, started a variety of entrepreneurial ventures,
primarily in the fields of insurance, real estate and construction. None of them really took off.
Once he hitched a ride to work with a friend, nothing that his friend's new 'buggy' rode smoother than
any he had been in. New design in the buggy's springs was the reason for this..
Durant, on learning that the Coldwater Road Cart Company made the buggies with the improved
springs, immediately offered to buy the company for $ 1500. For this, he had to borrow $ 2000 from
Citizen National Bank of Flint and made two sample buggy carts. Within a week, the buggy was sold,
leaving orders for 600 buggy carts and there was no turning back and the turning point came in 1904,
with BUICK MANUFACTURING COMPANY offering Durant partnership, as they were both in need
of fresh source of capital and the famed selling abilities of Durant.
But, Durant agreed to come in only if he could have absolute managerial control and finally took over
the BUICK COMPANY.

Suitability
On comparing the advantages and limitations of company form of business, it is suggested that
an entrepreneur should choose this form provided his/her:
1) Venture is a heavy and basic industry type
2) Large-scale operations are involved
3) Business requires huge funds
4) Enterprise involves heavy risks

50
5) Enterprise is technologically complex and sophisticated, banking heavily upon experts
and professionals.

To commence a "Company" in India

The idea of forming a company is conceived either by a person or by a group of persons known
as promoters. Our entrepreneurs are basically the promoters as they are the ones who:
a) Conceive the idea.
b) Scan it against the environmental forces to establish its feasibility and viability.
c) Procures the resources essential for its commencement.
d) Ensure the incorporation of the enterprise.
e) Arrange for commencing of the business.
g) Plans out expansion and diversification strategies.

The concept of the company is born in the entrepreneur's mind they investigate the potential
and take a lead for bringing human resources, money, materials, machinery and methods
together for converting his/her dream into reality.

Legal formalities expected to be complied by the entrepreneur:

A heavy responsibility rests on the entrepreneur in translating his idea into a working reality.
The sphere of activities done during this stage is very wide encompassing:

1. Obtain PAN number from Income Tax Department

What is PAN?
Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued by the
Income Tax Department.
✁✂✄ ☎✆✝✞✟☎✠ ✡☛☎ ☞☎✌✝✍✡✎☎✆✡ ✡✏ ✟✑✆✒ ✝✟✟ ✡✍✝✆✠✝✓✡✑✏✆✠ ✏✔ ✡☛☎ ✕✌☎✍✠✏✆✖ ✗✑✡☛ ✡☛☎ ☞☎✌✝✍✡✎☎✆✡✘
These transactions include tax payments, TDS/TCS credits, returns of income/wealth/
gift/FBT, specified transactions, correspondence, and so on. PAN, thus acts as an
✑☞☎✆✡✑✔✑☎✍ ✔✏✍ ✡☛☎ ✕✌☎✍✠✏✆✖ ✗✑✡☛ ✡☛☎ ✡✝✙ ☞☎✌✝✍✡✎☎✆✡✘
It is mandatory to quote PAN in all documents pertaining to financial transactions.
Who must have PAN?
i) All existing assesses or taxpayers or persons who are required to furnish a return of
income, even on behalf of others, must obtain PAN.
ii) Any person carrying on any business or profession whose total sales, turnover or
gross receipts are or is likely to exceed five lakh rupees in any previous year;
iii) Any person, who intends to enter into financial transaction where quoting PAN is
mandatory, must also obtain PAN.
iv) The Assessing Officer may allot PAN to any person either on his/her own or on a
specific request from such person.

51
2. Open a current account
Who can open a current account
i) Any person, competent to contract and satisfactorily introduced to the Bank may
open an account in his/her own name. He/she may not open more than one such
account. Accounts may be opened in the names of two or more persons and may be
made payable to.
ii) Accounts can be opened for sole proprietorship firms, partnership firms, private
limited and public limited companies, Joint Hindu families, trusts, clubs, associates
etc. satisfactorily introduced to the Bank and on fulfilling laid down procedures and
tendering required credentials.
iii) Accounts can be opened by minors of 14 years and above, if able to read and write,
in their sole names.

Basic common documentation

Proof of Identity: PAN Card, Voter Id Card, Passport, Driving License
Proof of Address: Latest Telephone Bill or Electricity Bill

Public or private limited companies

Certificate of incorporation and commencement of business
Memorandum and Articles of Association
Board resolution authorising the opening and operation of the account
PAN or GIR No. or completed Form 60
List of directors with residential addresses

3. Register your company (Pvt. Ltd/Public limited Company)

The following steps are involved in incorporating a private or public company in India
1. Name of the business entity
2. Register for e-filing at MCA (Ministry of Corporate Affairs) portal
3. Apply for Director Identification Number (DIN)
4. Obtain Digital Signature Certificate (DSC)
5. Register DSC at MCA website
6. Apply for approval of the name of the company
7. Formulate Memorandum of Association
8. Formulate Articles of Association
9. Verify, stamp and sign Articles of Association
10. Verify the various forms required for incorporation of the company

52
 Sales tax ID number
A state Sales Tax ID number is essentially a business version of your PAN number, under
which you collect and pay tax for any service or product you sell, which in turn, qualifies
for taxation in your state.

6. Excise duty (If applicable)

What is excise duty? Is it collected by the State Government or the Central Government?
How is it different from sales tax?

Excise duty is a tax on manufacture or production of goods. Excise duty on alcohol,

alcoholic preparations, and narcotic substances is collected by the State Government and is
called "State Excise" duty. The Excise duty on rest of goods is called "Central Excise" duty
and is collected in terms of Section 3 of the Central Excise Act, 1944. Sales Tax is different
from the Excise duty as former is a tax on the act of sale while the latter is a tax on the act
of manufacture or production of goods.
What categories of persons are required to obtain registration with the Central Excise
department?
Subject to specified conditions, generally the following categories of persons are required
to get themselves registered with the central excise department:
i) Every manufacturer of dutiable excisable goods;
ii) First and second stage dealers or importers desiring to issue Cenvatable invoices;
iii) Persons holding bonded warehouses for storing non-duty paid goods;
iv) Persons who obtain excisable goods for availing end-use based exemption.

What is the procedure for obtaining registration?

Apply to the nearest central excise division office in form A.1 along with a self-attested
copy of the PAN issued by the income tax department. After post verification, a regular
registration certificate in form RC is normally issued immediately, as far as possible.

7. Customs duty
Customs Duty is a type of indirect tax levied on goods imported either in or to India, not
both, as well as on goods exported from India. Taxable event is imported into or exported
from India. Import of goods means bringing goods to India from a place outside India.
India includes the territorial waters of India which extend up to 12 nautical miles into the
sea to the coast of India. Export of goods means taking goods out of India to a place
outside India.

8. File entrepreneurship memorandum at DIC (optional)

Although not mandatory, you may file part I of entrepreneurs memorandum to the
district industries centre. This may be necessary for claiming certain incentives / subsidies
and for certain formalities at the state level.

54
The scheme has been extended to shops, hotels, restaurants, cinemas including preview
theatres, road-motor transport undertakings and newspaper establishments employing 20
or more persons.

Steps involved in starting business in Mumbai

Registration requirements:

No. Procedure Time to Cost to complete

complete

1. Obtain director identification number 1 day INR 100

(DIN) online from the Ministry of
Corporate Affairs portal (National)

2. Obtain digital signature certificate 3 days INR 1,500

online from private agency authorized
by the Ministry of Corporate Affairs
(National)

3. Reserve the company name online with 2 days INR 500

the Registrar of Companies (ROC)
(National)

4. Stamp the company documents at the 1 day INR 1,300 (INR 200 for
State Treasury (State) or authorized MOA + INR 1,000 for
bank (Private) AOA for every INR
500.000 of shares capital
or part thereof + INR 100
for stamp paper for
declaration Form 1)

5. Get the certificate of incorporation from 5 days INR 14,133 (See

the Registrar of Companies, Ministry of comments)
Corporate Affairs (National)

6. Make a seal (Private) 1 day INR 350 (cost depends on

the number of seals
required and the time
period for delivery)

7. Obtain a permanent account number 7 days INR 67 (INR 60

(PAN) from an authorized franchise or application fee + 12.36%
agent appointed by the National service tax + INR 5 for
Securities Depository Ltd. (NSDL) or application form, if not
the Unit Trust of India (UIT) Investors downloaded)
Services Ltd. as outsourced by the
Income Tax Department (National)

56
 8. Obtain a Tax Account Number (TAN) 7 days INR 57 (INR 50
for income taxes deducted at source application fee + 12.36%
from the Assessing Office in the service tax)
Mumbai Income Tax Department

9. Register with the Office of Inspector, 2 days INR 6,500 (INR 2000 + 3
Shops and Establishment Act (State/ times registration fee for
Municipal) trade refuse charges)

10. Register for Value-Added Tax (VAT) at 12 days INR 5,100 (registration
the Commercial Tax Office (State) fee INR 5000 + stamp
duty INR 1000)

11. Register for Profession Tax at the 2 days No cost

Profession Tax Office (State)

12. Register with Employees' Provident 12 days No cost

Fund Organization (National)

13. Register for medical insurance at the 9 days No cost

regional office of the Employees' State
Insurance Corporation (National)

Source: Take in the India Biz-Tech Buzz

Though the most commonly opted out forms of business had already been discussed, yet
there are two more forms prevalent in India, to start venture. They are:

IV. Joint Hindu family / firm (HUFs):

Joint Hindu family or Hindu Undivided Family Business is a unique form of business
organisation prevailing only in India. It is governed by Hindu law and represents a form
which is owned, managed and controlled by the male members of a joint Hindu family.
Meaning of HUFs: The HUFs have been defined under the Hindu law "as a family, which
consists of male lineally descended from a common ancestor and included their wives and
unmarried daughters." The relation of HUFs arises from the status not from legal
contracts. Creating HUFs are the best possible way to save taxes.
Schools of law under HUF: Two schools of law are there in order to create a HUF:
a) Dayabhaga It is prevalent in West Bengal and Assam. As per this school of law, the
son acquires the right in the family property only after the death of his father.
b) Mitaakshara It is prevalent in rest of India under which, the son acquires the right
in the family property right from his birth.

There are two conditions for existence of HUFs. They are:

1) Minimum two members must be there in the family.
2) Existence of some ancestral property.

57
Characteristics of Hindu undivided family
The main features of HUF are as follows:

1) Creation: It arises by status or operation of Hindu Law.

2) Membership: A male member becomes a member merely by his birth. By adoption,
an outsider can be admitted to its membership but not otherwise.
3) Management: The senior most male member of the family known as 'Karta' manages
the affairs, having unlimited powers. The other male members called 'Coparceners'
have no right to deal with outsiders or inspect accounts.
4) Liability: The liability of Karta is unlimited and that of coparceners is limited to the
extent of their share in property which is jointly held by the family. The self-acquired
property of any member cannot be taken in order to satisfy business liabilities.
5) Right of Accounts: The members other than Karta do not have right to inspect
and/or copy contents of the account books.
6) Minor as member: A male from the time of his birth becomes the member in this
form of enterprise.

7) Dissolution: The HUF continues to operate forever as death of members does not
effect it. As upper links are removed by death, the lower ones are added by birth. So
there is no limit to its membership. But if all members want to mutually dissolve the
firm, they can do so.
8) Implied Authority: Only the Karta has implied authority to bind the HUF by acts
done in the ordinary course of the business of the firm. That's why he alone has
unlimited liability.

Legal formalities involved

Steps involved in creation of HUFs
Entrepreneur who is interested to operate his/her enterprise as an HUF is required to
comply with following requirement.
1) Capital and members: For an HUF to be created the major requirements is the
capital and persons. Capital can be in the form of ancestral property, assets gifted by
relatives and friends, or received by the HUF through a will. The minimum no. of
members required is two.
2) Select a suitable name: The HUF to be created should have proper name.
Entrepreneur should select a proper name for the HUF, ensuring it does not violate
the laws or have any negative impact.
3) Form a Deed: Formation of HUF should be embodied in a deed which provides that
a proper legal deed or agreement is required before creating a HUF, disclosing the
name of Karta, coparceners, address and source of funds in the corpus.

58
 4) Apply of PAN: Application of PAN (Permanent Account Number) is also an
important step to be undertaken while forming a HUF. After executing the deed, the
Karta is required to obtain a permanent account number PAN for the HUF.
Obtaining PAN is a mandatory requirement as all financial transactions shall carry
PAN.
5) Open a Bank Account: After PAN has been allotted, the Karta is required to open a
Bank a/c in the name of the HUF. It is also advisable to get some stationery printed
for official communication. The HUF is now ready to function. The Karta will have
to invest in tax saving instruments and file tax returns on behalf of the HUF. Only
the money related to the business of HUF shall be invested in such Bank accounts.

Some Interesting Information

1. The daughter after her marriage ceases to be a member of her father's HUF. After
marriage she becomes the member of her husband's HUF.
2. Adopted child can become the member but he cannot become the coparcener.
3. The HUF continues to exist in the hands of the female members after the death of the
male member.
4. A widow cannot be the Karta of the HUF as she is not the coparcener.
5. HUF is a separate entity for income tax purposes under the provisions of Section
2(31) of the Income Tax Act.

V. Co-operative Organisations
A co-operative is a different form of business enterprise as here, the main motive is not
earning profit but mutual help. It works with the principle of each for all and all for each.

"Co-operation is a form of organisation wherein persons voluntarily associate together as human

beings on the basis of equality for the promotion of the economic interest of themselves."
H.C. Calvert

The Indian Co-operative Societies Act, 1912 defines co-operative in section 4 as, "Society
which has its objectives as the promotion of economic interests of its members in
accordance with co-operative principle."

Features
Co-operative is a self-help as well as mutual help system, exhibiting following characteristics:
1. Voluntary organisation: Co-operative organisation is a voluntary association of
persons desirous of pursuing a common objective. They can come and leave the
organisation at their own will without any coercion or intimidation.

59
2. Democratic management: The management of a co-operative organisation is vested
in the hands of the managing committee elected by the members on the basis of 'one
member-one vote'. Democracy is, thus, the keynote of the management of a co-
operative society.
3. Service motive: Rendering services to its members rather than to earn profit as the
primary objective is the feature that distinguishes a cooperative organisation from
the other forms of business. The primary objective of a co-operative society is to
render services to its members rather than to earn profits.
4. Capital and return thereon: The capital is procured from its members in the form of
share capital. A member can subscribe subject to a maximum of 10% of the total
share capital or Rs. 1,000 whichever is higher. Shares cannot be transferred but
surrendered to the organisation. The rate of dividends paid to the members/
shareholders is restricted to 9% as per the Co-operative Societies Act, 1912.
5. Government control: In India, the activities of co-operative societies are regulated by
the Co-operative Societies Act and the State Co-operative Societies Acts. Co-
operative societies are required to submit their annual report and accounts to the
Registrar of Co-operatives.
6. Distribution of surplus: After giving dividends to the members, the surplus of
profits, if any, is distributed among the members on the basis of goods purchased by
each member from the society.

Entrepreneur does not find this form as a very desirable structure to start a new venture
because of his / her:
a) Quest for excellence
b) Drive for independence
c) Tendency to be project champion
d) Strong desire to succeed and earn profit
e) Creative and innovative nature
f) "Must be own boss", attitude.
g) Love for being a 'Leader' in the field.
h) Zeal to capture major market share.

Amazing Similarities!
Ray Kroc, founder of McDonald's, was selling milkshake machines when he was inspired to turn
the McDonald brothers hamburger restaurant into a International operation.
William C. Durant, the founder of General Motors, began his career as a buggy salesman.
King C. Gillette was a traveling salesman when he invented the safety razor.

60
No form is without merits and limitations. Entrepreneur needs to understand it better that
no form is the best form. Thus, selection of an appropriate form of business orgnisation is
a very difficult decision. With regards to special requirements of the enterprise if any,
mostly the selection of a form is to a great extent affected by:
1) Capital requirement of the enterprise
2) Risk and liability involved
3) Managerial control desired
4) Scale of operations involved
5) Continuity and stability demanded
6) Government regulations involved
7) Tax burden on the entrepreneur/enterprise
8) Nature of business
9) Confidentiality required
10) Flexibility desirable.

No single factor can help to decide the form. Thus, it's a summative effect of the factors to
be taken into consideration before opting the form of business ownership.

BUSINESS PLAN
"WHAT TO DO? HOW TO DO? WHO IS TO DO?" IS BASIC TO ANY ACTIVITY
Close your eyes for a while and suppose you are trying to decide a visit to SHIMLA in a car. As a
vigilant traveller, you must make some important decisions and gather information before
undertaking the journey as there might be a number of possible time frames and costs involved.
As a traveller, you should consider various factors which might be:
I) EXTERNAL: The factors which are basically uncontrollable by you but must be considered
in your plan, viz.
i) Emergency car repair
ii) Weather and road conditions
iii) Hotels availability and bookings
iv) Available rights to exercise and food availability
v) Political conditions prevailing etc. (i.e. unrest/peaceful)
II) INTERNAL: i.e. the factors which are, to an extent, controllable by you, viz.
i) Availability of money and time,
ii) Clothes to be taken

61
What is the business plan
The business plan is a comprehensively written down document prepared by the entrepreneur
describing formally all the relevant external and internal elements involved in starting a new
venture.
It's a formal statement of a set of business goals, the reasons they are believed attainable and the
plan for reaching those goals along with the background information about the organization
or/and team attempting to reach those goals.
Thus, a business plan is a comprehensive project report which not only encompasses the entire
range of activities which are being planned in the business, but also:
a) helps to understand the feasibility and viability of the proposed venture,
b) facilitates in assessing and making provisions for the bottlenecks in the progress and
implementation of the idea,
c) discusses the potential for success of the project along with the risk factors involved.

Business plans are decision-making tools:

1) Describing all necessary inputs for the enterprise.
2) Explaining the mode of utilization of the resources.
3) Detailing the strategies for the execution of the project.
4) Outlining the desired goals
5) Assessing market sensitivity and the profitability of the venture.
Thus, the content and the format of the business plan is such which is able to represent all these
aspects of the business planning process.

Who should write the plan?

A business plan represents all aspects of the business planning process declaring vision and
strategy alongside sub-plans to cover:
Marketing
Finance
Operations
Human resources
Legal compliance
Intellectual property rights, etc.

As such preparing a business plan draws on a wide range of knowledge from many different
business disciplines, requiring, the entrepreneur to consult with many other expert professional
sources in its preparation like:
i) Lawyers,
ii) Accountants,
iii) Marketing consultants,

63
iv) Engineers
v) Internet sites
vi) Officially appointed or/and set-up Banks, Specialized financial institutions or Agencies to
promote entrepreneurship
vii) Friends, relatives, mentors etc.
Though the business plan should be prepared by the entrepreneur, to determine whether to hire
a consultant or to make use of other resources, the entrepreneur can make an objective
assessment of his her own skills, to determine where is he/she lacking and needs assistance.

Importance of the business plan

The business plan is valuable to the entrepreneur, potential investors, venture capitalists, banks,
financial institutions, new personnel's suppliers, customers, advisors and others who are trying
to familiarize themselves with the venture, its goals, and objectives. The business plan
a) helps in determining the viability of the venture in a designated market
b) helps in providing guidance to the entrepreneur in organizing his/her planning activities
as such:
i) identifying the resources required
ii) enabling obtaining of licenses if required etc.
iii) working out with legal requirements as desired by the government.
c) helps in satisfying the concerns, queries, and issues of each group of people interested in
the venture.
d) provides room for self-assessment and self-evaluation, requiring entrepreneur to think
through various scenarios and plan ways to avoid obstacles.
e) though not desirable, at times, business plan helps to realize the obstacles which cannot be
avoided or overcome, suggesting to terminate the venture while still on paper without
investing further time and money.
f) as the investors/lenders focus on the four Cs of credit : character, cash flow, collateral and
equity contribution, it is the business plan which reflects the entrepreneur's credit history,
the ability to meet debt and interest payments, and the amount of personal equity invested
thus serving as an important tool in funds procurement.

Hence, a business plan gives adequate clarity to the entrepreneur, investor(s) and the
government of:
✁ What an entrepreneur is doing
✁ Why he/she is doing it
✁ How he/she will do that
It's well said that "writing a good business plan can't guarantee success, but it can go a long way
toward reducing the odds of failure."

64
Formats of a business plan:
The depth and detail in the business plan depends on the size and scope of the proposed new
venture. There is no fixed content for a business plan as it varies according to the entrepreneur's
goals and audience (i.e. who are being targeted).
Thus, it is common for especially start-ups to have three or four formats as follows for the same
business plan.
i) Elevator pitch: It is a three minute summary of the business plan's executive summary.
This is often used as a teaser to awaken the interest of potential funders, customers, or
strategic partners.
ii) A pitch deck with oral narrative : A hopeful, entertaining slide show and oral narrative
that is meant to trigger discussion and interest potential investors in reading the written
presentation, i.e. the executive summary and a few key graphs showing financial trends
and key decision making benchmark.
iii) A written presentation for external stakeholders: A detailed, well written, and pleasingly
formatted plan targeted at external stakeholders.
iv) An internal operational plan: A detailed plan describing planning details that are needed
by management but may not be of interest to external stakeholders.

Depending upon the entrepreneur's experience, knowledge and purpose, generally a business
plan outlines sequentially following components or parts:
1) Introductory cover page/general introduction
2) Business venture
3) Organisational plan
4) Production plan
5) Operational plan
6) Human resource plan
7) Marketing plan
8) Financial plan
9) Miscellaneous/appendix
These are discussed in detail below:
I. Introductory profile /general introduction
This is the title or cover page that provides a brief summary of business plan's contents.
The information of general nature contained in the introductory profile includes:
a) Entrepreneur's bio-data:
Name and address of the promoter
His/her qualifications,
Experience and other capabilities
In case of partners ✁ their names, number, addresses, designation etc. individually

65
 v) Transport and communication system: Requirements for transportation and
communication facilities, modes and means opted for, bottlenecks etc. are duly
covered in by the business plan.
vi) Machinery and equipments: A complete list of items of machinery and
equipments required indicating their size, capacity, type, cost and sources of
their supply should be disclosed.
vii) Production process: A mention of the process involved in production, the
installed licensed capacity of the plant, the technology to be used, whether
available locally or imported, shifts involved, needs to be present in the
business plan.
The target of this section of the plan is to save the entrepreneur from a potential
disaster of time and cost later on. Here in the entrepreneur is able to assess and
evaluate whether idea is feasible or not.

Describing the venture

1. What is the mission of the new venture?
2. What are your reasons for going into business?
3. Why will you be successful in this venture?
4. What development work has been completed to date?
5. What are your product(s) and/or service(s)?
6. Describe the product(s) and/or service(s), including patent copyright, or trademark
status.
7. Where will the business be located?
8. Is your building new? old? in need of renovations? (if renovation is needed, state
costs.)
9. Is the building leased or owned? (State the terms)
10. Why is this building and location right for your business?
11. What office equipment will be needed?
12. Will equipment be purchased or leased?
13. What experience do you have and/or will you need to successfully implement the
business plan?
Source: Entrepreneurship by The McGraw Hill Companies.

III. Production Plan

"The planning of industrial operations involves four considerations, namely, what work shall be
done, how the work shall be done and lastly, when and by whom the work shall be done."
Kimball and Kimball Jr.

67
 e) Time, motion and work study
f) Manpower requirement
g) Inventory requirement

Production plan
1. Will you be responsible for all or part of the manufacturing operation?
2. If some manufacturing is subcontracted, who will be the subcontractors? (Give names
and address)
3. Why were these subcontractors selected?
4. What are the costs of the subcontracted manufacturing? (Include copies of any written
contracts)
5. What will be the layout of the production process? (Illustrate steps if possible)
6. What equipment will be needed immediately for manufacturing?
7. What raw materials will be needed for manufacturing?

8. Who are the suppliers of new materials and what are the appropriate costs?
9. What are the costs of manufacturing the product?
10. What are the future capital equipment needs of the venture?

If a retail operation or service:

1. From whom will merchandise be purchased?
2. How will the inventory control system operate?

3. What are the storage needs of the venture and how will they be promoted?
4. How will the goods flow to the customer?
5. Chronologically, what are the steps involved in a business transaction?
6. What are the technology utilization requirements to service customers effectively?
Source : Entrepreneurship by The McGraw-Hill Companies

IV. Operational plan

Operational plan is a system whereby there is achieved a smooth and coordinated flow of
work within the factory so that, by planning and control of all the productive operations
in all the stages of manufacture, the final product is completed in accordance with the
plans. Wright

69
Where the production plan aims at "plan your work", there operations plan ensures "work
your plan". It is actually a blue print prepared right in advance of actual operations
i) Ensuing orderly flow of materials in the manufacturing process from the beginning
(raw state) to the end (the finished products)
ii) Facilitating continuous production, lesser work-in-progress and minimization of
wastage.
iii) ✁
Co ordinating the work of engineering, purchasing, production, selling and inventory
management.
iv) Describing the flow of goods / services from production point to the consumers.
v) Introducing a proper system of quality control
vi) Undertaking the best and most economic production policies and methods.

Thus, the operational plan organizes for the movement of material, performance of
machines and operations of labour, however sub-divided, into a defined direction,
✁
co ordinating for the desired manufacturing results in terms of:
a) Quantity
b) Quality
c) Time
d) Place and
e) Cost

Elements of operational plan:

The operation plan, in a way is planning:
i) For production in advance of operations.
ii) Establishing the exact route of each individual item, part of assembly.
iii) Setting starting and finishing dates for each important assignment/work.
iv) Regulating the orderly movement of goods through the entire manufacturing cycle
i.e. right from procurement of all materials to the shipping of finished goods.
Thus, to obtain the above mentioned objectives, entrepreneur specifically pays attention to
the following elements of the plan:
1) Routing
Routing is a process concerned with determining exact route or path a product/ service
has to follow right from raw material till its transformation into finished product.

2) Scheduling
Scheduling, simply means fixation of time, day, date when each operation is to be
commenced and ✂✄☎✆✝✞✟✞✠✡ ☛☞ ✌✞☞✞✍✎✝✏ ✑✟✒✓ ✟✔✞ ✠✞✟✞✍☎✑☞✎✟✑✄☞ ✄✕ ✟✔✞ ✟✑☎✞ ✟✔✎✟ ✓✔✄✖✝✠
be required to perform each operation.

70
 3) Dispatching
The process of initiating production in accordance with pre-conceived production
plan is said to be dispatching. This includes issuing necessary orders instructions,
guidelines and/or information to work pertaining to giving practical shape to the
production plan.

4) Follow-Up
Follow-up or expediting function relates to evaluation and appraisal of work
performed. A properly planned follow-up procedure is helpful in dispatching errors
and defects in the work. Follow-up element helps the entrepreneurs in:
a) Developing ways to review the present situation with regard to materials,
work-in-progress and finished goods.
b) Evolving ways to expedite the performance of those departments which lag
behind.
c) Removing obstacles in the way of production by suggesting remedial measures.

5) Inspection
Inspection is the art of comparing materials, product or performance with
established standards. This element helps the entrepreneur to set up laboratories or
evolve strategies/methods to ensure predetermined quality of product/service.

6) Shipping
This section goes beyond the manufacturing process and describes the flow of goods
/ services from production to the consumers.
This part is a detailed presentation by the entrepreneur explaining the chronological
steps in completing a business transaction efficiently and profitably. Operation plan
is greatly effected by:
a) Nature of venture
b) Type of product/service
c) Scale of operation, and
d) Technology involved

V. Organizational plan
You may start any kind of business, but surprisingly, all of them will fall into one of the
four basic categories:
a) Manufacturing a business that makes a tangible product.
b) Wholesale a business that buys products in bulk from the manufacturers to be sold
in smaller lot to retailers.
c) Retail a business that sells directly to the final consumer for final satisfaction.
d) Service a business that sells intangible such as time or expertise.

71
 As it is important to begin the new venture with a strong management team, committed to
the goals of the enterprise, it is the organizational plan that helps the entrepreneur to
carefully evaluate and decide that legal structure for his organization that could affect :
Long-term effectiveness of the enterprise, and
Profitability.

To conclude, both the entrepreneur and the potential investors stands to gain from the
organizational plan as the design of the organization so opted helps even in:
i) Specifying the types of skills needed and the roles that must be filled by the
members i.e. helps to decide the enterprise's formal organisation, and
ii) representing the attitudes, behaviours, dress, communication styles etc., thus
chalking out informal organisation or culture.

Organization Structure
1. What is the form of ownership of the organization?
2. In a partnership, who are the partners and what are the terms of agreement?
3. If incorporated, who are the principal shareholders and how much stock do they own?
4. How many and what type of shares of voting or non✁voting stock have been issued?
5. Who are the members of the board of directors? (Give names, addresses, and resumes)
6. Who has the check-signing authority or control?
7. Who are the members of the management team and what are their backgrounds?
8. What are the role and responsibilities of each member of the management team?
9. What are the salaries, bonuses, or other forms of payment for each member of the
management team?
Source: Entrepreneurship by The McGraw Hill Companies.

VI. Financial plan

Finance is one of the most important pre-requisites to establish an enterprise. Availability
of finance facilities the entrepreneur to bring together men, material, machines and
methods to produce goods/services.
As timely availability of funds in right volume is key to entrepreneurial success, the
entrepreneur should develop a sound financial plan discussing:
a) Financial requirements
b) Sources of raising funds
c) Exact assessment of the revenue, cost, profits, cash flow dynamics, stock of inventory
loans etc.

73
Components of financial plan
Major financial items that should be included in the financial plan are:
a) Proforma investment decisions
b) Proforma financing decisions
c) Proforma income statements
d) Proforma cash flow
e) Proforma balance sheet
f) Break-even analysis
g) Economic and social variables

A) Proforma investment decisions:

This part of financial plan relates to how the enterprise's funds are invested in different
assets so that the enterprise is able to earn the highest possible returns on investment. An
estimate of various components of capital nature i.e. fixed assets and of working capital
should be clearly mentioned in this part of business plan.
Carefully, clearly and sequentially the entrepreneur should mention investment required
in for:
i) Land and building
ii) Machinery and plant
iii) Installation cost
iv) Preliminary expenses
v) Margin for working capital
vi) Expenses on research and development
vii) Investment in short-term assets viz. raw material, level of cash, etc.
This part helps to understand the total amount of finance required by the entrepreneur.
Inadequate funds or excess funds, both have the capacity to severely damage the financial
fortune of a business. Therefore, these decisions must be taken with utmost care.

B) Proforma financing decisions

This section summarizes all the projected sources of funds available to the venture to raise
finance from, which you have already studied in previous class.
Typically, sources of funds are:
i) owners i.e. Owner's funds
ii) outsiders i.e. Borrowed funds

The entrepreneur's job is to ensure the selection of the best overall mix of financing for the
enterprise so that:
a) the cost of capital and the financial risk stands minimized,
b) return on investment and profitability stands maximized.

75
 Thus, calculation of BEP is quite useful for the entrepreneur as it helps in assessing:
1) The minimum level of output to be produced.
2) The effect of change in quantity of output upon the profits.
3) The selling price of the product.
4) The profitable options in line of production.
Thus, the break-even analysis is a useful technique for determining how many units must
be sold or how much sales volume must be achieved in order to break even. It helps to
indicate the volume of sales needed to cover total variable and fixed expenses by the new
enterprise.

G) Economic and social variables

In view of the social responsibility of business, the abatement costs, i.e. the cost of
controlling the environmental damage should also be stated in the plan. It's always
advisable to mention in the business plan, the socio-economic benefits expected to acquire
from the proposed investment like:
1) Employment generation
2) Import substitution
3) Ancillarisation
4) Export promotion
5) Local resource utilization
6) Development of the area
Wherever, it is not possible to quantify the expected benefits, they should be analyzed and
their importance emphasized.

VII. Manpower planning

Every organisation comes into existence when a number of persons join hands. All these
people work to achieve the organizational goals set by the entrepreneur. Human resource
is of paramount importance for the success of any organisation.

"The people working in a firm make it what it is."

✁ Hicks and Gullet

An organisation's performance and resulting productivity are directly proportional to the

quantity and quality of its manpower. Thus, the best assurance that the enterprise will
flourish, requires the entrepreneur to properly plan out for a rich and continuous supply
of qualified personnel. In order to build up loyal, efficient and dedicated personnel,
entrepreneur needs to pay adequate and proper attention to human resource planning.

77
This planning is a process by which an entrepreneur ensures that he/she has the right
number of people, and the right kind of people with appropriate skills, at the right place
and the right time to do work for which they are economically most suitable.

Manpower planning thus helps to assess:

1) What kind of people are required?
2) How many people are required?
3) How will they be selected?

1) What kind of people are required?

To carry on its work, each organisation needs personnel with the necessary
qualifications, skills, knowledge, experience and aptitude for work.
Thus, as the most basic thing, the entrepreneur must clearly state: (a) what
kind/type of person is required to be hired for getting his work done. (b) as each
person would have a different positions, duties and responsibilities, it becomes
imperative for the entrepreneur to clearly workout a wide range of personnel
ranging from managers, supervisors, administrators, engineers, technical, skilled
and unskilled class. (c) Nature of business activity helps entrepreneur to a large
extent in deciding the type of manpower required.

2) How many people are required?

This question deals with the quantity of personnel the enterprise needs. The number
of people required for various positions throughout the enterprise gets affected by:
a) The total work to be done.
b) How much work can an average person do in a specified period of time.
c) Level of absenteeism expected.
d) Rate of labour turnover.
e) The present number of employees.
f) The future plans for expansion and diversification.

3) How to procure personnel?

As the next step in manpower planning, entrepreneur clearly mentions the strategies,
methods, policies, rules and regulations pertaining to personnels:
Recruitment
Selection
Training.
Procurement of "right person, at right job, at right time" is the objective of human
resource plan.

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VIII. Marketing plan

Case Study-III
EXACTLY 3.875 Inches Across WEIGHS 1.6 OUNCES
HAVE 178 SESAME SEEDS AND 19% FAT IN EVERY
MCDONALD BURGER WORLD ACROSS
Ray Kroc, the president of McDonald's, did not invent or even improve the
hamburger. He invented a new way of marketing hamburgers.
The Original McDonald's restaurant was a small hamburger stand in San
Bernardino, California. Two brothers, Maurice and Richard McDonald, ran the stand.
Kroc was a fifty-two years old salesman of Multimixers, the mixers the McDonald brothers used
to make their shakes. When Kroc received an order for eight multimixers enough to make forty
milkshakes at once from these brothers, he flew out to see the business for himself.
With sales of over $ 350,000 a year, McDonald's was one of the most successful little restaurants
in America, which had the potential to expand around the country BUT BOTH BROTHERS
HATED TO FLY.
When Kroc flew in and formed a partnership with them and took care of franchising their
business, they signed on the dotted line. Kroc's marketing strategy aided around ✁
1) rigidly following McDonald brothers' original recipes even after buying them out.
2) rigidly ensuring that every customer from Anchorage to Miami get an identical product.
MANY GREAT FORTUNES HAVE BEEN BASED ON A SINGLE MARKETING INSIGHT.

This section goes beyond the production process by describing the market conditions and
strategies related to how:
a) Products/services will be distributed,
b) Priced
c) Promoted.

This valuable document is a guideline regarding the marketing objectives, strategies and
activities to be followed by the new enterprise. The marketing plan represents a significant
element in the business plan for a new venture as it effectively establishes how the
entrepreneur will complete and operate in the market place by providing answers to three
basic questions:

1) Where have we been?

This segment focuses on:
✂ Some history of the market place,

79
 Marketing strengths and weaknesses of the new venture,
Market opportunities and threats.

2) Where do we want to go?

This primarily addresses the marketing objectives and goals of the enterprise in the
next 12 months.

3) How do we get there?

This question discusses:
a) the specific marketing strategy that will be implemented,
b) when it will occur,
c) who will be responsible for the monitoring of activities.
Normally, each year the entrepreneur should prepare an annual marketing plan so
as to gel well with the changing business environment and its forces.

Facts Needed for Market Planning

Who are the users, where are they located, how much do they buy, from whom
do they buy, and why?

How have promotion and advertising been employed and which approach has
been most effective?

What are the pricing changes in the market, who has initiated these changes,
and why?

What are the market's attitudes concerning competitive products?

What channels of distribution supply consumers, and how do they function?

Who are the competitors, where are they located, and what advantages/
disadvantages do they have?

What marketing techniques are used by the most successful competitors and by
the least successful?

What are the overall objectives of the company for the next year and five years
hence?

What are the company's strengths and weaknesses?

What are one's production capabilities by product?

Source: Entrepreneurship by The McGraw-Hill Companies

80
6) Implementation and monitoring of the plan
Evolving a marketing plan is not a mere formality. It is meant to be a commitment by the
entrepreneur to a specific strategy. It is important for the entrepreneur to be flexible and
be prepared to make adjustments if necessary in the plan.

Outline for a marketing plan

1. Situation analysis

Background of venture

Strengths and weaknesses of venture

Market opportunities and threats

Competitor analysis

2. Marketing objectives and goals

3. Marketing strategy and action programs

4. Budgets

5. Controls

Source: Entrepreneurship by The McGraw-Hill Companies.

IX. Assessment of risk

There are some hazards, risks, or/and obstacles always present in the competitive
environment. In a business plan, entrepreneur should:
1) identify potential hazards
2) develop alternative strategies to either prevent minimize or respond to the risk.

X. Appendix
The appendix of the business plan generally contains any backup material that is not
necessary in the text of the document as:
a) Letters from customers, distributors etc.
b) Any primary or secondary research data
c) Copies of contracts, agreements or any price lists if received.

At times, businesses fail because of the entrepreneur's inability to plan effectively.

Intelligent planning is not difficult or impossible for an experienced entrepreneur. With
the proper commitment and support from many experts these days preparing an effective
plan is no more a Herculean task.

83
 Outline of a Business Plan
I. Introductory page
A. Name and address of business
B. Name(s) and address(s) of principal(s)
C. Nature of business
D. Statement of financing needed
E. Statement of confidentiality of report
II. Executive summary Three to four pages summarizing the complete business plan
III. Industry analysis
A. Future outlook and trends B. Analysis of competitors
C. Market segmentation D. Industry and market forecasts
IV. Description of venture
A. Product(s) B. Service(s)
C. Size of business D. Office equipment and personnel
E. Background of entrepreneurs
V. Production plan
A. Manufacturing process B. Physical plant
(amount subcontracted)
C. Machinery and equipment D. Names of suppliers of raw materials
VI. Operational plan
A. Description of company's operation
B. Flow of orders for goods and/or services
C. Technology utilization
VII. Marketing plan
A. Pricing B. Distribution
C. Promotion D. Product forecasts
E. Controls
VIII. Organizational plan
A. Form of ownership
B. Identification of partners or principal shareholders

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 C. Authority of principals
D. Management-team background
E. Roles and responsibilities of members or organization
IX. Assessment of risk
A. Evaluate weakness of business B. New technologies
C. Contingency plans
X. Financial plan
A. Proforma income statement B. Cash flow projections
C. Proforma balance sheet D. Break-even analysis
E. Sources and applications of funds
XI. Appendix (contains backup material)
A. Letters B. Market research data
C. Leases or contracts D. Price lists from suppliers
Source: Entrepreneurship by The McGraw Hill Companies.

SUMMARY
Entrepreneurial activities are divided into three major categories: manufacturing, trading and
service providing.
Activities undertaken to earn monetary benefits are called economic activities.
Activities done out of love and affection and not to earn monetary benefits are called non-economic
activities.
There are three main forms of enterprises: public sector, private sector, joint sector
The business plan is a comprehensively written down document prepared by the entrepreneurship.
It describes the internal & external elements involved in a new venture.
It represents all aspects of business planning process.
It embodies sub plans from diverse avenues of business, namely;
✁ Marketing ✁ Finance
✁ Operations ✁ Human
✁ Legal
A business plan is prepared by an entrepreneur with the assistance of experts & professionals from
diversified fields
A business plan is valuable not only to the enterprise but all the stakeholders who may be directly
or indirectly associated with the enterprise.
The four Cs of credit are: character, cash flow, collateral and contribution (equity)

85
 REVIEW CROSSWORD PUZZLE
1. S 2.

4. B

3. E

5. 7.

6.
9.
10.
8. L

11. 12.R

13.

14.

Across:
1. A business unit whose ownership and management are vested in one person.
3. AMUL comes under this form of business
4. A financial statement that summarizes a company's assets, liabilities and shareholders'
equity at a specific point in time.
5. Tax on the sale, or production for sale, of specific goods
6. A comprehensively written document prepared by the entrepreneur
8. Type of liability that does not exceed the amount invested
11. Total supply of personnel available
13. A tax levied on imports by the customs authorities of a country
14. The process of transporting an item, usually through by mail.

Down:
2. An association of two or more people
4. A point in a business venture when the profits are equal to the costs
7. The total amount of money being transferred into and out of a business
9. Something pledged as security for repayment of a loan
10. Synonym of 'useful'
12. Process concerned with determining the exact route or path of a product

87
 ✁✂✄☎ ✆✁✝✞☎✁
A. Very short type question: (10 words)
1. Give any two contents of a business plan?
2. Who can write the business plan?
3. How many formats are available to design a successful business plan?
4. What is the meaning of shipping in the process of operational plan?
5. What is a proforma income statement?
6. What is break✟even analysis?
7. What is meant by a target market?
8. What is TAN?

B. Short type questions (50 words)

1. What is a business plan?
2. What is elevator pitch?
3. What is a production plan?
4. Name the factors which affect the operational plan.
5. How many sources of funds are available for arranging funds for business enterprises?

C. Short type questions (75 words)

1. Briefly, explain the objectives of an operational plan.
2. Describe the contents of an organisational plan.
3. Which common techniques are required to calculate the forecasting income?
4. Write the steps in preparing a marketing plan.
5. What is PAN? Why is it required?

D. Long type questions (100 words)

1. What is an operational plan? Discuss its blue print.
2. Define organisational plan? A business can be classified in how many categories?
3. How many choices are there to start a business by a business man? Explain each of
them
4. What are the key areas, for a sound financial plan to work?
5. What are the major financial items that should be included in the financial plan?

E. Long type questions (250 words)

1. What is a business plan? Explain its importance.
2. Describe the different elements of an operational plan.
3. What is a financial plan? What are its objectives?

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 4. Explain the investment decision under the financial plan? In which areas should the
investment should be on the basis of priority?
5. What is manpower planning? Why is it necessary for every business unit?
6. What is a marketing plan? Why is it required in business enterprises?
7. Explain, in detail, the various formalities required to start a business.

F. HOTS (High Order Thinking Skills)

1. A person has decided to start a small leather belt manufacturing unit. He/she is not
aware of the various formalities involved in the process of setting up the unit.
Explain to him/her the procedure.

G. Value based questions

1. The first stage of a business plan is to come up with a business name supposing you
are an entrepreneur, who is in the stage of deciding a business name for your
enterprise would you:
a) Keep the name of your enterprise, similar to one of the enterprises that are
already doing really well in the same line of business?
b) Select/create a completely new name for your enterprise and create a brand
name of your own? Give reasons. (Honestly)
2. An entrepreneur is doing an industry analysis. While he/she is analyzing his/her
competitions in his/her line of business, he realises that the competitors are far
better in their business plans and their execution. Should the entrepreneur add
unique selling point in the existing plan to get a creative niche above others or
should he/she go for a completely different line of business where the competition is
less and he/she is easily able to place his/her feet in the market? Give reasons.
(creativity and problem solving)
3. You are an entrepreneur who is deciding the operational plan for your business.
While deciding the technology to be used, you come across three alternatives:
a) Use a cheaper technology which lets you dispose of the waste water and lets
you fix the price of your product low.
b) Use a technology that is a little expensive as it lets you recycle that waste water
into water fit for drinking. In this case, you will have to fix the price a little
higher in order to earn profits.
c) Use the technology that recycles the waste, do not change the price. And go
about cost cutting though efficient utilization of resources.
Give reasons for your selection of an alternative
4. An individual wants to start an enterprise that manufactures steam iron which can
be imported from Germany. The material available in Germany is a little better in
quality. However, there are no safety issues with the one available in India, which
material would you go for and why? (social responsibility, import substitution).

89
 5. While doing the manpower planning an entrepreneur, decides to keep less qualified
manpower and give them low wages and salaries to enable higher profits. Do you
think his/her approach is correct and justified, why?
6. According to you, what kind of organisational set up is better an autocratic form of
an organization where there is absolute centralization of power and the
communication from is from top to bottom.
OR
A democratic form of an organization where power is decentralized and
communication from both the ends. Justify?
7. Raghav, an entrepreneur realises that the enterprise he wants to start, has a potential
risk of fire accidents because the production process poses such a threat. Should he
develop strategies to:
a) Prevent the risk
b) Respond to the risk
c) Prevent as well as respond to the risk? Give reasons

H. Activity based questions

1. There are a lot of firms that use corporate social responsibility (CSR) as a tool for
marketing and promotion. For example ITC, P & G etc.
Devise a marketing plan for a clothing brand which uses CSR as a tool for marketing.
Your marketing plan should include:
i) Pricing
ii) Place
iii) Promotion
iv) Production forecasts
v) Controls
2. You are an individual who wants to create an enterprise that produces chocolates.
Develop a competition analysis, considering the giants that almost control the
market (Nestle, Cadbury etc). Prepare a detailed SWOT (strengths, weaknesses,
opportunities and threats) analysis of your enterprise and devise a strategy that
gives you an edge over your competitors.

✁✁✁

90
Aldi, from fresh fruits and vegetables to meats and electronics, is an expert in his field. They
look for products from around the world. This enables them to get the finest quality products
that Aldi then sells under its own brand labels. Selecting the prices is one of the most difficult
considerations when developing a marketing mix.
Different pricing strategies that are commonly used include:
Market penetration ✁ charging lower prices for new products to help them enter the market
and gain market share quickly.
Competitive pricing ✁ pricing at a slightly lower prices than competitors.
Strategic pricing ✁ emphasising the quality or brand positioning of a product to allow a
higher price to be charged.
Competitive pricing is a key strategy for Aldi. Aldi is able to offer quality products at low prices
as it buys in great volume. The fact that Aldi buys such large quantities of these products
allows great leverage for negotiating the best possible prices with its suppliers.
This is called economies of scale. Buying large quantities of each product allows Aldi to pass
these savings to its customers.
The place element of the marketing mix involves identifying where the product or service will be
sold. Aldi keeps its store layouts simple to limit waste and keeps the costs down. This means
Aldi can focus on offering its customers the lowest possible prices for its products. When
considering new store locations, Aldi takes into account:
the number of people visiting an area as well as the demography of the area ✁ for example,
the population of the area should be more than 30,000 people
the position of store ✁ Aldi focuses on edge of the town centre locations with good visibility
from a main road and not too much competition
the accessibility of the store and its public transport links
the number of parking spaces available.
Above-the-line promotion
For Aldi to achieve its objective of increasing its market share, it had to ensure its promotional
activity demonstrated the balance of its marketing mix. For example, to increase customer
loyalty it had to communicate its key quality and value messages. Promotion helps to:
increase awareness and improve brand recognition
increase demand for products
improve brand image
highlight the superiority of products and services.
Above-the-line promotions are paid-for advertising aimed at a mass audience. These include the
media such as television, radio, magazines and newspapers that reach a large number of people.
This form of promotion can be costly. It can also be difficult to target specific audiences. Aldi
uses a range of above-the-line methods to reach its customers and potential customers.
These include:
✂✄☎✆✝✞✟✠✟✡☛ ☞✡ ✌✍✎ ✌✏✆ ✑✒✟✓✆ ✔✝✕✡✄✠✖ ✗✕✘✙✕✟☛✡ ✚✆✕✞✛✝✆✠ ✜✢ second TV adverts which focus on
a particular product. The adverts show a famous brand as a benchmark for quality side-by-side

93
with an Aldi brand product. They use the slogan 'Like Brands, ✁✂✄ ☎✆✝✞✟✝✠✡☛ ☞✆✌✍ ✠✝✌✁✎✏✠✑✝✍
the message that Aldi products are cheaper than leading brands but equal in terms of quality.
The adverts provide personality to the Aldi brand use humour which helps to build trust and an
emotional connection with target audiences.
Printed leaflets are distributed within stores (1 million copies printed per week) and also to
customers living in areas surrounding the stores. These leaflets help to ✠✝✌✁✎✏✠✑✝ ✒✆✝ ✓Like
Brands✡ ✑✞✔✟✞✌✕✁☛ ☞✆✝✄ ✞✂✍✏ ✍✆✏✖✑✞✍✝ ✟✠✏✗✘✑✒✍ ✖✌✒✆ limited availability and seasonal offers
available in stores.
Newspaper adverts extend the 'Like Brands' campaign and help to showcase a variety of
product categories. They also communicate ✙✂✗✌✡✍ ✓✚✖✞✟ ✞✁✗ ✚✞✛✝✡ ✔✝✍✍✞✕✝☛ ☞✆✌✍ ✑✞✔✟✞✌✕✁
demonstrates the amount that shoppers could save if they swapped their weekly shop to Aldi.
They compare Aldi ✟✠✏✗✘✑✒✍ ✒✏ ✎✞✔✏✘✍ ✜✠✞✁✗✍ ✒✏ ✗✝✔✏✁✍✒✠✞✒✝ ✙✂✗✌✡✍ ✛✞✂✘✝ ✎✏✠ money message.
In✢✍✒✏✠✝ ✟✏✍✒✝✠✍ ✞✠✝ ✞✂✍✏ ✘✍✝✗ ✒✏ ✆✌✕✆✂✌✕✆✒ ✒✆✝ ✓✚✖✞✟ ✞✁✗ ✚✞✛✝✡ message. Below-the-line
promotion uses different ways to engage with customers. These methods can be more easily
targeted to specific audiences than above-the-line methods. They offer organisations a greater
level of control over their communications.
Aldi uses a range of below-the-line methods. These include:
✣ social media
✣ targeted e-mails to customers
✣ 3rd party endorsement and awards
✣ public relations and media relations
✙✂✗✌✡✍ Facebook and Twitter pages encourage two-way communication with customers. These
social media channels provide a platform through which Aldi can interact with customers. It
can then assess their opinions about the brand. One objective of this form of promotion is to
✑✠✝✞✒✝ ✓✙✂✗✌ ✙✗✛✏✑✞✒✝✍✡☛ ☞✆✝✍✝ are consumers who recommend Aldi to others, through
stimulating interactions about the high quality and low prices of Aldi products. For example,
✒✆✝ ✓✤ ✥✏✛✝ ✙✂✗✌✡ ✑✞✔✟✞✌✕✁ ✞✍✦✝✗ ✎✞✁✍ ✒✏ ✍✝✁✗ ✞ ✛✌✠✒✘✞✂ Aldi Valentines card to a Facebook
friend. This was encouraged by providing rewards. The campaign gave consumers the chance to
win a £10 voucher. They could also win a box of Aldi chocolates for their Valentine. The
campaign also encouraged consumers to complete ✒✆✝ ✍✝✁✒✝✁✑✝ ✓✤ ✂✏✛✝ ✙✂✗✌ ✜✝✑✞✘✍✝☛☛☛✡ ✗✌✠✝✑✒✂✄
✏✁✒✏ ✙✂✗✌✡✍ Facebook page to encourage positive brand feedback.
Aldi also uses direct e-mails. These e-mails allow Aldi to communicate a variety of messages to
target customers. For ✝✧✞✔✟✂✝★ ✒✆✝✄ ✑✞✁ ✑✏✁✛✝✄ ✒✆✝ ✓✚✖✞✟ ✞✁✗ ✚✞✛✝✡ ✔✝✍✍✞✕✝ ✞✍ ✖✝✂✂ as to
promote seasonal messages such as products associated with ✩✞✁✑✞✦✝ ✪✞✄☛ ✙✂✗✌✡✍ ✖✝✜✍✌✒✝ ✌✍ ✞✁
integral part of its below-the-line promotion. It ✎✝✞✒✘✠✝✍ ✞✂✂ ✏✎ ✙✂✗✌✡✍ ✦✝✄ ✟✠✏✔✏✒✌✏✁✞✂ ✔✝✍✍✞✕✝✍
as well as additional content to engage consumers. Examples include recipe ideas and weekly
offers. Aldi developed the www.likealdi.co.uk micro-website to further encourage brand
engagement with the '✥✌✦✝ ✫✠✞✁✗✍✡ ☞✬ ✑✞✔✟✞✌✕✁☛ ☞✆✝ ✍✌✒✝ ✟✠✏✛✌✗✝✍ ✑✏✁✍✘✔✝✠✍ ✖✌✒✆ the
opportunity to upload their ideas for the next Aldi TV campaign.

94
 Aldi also uses a dedicated recruitment website to promote its employer brand messages and
career opportunities.
A further below-the-line method used to highlight the quality of ✁✂✄☎✆ products is positive 3rd
party endorsements. Aldi has entered over 1,000 of its products into awards such as Grocer
Golds, Pizza and Pasta Awards (PAPA) and the British Frozen Food Federation Awards. In
✝✞✟✝ ✁✂✄ ✠✡✆ ✡✠✡☛✂☞✂ ✌✍☞✆✎ ✏✑✒☞☛✓✡☛✔☞✎☎ ✕✖ Consumer Watchdog. It beat competition from
Marks & Spencer and Waitrose. Further positive endorsements for production TV and in the
press reaffirm the message that Aldi products are of the highest quality and also are great value
for money. For example✗ ✁✂✄☎✆ ✘✙☛✄✆✎✓✡✆ ✒✑✂✂✄✚✛ ✠✡✆ ✡✠✡☛✂☞✂ ☛✑✚✚☞☛ -up and acknowledged
as a 'bargain' in a taste test comparison in Good Housekeeping magazine. Effective public and
media relations help to create positive press exposure. Aldi has secured record coverage through
hard working and innovative media relations. Journalists from newspapers such as The Grocer,
The Financial Times and The Times were invited for exclusive interviews with ✁✂✄☎✆ ✜☛✢✑✒ of
Managing Directors. They discussed record breaking sales results.
Aldi: Creating value through the marketing mix
Further coverage was gained through targeting key media at specific times with seasonal
✒☛✢✓✢✎✄✢✚✡✁ ✓☞✆✆✡✛☞✆✣ ✤✙☞ ✌✏✠✡✒ and ✏✡✥☞☎ ✦✡✓✒✡✄✛✚ ✙✄✛✙✁✄✛✙✎☞✂ ✎✙☞ ✆✡✥✄✚✛✆ ✡✥✡✄✁✡✕✁☞
through shopping at Aldi at times when value for money is high on the agenda. This was
✒✡☛✎✄✦✑✁✡☛✁✖ ☛☞✁☞✥✡✚✎ ✠✄✎✙ ✄✎✆ ✌✍✡✦✔ ✎✢ ✏✦✙✢✢✁☎ and Christmas products.
Conclusion
Aldi has a distinct approach to retailing that has given it a competitive advantage in a crowded
✓✡☛✔☞✎✒✁✡✦☞✣ ✁✂✄☎✆ unique balance of the marketing mix enables it to provide high quality, own
✕☛✡✚✂☞✂ ✒☛✢✂✑✦✎✆ ✡✎ ✎✙☞ ✁✢✠☞✆✎ ✒✢✆✆✄✕✁☞ ✒☛✄✦☞✣ ✁✂✄☎✆ ✄✚✚✢✥✡✎✄✥☞ ✌✧✄✔☞ ✍☛✡✚✂✆☎ ✡✚✂ ✌✏✠✡✒ ★
✏✡✥☞☎ ✓✡☛✔☞✎✄✚✛ campaigns are improving brand perceptions. They are aiding the achievement
of ✁✂✄☎✆ ✓✡☛✔☞✎✄✚✛ ✢✕✩☞✦ tives. The campaigns have increased ✁✂✄☎✆ ✆✡✁☞✆ ✒☞☛ ✆✎✢☛☞ ✕✖ ✪✟✞✞✫
over 3 years through creating more loyal customers. Its multi-channel promotional activity is
engaging consumers and creating positive feedback.
Courtesy: The Times 100 Business Case Studies

A. What is the goal of business?

Fundamental goal of business is to make profit; this always need not be in terms of money but
improved customer relations, goodwill etc.,

What is goal setting?

Definition of goal setting:
"Establishing short or long term objectives, usually incorporating
deadlines and quantifiable measures."
Why is goal setting important?
✬ Goal Setting is an important exercise for ensuring the appropriate
performance.

95
 Goal setting ensures clarity of vision, alignment to the organisational goals, clarity of
purpose and higher probability of achieving the goals.
Goal setting allows us to be proactive, instead of just being reactive.

However, goal setting isn't enough. Goal setting is just the first step to achievement. Imagine,
for instance, that your goal is to lose weight. Knowing that goals need to be specific if you're
going to have any chance of success, you decide that you will lose 15 pounds by a date set four
months from now. Time passes. Four months later, you get on the scale. Are you surprised to
discover that you haven't lost any weight?

Goals need action

Without a goal setting strategy, or series of actions, that you are going to use to work towards
the goal, whether or not you achieve the goal you have set is just a matter of blind chance. And
blind chance is no way to run a successful business. To be successful, you need to make things
happen, not just let things happen.

Like setting personal goals, setting business goals provides us with direction and motivation.
But only if we set the right goals, goals that will keep our business on track rather than derail it.
How do we know that we're setting the right business goals?
Rules for goal setting:
1) Business goals need to be relevant.
Business owners sometimes make the mistake of choosing business goals that are
pointless. To be relevant, a business goal has to be profitable in some fashion. That's not to
say that every business goal has to be measurable in rupees, but it does have to possess a
clear advantage or benefit to the specific business.
2) Business goals need to be actionable.
An even more common mistake when setting business goals is to choose business goals
that are too vague or abstract. When you're setting business goals, be sure that you have
developed them from general statements, such as in the example above, to specific actions
that can be performed and evaluated. Goals without action plans are just pretty words.
3) Business goals need to be achievable stretches.
The purpose of business goals is to move the businesses forward. So we have to position
the bar very carefully when we're setting business goals. If the bar is set too high, we set
ourselves up for failure and disappointment and many of us, recognising this in advance,
will just stop trying.
On the other hand, if the bar is set too low, and all we have to do is step over it, we might
not bother to do it as we won't get enough satisfaction or recognition from the
accomplishment. A goal has to stretch us to be worth doing. Recognize that a business
goal has to 'feel' worthwhile and set business goals that will accomplish the dual purpose.

96
and distinguishing their products from that of the competitors. Thus, branding is an effective
differentiation strategy commonly adopted by marketers when dealing with the products which
cannot be easily distinguished in terms of tangible features.
As we know that the entrepreneur has to take a look at the total product mix and decide
whether it is balanced in terms of contents, profit, risk and growth or not. The development of
the product mix is a key element of marketing strategy. Thus, product mix will be a futile
attempt if it doesn't discuss the following most crucial components.
1. Branding
2. Logo and tagline
3. Labelling
4. Packaging

Branding as a Concept
"BRANDR", Norwegian word meaning "to burn" led to the origin of the word "Brand". In olden
days, the farmers used to put some kind of an identification mark (using burning hot iron) on
the body of the livestock to distinguish their possession from that of others.
Similarly, marketers started resorting to branding in order to distinguish their offerings from
that of their competitors.
Thus, a brand is "a name, term, sign, symbol, or design or a combination of them which is
intended to identify the goods or services of one seller or group of sellers and to differentiate
them from those of the competitors."

Ponder over this

Generic Name Brand Names
Detergents Nirma, Suf, Ariel, Rin etc.
Pen Parker, Rottomac, Cello, Reynold etc.
Car BMW, Honda, Maruti, etc.
Refrigerator LG, Whirlpool, Godrej, etc.
Television Sony, LG, Videocon, Samsung, etc.
Milk products Amul, Saras, Mother Diary etc.
Cosmetics Ponds, Lakme, Revlon, etc.

So, the minute a brand name is used, identification of the product becomes easy.

Various terms relating to branding

Definition: 'Branding' is a process, a tool, a strategy, an orientation whereby a name, a sign, or a
symbol etc. is given to a product by the entrepreneur so as to differentiate his/her product from

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the rival products. Once a brand name is established in the market, then it becomes difficult to
compete with it.
Common terms related to branding are:

Brand
'Brand' is a comprehensive term. It is used to denote a name, term, sign, symbol, design or
combination of them to:
1) Identify the products of one firm, and
2) Differentiate them from those of the competitors.

Brand has three components

a) Brand name
A brand name is "that part of a brand which can be vocalized i.e. can be spoken. It is like
naming a newborn child. Mercedes, Woodland, Asian Paints, Pepsi, Maggie, Uncle Chips
etc. are few examples of the brand names.
b) Brand mark
A brand mark is that part of a brand which can be recognized but cannot be vocalized i.e.
is non-utterable. It appears in the form of a symbol, design or distinct colour scheme. For
example:
✁✂✄☎✆ of Amul, 'Maharaja' of Air India, 'Ronald' of McDonald etc.
c) Trade mark
A brand or part of a brand that is given legal protection against its use by other firms is
called a trade mark. Thus, a trade mark is essentially a legal term, protecting the seller's
exclusive right to use the brand name/mark.

Qualities of a good brand

A good brand name should basically possess qualities of distinctiveness. It should have the
capability to stand out amongst a host of competing names.
Thus, in selecting a brand name, entrepreneur should ask himself/herself what he/she wants to
achieve from it. While selecting a brand name, entrepreneur should choose a name which is :
a) Short, simple and easy to pronounce.
b) Noticeable, easy to recognize and remember.
c) Pleasing, impressive when uttered.
d) Neither obscene, negative, offensive or vulgar.
e) Adaptable to packaging, labelling requirements, to different advertising media and languages.
f) Linked to product, symbolically eye catching.
g) Contemporary, capable of being registered and protected legally.

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 Short, sweet and catchy!!!!!
Brand names like, Lux, Vim, Rin, VIP, Amul, Titan, Konica, Sx, Liv52, Quickfix, Band-aid, Sunflame,
Surf, Dalda and many more have earned a reputation for good quality.

Entrepreneur's perspective on brand name

Entrepreneur can follow different policies in choosing brand name keeping in mind the range of
products offered by him/her. The new product is given a name so that it can get public
attention. Thus, as, the whole meaning and direction of a company can be explained through its
brand management strategy, an entrepreneur should be very careful in deciding/in choosing its
brand strategy. Various types of brands available are:

1) Individual brand name

Here entrepreneur can choose distinct names for each of his offering, i.e. every product is
promoted on the basis of a separate brand name.

Hindustan Unilever Ltd. has been concentrating on its core business areas i.e. soaps and
detergents, and has emerged as the clear leader in the toilet soap industry. The company has
launched many line extensions and variants to LEVERAGE THE HIGH BRAND EQUITY of
its POWERFUL BRAND NAMES, viz....
Lifebuoy brand standing for 'Good health' Lifebuoy liquid, Lifebuoy Personal,
Lifebuoy Plus and Lifebuoy Gold to cover various price sub-segments in
the health segment.
Liril brand name with the "freshness" concept.
Lux brand name for "beauty soap for film stars"
Thus, HUL has ensured for itself a presence in all segments using new brand launches.

2) Family brand name

Entrepreneur can opt to use a common or successful family name for their several
products. Either the entrepreneur's name or the company's name may be used for all the
products. It is even referred as Umbrella branding.

PONDS, is a mother brand name used for shampoos, talcum powder, cold creams, soaps etc.
MAGGI, is brand name for noodles, sauces, masalas etc.
AMUL, has been used to market a large variety of dairy products viz. milk, ghee, butter,
chocolates etc.

3) Corporate names
Entrepreneur can choose to utilise their corporate name or logo together with some brand
names of individual products for example, Godrej, Tata, Bajaj, etc.

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4) Alpha-numeric names
In many industrial products, an alpha-numeric name often signifies its physical
characteristics, thus creating a distinctive identify of the product. Entrepreneur has an
option available to brand his/her products alpha-numerically too. For example, SX4,
Liv52, ANX Grindlay, i10, i20, etc.
Popular brands are susceptible to imitation. Thus, to be on the safer side, the entrepreneur
should legally protect his/her brand name or mark through trade mark. A trade mark is
meant to guard against ditto imitations.
The best way for a new brand to succeed is to carry the mantle from the old brand, if any.

Logos and tag lines

McDonald's golden arch (M) is a famous logo. When people see the golden (yellowish) arches, they
expect fast service, inexpensive prices, and a specific type of food around the corner.
This logo gives McDonald's restaurants a competitive advantage over less recognizable restaurants.
Customers head for the golden arches because they know what to expect there.

The entrepreneur, through his diverse and coordinated actions, tries to influence and impart a
distinct identity to his own brand, to make it stand out among the competitors. For this, he/she
strongly makes use of:
a) Logo
b) Tagline

a) Logo
'Logo' (Short for Logotype) is an identifying symbol for a product or business. It can be
any distinctive design, mark, sign which stands associated with the entrepreneur's
offering. 'Logo' is an important feature or part of branding.
Thus, a logo is a graphic mark or emblem commonly used by commercial enterprises,
organisations and even individuals to aid and promote instant public recognition. Logos
are either purely graphic (symbols/icons) or are composed of the name of the organisation
(a logotype or word mark).
Purpose
1) Logos are a critical aspect of business marketing. As the company's major graphical
representation, a logo anchors company's brand.
2) Corporate Logo are intended to be the "Identity" of an enterprise because of
displaying graphically enterprise's uniqueness.
3) Through a set color combination, fonts, images, impression and/or pattern, logos
provide essential information about a company that allows customers to relate with
the enterprise's core brand.

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 4) Enterprises normally resort to logos' as a short path for advertising and other
marketing materials.
5) Logos act as the key visual component of an enterprise's overall brand identify.

b) Tagline

Magical Slogan
Balsara Hygiene products, launched their 'Promise toothpaste in 1978 and took an aggressive
stand against all multinationals and Colgate Palmolive in particular.
Soon, it commanded the second highest market share. Could you assess the reason It was the
slogan (tagline) - "The unique toothpaste with time-tested clove-oil."
As clove oil in India is a traditional and herbal remedy for the prevention of dental ailments and
toothaches. This powerful connotation succeeded.

'Tagline', 'tag line' and 'tag' are American terms. In U.K., they are called 'end lines',
'endlines', or 'straplines'. Germans call them as 'Claims', French refer them as 'Signatures'
while, Belgians call them 'baselines'.

By whatever name they are referred, taglines are basically simple but powerful messages
that help to communicate an enterprise's goals, mission, distinct qualities and so much
more. Thus, a 'tagline' is a small amount of text which serves to clarify a thought and is
designed with a dramatic effect. They can come in the form of:
✁ Questions
✁ Statements
✁ Exclamations

The whole idea behind the concept is to create a memorable dramatic phrase that will sum
up the product.

They do interest us
Amul's message "A gift for someone you love."
Rasna "I love you, Rasna."
" ✂✄☎ ✆✝✞✟✠ ✟✡" ☛ McDonald
Weekender "Wear your attitude."
Raymond's Suiting "The complete man."
Yamaha Bike "The rugged personality."
Savdhan India ☛ "India fights back."

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Packaging
Packaging is often the key element in assisting, mainly consumer goods companies, to achieve a
comparative advantage.
The critical decisions that must be made on the package are concerned with the functions, the
product pack will perform as well as with the mix of packaging components best able to
perform in different degrees, the particular functions of the packaging.

Labelling
It is the display of information about a product on its container, packaging, or the product itself.

Importance of Intellectual Property for an entrepreneur

An entrepreneur whilst selecting a product keeping in mind the above mentioned factors
should also understood that he should take care of intellectual property rights.
Intellectual property (IP) rights are the legally recognized exclusive rights to creations of the
mind. Under this law, owners are granted certain exclusive rights to a variety of intangible assets.
Common types of intellectual property rights include copyrights, trademark, patents, industrial
design rights and trade secrets.

Patents
It grants an inventor the right to exclude others from making, using, selling, offering to sell, and
importing an invention for a limited period of time, in exchange for the public disclosure of the
invention.
Inventions patentable
Art, Process, Method or Manner of manufacture;
Machine, Apparatus or other Articles;
Substances produced by Manufacturing
Computer Software which has Technical application to Industry or is used with Hardware
Product Patent for Food/Chemical/Medicines or Drugs

Copyright
It gives the creator of original work exclusive rights to it, usually for a limited time. It means
apply to a wide range of creative, intellectual or artistic forms or work. For example, musical
composition, literary work such as poems, plays etc.

Industrial design
It protects the visual design of objects that are not purely utilitarian. It can be a two or three
dimensional pattern used to produce a product, industrial commodity or handicraft.

Trademark
It is a recognizable sign, design or expression which distinguished products or services of a
particular trades from the similar products or services of other traders.

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 determine likely production costs for new or modified products
focus attention on areas of high cost

In principle, estimates are made of the resources required (For example, materials, labour
and equipment), the cost of those resources and the time for which they will be used.
From these factors, an estimate of the costs of carrying out a manufacturing process is
made. Accounting methods are usually used for depreciation and cash-flow analysis when
capital-expenditure justifications are to be made.
Advantages of cost plus pricing
1. Biggest advantage of this is that company knows exactly the amount of expenditure
that has incurred on making a product and therefore they can add profit margin
accordingly which helps in achieving the desired revenue for a firm. So, for example
if a company has incurred expenses of ` 1000 and they want to earn profit margin of
10 % than the company will sell the product at ` 1100.
2. It is the simplest method to decide the price for a product because one has just to add
up all the cost and then add profit which you want to earn which will give the price
for a product.
3. Since the company is using its own data for deciding cost which makes it easier for a
company to evaluate the reasons for escalations in expenses and therefore it can take
corrective action immediately.
Disadvantages of cost plus pricing
1. This method does not take into account the future demand for a product which
should be the base before deciding on the price of a product and therefore a serious
limitation of this method.
2. It also does not take into account the competitors actions and their effect on pricing
of the product, because in today's competitive world if one solely depends on cost
✁✂✄☎ ✁✆✝✞✝✟✠ ✝✡ ✞☛✟ ✂☞☛✌ ✡✍ ✎☛✝✂✄✆☞ ✍✎ ✞✍✏✁☛✟✑✒☎ ✁✆✍✌✄✞✡ ✝✟ ✡✓☞ ✏☛✆✔☞✡✕
3. It can result in the company overestimating the price of a product because this
method includes sunk cost and ignores opportunity cost also while calculating cost
there is an element of personal bias while deciding the profit margin which is to be
added to a product.

2. Penetration pricing
Penetration pricing is a pricing strategy where the price of a product is initially set at a
price lower than the eventual market price to attract new customers. The strategy works
on the expectations that customers will switch to the new brand because of the lower
price. Penetration pricing is most commonly associated with a marketing objective of
increasing market share or sales volume, rather than to make profit in the short term. The
price will be raised later once this market share is gained. For example, toothpaste sold in
a remote rural area.

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 The advantages of penetration pricing to the firm are:
It can result in fast diffusion and adoption. This can achieve high market rates quickly.
This can take the competitors by surprise, not giving them time to react.
It can create goodwill among the early adopters segment. This can create more trade
by word of mouth.
It creates cost control and cost reduction pressures from the start, leading to greater
efficiency.
It discourages the entry of competitors. Low prices act as a barrier to entry
It can create high stock turnover throughout the distribution channel
This can create critically important enthusiasm and support in the channel.

Disadvantages or penetrating price method:

✁ The main disadvantage with penetration pricing is that it establishes long✂term price
expectations for the product and image preconceptions for the brand and company. This
makes it difficult to eventually raise prices. Some commentators claim that penetration
pricing attracts only the switchers (bargain hunters), and that they will switch away as
soon as the price rises. There is much controversy over whether it is better to raise prices
✄☎✆✝✞✆✟✟✠ ✡☛☞☎ ✆ ✌☞☎✍✡✝ ✡✎ ✠☞✆☎✏ ✑✏✡ ✒✓✆✒ ✔✡✕✏✞✖☞☎✏ ✝✡✕✗✒ ✕✡✒✍✔☞), or employ a single
large price increase. A common solution to this problem is to set the initial price at the
long term market price, but include an initial discount coupon. In this way, the
perceived price points remain high even though the actual selling price is low.
✘ Another potential disadvantage is that the low profit margins may not be sustainable
long enough for the strategy to be effective.

3. Creaming or skimming
In most skimming, goods are sold at higher prices so that fewer sales are needed to break
even. Selling a product at a high price, sacrificing high sales to gain a high profit is
therefore "skimming" the market. Skimming is usually employed to reimburse the cost of
investment of the original research into the product commonly used in electronic markets
when a new range, such as smart phones, are firstly dispatched into the market at a high
price. This strategy is often used to target "early adopters" of a product or service. Early
adopters generally have a relatively lower price-sensitivity. This can be attributed to their
need for the product outweighing their need to economics, a greater understanding of the
product's value, or simply having a higher disposable income.
This strategy is employed only for a limited duration to recover most of the investment
made to build the product. To gain further market share, a seller must use other pricing
tactics such as economy or penetration. This method can have some setbacks as it could
leave the product at a high price against the competition.
Advantages of skimming price
1. Price skimming helps the company in recovering the research and development
costs which are associated with the development of a new product.

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 2. If the company caters to consumers who are quality conscious rather than price
conscious, then this type of strategy can work in a great way for a company.

Disadvantages of skimming price

1. This strategy can backfire if there are close competitors and they also introduce same
products at lower price then consumers will think that the company always sells the
products at higher prices which will result in consumers abandoning other products
of the company also.
2. Price skimming is not a viable option when there are strict legal and government
regulations regarding consumer rights.
3. If the company has history of price skimming then consumers will never buy a
product when it is newly launched, they would rather wait for a few months and
buy the product at lower price.

4. Variable price method

Variable pricing is a marketing approach that permits different rates to be extended to
different customers for the same goods or services. The approach is often employed in
cultures where dickering over the price of goods is considered the norm, or potential
buyers are allowed to participate in a bidding situation, such as in an auction. Even in
countries where fixed pricing is the standard, variable pricing may come into play when
the customer is committing to the purchase of large volumes of goods or services. When
this is the case, the customer must usually comply with specific criteria in order to enjoy
pricing that varies from the standard cost.
One of the classic examples of the use of variable pricing has to do with street vendors
who sell various types of small goods. Often, there is a standard price posted for each item
on sale. If the vendor really wants to sell an item, and determines that a prospective buyer
is not willing to pay the posted price, he or she may engage the individual in a negotiation
of the sale price. Sometimes referred to as dickering, the buyer and seller make offers back
and forth until they can settle on a price that both believe is fair. Throughout the process,
the buyer tries to drive the price down as much as possible, while the seller attempts to
obtain the highest possible return from the sale.
The real estate market also functions with the use of variable pricing. Prospective home
owners will often submit bids for properties that are less than the posted asking prices, in
the hopes that the owners will accept a smaller amount. This often leads to a series of
offers and counteroffers that sometimes results in a sale taking place. At other times, the
two parties are unable to come to terms, and no sale takes place.

Examples:
1. Difference in order size by the customers
The soft drink bottle of 200 ml of a company is placed at Rs. 8, while a 2000 ml/2
litre bottle is placed at ` 55.

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 2. Difference in the anticipated business from different customers
The school fee for the second child and other siblings are charged at a lower rate by
the schools.
3. Difference in the bargaining power of the customer
The price of unbranded/assembled items of computers are charged differently
depending upon the awareness and bargaining power of the customers.
4. Difference in the ability of the consumers to pay
Different price is charged by the public distribution shops run by the government for
wheat, rice and other variety of food items depending on the income groups.

Variable pricing does provide some benefits, but also has the potential for drawbacks. On
one hand, sellers can use this pricing strategy to move goods or services that have failed to
perform as originally anticipated, allowing them to earn a modest profit or at least recoup
their investment in the products. A possible down side to variable pricing is that it can
lead to losing other customers who paid full price for their purchases, if they find out that
a more recent customer was able to receive a lower price.
Place: refers to the point of sale. In every industry, catching the eye of the consumer and
making it easy for her to buy is the main aim of a good distribution or 'place' strategy. Retailers
pay a premium for the right location. In fact, the mantra of a successful retail business is
'location, location, location'.

Place mix (distribution)

A channel of distribution or trade channel is defined as the path or route along which goods
move from producers or manufacturers to ultimate consumers or industrial users. In other
words, it is a distribution network through which the producer puts his products in the market
and passes it to the actual users. This channel consists of: producers, consumers or users and the
various middlemen like wholesalers, selling agents and retailers (dealers) who intervene
between the producers and consumers. Therefore, the channel serves to bridge the gap between
the point of production and the point of consumption thereby creating time, place and
possession utilities.

A channel of distribution consists of three types of flows:

Downward flow of goods from producers to consumers
Upward flow of cash payments for goods from consumers to producers
Flow of marketing information in both downward and upward direction i.e. Flow of
information on new products, new uses of existing products, etc from producers to
consumers. And flow of information in the form of feedback on the wants, suggestions,
complaints, etc from consumers/users to producers.
An entrepreneur has a number of alternative channels available to him for distributing his
products. These channels vary in the number and types of middlemen involved. Some channels

111
An entrepreneur has to choose a suitable channel of distribution for his/her product such that
the channel chosen is flexible, effective and consistent with the declared marketing policies and
programmes of the firm. While selecting a distribution channel, the entrepreneur should
compare the costs, sales volume and profits expected from alternative channels of distribution
and take into account the following factors:

I) Considerations related to product

When a manufacturer selects some channel of distribution he/she should take care of such
factors which are related to the quality and nature of the product. They are as follows:
1. Unit value of the product
When the product is very costly it is best to use a small distribution channel. For
example, industrial machinery or gold ornaments are very costly products that is
why for their distribution small distribution channel is used. On the other hand, for
less costly products long distribution channel is used.

2. Standardised or customised product

Standardised products are those for which cost is pre-determined and there is no
scope for alteration. For example: utensils of MILTON. To sell this long distribution
channel is used.
On the other hand, customised products are those which are made according to the
discretion of the consumer and also there is a scope for alteration, for example;
furniture. For such products face-to-face interaction between the manufacturer and
the consumer is essential. So for these direct sales is a good option.

3. Perishability
A manufacturer should choose minimum or no middlemen as channel of
distribution for such an item or product which is of highly perishable nature. On the
contrary, a long distribution channel can be selected for durable goods.

4. Technical nature
If a product is of technical nature, then it is better to supply it directly to the
consumer. This will help the user to know the necessary technicalities of the product.

II) Considerations related to market

Market considerations are given below
1. Number of buyers
If the number of buyers is large then it is better to take the services of middlemen for
the distribution of the goods. On the contrary, the distribution should be done by the
manufacturer directly if the number of buyers is less.
2. Types of buyers
Buyers can be of two types: General Buyers and Industrial Buyers. If the more
buyers of the product belong to general category then there can be more middlemen.
But in case of industrial buyers there can be fewer middlemen.

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 3. Buying habits
A manufacturer should take the services of middlemen if his/her financial position
does not permit him/her to sell goods on credit to those consumers who are in the
habit of purchasing goods on credit.
4. Buying quantity
It is useful for the manufacturer to rely on the services of middlemen if the goods are
bought in smaller quantity.
5. Size of market
If the market area of the product is scattered fairly, then the producer must take the
help of middlemen.

III) Considerations related to manufacturer/company

Considerations related to manufacturer are given below:
1. Goodwill
✁✂✄☎✁✆✝✄✞✟✞✠✡ ☛☞☞✌✍✎✏✏ ✁✏✡☞ ✁☎☎✟✆✝✡ ✝✑✟ ✡✟✏✟✆✝✎☞✂ ☞☎ ✆✑✁✂✂✟✏ ☞☎ ✌✎✡✝✞✎✒✄✝✎☞✂✓ ✔
manufacturer enjoying good reputation need not depend on the middlemen as he
can open his own branches easily.
2. Desire to control the channel of distribution
✔ ✕✁✂✄☎✁✆✝✄✞✟✞✠✡ ✁✕✒✎✝✎☞✂ ✝☞ ✆☞✂✝✞☞✏ ✝✑✟ ✆✑✁✂✂✟✏ ☞☎ ✌✎✡✝✞✎✒✄✝✎☞✂ ✁☎☎✟✆✝✡ ✎✝✡ ✡✟✏✟✆✝✎☞✂✓
Consumers should be approached directly by such type of manufacturer. For
example, electronic goods sector with a motive to control the service levels provided
to the customers at the point of sale are resorting to company owned retail counters.

3. Financial strength
A company which has a strong financial base can evolve its own channels. On the
other hand, financially weak companies would have to depend upon middlemen.
IV) Considerations related to government
Considerations related to the government also affect the selection of channel of
distribution. For example, only a license holder can sell medicines in the market according
to the law of the government.
In this situation, the manufacturer of medicines should take care that the distribution of
his product takes place only through such middlemen who have the relevant license.

V) Others
1. Cost
A manufacturer should select such a channel of distribution which is less costly and
also useful from other angles.
2. Availability
Sometimes some other channel of distribution can be selected if the desired one is
not available.

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1. Above-the-line
Above-the-line promotions use mass media methods. This type of promotion focuses on
advertising to a large audience. It includes conventional media like print, online,
television and cinema advertising.
Above-the-line activities include advertisements in the press. They also produce online
banner advertisements, place advertisements on billboards and use their website to meet
the needs of their consumers.
Making a message memorable to a large audience is not always easy. It is difficult to tailor
a promotion to a specific group of consumers through above-the-line promotions. This is
because it is viewed by a mass audience with different tastes and needs. Above-the-line
promotion is also very expensive.

2. Below-the-line
Below-the-line methods are very specific, memorable activities focused on targeted groups
of consumers. They are under the control of the organisation. The purpose of these
activities has been to develop the brand by creating awareness and building a brand
profile, which include:
sponsorship
sales promotions
public relations
personal selling
direct marketing

3. Through-the-line
"Through the line" refers to an advertising strategy involving both above-and below-the-
line communications in which one form of advertising points the target to another form of
advertising thereby crossing the "line".

Difference between above the line (ATL) and below the line (BTL)

Bases Above the line Below the line

Target Mass audience Identified small groups

Promotions Establishing brand identity Can lead to an actual sale

Measurability Difficult to measure Easy to measure

Examples Print, online, television and Sponsorship, sales promotions, public

cinema advertising relations, personal selling, direct
marketing

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 Create goodwill and build a favourable image
Educate and inform the public
Offer specific products or services
Attract customers to find out more about your product or service

The rules
There are four rules to consider when planning any advertising activity ✁ i.e. before we prepare
and book any form of advertising.
Aim - What is the primary purpose of the advertisement? Is it to inform, sell, produce listings or
improve the image of the business?
Target - Who is the target? From which sector of the public are we trying to achieve a response?
For example, is it male, female, adult, teenager, child, mother, father etc.
Media ✂ Bearing the aim and target in mind, which are of the media available is the most
suitable ✁ i.e. TV, radio, press or Internet?
Competitors ✂ What are the competitors doing? Which media channel do they use? Are they
successful? Can you improve on their approach and beat them in competition?

Developing effective advertising (AIDA)

Good advertising generally elicits the following four responses:
Attention ✂ It catches the eye or ear and stands out amid the clutter of competing
advertisements.
Interest ✂ It arouses interest and delivers sufficient impact in the message or offering.
Desire ✂ It creates a desire to learn more or crave ownership.
Action ✂ ✄☎ ✆✝✞✟✆ ✠✡ ✠☛☎☞✌✡ ✍✎☞☛✎ ✏✑✠✒✆ ☎✌ ✠☛✎☞✑✓✑✔✑✡☎ ✌✕ ☎✎✑ ✠✒✖✆ ✌✟☞✗☞✡✠✏ ✌✘✙✑☛☎☞✓✑ ✁ i.e. it
prompts potential customers to purchase or use your product or service.

Commonly used media

There are many media options open to advertisers. Which media we use will depend on who we
are trying to reach, what we want to say looking into the budget. Often a combination of media (the
media mix) can be used to good effect. Remember we have to keep branding and message
consistent across all media. This includes use of colours, logos, design elements and fonts.
✚ Stationary
Stationary, which includes letterheads, envelopes and business cards, is a means by which
☎✎✑ ✘✞✆☞✡✑✆✆ ☞✔✠✗✑ ✌✟ ✛✡✠✔✑ ☞✒✑✡☎☞✕☞☛✠☎☞✌✡✜ ☞✆ ✝✟✌✙✑☛☎✑✒✢ ✣✌✌✒ ✤✞✠✏☞☎✥ ✆☎✠☎☞✌✡✑✟✥✦ ✞✆✑✒ ✍☞☎✎
care and attention and with a high standard of presentation, is an everyday means of
presenting the business image.
✚ Window display or office front
The external presentation of the business office or shop is one of the principal ways of
establishing the business image. An attractive, well maintained exterior with clear, bold sign
writing is an essential start. Windows should be bright, attractively presented, scrupulously

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clean and well lit at night. The display should be arranged neatly and aimed at projecting an
attractive company image and providing a reason to buy your products or services. Above
all, it should have sufficient impact to attract attention.
Press advertising
This is a commonly used form of general advertising and includes advertising in all press
such as newspapers, magazines and journals. Press advertising is suitable for image
building, information dissemination and sales campaigns. It is also a very affordable option
for small businesses.
Radio
Radio is considered by many advertisers as an ideal medium due to its ability to reach
specific target groups for example teenagers, racing followers or grocery buyers. Radio
advertising covers spot adverts (usually 15 or 30 seconds), promotions or talkback/RJ
discussions. Most radio stations offer packages which include production and extension of
the radio campaign through their websites.
Television
Television is a powerful advertising medium because it creates impact through sight, sound
and movement. However, the cost of producing the advertisement and procuring sufficient
air time to allow the campaign to work often makes it prohibitive for small businesses.
Direct mail
This is a broad category covering direct communication with the consumer through email,
post or fax. It can include newsletters, catalogues and letters.
Outdoor
This is any type of advertising which is done outdoors, including static advertising such as
billboards, backs of street benches and bus shelters or mobile advertising displayed on
buses, trains, taxis or towed signage.
Ambient
Refers to any form of advertising that occurs in a non-standard medium outside the home,
and usually where your consum ✁✂ ✄✁ ☎✆✝ ☎✞ ✟✠ ✡ ☛ ☞✟✌✂ ☎✆✍✆✟ ✎ ✠✏☎✞ ✡✞ ✆✍✄✑✆✏✄✟✆✠✏ ✄✏✎
includes things like advertising on the back of shopping receipts or toilet doors at the
cinema, placing branded coasters at the local clubs, projecting onto buildings, advertising
inside lifts or distributing branded cups.
Cinema
We can purchase cinema advertising by individual cinemas or screens for a set amount of
✂✒✁ ✏✆✏✑✂ ✠✁ ✓✁✔✏✂✕☛ ✖✠✂✟ ✗✁✠✘✆✎ ✁✂ ✠✙✙ ✁ ✗✄✒✝✄✑ ✂ ✚✛✆✒✛ ✆✏✒☎✔✎ ✗✁✠✎✔✒✟✆✠✏ ✄✏✎
screening of your advertisement
Point of sale
Advertising at the point where the consumer makes a purchase decision eg: floor stickers,
in-store digital advertising, shopping trolley signage, shelf or counter posters or playing
interviews about your product in store.

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 Conference presentations
Trade show displays
Telemarketing and direct mail campaigns
Newsletters
Event sponsorship
Capability documents

Trade promotions
Reward incentives linked to purchases or sales
Reseller staff incentives
Competitions
Corporate entertainment
Bonus stock

Sales force promotions

Commissions
Sales competitions with prizes or awards
Back to top

4. Public relations
It is the deliberate, planned and sustained effort to establish and maintain mutual
understanding between an organisation (or individual) and its (or their) public.
Put more simply, public relations is about building good relations with the stakeholders
(public) of the business by obtaining favourable publicity, building a good corporate image and
handling or heading off unfavourable rumours, stories and events.
By building good relationships with the stakeholders, particularly customers, we can generate
positive word of mouth and referrals from satisfied customers.

A stakeholder
Stakeholders are the various groups in a society which can influence or pressure your business
decision making and have an impact on its marketing performance. These groups include:
✁ Clients/customers ✁ Staff
✁ Shareholders ✁ Strategic partners
✁ Media ✁ Government
✁ Local community ✁ Financial institutions
✁ Community groups

The main public relations tools

Typical public relations tools include:

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this may not be the case once you look at things creatively), and so this type of negotiation does
not lead to lasting or positive relationships.

Inductive
The inductive method involves starting on small details and working upward until a settlement
is reached. This can be the case where, for example, an employer and labour union are
negotiating the details of an employee pension and investment plan. Small details are
addressed one at a time.

Deductive
Deductive negotiations start with an agreed upon strategy. They rely on established principles
and a formula to frame the negotiation while the parties work out the details.

Mixed
Mixed negotiations are the most common, they are a blend of inductive and deductive methods.

F. Customer relations

CRM is the abbreviation for customer relationship management. It entails all aspects of
interaction that a company has with its customer, whether it is sales or service-related. It is the
process of carefully managing detailed information about individual customers in order to
manage loyalty.

CRM is often thought of as a business strategy that enables businesses to:

understand the customer
retain customers through better customer experience
attract new customer
win new clients and contracts
increase profitability
decrease customer management costs

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Employee relationship management is a process that companies use to effectively manage all
interactions with employees, ultimately to achieve the goals of the organisation. The human
resources department can play a critical role in this process, both in terms of training and
coaching managers and executives on how to effectively establish and nurture relationships
with employees and in measuring and monitoring those relationships to determine whether
objectives are being met.

Factors which lead to effective employee relationship

1. Identifying objectives
Employee relationship management is a general term that means a lot of different things
to a lot of different people. At the outset, it is important to define what is meant by
employee relationship management and, specifically, what areas of the relationship will
be managed. For most companies, relationship management centers around items like
attracting and retaining employees. Common measures of the effectiveness of these
relationships include time to hire, turnover and employee satisfaction.

2. Determining employee needs

It is not enough to assume that a company or even its HR professionals know what is
important to employees. Needs vary greatly depending on employee characteristics--age,
gender, etc. as well as the type of job being performed. It is a good idea to find out directly
from employees what their needs are. This can be done on one-on-one conversations that
take place informally throughout the year, during formal employee evaluation meetings
and through surveys and polls that can provide a quantitative indication of employee needs.

3. Balancing work and life needs

There is a widespread recognition in the 21st century that effective employee relationship
management requires consideration of the whole employee. That means taking steps to
ensure that the employee's work-life needs are well balanced. This can occur through
creative staffing that might involve part-time, flex time or even off-site work assignments.

4. Open and honest communication

Communication is critical to establishing strong employee relationships. Managers must
be committed to communicating regularly and honestly with employees about the issues
that impact their work. The more open organizations can be, the more likely they are to
establish strong relationships that lead to increased loyalty and productivity among
employees and decreased turnover and dissatisfaction.

5. Measuring and monitoring results

Effective employee relationship management requires ongoing attention. That means that
managers and their HR departments should be alert at all times for signs of discontent,
which can be subjective, as well as carefully monitoring the results of more formal
assessments. These results should also be shared with employees. Too often employees are
asked to complete surveys and are not informed of the results - or what will be done with
the results.

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contract terms are followed. In large companies, a vendor manager often has more than one
vendor in the pool for each type of product of service. Certain vendors might be preferred,
means that they are the first choice when a project arises. Others might be backup vendors, who
will be called upon if the preferred vendor cannot accept a given project or fails to perform.
Vendor management often involves a great deal of electronic or manual paperwork. Many
accounts payable systems require vendors to be set up in a database. This might require
collection of vendor contact information, certificates of insurance and taxpayer identification
numbers. If the vendor will have access to proprietary or private information, a non-disclosure
or other such agreement must usually be signed and placed in the vendor files. Many
companies require vendor files to be updated annually, so a vendor manager will need to
ensure that current documents are obtained each year.
The term vendor management is usually used within the context of business operations, but
individuals may also need to manage vendors from time to time. A homeowner, for example,
may need to contract with a roofer or an interior designer; in this situation, he/she will need to
obtain bids, choose a vendor, monitor quality of work, and process payment, just as a business
would. Hair salons, insurance agents, childcare facilities, and similar personal services are also
examples of vendors with whom an individual might work frequently.

Quality, timeliness and customer satisfaction

Quality is the totality of features and characteristics of a product or service that bear on its
ability to satisfy stated or implied needs. A company that satisfies most of its customer needs
most of the time is called a quality company.
Impact of quality:
Product and service quality, customer satisfaction and company profitability are intimately
connected. Higher level of quality results in higher level of customer satisfaction, which
supports higher prices and (often) lower costs. Companies that have lowered costs to cut
corners have paid the price when the quality of the customer experience suffers.
Quality is clearly the key to value creation and customer satisfaction.

I. Business failure
Business failure refers to a company ceasing operations following its inability to make
a profit or to bring in enough revenue to cover its expenses. A profitable business can fail if it
does not generate adequate cash flow to meet expenses.

Case Study-II
Subhiksha
Subhiksha was founded in 1997 by R. Subramanian, an IIT-IIM graduate. It operated over
1600 outlets selling groceries, fruits, vegetables, medicines and mobile phones and positioned
itself as value retail chain. It adopted strategy to cut price, focus on lower and upper middle
class, and opened shops near catchment area of customers. It started with one store in Chennai
and within a short span the count reached to 1600 outlets (2008).

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 Why did Subhiksha super market fail?
Rapid store expansion in various formats like groceries, medicines, mobiles, electronics,
consumer durables and IT without sufficient fund in hand.
Operated on very slim or zero margins resulting in higher cash outflow whereas inflows
were almost nil.
Not much attention to customer service resulted in bad quality service at store level.
Downstream supply chain was not integrated resulting in lower fill rates and customer
dissatisfaction.
Expanded business through debt (` 7500million debt).
In October, 2008 the company did not have enough funds to manage its operations.
Poor inventory management resulted in defective inventory, breakages, lower fill days and
pile up inventory.

The 12 broad causes that lead to a business failure are summarized below.
1. Lack of industry experience
Every business has an environment in which it operates. The internal resources of a firm
must match the needs of the environment to which the firm caters. Lack of experience in
the industry will lead to poor organization of a firm and its resources. The structure of the
industry in which the organisation operates substantially influences small firm
performance outcomes.

2. Inadequate financing
Financing is the lifeblood for growing a business whether in the start up phase or in a later
stage. Many businesses fail due to lack of proper financing channels. It is not a matter of
unavailability of funding, but the lack of planning for funding to support opportunities for
growth. Planning in advance, rather than looking for financing just when needed, is a
good practice. Trouble results when entrepreneurs do not have sufficient awareness of the
costs involved in raising capital, are not prepared with alternative sources in case of
rejection from financiers, fail to consider using a combination of debt and equity to fund the
business or, in general, fail to plan for growing their business to avoid the crisis of financing.

Case Study-III
Boo.com
Boo.com launched in the autumn of 1999 sold branded fashion apparel over the Internet. The
company spent $135 million of venture capital in just 18 months and it was placed into
receivership on 18 May 2000 and liquidated. The fundamental problem was that the company was
following an extremely aggressive growth plan, launching simultaneously in multiple European
countries. This plan was founded on the assumption of the ready availability of venture capital
money to see the company through the first few years of trading until sales caught up with

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 operating expenses. Such capital ceased to be available for all practical purposes in the second
✁✂✄☎✆✄ ✝✞ ✟✠✠✠ ✞✝✡✡✝☛☞✌✍ ✎✄✂✏✂☎☞✑ ✞✂✡✡✒ ☞✌ ☎✓✆ ✔✕✖✗✕✘ ✙✄✆✒✂✍☞✌✍ ☎✓✆ ✚✎✝☎ ✑✄✂✒✓✛ ✞✝✡✡✝☛☞✌✍ ☎✓✆
Dot-✑✝✏ ✜✁✜✜✡✆✢ ✣✝✝✢✑✝✏✤✒ ✒✂✡✆✒ ✎☞✎ ✌✝☎ ✏✂☎✑✓ ✆✥✙✆✑☎✂☎☞✝✌✒✦ partly due to a higher-than-expected
rate of product returns (a service that was offered for free, but charged for by their logistics
supplier Deutsche Post)

3. Lack of adequate cash flow

✧★✩✪ ✫✬✭✮ ✯✩ ✰✪✱ ✲✱★✩✳✴✱ ✭✫ ★ ✫✯✴✲✵✩ ★✶✯✬✯✰✷ ✰✭ ✲★✯✸✰★✯✸ sufficient funding to meet its
expenses for the day-to-day activities of the business. Many small businesses fail because
owners have a difficult time projecting what cash will come in every month, and thus,
how much can go out. It is vitally important for an entrepreneur to learn some basic
accounting disciplines and be able to make cash flow projections that will help them
understand how much they can afford to spend every month.

4. Poor business planning

Nine out of ten business failures are caused by a lack of general business management
skills and planning. A good business plan helps identify the mission; cost structure;
market; external influences; and strengths and weaknesses of a business. The business
plan can separately include a marketing plan, operating plan, etc.

5. Management incompetence
Ninety percent of business failures are associated with "management inadequacy", which
consist of either management inexperience or incompetence. Good management efficiently
implements and monitors the strategic and operational plan of a business. .A good strategic
plan is only good as the management's ability to implement changes in day to day operations.

Case Study-IV
Chrysler
Top management in all divisions overspent, especially in new product development, and generous
union contracts were continually signed year after year. Vehicle prices soared with little consumer
incentives and franchised dealers were placed in the position of moving product which consumers
✎☞✎✌✤☎ ☛✂✌☎✢
The Chrysler Crossfire, when introduced was fine but had many mechanical problems, as did the
✖✆✜✄☞✌✍✢ ✹✓✆✌ ☎✓✆ ✺✻ ✼✄✁☞✒✆✄✒ ✑✂✏✆ ✝✁☎✦ ☎✓✆ ✏✂✄✽✆☎☞✌✍ ☛✂✒ ✍✄✆✂☎ ✜✁☎ ☎✓✆ ✂✒✒✆✏✜✡✾ ✡☞✌✆✒ ✑✝✁✡✎✌✤☎
keep up with the demand and many turned to other manufactures who were tired of waiting for
PT Cruisers to hit showroom floors. Too many product lines were dropped or modified leaving
✼✓✄✾✒✡✆✄ ✞✂✌✒ ✁✙ ☞✌ ✂✄✏✒✢ ✿✝✾✂✡ ❀✆✆✙ ✝☛✌✆✄✒ ☛✆✄✆✌✤☎ ✙✡✆✂✒✆✎ ☛☞☎✓ ☎✓✆ ✒☎✝✙✙✂✍✆ ✝✞ ☎✓✆ ✜✂✒✆
Cherokee. Still, spending continued with little concern for regaining profits to pay expenses. In the
end, Chrysler, LLC was forced through a bankruptcy restructuring and now ownership is very
diverse including the entering Fiat. Still, brand loyalty for Chrysler is at an all time low.

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6. Ignoring the competition
Customers are always looking for the best deal, or at least, a better deal. And if the
competition offers better products, services, or prices, the customers will succeed at the
expense of the business. Keeping an eye on competitors and positioning the products
accordingly is vital to staying in business.

Case Study-V
Corfam Fake Leather
In the 1960s the company DuPont promoted Corfam, a fake leather substitute. They used the
material for women ✁✂✄ ☎✆✝ ✞✟✞✠✡✝ ✝☛☞✄ ✟✠✝✂ ☛✌✌✂✆✠✝ ✌✂✍✎✂✏✝✑ ✒✁✄ ✓✏✂✞✆✌✝ ✔☛ ☛✕✝✁✂✆✖✁ ✌✁✄☛✓✄✏
but was very uncomfortable. Competitors responded by lowering the price of leather and
increasing the quality and so the need for a fake substitute was lost and Corfam failed.

7. Unworkable goals
It is one thing to set goals and another thing to set workable goals. Entrepreneurial
initiatives are fundamentally influenced by uncertainty. Setting realistic goals, within the
bounds of acceptable risk taking and optimism, is important.

8. Diminished customer base

Competition can cause the customer base to diminish. From a small business's perspective,
it is good to focus on a customer strategy that works well for their business. At the same
time it is also dangerous to focus only on one recipe for success. Diversifying the customer
base is an important factor in building the business. Being flexible enough to adapt to new
trends and ideas is important for staying in business.

9. Uncontrolled growth
Uncontrolled growth of the business can also cause it to fail if not handled appropriately.
Obesity is a problem in business as it is in an individual's health. Proper planning must be
in place even for business growth. Successful growth requires a professional management
team, flexible organization, and proper systems and controls.

10. Inappropriate location

The old real estate maxim - location, location, location - may be even truer in the small
business world. Even the best-run retail establishment will have a difficult time
succeeding if it is in a poor location. Location may not be applicable to all types of
businesses, but when it is, it may be critically important.

Case Study-VI
Blockbuster
✒✁✟ ✌☛ ✄ ✝✆✞✗ ☛✕ ✂ ☛✓✓✕✟✄ ✝✂ ✕☛✌☞ ✂✎ ☛✖✟✕✟✝✗ ☎✆✝ ✟✝✡ ✄ ✄✠✝✟☛✕✕✗ ✕✂✌☛✝✟✂✠ ✝✁☛✝ ✁☛ ✕✄✞ ✝✂ ✝✁✄
✞✂✔✠✎☛✕✕ ✂✎ ✘✕✂✌☞☎✆ ✝✄✏✑ ✒✁✄ ✌✂✍✓☛✠✗ ✝✁☛✝ ✞✄✕✟✙✄✏ ✍✂✙✟✄ ✝✂ ✚✛ ✍✟✕✕✟✂✠ ✞✂✂✏ ✝✄✓ ✝✁✄ ✄ ✞☛✗ ✟ ✠✡✝

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 Months before being launched, articles from sites like Techcrunch and Mashable gave us a sneak
peek to the new application and showed us what the application had in store for us. It was such an
interesting concept that Twitter was flooded with tweets minutes after the news was out.
Google Wave was launched with a lot of speculation. It started out as an invite only application
and the first users who got an invitation were the ones using Sandbox. In the first few weeks,
everybody was dying to get their hands on the new product by Google. Many weeks have gone by
and Google Wave has opened their gates to everyone. But as the mystery of the Google Wave has
unfolded, it has turned out that Google Wave has failed expectations. The reasons why Google
Wave failed are manifold, and the major ones are:
1. Too much conversation: In Google Wave, any user can comment on any part of the
thread. The problem occurs when multiple users comment at the same time. And think of a
situation when you receive 5 chats in one second. For a normal human being, it is a really
difficult task to follow these many conversations in a very short span of time. And in the
end, it results into a heap of chats which resembles more like a trash bin. Yes, one can use
the playback feature to replay chats, but it would be an arduous task to read and follow all
these waves.
2. Prone to excessive spamming: ✁ ✂✄☎ ✆✝✞ ✝✄✂✟✆☎✠ ✡☎✠✞✂✄☛✞ ☞✂✂✌✍☎ ✎✝✏☎ ✑✒✓ ✆☎✔✞✆☎ ✕✝✄
easily add the other user and can wave at him/her. This feature makes it a heaven for
✞✡✝✖✖☎✠✞✗ ✘✞ ✂✄☎ ✕✝✄ ✙✝✏☎ ✝✟ ✝✄✚✛✂✒✚✓ ✙✝✏✑✄✌ ✕✝✄ ✛☎✕✂✖☎ ✝ ✞✡✝✖✖☎✠☛✞ ✡✝✠✝✒✑✞☎✗ ✜☎✑✄✌

constantly waved by spammers makes the Google Wave experience even worse.
3. Real time chatting: A unique feature of Google Wave is to chat in real time. In this real
time chat, one user can see what other user is typing at that particular moment and it is not
clear why this feature is required. It has no usefulness, but yes it just increases the chances
of getting noticed for making spelling mistakes.
4. Applications affect load time: Gmail is known for its light design and fast loading
capability. But Google Wave works the other way around. The ability to add applications
and extensions to Google Wave, instead of being a useful feature, acts as a hindrance in the
overall loading of the Waves.

SUMMARY
✢ Goal Setting: Establishing short or long term objectives, usually incorporating deadlines and
quantifiable measures
✢ SMART goals: specific, measurable, achievable, relevant, and time-based goals.
✢ Marketing strategy is defined by David Aaker as a process that can allow an organisation to
concentrate its resources on the optimal opportunities with the goals of increasing sales and
achieving a sustainable competitive advantage.
✢ Marketing Mix: Product, Price, Place and Promotion
✢ Product refers to the item actually being sold. The product must deliver a minimum level of
performance; otherwise even the best work on the other elements of the marketing mix won't do any good.

133
The components of Product mix: Branding, labelling and packaging
Trade mark is a word, phrase, symbol or design, or a combination of them, that identifies and
distinguishes the source of the goods of one party from those of others.
Service mark is the same as a trade mark, except that it identifies and distinguishes the source of a
service rather than a product.
Price refers to the value that is put for a product. It depends on cost of production, segment
targeted, ability of the market to pay, supply - demand and a host of other direct and indirect factors.
Pricing strategies:
✁ Cost Plus Pricing ✁ Penetration Pricing
✁ Creaming or skimming ✁ Variable Price method
Place mix (distribution)
A channel of distribution or trade channel is defined as the path or route along which goods move
from producers or manufacturers to ultimate consumers or industrial users.
A sales strategy ✂✄☎✆✝✆✞✆ ✄✟ ✠ ✡☛✠☎ ✞☞✠✞ ✡✄✆✝✞✝✄☎✆ ✠ ✂✄✌✡✠☎✍✎✆ ✏✑✠☎✒ ✄✑ ✡✑✄✒✓✂✞ ✞✄ ✔✠✝☎ ✠
competitive advantage. Successful strategies help the sales, force focus on target market customers
and communicate with them in relevant, meaningful ways.
Types of sales strategy: Direct and Indirect
Branding is a process, a tool, a strategy, an orientation whereby a name, a sign, or a symbol etc. is
given to a product by the entrepreneur so as to differentiate his/her product from the rival products.
Brand name:
o A brand name is "that part of a brand which can be vocalized i.e. can be spoken.
Brand mark:
A brand mark is that part of a brand which can be recognised but cannot be vocalised i.e. is non-
utter able. It appears in the form of a symbol, design, or distinct colour scheme.
Trade mark:
A brand or part of a brand that is given legal protection against its use by other firms is called trade
mark
Individual brand name:
o Here entrepreneur can choose distinct names for each of his offering, i.e. every product is
promoted on the basis of a separate brand name.
Family brand name:
Entrepreneur can opt to use a common or successful family name for their several products. Either
the entrepreneur's name or the company's name may be used for all the products
Corporate names:
Entrepreneur can choose to utilise their corporate name or logo together with some brand names of
individual products

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Alpha-numeric names:
In many industrial products, an alpha-numeric name often signifies its physical characteristics, thus
creating a distinctive identify of the product. Entrepreneur has an option available to brand his/her
products alpha-numerically too.
'Logo' (Short for Logotype) is an identifying symbol for a product or business.
Taglines are basically simple but give a powerful message that helps to communicate enterprise's
goals, mission, district qualities and so much more.
Promotion is the method through which we spread the word about the product or service to
customers, stakeholders and the broader public.
Components of promotion mix:
Advertising; personal selling; sales promotion; public relations
ATL- Above-the-line promotions use mass media methods. This type of promotion focuses on
advertising to a large audience. It includes print, online media, television and cinema advertising.
BTL- Below-the-line methods are very specific, memorable activities focused on targeted groups of
consumers. They are under the control of the organisation.
Below-the-line methods include:
Sponsorship, sales promotions, public relations, personal selling, direct marketing.
TTL - "Through the line" refers to an advertising strategy involving both above and below the line
communications in which one form of advertising points the target to another form of advertising
thereby crossing the "line"."
Advertising is a form of communication designed to persuade potential customers to choose the
product or service over that of a competitor.
✁ Commonly used media in advertising ✁ Stationery
✁ Window display or office front ✁ Press advertising
✁ Radio ✁ Television
✁ Direct mail ✁ Outdoor
✁ Ambient ✁ Cinema
✁ Point of sale ✁ Online
✁ Directory listings
Personal selling It means-✂✄☎✆✆✝✞✟ ✠✡☛☞✌✍✎✄ ✠☎✡✄☛✞✏✆✆✑✒✓ ✔✎ ✝✞✕☛✆✕☎✄ ☛✡✏✆ ✠✡☎✄☎✞✎✏✎✝☛✞ ☛✖ ✗☎✄✄✏✟☎ ✝✞
the form of conversation with one or more prospective customers for the purpose of making sales.
Thus a salesperson plays three different roles
Persuasive role
Service role
Informative role
Sales promotion relates to short term incentives or activities that encourage the purchase or sale of
a product or service.

135
 Public relations is the deliberate, planned and sustained effort to establish and maintain mutual
understanding between an organisation (or individual) and its (or their) public.
Negotiation is a process where two or more parties with different needs and goals discuss an issue
to find a mutually acceptable solution.
Methods of negotiation:
o Integrative is ✁✂✄✂✁✁✂☎ ✆✝ ✞✟ ✠✡☛☞-✡☛☞✌✍
o Distributive is refer✁✂☎ ✆✝ ✞✟ ✠✡☛☞-✎✝✟✂✌✍
o Inductive is the inductive method where in involves starting on small details and working
upward until a settlement is reached.
o Deductive - Start with an agreed upon strategy.
o Mixed -Mixed negotiations are the most common; they are a blend of inductive and deductive
methods.
CRM - It is the process of carefully managing detailed information about individual customers in
order to manage loyalty.
Employee relationship management is a process that companies use to effectively manage all
interactions with employees to ultimately achieve the goals of the organization.
Factors which lead to effective employee relationship
✏ Identifying objectives ✏ Determining employee needs
✏ Balancing work and life needs ✏ Open, honest communication
✏ Measuring and monitoring results ✏ Relationships are interpersonal
Vendor management is a term used to describe the process of finding, qualifying and doing
business with vendors.
Business failure refers to a company ceasing operations following its inability to make a profit or to
bring in enough revenue to cover its expenses.
The 12 broad causes that lead to a business failure are summarized below.
✏ Lack of industry experience ✏ Inadequate financing
✏ Lack of adequate cash flow ✏ Poor business planning
✏ Management incompetence ✏ Ignoring the competition
✏ Unworkable goals ✏ Diminished customer base
✏ Uncontrolled growth ✏ Inappropriate location
✏ Poor system of control ✏ Lack of entrepreneurial skills

"Twenty years from now you will be more disappointed by the things that you
✑✒✑✓✔✕ ✑✖ ✕✗✘✓ ✙✚ ✕✗✛ ✖✓✛✜ ✚✖✢ ✑✒✑ ✑✖✣ ✤✖ throw off the bowlines. Sail away from
✕✗✛ ✜✘✥✛ ✗✘✦✙✖✦✣ ✧✘✕★✗ ✕✗✛ ✕✦✘✑✛ ✩✒✓✑✜ ✒✓ ✚✖✢✦ ✜✘✒✪✜✣ ✫✬✭✪✖✦✛✣ ✮✦✛✘✯✣ ✮✒✜★✖✰✛✦✣✱

✲ Mark Twain

136
 REVIEW CROSSWORD PUZZLE

1.Q 2.

3. A

4. 7.A 8.

5. 6.

9.S

10. 11.

12. G

14.T 15. 13.

16. O

Across:
1. The standard of something as measured against other things of a similar kind
3. Discussion aimed at reaching an agreement
4. Display of information about a product on its container
9. A person with an interest or concern a business
10. Ideal medium of advertising due to its ability to reach specific target groups
12. Selling a product at a high price, sacrificing high sales to gain a high profit
13. An aim
14. A catch phrase or slogan as used in advertising
16. It includes all aspects of interaction that a company has with its customer

Down:
2. A symbol, a word legally registered or established by use as representing a company or product.
5. A name given to their products, which helps in identifying and distinguishing products
from that of the competitors.
6. The established reputation of a business.
7. The activity of attracting public attention to a product or business
8. Materials used to wrap or protect goods
11. The kind of advertising used by social networking sites
15. Design adopted by an organization to identify its products

137
 ✁✂✄☎ ✆✁✝✞☎✁
A. Very short answers. Answers to these questions should not exceed 15 words.
1. What is meant by goal setting?
2. What is marketing strategy?
3. What are the components of marketing mix?
4. Which is the shortest channel of distribution?
5. What are the components to a successful sales strategy?
6. Define branding.
7. Why is a logo important for a company?
8. Give the meaning of tagline with the help of an example.
9. Explain the term packaging.
10. What is labelling?
11. Define advertising?
12. What is negotiation?
13. Explain the meaning of CRM.
14. When do we conclude that a business has failed?
15. Explain the following term: ATL.
16. Give the meaning of BTL.
17. What is TTL?

B. Short answers. Answers to these questions should not exceed 50 words.

1. What are the rules for goal setting?
2. What does the marketing strategy of a company include?
3. What is sales strategy?
4. Explain the different types of sales strategies.
5. Differentiate between trade mark and brand mark.
6. What is the purpose of logo?
7. Why should we advertise?
8. What is employee management?
9. Is vendor management different from employee management? Enumerate.
10. Differentiate between ATL and BTL.

C. Short answers. Answers to these questions should not exceed 75 words.

1. Explain in detail SMART goals.
2. Explain the disadvantages of skimming price method.
3. What are the qualities of a good brand name?
4. What are the rules for advertising?

138
 5. What is AIDA?
6. What are the different roles played by a salesperson?
7. What are Public Relations?
8. Who is a stakeholder?
9. What are the main public relations tools?
10. Explain the benefits of CRM?

D. Long answers. Answers to these questions should not exceed 150 words.
1. What is penetration pricing ✁✂✄☎✆ ✝✞✆ ✁✞✟✠✡✂ ✠✂☛✡ ✝✆☞✝✞✂✝✌✁✡ ✝✞✆ ✆✠✡✝✆☞✝✞✂✝✌✁✡✍
2. ✎✄✝✂ ✝✏✁ ✂✄✁ ☞✝✏✠☎✑✡ ✂✒✓✁✡ ☎✔ ✕✏✝✞✆ ✞✝ ✁✡ ✔✏☎ ✂✄✁ ✁✞✂✏✁✓✏✁✞✁✑✏☛✡ ✓✁✏✡✓✁✖✂✠☞✁✗
3. What are the various factors which help in employee management?
4. How is vendor management done?

E. Very long answers. Answers to these questions should not exceed 250 words.
1. Explain in detail any 3 pricing strategies.
2. Explain the important factors affecting the choice of channels of distribution by the
manufacturer.
3. Explain Promotional mix in detail
4. Explain any 6 commonly used media options.
5. Enlist some typical sales promotion activities.
6. Explain the methods of negotiation.
7. Explain the reasons for business failures.

F. HOTS (High Order Thinking Skills)

1. Varshini started her high end boutique in a posh locality, but she was not aware of
how to make her boutique popular in the area. Suggest some measures for it.

G. Application based questions

1. Arvind has started his Italian food based restaurant. Does he have to register his
trademark? And give the reasons for the same.
2. Imagine that you have started selling FMCG goods then what kind of promotional
strategies will you be using?

H. Activities
1. Create your own product with a brand name, logo and tagline.
2. Pick any two rival companies (For example, Coke and Pepsi) and find their
marketing and promotional strategies.

✘✘✘

139
Origin and Concept
Goli Vada Pav, a quick serve food concept with authentic Indian touch, originated in Mumbai
✁ ✂✄✄☎✆ ✝✞✟ ✠✡☛✁☞✌✍ ✎✏✑✁☞✟✡✍, Venkatesh Iyer and Shiv Menon, realised the huge scope of

business in tapping the adult and lower income customers by selling widely popular local
✍✒✡✟✟✒ ✎✏✏☞ ✓✔☛☞☛ ✕☛✖✌ ✒✏ ✒✞✟✗✘ ✁ ☛✁ ✏✡✙☛✁ ✍✟☞ ✚☛✛✆ ✝✞✑s, the idea of Indian finger food Goli

Vada Pav Pvt Ltd was born that retailed the humble mouth watering spicy ethnic delicacy,
which was pocket friendly as well as prepared and served in hygienic conditions. Indian QSR
market is flooded with brands like ✜✢✣✏✁☛✤☞✌✍✘ ✥✑✠✚☛✛ ☛✁☞ ✦✑ ✧✁✏✍ ✠✑✒ ✒✞✟ ✍✑✢✢✟✍✍ ✏✎ Brand
★ Goli Vada Pav No. 1 reaffirms the fact that a strong home grown concept can not only thrive

but also compete with International Brands.

What makes concept so special?
Vada Pav is basically a spicy vegetable patty in bun sold by street-food vendors. The brand
Goli Vada Pav No. 1 has pioneered the concept of selling vada pav through retail outlet. The
✠✡☛✁☞✌✍ ✍✒✏✡✟s offer quality and hygienic fast food which is quite affordable. It has successfully

branded the traditional street food. It sells hygienically prepared food items made in fully
au✒✏✗☛✒✟☞ ✓✩✪✫✫✕✌ ✢✟✡✒ ✎ ✟☞ ✞☛✁☞✍✎✡✟✟ ✬✤☛✁✒ ✚ ✒✞ ☛✁ ☛✑✒✞✟✁✒ ✢ ✒✏✑✢✞✆ ✓✭✏✤ Vada P☛✖✌ ✍ ☛
typical finger food made of spices, vegetables, and mashed potatoes packed in 'vada pav'.
Today, it is known to be an established, reputed, and popular Indian fast-food brand that
offers a clean and ethnic finger food for those who have less money and time.
Popular products
The brand offers wide assortment of items to cater to varied taste buds and preferences of
customers. Its outlets serve different finger dishes like sweet chutney, dry chutney, and fried
green chilly. Its famous dishes include Goli Schezwan Vada Pav, Goli Cheese Vada Pav, Goli
Sabudana Vada, Goli Mix Veg. Vada Pav, Goli Tikki Vada Pav, Goli Palak Makkai Tikki, Goli
Cheese Ungli, and Goli Masala Vada Pav. As the name suggests vada is a common thing,
which is mixed with other thing for different ✒☛✍✒✟✆ ✝✞✟ ✢✏✗✬☛✁✛✌✍ ✎✏✏☞ ✏✎✎✟✡ ✁✙✍ ✁✏✒ ✏✁✤✛
entice the taste buds of consumers, but they are also touted to be nutritional.
Success journey till now
The brand has opted for franchise business models to grab a quick bite into the Indian
quick serve business. Today, Goli Vada Pav has extensive presence across 40 Indian cities in
six states. Goli Vada Pav No. 1 outlets are spread across the length and breadth of the country.
Its stores can be found in cities like Aurangabad, Ahmednagar, Bangaluru, Belgaum,
Chandrapur, Chennai, Coimbatore, Dhulia, Hubli, Hyderabad, Jalgaon, Kolhapur, Mumbai,
Pune and many more. It operates about 150 stores, of which over 140 are via franchise route.
Lucrative business opportunity
✝✞✟ ✠✡☛✁☞✌✍ ✢✏✁✢✟✬✒ offers lucrative business opportunity for aspiring franchisees. The factors

that make this concept a money spinner are:

Vada Pavs are popular all-time favourite and convenient fast food. The product is hygienic
and less oil fried snack ✞☛✖ ✁✙ ✑✁ ✖✟✡✍☛✤ ☛✬✬✟☛✤✆ ✮✒✌✍ ☛ ✍✒☛✁☞☛✡☞ ✒☛✍✒✛ ✎✏✏☞ ✒✞☛✒ ✢☛✁ ✠✟

141
you want to capture or a location not serviced even by your competitors. Expansion is often one
of the most daunting challenges a successful business will face.

Ron Sommer, former president, Sony Corporation of India: says "Where a company comes from
is less important than where it is going, as boundaries are erased, corporate birth certificate
✁✂✄☎ ✆✁✝✂☎ ✞✝✆✟✠
" The successful entrepreneur will make sure there is a constant flow of new
ideas and a commitment to try out at least some of these new ideas. An organization has to
maintain its momentum through interplay of flexibility and change. This calls for growth and
development which in essence is achieved through constant strife.

An entrepreneur has a dual role to play- one, that of a leader and the other of a manager. The
former provides direction and energy while the latter processes the input and gives the output.
To ensure the continued efficiency and profitable functioning and growth of enterprise, extra
managerial ability is required.

The expansion of a concern may be in the activities or acquisition of ownership and control of
other concerns. Thus, expansion may be;
✡ Internal Expansion
✡ External Expansion

i) Internal expansion
Internal expansion results from the gradual increase in the activities of the concern. The
concern may expand its present production capacity by adding more machines or by
replacing old machines with the new machines with higher productive capacity. The
internal expansion can also be undertaken by taking up the production of more units or by
entering new fields on the production and marketing sides. Internal expansion may be
financed by the issue of more share capital, generating funds from old profits or by
☛
issuing long term securities. The net result of internal expansion is the increase in
business activities and broadening the present capital structure.

ii) External expansion or business combination

External expansion refers to business combination where two or more concerns combine
and expand their business activities. In the process of combination, two or more units
engage in similar business or related process or stages. Sometimes stages of the same
business join with a view to carry on their activities or shape, their polices on common
basis some other or in coordination for mutual benefit or maximum profits. The
combination may be among competing units or units engaged in different processes. After
combination, the constituted firm pursues some common objectives or goals.

In this unit, we will focus on the main forms of external expansion which are
a) Franchising
b) Mergers and Acquisitions

143
 Case Study-II
✁✂✄ ☎✆✁✝✞✆✟✠ ✁✂✄ ✡✝☛☛✡☞ ✁✌✄ ✍✎✏✑✒✎✓ ✔✕ ✔✒✕✎✖

It's natural. It's yummy. Those who have tasted it, swear by it. The unique feature of the ice
creams manufactured by Natural Ice Cream is that they contain no artificial flavours, preservatives or
stabilisers, only fresh fruit pulp or dry fruits.
Started as a 300-sq-ft ice cream parlour at Juhu, a northwest Mumbai suburb, in 1984, the brand is a
runaway success. It now has 89 franchise outlets across West and South India: 47 in Mumbai, 29 in the
neighbouring urban clusters of Navi Mumbai, Thane and Pune, and the rest scattered across selected
cities of Maharashtra and neighbouring states. Ten more will be opened in the current financial year.
Natural's revenues have grown from ` 14 lakh in 1986 to ` 40 crore in 2010-11. The franchises may be
many, but the manufacturing hub is just one, located in another Mumbai suburb, Kandivali. Every
morning, a fleet of trucks rolls out from the factory carrying the ice cream to all the Natural outlets, thus
ensuring quality is not compromised.
The store at Juhu has been renovated and expanded repeatedly, and is now more than three times its
original size. "It is a landmark in the area," says a beaming Kamath. It all began after Kamath broke
away from his elder brother's ice cream business, Gokul Ice Cream, in 1983. "I took my share of the
inheritance and set up Natural," says Kamath. From the start he was at enormous pains to keep to
quality - a trait he maintains to this day. Seasonal fruits are bought in bulk daily from the market, with
only the best quality ones being chosen. The extracted pulp is heated, to get rid of unwanted bacteria,
and then stored in aluminium-sealed packages.
Kamath, who from the start involved himself in every aspect of manufacture and distribution, says he
has experimented with 60 different kinds of fruit. (In case of non-seasonal fruits, however, Kamath has
no choice but to buy pulp and get it machine processed.)
The means Natural uses to enforce quality control, however, impose their own limits on the brand's
expansion. All the temperature control in the world cannot preserve the taste - and more importantly the
freshness - of ice cream beyond a specified number of hours, during which Natural's trucks can cover
only a finite distance. This explains why Natural's outlets are largely in Western India, and it has no
outlet yet in the national capital, despite the obvious business opportunity Delhi presents. "The National
Capital Region has remained an elusive destination," admits Pai.
But the scenario may soon change. Though Natural officials are reluctant to share details of their
financial relationship with the franchises, they do reveal that plans are afoot for a major change in
operational strategy. The man responsible is Kamath's son, Srinivas, who was inducted into the
business in 2009. Srinivas, 27, believes that since it is dealing in perishable products such as ice cream,
Natural has to set up manufacturing units in other locations, if it wants to keep expanding.

144
Franchising opportunities have often evolved from changes in the environment as well as
important social trends.
Franchising is as "an arrangement whereby the manufacturer or sole distributor of a
trademarked product or service gives exclusive rights of local distribution to independent
retailers in return for their payment of royalties and conformance to standardized operating
procedures". The person offering the franchise is known as the franchisor. The franchisee is the
person who purchases the franchise and is given the opportunity to enter a new business with a
better chance to success than if he or she were to start a new business from scratch. Foundation
of this relationship is the Franchise Agreement.
A franchise agreement is the legal document that binds the franchisor and franchisee together.
This document explains what the franchisor expects from the franchisee in running the
business. The agreement is designed to assure that all of the franchisees within an organization
are treated equitably. The expectations must be uniform throughout the system.

The main ingredients of a franchise agreement:

Contract Explanation: The contract explanation is the part of the agreement that outlines the
type of relationship a franchisee is entering into with the franchisor.
Operations Manual: The operations manual is the section of the agreement that details the
guidelines that the franchisee must legally follow in operating the business as outlined by
the franchisor. From time to time amendments may be made and the franchisee must be
prepared to adjust operations accordingly. The franchisee needs to be aware that the
contents of the document are confidential.
Proprietary Statements: Proprietary statements outline how the franchise name is to be
used, as well as the marketing and advertising procedures in place that the franchisee will
be required to follow. Also, the franchisor documents how much the franchisee will be
required to contribute toward national advertising efforts.
Ongoing Site Maintenance: Ongoing site maintenance is another item that is outlined in the
agreement. Included are the types and timeframes regarding various maintenance items and
upgrades that must be made to the franchisee's location.
As in any legal document, it is recommended that you have your attorney review the franchise
agreement before signing.

Big brands make head towards for franchising

The big corporate houses that have opted for a franchise route consider franchising as an easy
mode of expansion with commitment level of the franchisor and the franchisees. It is a powerful
and ideal way to expand business, for a company which does not have any capital, manpower
or time to build the network of company-owned outlets.
However, Dabur is not the first big established brand that has taken up franchising for
expansion. There are various other corporate houses that have been into franchising for quite
some time now and have marked their presence not just pan-India, but also global.

146
Raymond Ltd, a company started in 1925 as a woollen and readymade garment industry, has
achieved phenomenal success with more than 500 stores. As Anirudh Deshmukh, President,
Raymond Ltd, says, 'Raymond can be called the "absolute leaders" in the fabric industry as
consumers had faith on us for the last 50 years and still we are growing stronger. We basically
opted for franchise model for expanding in smaller towns as these are not affected by recession
and the franchised stores can be driven by local entrepreneurs who are aware of the preferences
of the local customers.
NIIT, a well-known name in the IT education industry, has a franchising network of more than
12,500 centres spread over in more than 40 countries worldwide, apart from India. As per G.
Raghavan, President, Global Learning Solutions, NIIT, 'A large part of this success has been
possible due to our business partners, who have been a crucial element of our fabric. The
Business Partner Network not only helped NIIT expand its presence across India and reach the
unreached, it also fuelled the fire of entrepreneurship in the country.
JSW Steel Ltd., the third-largest Steel manufacturer in India, operates through 174 JSW Shoppe
outlets that work on the franchise model. Now, the company is planning to take the count of its
JSW Shoppe outlets to 340 by 2011.
Mahindra & Mahindra Ltd. a part of the India industrial conglomerate Mahindra Group, has
taken the franchise route to expand its 100 per cent subsidiary, Mahindra First Choice, a multi-
brand car-servicing company. The company is planning to take the count of its outlets to 450 in
the next four years. The new outlets will be a mix of both company-owned and franchise
outlets. Can also refer to the Case study of Satya Barta Dey SHREE LEATHERS Unit 2, sub
heading Growing, growing, franchising, ✁✂ ✄☎✆✝✞✟✁✠☎✆ ✠✡✁☛☞ ✌✍✠✁ ✎✟ ✏✝✠☎✁ ✑☞✒ if you do not
✓✞✂✌✔ ☞✂✄ ✕✠☎☎✂✁ ✝☎✆✄✞✝✖✗

Types of franchising
✘✝✙✂✞✝ ☞✂✄ ✆✎✚✝ ✍✝✠✆ ✙✎✞✟✁ ✎☎✁✂ ☞✂✄✞ ✙✞✠☎✕✍✎✟✝ ✑✄✟✎☎✝✟✟ ✂✡✡✂✞✁✄☎✎✁☞ ✟✝✠✞✕✍✔ ✎✁✖✟ ✎✏✡✂✞✁✠☎✁ ✁✍✠✁
you understand the four different types of franchising opportunities available to you.
Product franchise business opportunity: Manufacturers use the product franchise to govern
how a retailer distributes their products. The manufacturer grants a store owner the authority to
distribute goods by the manufacturer and allows the owner to use the name and trademark
owned by the manufacturer. The store owner must pay a fee or purchase a minimum inventory
of stock in return for these rights. Some tire stores are good examples of this type of franchise.

Manufacturing franchise opportunity: These types of franchises provide an organization with

the right to manufacture a product and sell it to the public, using the franchisor's name and
trademark. This type of franchise is found most often in the food and beverage industry. Most
bottlers of soft drinks receive a franchise from a company and must use its ingredients to
produce, bottle and distribute the soft drinks.
Business franchise opportunity ventures: These ventures typically require that a business
owner purchases and distributes the products for one specific company. The company must
provide customers or accounts to the business owner, and in return, the business owner pays a

147
fee or other consideration as compensation. Examples include vending machine routes and
distributorships.
Business format franchise opportunity: This is the most popular form of franchising. In this
approach, a company provides a business owner with a proven method for operating a business
using the name and trademark of the company. The company usually provides a significant
amount of assistance to the business owner in starting and managing the company. The
business owner pays a fee or royalty in return. Typically, a company also requires the owner to
purchase supplies from the company.

How Franchising help start-ups:

1. Franchising changed the working of the startups because already the product carriers a
name in the market already which is the most difficult part of business to establish. That is
why the startups pay royalty to the franchisor. Since the startups offer an established
product that struggling time and money involved in the process. Startups save that.
2. Startups take up training to understand the product and franchisors make franchises fully
conversant with the product/services that they have to offer. It is very important that the
Sales-man must know his/her product. In this case, start-ups are the sales person. And
✁✂✄☎✆✝✞✟✁✞ ☎✆✂✁✠✡ ✂ ✡✡ ✟✁ ☛✆✝✞ ☞✌✁☞✟✞✡✍ ✁✂✄☎✆✝✞✟✁✞ ✎✟☛✝✏✡ ✝✞ ✂☛ ✡✏✡✁✑ ✞☛✡☞ ✒✓✂✑ ✂✄✔

Smile. That is not a bad bargain.

3. The start-ups can grow fast without having to increase labour, operating costs and
blocking running expenses because normally buyers straight walk up to them.
4. In practical Franchises work for the benefit of franchisors in other words they turn up one
plus one eleven. Both are all out open to help each other. Franchisors' efforts to boast their
franchises are always sincere, so there is no✕clash of interest.

Advantages of franchising
One of the most important advantages of buying a franchise is that the entrepreneur does not
have to incur all the risks associated with creating a new business. Typically, the areas that
entrepreneurs have problems with in starting a new venture are product acceptance,
management expertise, meeting capital requirements, knowledge of the market, and operating
and structural controls. In franchising, the risks associated with each are minimized through the
franchise relationship, as discussed below.

Advantages to the franchisee

1. Product acceptance
The franchisee usually enters into a business that has an accepted name, product or
service. In the case of Subway, any person buying a franchise will be using the Subway
name, which is well known and established throughout the United States. The franchisee
does not have to spend resources trying to establish the credibility of the business. That
credibility already exists based on the years the franchise has existed. Subway has also
spent millions of dollars in advertising, thus building a favourable image of the products
and services offered. An entrepreneur who tries to start a sandwich shop would be

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 unknown to the potential customers and would require significant effort and resources to
build credibility and a reputation in the market.

2. Management expertise
Another important advantage to the franchisee is the managerial assistance provided by
the franchisor. Each new franchisee is often required to take a training program on all
aspects of operating the franchise. This training could include classes in accounting,
personnel management marketing and production. McDonald's, for example, requires all
its franchisees to spend time at its school, where everyone takes classes in these areas. In
addition, some franchisors require their new franchisees to actually work with an existing
franchise owner or at a company-owned store or facility to get on-the job training. Once
the franchise has been started, most franchisors will offer managerial assistance on the
basis of need. Toll-free numbers are also available so that the franchisee can ask questions
anytime. Local offices for the larger franchises continually visit the local franchisees to
offer advice and keep the owners informed of new development.
The training and education offered is actually an important criterion that the entrepreneur
should consider in evaluating any franchise opportunity. If the assistance in start-up is not
good, the entrepreneur should probably look elsewhere for opportunities unless he or she
already has extensive experience in the field.

3. Capital requirements
As we've seen in previous chapters, starting a new venture can be costly in terms of both
time and money. The franchise offers an opportunity to start a new venture with up-front
support that could save the entrepreneur's significant time and possibly capital. Some
franchisors conduct location analysis and market research of the area that might include
an assessment of traffic, demographics, business condition and competition. In some
cases, the franchisor also finances the initial investment to start the franchise operation.
The initial capital required to purchase a franchise generally reflects a fee for the franchise,
construction costs and the purchase of equipment.
The layout of the facility, control of stock and inventory and the potential buying power of
the entire franchise operation can save the entrepreneur significant funds. The size of the
parent company can be advantageous in the purchase of health care and business
insurance, since the entrepreneur would be considered a participant in the entire franchise
organization. Savings in start-up are also reflected in the pooling of money by individual
franchisees for advertising and sales promotion. The contribution by each franchisee is
usually the function of the volume and the number of franchises owned. This allows
advertising on both local as well as national scale to enhance the image and credibility of
the business, something that would be impossible for a single operation.

4. Knowledge of the market

Any established franchise business offers the entrepreneur years of experience in the
business and knowledge of the market. This knowledge is usually reflected in a plan

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 offered to the franchisee that details the profile of the target customer and the strategies
that should be implemented once the operation has begun. This is particularly important
because of regional and local differences in markets. Competition, media effectiveness,
and tastes can vary widely from one market to another. Given their experience,
franchisors can provide advice and assistance in accommodating any of these differences.
Most franchisors constantly evaluate market conditions and determine the most effective
strategies to communicate to the franchisees. Newsletters and other publications that
reflect new ideas and developments in the overall market are continually sent to franchisees.

5. Operating and structural controls

Two problems that many entrepreneurs have in starting a new venture are maintaining
quality control of products and services and establishing effective managerial controls.
The franchisor, particularly in the food business, identifies purveyors and suppliers that
meet the quality standards established. In some instances, the supplies are actually
provided by the franchisor. Standardization in the supplies, products and services
provided helps ensure that the entrepreneur will maintain quality standards that are so
important. Standardization also supports a consistent image on which the franchise
business depends for expansion.
Administrative controls unusually involve financial decisions related to costs, inventory
and cash flow and personnel issues such as criteria for hiring/firing, scheduling and
training to ensure consistent service to the customer. These controls are usually outlined
in manual supplied to the franchisee upon completion of the franchise deal.
Although all the above are advantages to the franchisee, they also represent important
strategic considerations for an entrepreneur who is considering growing the business by
selling franchises. Since there are so many franchise options available for an entrepreneur,
the franchisor will need to offer all of the above services in order to succeed in the sale of
franchises. One of the reasons for the success of such franchises as McDonald's, Burger
King, KFC, Boston Market, Subway, Midas, Jiffy Lube, Holiday Inn, Mail Boxes and Merry
Maids is that, all these firms have established an excellent franchise system that effectively
provides the necessary services to the franchisee.

Advantages of franchising to the franchisor

The advantages a franchisor gains through franchising are related to expansion risk, capital
requirements and cost advantages that result from extensive buying power. It is clear from the
Subway example that Fred DeLuca would not have been able to achieve the size and scope of
his business without franchising it. In order to use franchising as an expansion method, the
franchisor must have established value and credibility that someone else is willing to buy.

Quick expansion
The most obvious advantage of franchising for an entrepreneur is that it allows the venture to
expand quickly using little capital. This advantage is significant when we reflect on the
problems and issues that an entrepreneur faces in trying to manage and grow a new venture. A

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franchisor can expand a business nationally and even internationally by authorizing and selling
franchises in selected locations. The capital necessary for this expansion is much less than it
would be without franchising. Just think of the capital needed by DeLuca to build 8,300 Subway
sandwich shops!

The value of the franchise depends on the track record of the franchisor and on the services
offered to the entrepreneur or franchisee. Subway's low franchise fee has enhanced expansion
opportunities, as more people can afford it.

Operating a franchised business requires fewer employees than a non-franchised business.

Headquarters and regional offices can be lightly staffed, primary to support the needs of the
franchisees. This allows the franchisor to maintain low payroll and minimizes personnel issues
and problems.

Cost advantages
The mere size of a franchised company offers many advantages to the franchisees. The
franchisor can purchase supplies in large quantities, thus achieving economies of scale that
would not have been possible otherwise. Many franchise businesses produce parts, accessories,
packaging and raw materials in large quantities, then in turn sell these to the franchisees. The
franchisee are usually required to purchase these items as part of the franchise agreement and
they usually benefit from lower prices.
One of the biggest cost advantages of franchising a business is the ability to commit larger sums
of money to advertising. Each franchisee contributes a percentage of sales (1 to 2 %) to an
advertising pool. This pooling of resources allows the franchisor to conduct advertising in major
media across a wide geographic area. If the business had not been franchised, the company
would have to provide funds for the entire advertising budget.

Disadvantages of franchising to the franchisee

Since there are multiple advantages of growing a business through the franchise mode, certain
disadvantages also exist that need to be carefully examined. The greatest problem mainly arises
as an outcome of differences between the franchisor and franchisee in terms of certain formal
and informal commitments that do not get operationalized. Some of the key disadvantages of
this mode of expansion are:
Right and the only way of doing things: Entering into a franchise contract limits the degree
of freedom for the franchise. As such, one gets an over-guided and over-influenced degree
of control exerted by the franchisor. This results in losing the freedom to innovate to some
extent.
Continuing cost implication: Over and above the original franchise fee and royalties, a
percentage of revenue gets shared perpetually with the franchisor. The franchisor may also
charge additional amounts towards sharing the cost for services provided such as
advertising and training. As such, entering into franchise contracts with a well-known
franchisor becomes a very expensive proposition because of a tendency on their part to
exploit the franchisee.

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 Risk of franchisor getting bought: The franchisee faces serious problems and difficulties
when the franchisor either fails or gets bought out by another company.

No one knows this better than Vicent Niagra, an owner of three Window Works franchises. Niagra
had invested about $1 million in these franchises, when the franchise was sold in 1988 to Apogee
Enterprises and then resold in 1992 to a group of investors. This caused many franchises to fail,
leaving a total of 50. The failure of these franchises has made it difficult for Niagra to continue
because customers are apprehensive about doing business with him for fear that he will go out of
business. No support services that had been promised were available.

Inability to provide services: The disadvantages to the franchisee usually centre around the
inability of the franchisor to provide services advertising and location. When promises
made in the franchise agreement are not kept, the franchisee may be left without any
support in important areas. For example, Curtis Bean bought a dozen franchises in Checkers
of America Inc., a firm that provides auto inspection services. After losing $200,000, Bean
and other franchisees filed a lawsuit claiming that the franchisor had misrepresented
advertising costs and had made false claims including that no experience was necessary to
own a franchise.

Disadvantage to the franchisor

Difficulty in identifying quality franchisees: Above all, even the franchisor may find it
difficult to identify quality franchisees. Even after extending all support towards training and
providing capital, poor management may lead to the failure of the franchisee and in turn,
adversely affect the franchise system as a whole.

Case Study-III
Indian franchise boom
For small and first time entrepreneurs in India, taking up franchise of a well-established brand is a good
proposition. Buying a franchise of an established brand is a good alternative to starting on a new idea
from scratch or could offer a faster way to take an existing business to the next level. To list a few;
✁✂✄☎ ✆ ✄✝✞✟✠✡☛☛☞☞✆✌✍ ✆ ✎✆✏✠☛☞✆✌✍ ✆ ✎✆✌✍✝✠☛☞
Ferns N Petals, founded by Vikaas Gutgutia, a Delhi based company, and the leading brand of floral
boutiques in India is marked as a one-stop-shop for all flower requirements, whether it is for daily or
occasional gifting, for floral decoration in weddings, corporate events or for an individual parties. Floral
boutiques are aesthetically designed and its air ✑ conditioned outlets reflect style and high taste to cater
to elite customers. FNP's floral boutique offers a vast variety of fresh cut flowers and unique flower
arrangements, artificial & dry flowers, and an exclusive range of object d'art such as scented candles,
candle stands, imported Italian glass vases, wooden gift accessories with intricate carving, photo-frames,
miniature exportable gift items, fragrance items based on aromatherapy and potpourris, etc. These
boutiques offer a vast variety of exquisite flower arrangements and displays to match the distinct needs
and tastes of the customers. Growth of FNP, too, is attributable to franchising.

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Food Courts work well with franchising models
Haldiram Franchise A Profitable Business Opportunity
The food and beverage industry has not experienced any crunch, mainly because the people are spending
money in a big way on eating out, together with entertainment. The Indian economy is growing rapidly,
automatically creating more room for the growth of this industry.
The Haldiram Marketing franchise is associated with sweets and namkeens for the discerning consumers
for the past six decades in India and across the world. The food and beverage franchise made a modest
start in the beginning of 1941 in Bikaner in the State of Rajasthan in India. According to the sweet and
savory products franchise, sweet and salt are opposite to each other, but they perform wonders on the
taste buds.
The Haldiram Marketing franchise uses both sweet and salt in its foods, with mithais (sweets) and
namkeens (salty snacks). This unique concept of the food and beverage franchise has made it to be a
leader in the sweet industry and it has also maintained this position for many years. The sweet and
savoury products franchise has been synonymous with sweets similar as Cadbury is to Chocolates.
The Haldiram Marketing franchise can by default be termed as taste of tradition of India. The sweet and
savoury products franchise has certain prospective markets, such as those in China, Russia, the United
Kingdom, Madagascar and Ukraine, for promoting and marketing the brand of Haldirams.
Among various food joints from domestic sector, Haldiram franchise has carved a separate niche for
themselves. Haldiram made a humble beginning, when it commenced its business in Bikaner, in the state
of Rajasthan. Since then, the food and beverage franchise has witnessed phenomenal growth and is
currently a renowned manufacturer of sweets across the globe. The sweet and savory products franchise
has a chain of restaurants and is also anticipated to start amusement parks.
The Haldiram franchise is the flag bearer of the traditional Indian sweet. This food and beverage
franchise was started by Shri Ganga Bisanji Agarwal alias Haldiram Agarwal. He is the grandfather of
Shri Shivkisan Agrawal, who was responsible for the fame and success of the sweet and savory products
franchise. Moreover, he made the brand of Haldirams a household name in the Indian subcontinent.
Hotel Saravana Bhavan
Hotel Saravana Bhavan is the largest vegetarian restaurant chain in the world, founded in 1981 by
Rajagopal, offers south Indian cuisine. They have more than 20 outlets in Chennai, 33 in India and 47
around the world (including USA, Canada, United Kingdom, France, Germany, Singapore, Malaysia,
and the Middle East. There are plans to open 5-star Vegetarian-Hotels. This chain is also an example of
successful model of Franchising.
Jumboking
Jumboking began its journey to brand the Vada Pav on 23rd August 2001. Jumboking in its 12th year of
operations is a pioneer in the food retail company in India in the QSR (Quick Service Restaurants)
segment.
Inspired by western models and applying it to Indian food, Jumbo King believes that the common man
has the constitutional right to get hygienic food at an affordable price!
Jumboking has been founded by Dheeraj Gupta. Jumboking has a team of people spanning the functional
areas of operations, business development, franchisee relations and marketing.

153
The term chosen to describe the merger depends on the economic function, purpose of the
business transaction and relationship between the merging companies.

1. Conglomerate
A merger between firms that are involved in totally unrelated business activities. There
are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers
involve firms with nothing in common, while mixed conglomerate mergers involve firms
that are looking for product extensions or market extensions.
Example: A leading manufacturer of athletic shoes merges with a soft drink firm. The
resulting company is faced with the same competition in each of its two markets after the
merger as the individual firms were before the merger. One example of a conglomerate
merger was the merger between the Walt Disney Company and the American
Broadcasting Company.

2. Horizontal merger
A merger occurring between companies in the same industry. Horizontal merger is a
business consolidation that occurs between firms which operate in the same space, often
as competitors offering the same goods or service. Horizontal mergers are common in
industries with fewer firms, as competition tends to be higher and the synergies and
potential gains in market share are much greater for merging firms in such an industry.
Example: A merger between Coca-Cola and the Pepsi beverage division, for example,
would be horizontal in nature. The goal of a horizontal merger is to create a new, larger
organization with more market share. If the merging companies' business operations are
very similar, there may be opportunities to join certain operations, such as manufacturing
and reduce costs.

3. Market extension mergers

A market extension merger takes place between two companies that deal in the same
products but in separate markets. The main purpose of the market extension merger is to
make sure that the merging companies can get access to a bigger market and that ensures
a bigger client base.
Example: A very good example of market extension merger is the acquisition of Eagle
Bancshares Inc. by the RBC Centura. Eagle Bancshares is headquartered at Atlanta,
Georgia and has 283 workers. It has almost 90,000 accounts and looks after assets worth
US $1.1 billion.
Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest
banks in the metropolitan Atlanta region as far as deposit market share is concerned. One
of the major benefits of this acquisition is that this acquisition enables the RBC to go ahead
with its growth operations in the North American market.
With the help of this acquisition RBC has got a chance to deal in the financial market of
Atlanta , which is among the leading upcoming financial markets in the USA. This move
would allow RBC to diversify its base of operations.

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4. Product extension mergers
A product extension merger takes place between two business organizations that deal in
products that are related to each other and operate in the same market. The product
extension merger allows the merging companies to group together their products and get
access to a bigger set of consumers. This ensures that they earn higher profits.
Example: The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of
product extension merger. Broadcom deals in the manufacturing of Bluetooth personal
area network hardware systems and chips for IEEE 802.11b wireless LAN.
Mobilink Telecom Inc. deals in the manufacturing of product designs meant for handsets
that are equipped with the Global System for Mobile Communications technology. It is
also in the process of being certified to produce wireless networking chips that have high
speed and General Packet Radio Service technology. It is expected that the products of
Mobilink Telecom Inc. would be complementing the wireless products of Broadcom.

5. Vertical merger
A merger between two companies producing different goods or services for one specific
finished product. A vertical merger occurs when two or more firms, operating at different
levels within an industry's supply chain, merge operations. Most often the logic behind
the merger is to increase synergies created by merging firms that would be more efficient
operating as one.
Example: A vertical merger joins two companies that may not compete with each other,
but exist in the same supply chain. An automobile company joining with a parts supplier
would be an example of a vertical merger. Such a deal would allow the automobile
division to obtain better pricing on parts and have better control over the manufacturing
process. The parts division, in turn, would be guaranteed a steady stream of business.
Synergy, the idea that the value and performance of two companies combined will be
greater than the sum of the separate individual parts is one of the reasons companies merge.

Case Study-IV
✁✂✄☎✆✝ ☎✂✞✟✠✡✟✁ ✠✄ Cadbury
By Scott Moeller
The story: In 2009, US food company Kraft Foods launched a hostile bid for Cadbury, the UK-listed
chocolate maker. It became clear almost exactly two years later in August 2011, Cadbury was the final
acquisition necessary to allow Kraft to be restructured and indeed split into two companies by the end of
2012: a grocery business worth approximately $16bn; and a $32bn global snacks business. Kraft needed
Cadbury to provide scale for the snacks business, especially in emerging markets such as India. The
challenge for Kraft was how to buy Cadbury when it was not for sale.
The history
Kraft itself was the product of acquisitions that started in 1916 with the purchase of a Canadian cheese
company. ☛☞ ✌✍✎ ✌✏✑✎ ✒✓ ✌✍✎ ✒✓✓✎✔ ✓✒✔ ✕✖✗✘✙✔☞✚ ✏✌ ✛✖✜ ✌✍✎ ✛✒✔✢✗✣✜ ✜✎✤✒✥✗ -largest food conglomerate, with
seven brands that each generated annual revenues of more than $1bn.

157
Cadbury, founded by John Cadbury in 1824 in Birmingham, England, had also grown through mergers
and demergers. It too had recently embarked on a strategy that was just beginning to show results.
Ownership of the company was 49 per cent from the US, despite its UK listing and headquarters. Only
5 per cent of its shares were owned by short-term traders at the time of the Kraft bid.
The challenge
Not only was Cadbury not for sale, but it actively resisted the Kraft takeover.
Sir Roger Carr, the Chairman of Cadbury, was experienced in takeover defences and immediately put
together a strong defensive advisory team. Its first act was to brand the 745 pence-per-share offer
✁✂✄☎☎✆✄✝☎✞✟✠✡☛ ☞✄✌✞✂✍ ☎✎✄☎ ✞☎ ✏✁✂✑✄✒✠✂☎✄✓✓✌ ✁✂✑✠✆✟✄✓✁✠✑ ☎✎✠ ✝✔✒✕✄✂✌✡✖ ✗✎✠ ☎✠✄✒ ✒✄✑✠ ✝✓✠✄✆ ☎✎✄☎
even if the company had to succumb to an unwanted takeover, almost any other confectionery company
(Nestlé, Ferrero and Hershey were all mentioned) would be preferred as the buyer. In addition, Lord
✘✄✂✑✠✓☞✔✂☛ ☎✎✠✂ ☎✎✠ ✙✚✛☞ ✜✁☞✞✂✠☞☞ ☞✠✝✆✠☎✄✆✌☛ ✕✁✜✓✞✝✓✌ ✑✠✝✓✄✆✠✑ ☎✎✄☎ ☎✎✠ ✍✔✟✠✆✂✒✠✂☎ ✢✔✁✓✑ ✔✕✕✔☞✠ ✄✂✌
✜✁✌✠✆ ✢✎✔ ✏✄✞✓✠✑ ☎✔ ✆✠☞✕✠✝☎✡ ☎✎✠ ✎✞☞☎✔✆✞✝ ✝onfectioner.
The response
✣✄✑✜✁✆✌✛☞ ✔✢✂ ✑✠✏✠✂✝✠ ✑✔✝✁✒✠✂☎☞ ☞☎✄☎✠✑ ☎✎✄☎ ☞✎✄✆✠✎✔✓✑✠✆☞ ☞✎✔✁✓✑ ✆✠✤✠✝☎ ✚✆✄✏☎✛☞ ✔✏✏✠✆ ✜✠✝✄✁☞✠ ☎✎✠ ✝✎✔✝✔✓✄☎✠
✝✔✒✕✄✂✌ ✢✔✁✓✑ ✜✠ ✄✜☞✔✆✜✠✑ ✞✂☎✔ ✚✆✄✏☎✛☞ ✓✔✢ ✍✆✔✢☎✎ ✝✔✂✍✓✔✒✠✆✄☎✠ ✜✁☞✞✂✠☞☞ ✒✔✑✠✓ ✥ an unappealing
prospect that sharply contr✄☞☎☞ ✢✞☎✎ ☎✎✠ ✣✄✑✜✁✆✌ ☞☎✆✄☎✠✍✌ ✔✏ ✄ ✕✁✆✠ ✕✓✄✌ ✝✔✂✏✠✝☎✞✔✂✠✆✌ ✝✔✒✕✄✂✌✡✖
✦✞☎☎✓✠ ✑✞✑ ✣✄✑✜✁✆✌✛☞ ✒✄✂✄✍✠✒✠✂☎ ✧✂✔✢ ☎✎✄☎ ✚✆✄✏☎✛☞ ✕✓✄✂ ✢✄☞ ☎✔ ☞✕✓✞☎ it into two to eliminate its
conglomerate nature and become two more focused businesses, thereby creating more value for its
shareholders.
The result
The Cadbury team determined that a majority of shareholders would sell at a price of roughly 830 pence
a share. A deal was struck between the two chairmen on January 18 2010 at 840 pence per share plus a
special 10 pence per share dividend. This was approved by 72 per cent of Cadbury shareholders two
weeks later.
The key lessons
In any takeover, especially a cross-border deal in which the acquired company is as well known as
Cadbury was in the UK, the transaction will be front-page news. In this case, it was the lead business
story for at least four months. Fortunately, this deal had no monopoly or competition issues, otherwise
those regulators could also have been involved.
But aside from any regulators, most other commentators will largely be distractions. It is important for
☎✎✠ ✄✝★✁✞✆✞✂✍ ✝✔✒✕✄✂✌✛☞ ✒✄✂✄✍✠✒✠✂☎ ✄✂✑ ✄✑✟✞☞✠✆☞ ☎✔ ☞☎✄✌ ✏✔✝✁☞✠✑ ✔✂ ☎✎✠ ✑✠✄✓ ✞☎☞✠✓✏ ✄✂✑ ☎✎✠ ✆✠✄✓
decision-makers ✥ the shareholders of the target company.
As this deal demonstrates, these shareholders may not (and often will not) be the long-term traditional
owners of the target company stock, but rather very rational hedge funds and other arbitrageurs (in
✣✄✑✜✁✆✌✛☞ ✝✄☞✠☛ ✔✢✂✞✂✍ ✩✪ ✕✠✆ ✝✠✂☎ ✔✏ ☎✎✠ ☞✎✄✆✠☞ ✄☎ ☎✎✠ ✠✂✑✫☛ ✢✎✔ ✄✆✠ ☞✢✄✌✠✑ ✔✂✓✌ ✜✌ ☎✎✠ ✔✏✏✠✆ ✕✆ ice and
how quickly the deal can be completed.
Other stakeholders may have legitimate concerns that need to be addressed but this can usually be done
after the deal is completed, as Kraft did.

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 the increase in value of the combined entity. In other words, it refers to the difference
between the value of the combined firm and the value of the sum of the participants.
Synergy accrues in the form of revenue enhancement and cost savings. For example, if
firms A and B merge and the value of the combined entity V(AB) is expected to be
greater than (VA+VB), the sum of the independent values of A and B, the combined entity
is said to be benefitting through synergy.

Synergies between TATA Steel and Corus

There were a lot of apparent synergies between Tata Steel which was a low cost steel producer in
fast developing region of the world and Corus which was a high value product manufacturer in
the region of the world demanding value products. Some of the prominent synergies that could
arise from the deal were as follows :
✁ Tata was one of the low cost steel producers in the world and had self-sufficiency in raw
material. Corus was fighting to keep its production costs under control and was on the lookout
for sources of iron ore.
✁ Tata had a strong retail and distribution network in India and SE Asia. This would give the
European manufacturer an in-road into the emerging Asian markets. Tata was a major
supplier to the Indian auto industry and the demand for value added steel products was
growing in this market. Hence, there would be a powerful combination of high quality
development and low cost high growth markets.
✁ There would be technology transfer and cross-fertilization of R&D capabilities between the
two companies that specialized in different areas of the value chain
✁ There was a strong culture fit between the two organizations, both of which highly emphasized
on continuous improvement and ethics. Tata steel's Continuous Improvement Programme
✂✄☎✆✝✞✟✠ with the core values: trusteeship, integrity, respect for individual, credibility and
excellence. Corus's Continuous Improvement Programme ✂✡☛✟ ☞✌✞✍☎ ✎✏✑✠ ✒✝✓☛ ✓☛✟ ✔✌✞✟
values: code of ethics, integrity, creating value in steel, customer focus, selective growth and
respect for our people.

Synergy can take the following forms:

a) Operating synergy
This refers to the cost savings that come through economies of scale or increased sales and
profits. It leads to the overall growth of the firm.
b) Financial synergy
This is the direct result of financial factors such as lower taxes, higher debt capacity or
better use of idle cash. When a firm with accumulated losses or unabsorbed depreciation
merges with a profitable firm and the combined firm can set off such losses against its
profits, a financial synergy, known as tax shield, occurs. The following are some examples:
✁ When Hindustan Unilever Company acquired Lakme, it helped HUL to enter the
cosmetics market through an established brand.

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 When Glaxo and Smithkline Beecham merged, they not only gained market share but
also eliminated competition between each other.
Tata Tea acquired Tetley to leverage Tetley's international marketing strengths.

2. Acquiring new technology

To remain competitive, companies need to constantly
upgrade their technology and business applications. To
upgrade technology, a company need not always acquire
technology. By buying another company with unique
technology, the buying company can maintain or develop
a competitive edge. A good example is a merger of a
logistics company such as a land transport entity with an
air-line cargo company. Another example is a merger
between Blackberry and Treo which can incorporate cell
phone capability and e✁mail connectivity in one device;
palm pilots and tablet laptops can provide benefits to both the entities.

3. Improved profitability
Companies explore the possibilities of a merger when they anticipate that it will improve
their profitability. The results of the International Business Owners Survey, 2004, carried
out by Grant Thompson, conducted across 26 countries in Europe, Africa, Asia-Pacific,
and the US, showed that 34% of business use M&A to maintain or improve profitability.
For example, European Media Group Betelsmann, Pearson, and others have driven their
growth by expanding into the US though M&As.

4. Acquiring a competency
Companies also opt for M&A to acquire a competency or capability that they do not have
and which the other firm does. For example, the ICICI ITC alliance made the retailer
network and depositor base available to the merging entity. Similarly, IBM merged with
Daksh for acquiring competencies that the latter possessed.

5. Entry into new markets

Mergers are often looked upon as a tool for hassle-free entry into new markets. Under
normal conditions, a company can enter a new market, but may have to face stiff
competition from the existing companies and may have to battle out for a share in the
existing market. However, if the merger route is adopted, one can enter the market with
greater case and avoid too much competition. For example, the merger of Orange, Hutch,
and Vodafone took place to achieve this objective.

6. Access to funds
Often a company finds it difficult to access funds from the capital market. This weakness
deprives the company of funds to pursue its growth objectives effectively. In such cases, a

161
 company may decide to merge with another company that is viewed as fund-rich. For
example, TDPL (Tamil Nadu Dadha Pharmaceuticals) merged with Sun Pharma since
TDPL did not have funds to launch new products.

7. Tax benefits
Mergers are also adopted to reduce tax liabilities. By merging with a loss-making entity, a
company with a high tax liability can set off the accumulated losses of the target against
its profits gaining tax benefits. For example, Ashok Leyland Information Technology
(ALIT) was acquired by Hinduja Finance, a group company, so that it could set off the
accumulated losses in ALITs books against its profits.

Reasons for failure of merger and acquistions

While there is often a great hype when a merger or acquisition is announced, the end result is
not always positive. The most common reasons for failure are as follows:

1. Unrealistic price paid for target

The process of M&A involves valuation of the target company and paying a price for
taking over the assets of the company. Quite often one finds that the price paid to the
target company is much more than what should have been paid. While the shareholders
of the target company stand benefited, the shareholders of the acquirer end up on the
losing side. This is because they have to carry the burden of the overpriced assets of the
target company which dilutes the future earnings of the acquirer. Having bid over-
enthusiastically, the buyer may find that the premium paid for the acquired company's
shares, the so-called 'winner's curse' wipes out any gains made from the acquisition.
This phenomenon is generally noticed in the later years when the acquirer has to revalue
the assets and write goodwill booked at the time of M&A.

2. Difficulties in cultural integration

Every merger involves combining of two or more different entities. These entities reflect
different corporate cultures, styles of leadership, differing employee expectations and
functional differences. If the merger is implemented in a way that does not deal sensitively
with the companies people and their different corporate cultures, the process may turn out
to be a disaster. There may be acute contrasts between the attitudes and values of the two
companies, especially if the new partnership crosses national boundaries. While the
process is being executed, these differences are known but often ignored. As years pass by
and the combined entity tries to synergize the operations, these differences surface and
often lead to failure of the merger. For example, the merger of Daimler Benz with
Chrysler. While Daimler-Benz's culture stressed on a more formal and structured
management style, Chrysler favoured a more relaxed, freewheeling style.

3. Overstated synergies
Mergers and acquisitions are looked upon as an important instrument for creating
synergies through increased revenue, reduced costs and reduction in networking capital

162
 and improvement in the investment intensity. Overestimation for these can lead to failure
of mergers.

4. Integration difficulties
Companies very often face integration difficulties, i.e., the combined entity has to adapt to
a new set of challenges given by the changed circumstances. To do this, the company
prepares plans to integrate the operations of the combining entities. If the information
available on related issues is inadequate or inaccurate, integration becomes difficult.

5. Poor business fit

Mergers and acquisitions also fail when the products or services of the merging entities do
not naturally fit into the acquirer's overall business plan. This delays efficient and effective
integration and causes failure.

6. Inadequate due diligence

Due diligence is a crucial component of the M&A process as it helps in detecting financial
and business risks that the acquirer inherits from the target company. Inaccurate
estimation of the related risk can result in failure of the merger.

7. High leverage
One of the most crucial elements of an effective acquisition strategy is planning how one
intends to finance the deal through an ideal capital structure. The acquirer may decide to
acquire the target through cash. To pay the price of acquisition, the acquirer may borrow
heavily from the market. This creates a very high leveraged structure and increases the
interest burden of the company. This increased interest cost may consume a big portion of
the earnings and defeat the very purpose of acquisition.

8. Boardroom split
When a merger is planned, it is crucial to evaluate the composition of the boardroom and
compatibility of the directors. Managers or directors who are suddenly deprived of
authority can be particularly bitter. Specific personality clashes between executives in the
two companies are also very common. This may prove to be a major problem, slowing
down or preventing integration of the entities.

9. Regulatory issues
The entire process of merger requires legal approvals. If any of the stakeholders are not in
favour of the merger, they might create legal obstacles and slow down the entire process.
This results in regulatory delays and increases the risk of deterioration for the business.
While evaluating a merger proposal, care should be taken to ensure that regulatory
hassles do not crop up.

163
 Cause-related
Cultural
The different types of added value are not mutually exclusive and can be employed at any
phase of the production or service cycle.
1. Quality added value
Quality added value is basically adding convenience, ease of use or other desirable
characteristics that customers value. For example, turning a commodity into a branded
product or design enhancements like pull tabs for easy opening or sipper tops on
beverage bottles.
2. Environmental added value
Environmental added value employs methods or systems that do not harm the
environment or are less harmful than those commonly used. For example, using less
electricity, using less fuel and using recycled material for packaging.
3. Cause-related added value
Cause-related added value is a social marketing strategy where business contributes part
of the revenue from a product or service to a cause. For example, a business may donate a
percentage of revenue from each transaction to a cause such as an educational facility for
disadvantaged children or a wildlife sanctuary.
4. Cultural added value
Cultural added value is also a social marketing strategy that employs methods or systems
of production involving cultural aspects or allow for the needs and sensitivities of cultural
groups. For example, producing kosher food (in accord with Jewish law) or using a
combination of English and the language of other ethnic groups in a community in written
communications.
Adding value can be used as a marketing strategy to differentiate a product from
competing products. Such strategies should be fully researched and included in a business
plan to show the potential benefits to a business.

C. Moving-up the value chain

A value chain is the whole series of activities that create and build value at every step. The total
value delivered by the company is the sum total of the value built up all throughout the
company. Michael Porter developed this concept in his 1980 book 'Competitive Advantage'. In
simple words 'Value Chain' is a high level model of how business receive raw-materials, add
value to the raw-materials through various processes and sell as finished products to customers.
'Value Chain' analysis looks at every step of business, from raw-materials to the eventual end
users, with one goal to deliver maximum value.
✁✂✄☎✆✝✞ ✟✠✡☛✝✡ ✂☞☛✡✠✌✍✄✝✌ ☛☎✝ ✎✆✞✍✝ ✄☎✆✂☞ ✆☞✆✞✏✑✂✑ ✄✠☞✄✝✒☛ ✂☞ ☎✂✑ ✓✔✕✖ ✗✠✠✘ ✙✚☎✝ ✛✠✜✒✝☛✂☛✂✎✝
✢✌✎✆☞☛✆✣✝✤✥ Porter suggested that activities within an organisation add value to the service and
products that the organisation produces and all these activities should be run at optimum level

165
if the organisation is to gain any real competitive advantage. If they are run efficiently, the value
obtained should exceed the costs of running them i.e. customers should return to the
organisation and transact freely and willingly. Michael Porter suggested that the organisation is
✁✂✄☎ ✄✆☎✝ ✞✁✟✄✠✡✟☛ ✡☞☎✄✌✄☎✄✍ ✎ ✡✆✏ ✞ ✑✁✁✝✟☎ ✡☞☎✄✌✄☎✄✍ ✎✒

Primary activities
Inbound logistics: Goods being obtained from the organisation's suppliers and to be used for
producing the end product.
Operations: Raw materials and goods are manufactured into the final product. Value is added
to the product at this stage as it moves through the production line.
Outbound logistics: Once the products have been manufactured, they are ready to be
distributed to distribution centres, wholesalers, retailers or customers. Distribution of finished
goods is known as outbound logistics.
Marketing and sales: Marketing must make sure that the product is targeted towards the correct
customer group. The marketing mix is used to establish an effective strategy, any competitive
advantage is clearly communicated to the target group through the promotional mix.
Services: After the product/service has been sold, what support services does the organisation
offer customers? This may come in the form of after sales training, guarantees and warranties.
With the above activities, any or a combination of them are essential if the firm has to develop
the "competitive advantage" which Porter talks about in his book.

Support activities
Support activities assist the primary activities in helping the organisation achieve its
competitive advantage. They include:
Procurement: This department must source raw materials for the business and obtain the best
price for doing so. The challenge for procurement is to obtain the best possible quality available
(on the market) for their budget.
Technological development: The use of technology to obtain a competitive advantage is very
im✁✝✟☎✡✆☎ ✄✆ ☎✝✏✡☛✎ ☎✍☞✓✆✝✂✝✔☛ driven environment. Technology can be used in many ways,
including production, to reduce cost and thus adding value, research and development to
develop new products on the internet so that customers can have 24/7 access to the firm.
Human resource management: The organisation will have to recruit, train and develop the
right people for the organisation to be successful. Staff will have to be motivated and paid the
✞✠✡✟✕✍☎ ✟✡☎✍✎, if they are to stay with the organisation and add value. Within the service sector
such as the airline industry, employees are at the competitive advantage as customers are
purchasing a service, which is provided by employees; there isn't a product for the customer to
take away with them.
Firm infrastructure: Every organisation needs to ensure that their finances, legal structure and
management structure work efficiently and help drive the organisation forward. Inefficient
infrastructure's waste resources could affect the firm's reputation and even leave it open to fines
and sanctions.

166
5. Employee/human resources
A central hub of information on benefits, company policies, hiring and conflict
management is also necessary for a corporation to function properly. Without a
knowledgeable and active human resources department, employees may feel they don't
have a voice within the company. Many times, an employee is hesitant to go directly to the
supervisor with issues; a human resources employee can act as a liaison in many
situations.
6. Organizational culture and attitudes
Organizations that foster strong cultural identity with positive attitudes tend to attract and
retain top employees. Regular corporate sponsored activities are suggested to help build
cultural unity and keep attitudes positive while boosting productivity.

SUMMARY
Growth of an enterprise can be either through a. internal expansion or b. external expansion
Main forms of external expansion are :
a. Franchising; b. merger; c. acquisition
Franchising is "an arrangement whereby the manufacturer or sole distributor of a trademarked
product or service gives exclusive rights of local distribution to independent retailers in return for
their payment of royalties and conformance to standardized operating procedures".
Four types of franchising
a. Product franchise business opportunity b. Manufacturing franchise opportunity
c. Business franchise opportunity ventures d. Business format franchise opportunity
Advantages to the franchisee
✁ Product acceptance ✁ Management expertise

✁ Capital requirements ✁ Knowledge of the market

✁ Operating and structural controls

Advantages to the Franchisor

✁ Quick expansion ✁ Cost advantages

Disadvantages to the franchisee

✁ Right and the only way of doing things ✁ Continuing cost implication
✁ Risk of franchisor getting bought ✁ Inability to provide services
Disadvantage to the franchisor
Difficulty in finding quality franchisee's
A merger is a combination of two companies into one larger company.

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Types of mergers:
1. Conglomerate; 2. Vertical; 3. Market extension; 4. Horizontal; 5. Product extension
Acquisition
It is a corporate action in which a company buys most, if not all, of the target company's ownership
stakes in order to assume control of the target firm.
Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to
take over an existing firm's operations and niche compared to expanding on its own.
Acquisitions are often paid in cash, the acquiring company's stock or a combination of both. An
acquisition, also known as a takeover, is the buying of one company (the target) by another.
Types of acquisition
a. Friendly acquisition; b. Reverse acquisition; c. Back flip acquisition; d. Hostile acquisition
Reasons for mergers and acquisitions
✁ Synergy - operating synergy and financial synergy

✁ Acquiring new technology ✁ Improved profitability

✁ Acquiring a competency ✁ Entry into new markets

✁ Access to funds ✁ Tax benefits

Reasons for failure of merger and acquistions

✁ Unrealistic price paid for target ✁ Difficulties in cultural integration
✁ Overstated synergies ✁ Integration difficulties
✁ Inconsistent strategy ✁ Poor business fit
✁ Inadequate due diligence ✁ High leverage
✁ Boardroom split ✁ Regulatory issues
✁ Human resource issues

Value addition
Businesses add value to goods and services by modifying them in a particular way to create a new
product of greater value to customers.
Types of added value
✁ Quality ✁ Environmental
✁ Cause-related ✁ Cultural
Value Chain: It is the whole series of activities that create and build value at every step.
✂✄☎✆✝✞✟ ✠✡☛☞✞☛ ✄✌☞☛✡✍✎☎✞✍ ☞✆✞ ✏✝✟✎✞ ☎✆✝✄✌ ✝✌✝✟✑✒✄✒ ☎✡✌☎✞✓☞ ✄✌ ✆✄✒ ✔✕✖✗ ✘✡✡✙ ✚✛✆✞ ✜✡✢✓✞☞✄☞✄✏✞
✣✍✏✝✌☞✝✤✞✥✦ ✠✡☛☞✞☛ ✒✎✤✤✞✒☞✞✍ ☞✆✝☞ ✝☎☞✄✏✄☞✄✞✒ ✧✄☞✆✄✌ ✝✌ ✡☛✤✝✌✄✒✝☞✄✡✌ ✝✍✍ ✏✝✟✎✞ ☞✡ ☞✆✞ ✒✞☛✏✄☎✞ ✝✌✍

169
products that the organisation produces, and all these activities should be run at optimum level if the
organisation is to gain any real competitive advantage. If they are run efficiently, the value obtained
should exceed the costs of running them i.e. customers should return to the organisation and transact
freely and willingly.
✁✂✄☎✆✝✞ ✟✠✡☛✝✡ ☞✌✍✍✝☞☛✝✎ ☛☎✆☛ ☛☎✝ ✠✡✍✆✏✂☞✆☛✂✠✏ ✂☞ ☞✑✞✂☛ ✂✏☛✠ ✒✑✡✂✓✆✡✔ ✆✄☛✂✕✂☛✂✝☞✖ ✆✏✎ ✒☞✌✑✑✠✡☛
✆✄☛✂✕✂☛✂✝☞✖✗

Primary activities
1. Inbound logistics; 2.Operations; 3.Outbound logistics; 4. Marketing and sales; 5. Services
Support activities
1. Procurement 2. Technology development 3. Human resource management 4. Firm infrastructure
Six requirements for value chain management
1. Coordination and Collaboration 2. Technology Investment 3. Organizational Process
4. Leadership 5. Employee/Human Resources 6. Organizational Culture and Attitudes

✘✙✚✛ ✜✢✣✤✛ ✥✦ ✧★✤✤✛✧✧ ✣✧ ✚✩✢✪ ✫✥✢✬✭ ✪✛✪✣✤✩✮✣✥✯ ✮✥ ✮✚✛ ✰✥✱ ✩✮ ✚✩✯✪✭ ✩✯✪ ✮✚✛
determination that whether we win or lose, we have applied the best of
✥★✢✧✛✲✳✛✧ ✮✥ ✮✚✛ ✮✩✧✬ ✩✮ ✚✩✯✪✴✵
✶ Vince Lombardi

170
 REVIEW CROSSWORD PUZZLE

1.F 11.C
12.
2.

3.
5.
4.L
10. E
6. E 7.

8.

9. N

Across:
2. A corporate action in which a company buys most, if not all, of the target company's
ownership stakes in order to assume control of the target firm
3. The way of life of the people
4. The management of the flow of goods between the point of origin and the point of
consumption in order to meet some requirements
6. A combination of two companies into one larger company
8. The company that allows an individual (known as the franchisee) to run a location of their
business
9. The basic physical and organizational structures and facilities
10. It refers to the difference between the value of the combined firm and the value of
the sum of the participants

Down:
1. McDonald's works under this arrangement
4. The action of leading a group of people
5. The action of working with someone to get something done
7. The action of becoming larger or more extensive
11. A company that comprises multiple different corporations.
12. The use of various financial instruments or borrowed capital, such as margin, to increase
the potential return of an investment.

171
 ✁✂✄☎ ✆✁✝✞☎✁
A. Answer each of these questions in about fifteen words:
1. What are the two ways in which an organization can expand?
2. Who is a franchisor?
3. Who is a franchisee?
4. What is franchising?
5. Which is the most popular form of franchising?
6. What is acquisition?

B. Answer each of these questions in about fifty words:

1. Explain in brief the three ways in which an organization can expand externally.
2. Enumerate the importance of franchising.
3. Differentiate between consolidation and merger.
4. Name the two forms that merger can take place.
5. Explain the types of acquisition.
6. What is value addition? Explain by giving examples.

C. Answer each of these questions in about one hundred and fifty words:
1. Explain the types of franchising.
2. What are the disadvantages of franchising to the franchisee?
3. What is synergy? In what forms can it take place?
4. What are the different types of value added?

D. Answer each of these questions in about two hundred and fifty words:
1. Explain the advantages of franchising, both for the franchisor and franchisee
2. Explain in detail the types of mergers
3. What do you think are the reasons for failure of merger and acquisition?
4. What is meant by moving up the value chain? Explain with the help of an example.
5. ✟✠✡☛☞✌✍ ✌✍ ✎✏✑☞✌☛ ✒✓✔✑✏✔✕✖ ✗✏✍✏✔✌✘ ✙☞☛✚✏ ✛✜☞✌✍ ✢✌✑✜ ✑✜✏ ✜✏☛✡ ✓✣ ☞ ✎✌☞✤✔☞✥✦
6. Explain the requirements for value chain management.

E. HOTS (High Order Thinking Skills)

In the following cases identify the type of merger:
a) A merger between firms that are involved in totally unrelated business activities.
b) A merger occurring between companies in the same industry.
c) It takes place between two companies that deal in the same products but in separate
markets.
d) It takes place between two business organizations that deal in products that are
related to each other and operate in the same market.

172
 e) It is between two companies producing different goods or services for one specific
finished product.
F. Application Based Questions
1. ABC Company, manufacturing shoes, has taken over XYZ Company which also
manufactures shoes at a small scale. What do you think will be the reason for this
kind of takeover?
2. Vimal Company Ltd., were earlier producing pencils, now they have decided to
further venture into the field of notebooks and paper. What do you think is the
company attempting to do? Identify and explain the concept.
G. Activities
1. Look around in the market for a product of your interest. Suggest some ways in
which the company can move up their value chain.
2. Find out in your area if there are any shops which are run on the franchise model
and assess the success of those firms.
3. Make a list of major companies which have merged or have acquired some other
company and state whether they are successful or unsuccessful, giving reasons.

173
Defining the unit of sale, unit price and unit cost & resultant gross profit in a meaningful way is
the answer. Let us see how!
In the examples used above, we all know that a customer does not buy all the items from the
grocer at a given time, nor does he/she order all the items on the menu when visiting a
restaurant. A customer coming to the beauty parlor does not avail of all the offered services.
Neither do all customers buy or order or avail of same items or services. If this be the case, and
it is, how does the business owner figure out what is going on in his/her business?
✁✂✄ ✂✄ ☎✁✆✝ ✞✟✠✆✡✟☛✆✄☞ ✌✍✎✆ ✂✝ ✏✍ ✑✒✟✓ ✟✝✔ ✁✆✒✑ ✏✁✆ ✕✖✄✂✝✆✄✄ ✍☎✝✆✡✗
Let us take the example of a grocery store. Observe the process, as it will be applicable to many
similar situations. Each customer coming in to buy things will have different requirements.
✁✂✄✘ ✏✁✆✝ ✡✆✄✖✒✏✄ ✂✝ ✏✁✆ ✞✕✂✒✒✆✔ ✟✎✍✖✝✏☞ ✙✍✡ ✂✝✠✍✂✌✆✔ ✟✎✍✖✝✏✚ ✕✆✂✝☛ ✔✂✛✛✆✡✆✝✏ ✛✍✡ ✔✂✛✛✆✡✆✝✏
people. For example, at the end of the day, the shop keeper found out the following.

Number of customers Per customer billed amount ( ) Total billed amount ( )

5 500 2,500
10 700 7,000
15 1,000 15,000
10 1,450 14,500
25 2,000 50,000
5 2,500 12,500
10 3,100 31,000
15 3,500 52,500
5 5,000 25,000
Total Weighted Average Total
100 2,100 2,10,000

In other words, 100 customers bought items worth ` 2,10,000/- , thus giving an average of
` 2,100/- per customer. You would notice that no one bought items worth "exactly" ` 2,100.
However, the collective purchase by all of them yielded this average we arrived at. It is
conceivable that on another day the average could be different. In a month, the average (derived
on a daily basis) at the beginning of the month could be higher than towards the end. If the
average is arrived for all the customers in a month then that could give a more realistic picture
as the sample (total customers) would be larger.
✜✝ ✏✁✂✄ ✑✟✡✏✂✌✖✒✟✡ ✌✟✄✆✘ ✞✢✖✄✏✍✎✆✡☞ ✂✄ ✏✁✆ ✞✖✝✂✏ ✍✛ ✄✟✒✆☞ ✟✝✔ ✏✁✆ ✟✠✆✡✟☛✆ ✑✖✡✌✁✟✄✆ ✎✟✔✆ ✕✓ ✍✝✆
customer (not the actual bill but total billed amount divided by total number of customers) is
the "Unit Price". Taking the same example, the Unit Price per Customer (or per Unit of Sale)
would be ` 2,100/-.

175
✁ ✂✄☎ ✆✝✞☎ ✟✠ ✝ ✡☎✞✂✝☛✡✝✁✂☞ ✂✄☎ ✌☛✁✍✂ ✟✠ ✞✝✎☎✏ ✑✟☛✎✒ ✓☎ ✝ ✌✔✍✁☎✡✏✕ ✖✄✍✞ ✍✞ ✒✍✠✠☎✡☎✁✂ ✠✡✟✗ ✂✄☎
person who pays the bill. A group my consist of 10 people or 5 or 2. At times it may even be
one. In each case, the number of persons paying the bill would most likely be one. So it is more
✝✆✆☛✡✝✂☎ ✂✟ ✘✟ ✓✙ ✂✄☎ ✁☛✗✓☎✡ ✟✠ ✌✔✍✁☎✡✞✏✕ ✖✄☎ ✌✔✍✁☎✡✏ ✍✞ ✂✄☎ ✌✚✁✍✂ ✟✠ ✛✝✎☎✏ ✝✁✒ ✂✄☎ ✝✜☎✡✝✘☎

✝✗✟☛✁✂ ✓✍✎✎☎✒ ✢☎✡ ✌✔✍✁☎✡✏ ✑✟☛✎✒ ✓☎ ✂✄☎ ✌✚✁✍✂ ✣✡✍✆☎✏✕ ✁ ✂✄☎ ✆✝✞☎ ✟✠ ✝ ✡☎✞✂✝☛✡✝✁✂ ✂✄✝ t provides
only Buffet Lunch or Dinner, life is simple. It is like a single product business.
You can now visualize how a beauty parlor or saloon can also use the same concept. The
✌✤☛✞✂✟✗☎✡✏ ✍✞ ✂✄☎ ✌✚✁✍✂ ✟✠ ✛✝✎☎✏ ✝✁✒ ✝✜☎✡✝✘☎ ✓✍✎✎✍✁✘ ✢☎✡ ✆☛✞✂✟✗☎✡ ✍✞ ✌✚✁✍✂ ✣✡✍✆☎✏✕

So we have understood Unit of Sale and Unit Price in multi product environment. What about
Unit Cost.
As you would recollect from your earlier study, unit cost refers to variable cost (also referred to
as cost of goods sold). How do we calculate the unit cost in the case of multi product or service
situations? If we understood the way we calculated the unit price, it should give us a clue. Let
us take the grocery store again.
Grocery store is a Trading Business. One buys and sells. So, the cost at which the items are
purchased is known (just as its MRP at which you are selling). Therefore, at the end of the day,
it is possible to know the purchase price of all the items and quantities that were sold. Let us
suppose that it works out to ` 1,70,000/-. There were 100 units of Sale. So the unit cost is
` 1,700/-.
In some cases, there could be another way. For every item, if the purchase price is 80% of selling
price, then in that particular case, the Unit Cost would be ` 1,680/- (= 80% of ` 2,100/-).
Gross Profit would then be ` 400/- per unit of sale (` 2,100 - ` 1,700) in the first case and
` 420/- per Unit of sale (` 2,100- ` 1,680) in the second case. This will depend on the industry
specifics.
Many industries have their unique thumb rules for the relationship between Unit Price and Unit
Cost. In Fast Moving Consumer Goods Industry it could be 80 or 85% (cost as percentage age of
selling price). In food industry, it could be 30 to 35% (COG as percentage age of selling price).
Electronic items may have a different thumb rule. Where none exists, you may be able to
develop your own. However, the more accurate way is to actually compute the costs as
explained.

An exercise
A stationery store sold in one day the following items at the prices indicated.

Products Price per unit ( ) Quantity sold

Student note book 40 35

Reynolds pens 40 40
Erasers 5 5

176
 ✁✂✄☎ ✆✝✞✟ plastic) 15 10
Flip chart 10 5
Sketch pens (one DOZEN) 25 3

The shopkeeper also found out, based on the number of bills issued by him, that there were 50
customers. If customer is the unit of sale✠ ✡☛✂☞ ✌✍ ☞☛☎ ✎✏✑✌☞ ✒✓✌✁☎✟ ✌✑ ☞☛✌✍ ✁✂✍☎✔ ✕✖ ☞☛☎ ✁✗✍☞ ✗✖ ☎✂✁☛
stationery item is 75% of its selling price, calculate the ✎✏✑✌☞ ✘✗✍☞✟ ✂✑✙ ☞☛☎ ✎✚✓✗✍✍ ✛✂✓✜✌✑✟ ✢☎✓
unit of sale.

Exercises for practice

Illustration 1: Beauty parlor
A Beauty parlor had varying number of customers during 5 weeks. This information and the
total weekly billing are in the following table. What are the ✎✏✑✌☞ ✗✖ ✍✂✄☎✟ ✂✑✙ ☞☛☎ ✎✏✑✌☞ ✒✓✌✁☎✟
✌✑ ☞☛✌✍ ✁✂✍☎✔ ✕✖ ☞☛☎ ✁✗✍☞ ✗✖ ✜✗✗✙✍ ✍✗✄✙ ✗✓ ✣✂✓✌✂✤✄☎ ✁✗✍☞ ✌✍ ✥✦✧ ✗✖ ☞☛☎ ✍✂✄☎ ✢✓✌✁☎✠ ✁✂✄✁★✄✂☞☎ ☞☛☎ ✎✏✑✌☞
✘✗✍☞✟ ✂✑✙ ☞☛☎ ✎✚✓✗✍✍ ✛✂✓✜✌✑✟ ✢☎✓ ✏✑✌☞ ✗✖ ✂✄☎✩

Week # No. of customers Total amount Average amount billed

billed ( ) ( ) per customer
Week 1 10 1,000 100
Week 2 17 1,445 85
Week 3 13 923 71
Week 4 22 5,082 231
Week 5 18 3,150 175
Total 80 11,600

Illustration 2: Restaurant
Number of people who took their meals and the total billing for each of the 5 weeks is in the
✖✗✄✄✗✡✌✑✜ ☞✂✤✄☎✩ ✪☛✂☞ ✂✓☎ ☞☛☎ ✎✏✑✌☞ ✗✖ ✍✂✄☎✟ ✂✑✙ ☞☛☎ ✎✏✑✌☞ ✒✓✌✁☎✟ ✌✑ ☞☛✌✍ ✁✂✍☎✔ ✕✖ ☞☛☎ ✣✂✓✌✂✤✄☎
✁✗✍☞ ✌✍ ✫✦✧ ✗✖ ☞☛☎ ✍✂✄☎ ✢✓✌✁☎✠ ✁✂✄✁★✄✂☞☎ ☞☛☎ ✎✏✑✌☞ ✘✗✍☞✟ ✂✑✙ ☞☛☎ ✎✚✓✗✍✍ ✛✂✓✜✌✑✟ ✢☎✓ ✏✑✌☞ ✗✖ ✂✄☎✩

Weeks No. of people Total amount billed ( ) Average amount

taking meals billed ( )
Week 1 120 18,000 150
Week 2 60 12,300 205
Week 3 70 10,220 146
Week 4 80 17,680 221
Week 5 90 21,600 240
Total 420 79,800

177
Some formulas:
Total Billed Amount
1. Unit Price per customer =
Number of Customers

Total Sale
2. Unit Cost perproduct =
Number of Unit Sold

3. Gross Profit = Selling price per unit-cost price per unit

Break even analysis

(Multiple products or services)
We have understood the meaning and importance of & method of determining breakeven Point
in our earlier lesson (Std XI). That related to single product or service business.
Just to recap, breakeven point is the level of sales (or revenue generated) that equals all the
expenses required for generating that revenue. It is not more than the expenses (i.e. no profit)
nor is it less than the expenses (i.e. no loss). In other words there is neither loss nor profit.
At the breakeven level
Total revenue = Total expenses
(Qty x Unit Price) = (Qty x Unit Cost) + Fixed Exp
Qty x (Unit Price Unit Cost) = Fixed Exp
Qty x Gross Margin (or Profit) per Unit = Fixed Exp
B.E. Qty for a single product =
Fixed expenses
Selling price per unit variable cost per unit
B.E. quantity for multiple products
Fixed expenses
Weighted average selling price per unit Weighted Average variable cost per unit
Please note: Gross margin and gross profit are one and the same.
Usefulness of break even analysis continues to be the same whether you are operating a single
product or multiple product business. It helps in setting profit goal and sales target. In a
manufacturing environment, it helps in determining the products that are not contributing to
meet the fixed expenses and thus brings up the item for discussion in management meetings
about its continuity.

Sales mix break-even point calculation

Sales mix is the proportion in which two or more products are sold. For the calculation of break-
even point for sales mix, following assumptions are made:
1. The proportion of sales mix must be predetermined.
2. The sales mix must not change within the relevant time period.

178
3. All cost can be categorized as variable or fixed.
4. Sales price per unit, variable cost per unit and total fixed cost are constant.
5. All units produced are sold.

The calculation method for the break-even point of sales mix is based on the contribution
approach method. Since we have multiple products in sales mix therefore it is most likely that
we will be dealing with products with different contribution margin per unit and contribution
margin ratios. This problem is overcome by calculating weighted average contribution margin
per unit and contribution margin ratio. These are then used to calculate the break-even point for
sales mix.

The calculation procedure and the formulas are discussed via following example:
Example: Formulas and calculation procedure
Following information is related to sales mix of product A, B and C.

Product A B C

Sales price per unit `15/ `21/ `36/

Variable cost per unit `9/ `14/ `19/

Sales mix percentage 20% 20% 60%

Total fixed cost `40,000/

Calculate the break-even point in units and in rupees.

Calculation:

Step 1: Calculate the contribution margin per unit for each product:

Product A B C

Sales price per unit `15/ `21/ `36/

✁ ✂✄☎✆✄✝✞✟ cost per unit `9/ `14/ `19/

Contribution margin per unit `6/ `7/ `17/

Step 2: Calculate the weighted-average contribution margin per unit for the sales mix using the
following formula:

Product A CM (contribution mix) per Unit × Product a sales mix percentage

+ Product B CM per unit × Product B sales mix percentage
+ Product C CM per unit × Product C sales mix percentage
= Weighted average unit contribution margin

179
Product A B C

Sales price per unit `15/ `21/ `36/

✁ ✂✄☎✆✄✝✞✟ cost per unit `9/ `14/ `19/

Contribution margin per unit `6/ `7/ `17/

× Sales mix percentage 20% 20% 60%

`1.2/ `1.4/ `10.2/

Sum: Weighted average CM per unit `12.80/

Step 3: Calculate total units of sales mix required to break-even using the formula:
Break-even point in units of sales mix = Total fixed cost ÷ Weighted average CM per unit

Total fixed cost `40,000/

÷ Weighted average CM per unit `12.80/

Break-even point in units of sales mix `3,125/

Step 4: Calculate number units of product A, B and C at break-even point:

Product A B C

Sales mix ratio 20% 20% 60%

× Total break-even units 3,125 3,125 3,125

Product units at break-even point 625 625 1,875

Step 5: Calculate break-even point in rupees as follows:

Product A B C

Product units at break-even point 625 625 1,875

× Price per unit `15/ `21/ `36/

Product sales in rupees `9,375/ `13,125/ `67,500/

Sum: Break-even point in rupees `90,000/

BE analysis helps in such decision making. Please note that such decisions are product related
and not business related. So it is clear from the above calculations as to how we can calculate
weighted average sales price per unit and weighted average variable cost so that we can arrive
at breakeven point.
Below is another sum for more clarification:

180
Multiple-product break even analysis
Toy craft produces toy alligators and toy dolphins. Fixed costs are `12,90,000 per year. Sales
revenue and variable costs per unit are as follow:
Alligators Dolphins
Sales Price `20/ `25/
Variable Costs `8/ `10/

Questions:
A. Suppose the company currently sells 140,000 alligators per year and 60,000 dolphins per
year (Sales Mix Percentage 14:6). Assuming the sales mix stays constant how many
alligators and Dolphins must the company sell to break even?
B. Suppose the company currently sells 60,000 alligators per year and 140,000 dolphins per
year (Sales mix percentage 6:14). Assuming the sales mix stays constant, how many
alligators and dolphins must the company sell to break even per year?
C. Explain why the total number of toys needed to break even in (a) is the same as or
different from the number in (b).

Solution:
A.

Units 140000 60000 200000

Sales price per unit `20/ `25/

Variable Cost per unit `8/ `10/

Alligators Dolphins TOTAL

Sales(A) `28,00,000/ `15,00,000/ `43,00,000/

Variable cost(B) `11,20,000/ `6,00,000/ `17,20,000/

Contribution Margin
(A-B) `16,80,000/ `9,00,000/ `25,80,000/

Less :Fixed cost `12,90,000/

Net income `12,90,000/

Weighted Average Contribution margin: Total Contribution/Total units

= `2580000/200000
= `12.90/

181
Breakeven Point = Fixed Cost/Weighted Average Contribution
= `1,290,000/`12.90
= 100000 units
Allocating TOTAL UNITS to each product based on EXPECTED UNITS PROPORTION= 14:6
14
Alligators to be produced for Breakeven = 100000 x
20
= 70000 units
6
Dolphins to be produced for Breakeven = 100000 x
20
= 30000 units
So, Toy Crafts has to produce 70000 toy alligators and 30000 toy dolphins for breakeven.

B.

Units 60000 140000 200000

Sales price per unit `20/ `25/

Variable Cost per unit `8/ `10/

Alligators Dolphins TOTAL

Sales(A) `12,00,000/ `35,00,000/ `47,00,000/

Variable cost(B) `4,80,000/ `14,00,000/ `18,80,000/

Contribution
Margin(A-B) `7,20,000/ `21,00,000/ `28,20,000/
Less :Fixed cost `12,90,000/

Net income `15,30,000/

Weighted Average Contribution margin: Total Contribution/Total units

= `2820000/200000
= `14.10/
Breakeven Point = Fixed Cost/Weighted Average Contribution
= `1,290,000/`14.10
= 91489 units
Allocating TOTAL UNITS to each product based on EXPECTED UNITS PROPORTION = 6:14
6
Alligators to be produced for Breakeven = 91489 x
20
= 27446 units

182
 14
Dolphins to be produced for Breakeven = 91489 x
20
= 64042 units

So, Toy Crafts has to produce 27446 toy alligators and 64042 toy dolphins for breakeven.
C. The total number of toys needed to break even in (a) is different from the number in (b)
and lower also. This is due to the reason as weighted contribution per unit has increased;
fixed cost spreads over greater number of rupees letting the breakeven to be achieved
early. Perhaps (b) sales mix is more efficient and gives the firm a hint to produce toy
dolphins more as contribution per unit of a toy dolphin is also higher.

Table 1:

Total Revenue = Total Expenses

(Qty x Unit Price) = (Qty x Unit Cost) + Fixed Exp
Qty x (Unit Price- Unit Cost) = Fixed Exp
Qty x Gross Margin (or Profit) per Unit = Fixed Exp
✞✁✂✄☎✆✂✝✄✟✠✄✠
B.E. Qty =
✡☛☞✠✠ ✌✍☛✎✁✟ ✏✄☛ ✑✟✁✒

Table 1.1:

Here are some more examples for practice

Let us look at a manufacturing plant that produces four different types of machine tools and
their cost, price and BE Qty. The fixed costs are allocated taking in to consideration the
utilization of common resources for different products.
Here is the basic data:
Products: A, B, C and D
Selling Price: `100,000; `50,000; `70,000 and `200,000 respectively
Variable Cost: `30,000; `25,000; `30,000 and `100,000 respectively
Allocated Fixed Expenses per month: `350,000; `250,000; `1,000,000 and `1,500,000 respectively
Computation of Break Even Level would show the following.
A B C D
Unit Selling Price `100,000 `50,000 `70,000 `200,000
Unit Variable Cost `30,000 `25,000 `30,000 `100,000
Gross Profit per Unit `70,000 `25,000 `40,000 `100,000
Fixed Exp Per Month `350,000 `250,000 `1,000,000 `1,500,000
BE Qty per Month 5 10 25 15

183
 ✁✂✄ ☎✆✝✞✟✂✠ ✄✁✡ ☛✠☞✡ ✌ ✍✎✏✎✍✑ ✒✓ ✁ ☎✁✆✠☛✂✟✍✁✆ ☎✆✝✞✟✂✠ ✂✝✔✡☛✡✠✎✔✠✍✕ ✓✁☛✍✡ ✠✝ ✖✝✏✎ beyond the BE
level, then it is a candidate for some management discussion ✗ how to increase sales or reduce
costs (variable as well as fixed) etc. If all else fails, then dropping the product is the preferred
management action.
BE analysis helps in such decision making. Please note that such decisions are product related
and not business related.
Exercise for practice
Illustration 1: Textile shop - please calculate breakeven point.
Garments sold are silk saris, cotton saris, suit materials, kids wear.
Selling prices (in ) are:
Silk saris: `3,500/sari
Cotton saris: `900/sari
Suit materials: `1,800/suit
Kids wear: `450/wear
Variable cost:
Silk saris: 1,050 pieces
Cotton saris: 270 pieces
Suit materials: 540 pieces
Kids wear: 135 pieces
Allocated fixed expenses:
Silk saris: `2, 45,000/-
Cotton saris: `15, 7500/-
Suit material: `63,000/-
Kids wear: `70,875/-

Importance and use of cash flow projections

Cash (or money, which means both currency and checks) is the lifeblood of every business. It is
the most important asset for the operations of a business. Cash Flow refers to the movement of
money in and out of a business during a specific period of time. It is a record of a company's
inflows and outflows. Cash inflow is defined as the movement of money into a business and
cash outflow is defined as the movement of money out of a business. As you have seen in
earlier lessons, there are various ways in which money comes in to and goes out of business.
Cash Flow Projection shows how cash is expected to flow in and out of your business. For
you, it's an important tool for cash management, letting you know when your outflows are too
high or when you might want to arrange short term investment to deal with a cash surplus. As
part of your business plan, a Cash Flow Projection will give you a much better idea of how
much capital investment your business idea needs.

184
Please do not confuse a Cash Flow Projection with a Cash Flow Statement. The Cash Flow
Statement shows how cash has flowed in and out of your business. In other words, it describes
the cash flow that has occurred in the past. The Cash Flow Projection shows the cash that is
anticipated to be generated or expended over a chosen period of time in the future.
Cash Flow Statement, like Balance Sheet and Income Statement, deals with the past. It does not
help in managing the current, day to day requirement. Cash Flow Projection, on the other hand,
is a very critical management tool for the successful operation of the business.

Why cash flow projection?

Every business must want to manage its affairs in a very efficient manner. Which means it must
pay its suppliers as per agreed terms, pay the employees their wages on stipulated dates, pay
government levies etc as per rules, procure services and pay for the same, pay utility bills & rent
etc on time. The list is endless. Similarly it must collect what is due to it also in a timely manner.
It should strive to sell more so it can collect more.
Very often, when business is expanding, your outflows can be more than in your inflows. This
is so because there is always a lag between your spending (on raw materials, labor etc) and your
receiving the sales revenue. Receipt of sales revenue may be delayed because you might have
given credit or you have produced ahead of the sales (to cater to the high demand during
festive season) and are temporarily holding finished goods stock. In such situations, you should
be equipped with sufficient information to be able to arrange for needed funds.(More on this in
Working Capital lesson).
Very nature of any business is uncertainty. You base your calculations on certain (hopefully
realistic) assumptions. You plan the funds required using these assumptions. However, your
actual performance, say of sales, could be higher or lower than your plan. It will rarely be
exactly per plan. Or your collection from credit customers has lagged and you are running short
of funds. There could be many other reasons as to why your well laid out funding plan has
gone for a toss.
To avoid such situations and be on top of things, reviewing your projections periodically and
recasting the future based the current status (and not assumptions of the past) and what is
likely to happen in the near future is very crucial. Cash Flow Projections is not a static
document. It must be used as a dynamic tool.
An important question that arises is about the frequency and period (unit of time) of preparing
Cash flow projections. The answer depends on the purpose for which the projection will be
used.
If it is for a Business Plan (to attract investors and lenders), it will be prepared at the initial
stage ✁ monthly for the first year, quarterly for the next two years and annual thereafter.
These projections are not of much use for day to day cash management but meant for
demonstrating the fluctuating need of the short term funds (working capital or overdraft
facility). In fact, it almost takes the form of Cash Flow Statement and because it is for the
future, it is also referred to as Pro-Forma Cash Flow Statement. (Pro Forma, a Latin word,
means potential or expected in relation to a planned act).

185
 If it is for running the day to day operations, then the projections would cover a much
shorter period of say 3 to 6 months (13 to 26 weeks). The unit of time could be a month or
even a week. The length of the period is closely related to the volatility of the business and
✁✂✄☎✆ ✝✞✟✠✟✡☛ ✡✁ ☞✁✌✄✍✝✆✡ ✝✍✍✎✌✝✡✄✠☛✏
Once you have decided on the frequency of preparing a Cash Flow Projection, say weekly
(period) to cover 13 weeks (horizon), or monthly to cover 6 months or even daily to cover a
month, develop a format that suits your business. While there are generic formats, it will be
helpful to develop one appropriate for your business, keeping the generic ones in mind.
As you would be preparing this projection on periodic basis, please make sure that when
✁✂✄ ✑✒✄✌✟✁✓✔ ✟✆ ✁✕✄✌✖ ✟✡ ✟✆ ✓✌✁✒✒✄✓ ✝✂✓ ✝ ✂✄✗ ✒✄✌✟✁✓ ✟✆ ✝✓✓✄✓✖ ✘✄✄✒✟✂✙ ✡✚✄ ✠✄✂✙✡✚ ✁☞ ✡✚✄
horizon intact.
How accurate a Cash Flow Projection is depends on the period and horizon involved. A
forecast covering the next 30 days could be taken as extremely reliable as the payments due
to be made and received during that time may already be known. This means that the
forecast will be extremely accurate unless there are unforeseen issues such as a customer
going out of business before paying their bills. A forecast for the next 12 months may be less
reliable as it will include estimates of future sales. This does not make the forecast
worthless: even if overall sales are unpredictable, a business owner may still have a very
good idea of seasonal variations.

How to develop a cash flow projection?

Based on your business charateristics, decide on the frequency & period (day, week or
month) as well as horizon (month, 13 weeks or 6 months).
Develop the format, with items appropriate for your business, which will be used for
developing the projection. You may take help from the formats attached here as sample.
A projected cash flow begins with the existing cash balance for the business. It then lists the
sources of inflow and the anticipated payment dates. For example, if you supply goods on
credit, you will know at the start of February that you will receive a certain amount during
the month covering sales from January ✛ based on credit terms. You may have other inflows
✛ interest on your deposits, sale of scrap,rent from space sub-let etc. In this manner, you add
up all your inflows.
The statement then looks at forthcoming expenditure. Some of this will be a fixed, regular
sum such as staff costs. Other expenses will be known but only payable at certain times,
such as taxes. There will also be variable costs such as buying stock or materials.
Where payment dates are variable, it is usually safest to work on the basis that you will pay
suppliers as soon as possible but not receive payment from customers until the last possible
date. In short, be conservative in your assumptions.
Adding all outflows then enables you arrive at the surplus or deficit for the period. This,
when combined with the opening balance, leads to deriving the closing balance ✛ which
becomes opening balance for the next period.

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Budgeting & managing the finances
What is financial management?
Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.

Objectives of financial management

The financial management is generally concerned with procurement, allocation and control of
financial resources of a concern. The objectives can be-
Main objective of Wealth maximization of sha ✁✂✄☎✆✁ ✝✞ ✟✁✠☎✡✂☛

1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost.

To plan a sound capital structure-There should be sound and fair composition of capital so that
a balance is maintained between debt and equity capital as well as long term and short term
uses and sources.

Process of financial management

There are three key elements to the process of financial management:
1) Financial planning
Management need to ensure that enough funding is available at the right time to meet the
needs of the business. In the short term, funding may be needed to invest in equipment
and stocks, pay employees and fund sales made on credit.
In the medium and long term, funding may be required for significant additions to the
productive capacity of the business or to make acquisitions.

2) Financial control
Financial control is a critically important activity to help the business ensure that the
business is meeting its objectives. Financial control addresses questions such as:
☞ Are assets being used efficiently?
☞ Are the businesses assets secure?
☞ Does management act in the best interest of shareholders and in accordance with
business rules?

3) Financial decision-making
The key aspects of financial decision-making relate to investment, financing and
dividends:

187
 Investments must be financed in some way ✁ however there are always financing
alternatives that can be considered. For example it is possible to raise finance from
selling new shares, borrowing from banks or taking credit from suppliers
A key financing decision is whether profits earned by the business should be retained
rather than distributed to shareholders via dividends.
If dividends are too high, the business may be starved of funding to reinvest in
growing revenues and profits further.
Focus of our discussion in the remaining paragraphs would be on planning and
control aspects.

Budgeting
One of the important tools for good financial management (i.e. planning and controlling) is the
budgeting process.
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allocates the money for different items like grocery, rent, Easy monthly installments for housing
loan, school fees, entertainment etc. The idea is to make sure you monitor your expenses and
stay within the available resources. School administration allocates periods for different subjects
and various activities, within the overall time available for contact purposes. Students should
allocate (read budget) time for studying different subjects, based on the need. So we all
understand what budget or budgeting means.
French word bougette, meaning purse (so obviously referring to money), is the origin of the
word budget. Though it might have started with only money, today we use it in context of
many resources as seen above.
For any business, a budget is a quantitative expression of a plan for a defined period of time. It
may include planned sales volumes and revenues, resource quantities, costs and expenses etc.

Essentials of budget include:

✚ To control resources
✚ To communicate plans to various responsibility center managers.
✚ To motivate managers to strive to achieve budget goals.
✚ To evaluate the performance of managers
✚ For accountability

Types of budgets include

✚ Sales budget ✁ an estimate of future sales, often broken down into both units and currency.
It is used to create company sales goals.
✚ Production budget ✁ an estimate of the number of units that must be manufactured to meet
the sales goals. The production budget also estimates the various costs involved with
manufacturing those units, including labor and material.

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 Capital budget - used to determine whether an organization's long term investments such
as new machinery, replacement machinery, new plants, new products, and research
development projects are worth pursuing.
Cash flow/cash budget ✁ a prediction of future cash receipts and expenditures for a
particular time period. It usually covers a period in the short term future. The cash flow
budget helps the business determine when income will be sufficient to cover expenses and
when the company will need to seek outside financing.
Marketing budget ✁ an estimate of the funds needed for promotion, advertising, and public
relations in order to market the product or service.
Project budget ✁ a prediction of the costs associated with a particular company project.
These costs include labour, materials, and other related expenses. The project budget is
often broken down into specific tasks, with task budgets assigned to each. A cost estimate is
used to establish a project budget.
While budget is the final product, the process of arriving at a budget is the budgeting process.
Is there only one way to prepare a budget or are there different ways and what are their pros
and cons?
Let us review what Inc. Magazine has to say on this

Budgets and budgeting

In the broadest sense, a budget is an allocation of money for some purpose. Modern formal
budgets not only limit expenditures; they also predict income, profits, and returns on
investment a year ahead. They have evolved into tools of control and are also used as a means
of determining such rewards as profit-sharing and bonuses. Unless the budgetary process is
managed with extreme skill and care, the very virtues of budgeting can turn into negatives

Budgeting as a process
In large corporations, budgeting is a collective process in which operating units prepare their
plans in conformity with corporate goals published by top management. Each unit plan is
intended to contribute to the achievement of the corporate goals. Unit managers prepare
projections of sales, operating costs, overhead costs, and capital requirements. They calculate
operating profits and returns on the investment they intend to use.
The budget itself is the projection of these values for the next calendar or fiscal year. As part of
this process, each unit presents its plans and budget to a reviewing upper management panel
and may, thereafter, make whatever changes result from instructions from or negotiations with
the higher level.
Texts presenting, documenting, and defending the rationales underlying the numbers are
usually part of the planning document. Approved budgets then become the road-map for
operations in the coming year. Ideally monthly or quarterly budget reviews track performance
against the budget. As part of such reviews, changes to the budget may be approved. At year-
end managers are judged by their performance against the budget.

189
Benefits of budgeting
For startup entrepreneurs, a budget is like a roadmap that can help them set goals and assess
the validity of their business concept.
For established small businesses, a budget can be used to take the pulse of the business,
determining how the business is performing through the years, and helping identify possible
future investments.
By regularly consulting a budget, business leaders can compare actual figures and catch
potential business shortfalls or other problems early. Budgets can also be instrumental in
winning over investors, convincing banks your business is a good loan risk, or bringing on new
partners or customers.
The single-most potential benefit of formal budgeting lies in ensuring that responsible
managers take time each year (and then at fixed intervals throughout the year) in thinking
about their operation by looking at all of its aspects. Budgeting creates a comprehensive picture
of the future and makes both opportunities and barriers conscious. This foreknowledge then
helps guide day-to-day activities.

Cost of budgeting
The chief cost of the budget process is time. In some corporations the process takes on a life of
its own and becomes a convoluted exercise of excessive complexity which, moreover, prevents
unit managers from doing any thinking: their time is consumed in efforts to comply with a vast
array of requirements dictated from above.
Much of the negative attitude that has developed concerning this activity has its roots in
unnecessary bureaucratic impositions on the one hand and unreliability because of rapid
change a few months out.

Forms budgeting process

The two dominant forms of budgeting processes are traditional and zero-based. Business
planning is usually a combination of the two. Traditional budgeting is based on a review of
historical performance and then the projection of such findings to the future with modifications.
If inflation is high, for instance, cost trends of the last several years are projected forward but
with adjustments both for inflation and for projected growth or decline in business activity.
Historical sales patterns, using established trends in sales growth, are projected; new sales from
planned new product introductions are then added. Zero-based budgeting is the creation of a
completely new budget from the ground up as if no history existed. When using this method,
the operation must justify and document every item of expenditure and income anew.

Table 2:

For the small business, different types of budgets can be drafted to monitor various financial
aspects of the business.
✁ Operational budget - An operational budget is the most common type of budget used. It
forecasts and tries to pretty closely predict yearly revenue and expenses for a business.

190
 This budget can be updated with actual figures on a monthly basis and then you can revise
your figures for the year, if needed.
Cash flow budget - A cash flow budget details the amount of cash you collect and pay out.
This is generally tallied on a monthly basis, but some businesses tabulate this weekly. In
this budget, you track your sales and other receivables from income sources and contrast
those against how much you pay to suppliers and in expenses. A positive cash flow is
essential to grow your business. (Also see chapter on importance and use of Cash Flow
Projections).
Capital budget - The capital budget helps you figure out how much money you need to
put in place new equipment or procedures to launch new products or increase production
or services. This budget estimates the value of capital purchases you need for your
business to grow and increase revenues.

Budgeting is an important and integral part of running a business. Various future strategies
planned in the business must be translated in to numbers ✁ sales qty and revenue, costs,
resources required, fixed expenses and many other. The common denominator is money and
the vehicle is budget, which is the result of budgeting process.
Budget and budgeting help one manage the business by numbers and not the seat of pants. One
of the reasons businesses fail is due to lack of discipline ✁ in terms of strict budgetary process.

Working capital
While one needs a good idea and a well laid out implementation plan, for the business to run
successfully it needs adequate capital (among other things).

Need for capital

a) For procuring or investing in longer term assets ✁ land, building, machinery, equipment
etc. These are typically known as Fixed Assets. Once pressed in to service, they last over a
reasonably longer period. These are placed in service for carrying out the main activity of
the business ✁ production and sales or service etc ✁ and are not traded or sold to receive
money (except when they have outlived their life). In other words, money invested on
these items does not result in direct cash inflow for the business.
b) For buying raw materials, packing materials, paying rent, insurance premium, utility bills,
wages and salaries and for many other services and/or materials used in the production
or service. In other words this is the money needed for the day-to-day operations of the
business.

Money needed to fund the normal, day to day operations of a business is known as the
Working Capital. It ensures you have enough cash to pay your debts and expenses as they fall
due, particularly during start-up period as very few new businesses are profitable as soon as
they open their doors. It takes time to reach breakeven point and start making a profit.
Our discussion here is limited to Working Capital ✁ how to compute, where to source it and
such other related issues.

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Inventory control and economic order quantity
Inventory
The word inventory conjures up the image of collection of things and a list of those items in our
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list of movies seen etc. While that is the general meaning of the term inventory, in the present
context we will be talking of raw materials, semi-finished goods, consumables, spare parts, finished
goods etc. In other words, inventory are required directly or indirectly to make a sale (of the end
product) and may also represent different stages in the process of getting the final product.
Inventory, in this context, deals with tangible items. One could have inventory of intangible
items like quality or traits one possesses, or happy memories of childhood etc. Those are not the
subject matter of our discussion. Similarly, our discussion would be limited to two types of
✛
businesses manufacturing and trading (wholesale or retail) and not service. In certain service
✛
industries there may be use of tangible material like spare parts in repair shop. But then, these
are two distinct businesses ✛ trading of spares and repair (which is a service). Various
consumables like rags, solvents, lubricants etc are required and they will get similar treatment
as other items being discussed here later.
In the accounting jargon, inventory refers to the value of all the items in the inventory list that is
owned by the business. Ownership is the determining factor. Location may be your premises or
✑☞✂✄✌✍ ✗✍☞ ✁✒☞✒✜ ✠☛✞✠ ✞✢☞✒ ✂✌ ✄✁✝✝☞✍☞✂✟☞☎ ✣✁ ✁✖✞✍✖✎ ✎✌✤ ✞✎ ☛✞✑☞ ✌✠☛☞✍ ✗☞✌✗✖☞✥✒ ✞✠☞✍✁✞✖ ✌✂
your premises. That is not part of your inventory (in terms of value), but you have
responsibility for that material.
There are different valuation methods for accounting purposes. We will not be dealing with
those issues here.

Control
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be specific to the situation or class. Any system that helps in ach ✁☞✑✁✂✏ ✔☞✦✗☞✟✠☞✄ ✧☞☛✞✑✁✌✍✘ ✁✒ ✞
control system. So an inventory control ✒✎✒✠☞ ✁✒ ☞✦✗☞✟✠☞✄ ✠✌ ☛☞✖✗ ✞✟☛✁☞✑☞ ✔✄☞✒✁✍✞✧✖☞ ✧☞☛✞✑✁✌✍✘
✌✝ ✠☛☞ ✁✂✑☞✂✠✌✍✎ ✁✠☞ ✒☎ ★✁✏☛☞✍ ✠☛☞ ✟✌✂✝✌✍ ✞✂✟☞ ✚✁✠☛ ✠☛☞ ✔✄☞✒✁✍✞✧✖☞ ✧☞☛✞✑✁✌✍✘ ✤✒✁✂✏ ✞ ✒✎✒✠☞ ✡
that system can be labeled as a better system.
What is the desirable behavior of any inventory item? Intuitively, we can say that there should
never be any stock out. In other words, moment the need (demand) arises we should be able to
✛
supply the item without losing any time. If this was the only expectation, then it would be
very simple ✛ ☛✌✖✄ ✁✂ ✒✠✌✟✢ ✔☛✤✏☞ ✩✤✞✂✠✁✠✎✘ ✝✌✍ ✞✂✎ ✞✂✄ ✞✖✖ ☞✑☞✂✠✤✞✖✁✠✎✪ ✫✤✠ ✠☛☞✍☞ ✁✒ ✞✂✌✠☛☞✍
✛
expectation it should be at the lowest possible cost! Now that could be a challenge.
A well conceived and thought through system can help in achieving the control of inventory.
Let us keep in mind that there are different aspects of control ✛
physical and fiscal (or
monetary). We will discuss both in subsequent paragraphs.

194
Items that make up the inventory
For a good inventory control system, we need to take care of both physical and fiscal aspects.
But before we deal with those two, let us understand the nature of items that make up the
inventory.
Stock keeping unit (SKU) code
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signifies certain aspects of the item. It can be color, size, weight or any other characteristic
that is of importance in its use. The SKU code can be a combination of alpha and numeric.
SKU is the very basic unit for data collection and further manipulation for deriving
meaningful statistics and decision making. Bar Codes and RFID (Radio Frequency
Identification) tags are used in tracking etc using SKU.
Motley crowd
While we refer to inventory in one monetary value in the accounting statement, behind it
are myriad numbers of SKUs ✒ that can be classified as Raw Materials, Packing Materials,
Spare Parts, Semi Finished Goods (or WIP ✒ Work In Progress), Finished Goods,
Consumables etc. The SKU code should definitely help us identify which class the item
belongs but not much else. The treatment for each class will have to be different, keeping in
mind some of the factors identified here.
Space
Space requirement for all items will not be identical; neither will it have proportionate
relationship with the cost of the item. There can be many bulky items with low value (For
example, straw for use in paper mill) as well as high value items with low volume (For
example, Diamonds). Good Inventory Control system will have to take due note of this.
Value
Not all SKUs have same value. See more about the value distribution under Pareto Principle
later.
Lead time
Lead time to manufacture or procure an item depends on many factors. Combined effect of
these factors - like standard or special raw material, processing time, scheduling of
machines, distance between source and user point etc - makes up the lead time for an item.
Also, it is not always the same for a given item; variability in different factors contributing
to the total lead time can make the lead time vary.
Standard vs made to order
Some of the items in the inventory could be commodity items ✒ no significant differentiation
and hence easy to substitute, or many suppliers produce to same specifications and hence
easy to choose from. Others may be specifically made to order and hence possibly limited
sources to order from.

195
 Seasonality of supply
If the item is an agricultural product (grains, vegetables, fruits etc.), the supply would be
seasonal. This can play a role in designing the inventory control system.
Demand not uniform or not predictable
Demand for an item could be seasonal ✁ weather, festival seasons, events, school opening
etc can play a significant part in this. In some cases it is easy to forecast ✁ raw material for
items produced to order; but in others not so easy ✁ requirement of a spare part.
Shelf life
Items like vegetables, fruits, flowers and fish are perishable in nature. This calls for special
storage conditions and equipments ✁ cold storage, freezers etc. These have financial
implications. Similarly some of the manufactured food or medicinal products have expiry
dates ✁ beyond which they are not fit for consumption. This imposes certain constraints on
inventory management.
Safety aspects
Some of the items are hazardous in nature and special precautions have to be taken in their
storage. Examples are ✁ gasoline, other combustible items, some hazardous chemicals etc. In
a factory manufacturing safety matches, phosphorous and potassium chlorate are not stored
in the same or even adjoining areas, for fear of accidental mix up. In fact, even their path of
delivery to the respective end use points do not cross.
Obsolescence
Due to advancement in technology, certain items may not be used and their demand drops
off.
These are the various characteristics of SKUs that have to be kept in mind while designing
inventory control systems ✁ one size will not fit all. Systems (rules and guidelines) will have
to be different for raw materials, consumables, spare parts, packing materials etc. We will
discuss some more about these later. But let us now look at one common thread that can run
through systems for these different classes or categories.

Pareto's Principle and ABC analysis for control

Whether or not you're familiar with the economic principle known as Pareto's Principle, you
may have observed its effects. This principle holds that in a given system, a relative handful of
"causes" will produce the majority of "effects." For example, one may find that 20 percent of
customers are responsible for 80 percent of sales, or that 30 percent of the product lines result in
70 percent of returns.
The principle is named for Vilfredo Pareto, an Italian economist who studied land ownership in
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80 percent of the land. Legend has it that he further developed the theory upon observing that
20 percent of the pea pods in his garden produced 80 percent of the peas. For this reason,
Pareto's Principle is often referred to as the "80/20" rule. There's nothing "magic" about the 80
percent figure, though. Many business systems do in fact show an 80/20 relationship; others

196
don't. But the overall point still stands: A relatively handful of things will generate the bulk of
✁✂ ✄✂☎✆✝ ☎ ✞✄ ✟✠ ✡✠☛ ☞✄✞✆✌ ✍✟✝✝ ✁✡✎✂ ✏✎✟ ✡✝ ✑✂✍ ✡✠✒ ✄✟✎✟✡✝ ✓✡✠☛✔✕

Pareto's law has applications throughout science as well as business, including inventory
control, where it forms the basis for a technique called ABC analysis.
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✪✘✦✩✘★✤ ✤✗✚✤ ✫✚✤✤✘✦✭✳✴

Examining inventory
Businesses that maintain an inventory of goods to sell to customers or for use in manufacturing
commonly observe a Pareto distribution in the value of that inventory. For example, a company
might determine that 20 percent of the products in its inventory account for 80 percent of the
total value of inventory. Managing inventory is time-consuming and expensive. By
understanding that a few items represent the vast majority of inventory value, a company can
get the most bang for its buck by focusing its inventory control efforts on those particular items.

ABC analysis
The inventory control technique known as ABC analysis builds on Pareto's Principle. In ABC
analysis, a company reviews its inventory and sorts all SKUs into three categories, called "A" ,
"B" and "C" items. The typical breakdown might look like this: "A" inventory: 20 percent of
SKUs, 80 percent of value. "B" inventory: 30 percent of SKUs, 15 percent of value. "C" inventory:
50 percent of SKUs, 5 percent of value. Again, a particular company's numbers may be different,
but we should be able to discern a similar kind of pattern.
Once a company has conducted its ABC analysis, it can devise an inventory-control strategy that
focuses effort where it will have the greatest effect. Items in "A" inventory are tightly controlled,
meaning the company keeps close tabs on how much it has in stock; pays close attention to
current demand and forecasts for future demand; and carefully plans its ordering so that it
neither runs out nor winds up with too much excess inventory that can become obsolete. Items in
"B" inventory are also watched closely, but the company reviews its ordering strategy less often.
Since items in "C" inventory are the least expensive, the company can order them in bulk and
exercise minimal controls; all that really matters is that the company doesn't run out.
A - outstandingly important; B - of average importance; C - relatively unimportant as a basis for
a control scheme. Each category can and sometimes should be handled in a different way, with
more attention being devoted to category A, less to B, and still less to C.
Thus, applied in the context of inventory, it's a determination of the relative ratios between the
number of items and the currency value of the items purchased/consumed on a repetitive basis:

✵ 10-20% of the items ('A' class) account for 70-80% of the consumption.
✵ The next, 15-25% ('B' class) account for 10-20% of the consumption and.
✵ The balance, 65-75% ('C' class) account for 5-10% of the consumption.
'A' class items are closely monitored because of the value involved (70-80%!).

197
Suggested policy guidelines for A, B & C classes of items

(A) items (High (B) items (Moderate (C) item (Low

Consumption Value) Consumption Value) Consumption Value)

Very strict consumption control Moderate control Loose control

No/very low safety stock Low safety stock High safety stock

Phased delivery (Weekly) Once in three months Once in 6 months

Weekly control report Monthly control report Quarterly report

Maximum follow up Periodic follow up Exceptional

As many sources as possible Two or more reliable Two reliable

Accurate forecasts Estimates on past data Rough estimate

Central purchasing /storage Combination purchasing Decentralised

Max. efforts to control LT Moderate Min. clerical efforts

To be handled by Sr. officers Middle level Can be delegated

ABC (Always Better Control) analysis can help you control your inventory better.

Economic order quantity

Keeping aside various other aspects (like security, safety etc) and considering only the
monetary or financial implications, how does one design an effective Inventory Control System?
One of the objectives of such a system would be to ensure that there is no stock-out situation. If
t ✁✂ ✄☎✆☎ ✂ ☎ ✝✞✟✠ ✡✆☛✂☎✆☛✁☞ ✂ ☎✞ ☛✂ ☛✌ ☎✁✌✠ ✂✝ ✝✆✍☎✆ ✎✟✁✆✏☎ ✑✂✠✒ ✁✞✍ ✓☎ ✔☎✆✠ ✌✁✕☎✖ ✗✝✄☎✔☎✆☞ ✂ ☎✆☎
is cost associated with ordering and holding inventory.
Assuming that the future demand is known, one needs to determine when to place an order
(Reorder Point) and how much to order (Order Quantity). Reorder point takes due note of the
lead time and demand during lead time. For example, if procurement or manufacturing lead
time is 2 months, and demand during this period is expected to be 300 units per month, then an
order is to be placed when the stock or inventory level reaches 600 pieces. This is the reorder
point or level.
Reorder formula = Average daily usage rate × Lead time in days
Under utopian situation, the new quantity will arrive, just as the stock reaches zero. Real life is
not that simple or straightforward. There is variability in the rate of demand (or consumption)
as well as in the supply or manufacturing lead time etc. Therefore, it may reach a zero stock
status, before the supply arrives. To cater to such variability, the concept of safety stock is used.
In this particular case, 150 may be added as safety stock. The reorder level then would be 750
pieces i.e. place new order when the stock level reaches 750.

198
For every item, a level of safety stock is determined keeping the possible variation in lead time
and variation in demand during lead time in mind. As we will see later, the Safety Stock has no
impact on the Economic Order Quantity. However, both are essential for good inventory
control system.

Costs
There are two costs involved: One for Ordering (which includes paperwork for placing order,
receiving, inspection, warehouse handling etc) and another for holding the inventory or
Inventory Carrying Cost (which includes cost of money tied up i.e. interest, space cost,
insurance etc).

Let us try to figure out the way to determine EOQ (Economic Order Qty).

The following model assumes:

1. Future demand is known and is uniform throughout the period.
2. Unit price of item does not vary with qty ordered. (In real life, the price varies. We will
then have to use a different model. That is not discussed here.)
Let us use following symbols:
D: Annual demand for the item (SKU)
P: Cost of placing and receiving one order (does not include purchase price)
C: Inventory carrying cost per unit. This may be derived by multiplying the unit price of the
item by the carrying cost expressed as %age of the unit price.

S: Safety Stock level for the item.

Q*: Economic order quantity
✟
✁ Total number of orders being placed during the year will be =
✂
✄✟
✁ Total ordering cost =
✂
✂
✁ Average inventory = S +
✡
✂
✁ Inventory carrying cost = C x (S + )
✡
✄✟ ✂
Total annual cost = + [C x (S + )]
✂ ✡
As you would recollect, the safety stock S is not dependent on Q. Irrespective of the value of Q,
value of S depends on variability of lead time and demand rate. So it can be removed from the
equation and get a modified total cost as follows:
✄✟ ✂
Modified annual cost = + [Cx ]
✂ ✡

199
Table 4:

PD ✁ ✝ Q✞
The ordering cost ✂ ✄ and inventory carrying cost ✟ C x ✠ equal each other when the total
☎ Q ✆ ✡ 2☛
cost is the lowest.
PD Q
☞Cx
Q 2
or
2PD = CQ2
or
2PD
Q✌
C
Therefore,
Those who have background of calculus can easily see that, the EOQ is the value when
derivative of modified annual cost is zero. Therefore, differentiating the equation, with respect
to Q,
PD C
O✍ ✎ 2
✏
Q 2
or
PD C
2
✑
Q 2
or
2PD 2
✒Q
C
or
2PD
Q✓
C
Formula for calculating EOQ =
D: Annual Demand for the item (SKU)
P: Cost of placing and receiving one Order (does not include purchase price)
C: Inventory carrying cost per unit. This may be derived by multiplying the unit price of the
item by the carrying cost expressed as %age of the unit price.
S: Safety Stock level for the item.
Q: Economic Order Quantity
2PD
Q✓
C

200
Couple of numerical examples may further clarify the formula
Example 1:
Annual qty of jeans sold by a shop is 1,200 at the rate of ` 100/- per month. Cost of placing an order and
receiving goods is ` 500/- per order. Inventory holding cost is ` 30/- per annum. What is the economic
order Qty for the shop keeper?
Here, D = 1,200; P = 500 and C = 30.
So 2 x P x D = 12,00,000
This divided by 30 = 40,000.
Square root of which is = 200
So the EOQ is 200 jeans.

Example 2:
A book shop sells pens 30,000 qty per year. Demand is uniform. Purchase cost is ` 6/- per pen. Holding
cost per annum is 20% of purchase cost. Ordering cost is ` 500/- per order. What should be the EOQ for
the shop keeper?
Here, D = 30,000; P = 500 and C = 1.2 (20% of 6)
So 2 x P x D = 3,00,00,000
This divided by 1.2 = 2,50,00,000
Square root of which is = 5,000
So the EOQ is 5,000 pens.

Final note on inventory control and EOQ

Inventory control, as explained earlier, has many facets ✁ monetary, physical, safety and many
others. It is crucial to understand these aspects in designing an inventory control system. ABC
system is one such. There are other different system, including Just-in- time (JIT), perpetual
inventory etc. These have not been elaborated here.

Economic ordering quantity is a key factor (but not the only one) in managing any inventory.
However, the formula we have arrived at in the earlier pages is a simplified one. There are more
advanced formulae available ✁ that take care of seasonality of demand, fluctuations in lead time
as well as price breaks based on quantity ordered etc. Those are beyond the scope of current
discussion.

Return on investment and return on equity

Measure of profitability
The purpose of any economic activity is earning profit. At its very basic level, profitable
business means earning more than what one spends. Of course, there are nuances to the words
✂✄☎✆✝✞✝✟✠ ☎✝✡ ✂☛☞✄✝✡✞✝✟✠ ✌✍ ✎☎✏✄ ✞✌ ✎✄☎✝✞✝✟✑✒✓✔
While profit is the motive, question arises as to how to measure or compare profit from one
activity or project with profit from many others. Suppose we spend ` 1,000/- and earn a profit

201
of ` 400/- in one case and in another case spend ` 100,000/- and earn profit of ` 10,000/- which
makes more profit? The answer obviously is- the later one. However, if we ask which is more
profitable then the answer is - the first one. That is because; relationship between profit and
spending is being compared. And we have not even figured the timing issues which may exist
one may be in six months and another in 2 years!
So the need arises for some common understanding and yardstick or measurement technique.
Return on Investment (ROI) and Return on Equity (ROE) are two such critical profitability
ratios. These measures are applicable to individual projects, such as the purchase and
subsequent sale of an apartment, a small grocery business or a multinational conglomerate.
Therefore, it pays to understand ROE and ROI.

Return on investment
Return on investment equals the net income from a business or a project divided by the total
money invested in the venture multiplied by 100.

Net Profit
ROI = x 100
Total Capital Invested

If, for example, you spend ` 100,000/- to open a grocery shop and make a net profit of `
20,000/- in one year, your annual ROI equals (20,000/100,000) x 100 = 20 percent. When
calculating ROI, the investment will include not only what the investor spent out of his/her
pocket, but also all borrowed funds. In the example, the owner might have invested ` 40, 000/-
of his own money (equity) and secured a loan for ` 60, 000/-.

Return on equity
You can calculate ROE by dividing the net income by the equity of the investor and multiplying
the result by 100. In the example, the grocery owner has an equity stake of ` 40,000/- in the
business. He has borrowed ` 60,000/-. This will attract an interest of ` 6,000/- @ of 10% per
annum. The net profit, then would be ` 14,000/- (= 20,000 6,000). So, ROE is (14,000 / 40,000) x
100 = 35 percent. This means that for every Rupee of own money the owner put into the
business, he made 35 paisa. The ROI of 20 percent, on the other hand, means that for every
Rupee of combined assets and loans invested, the business yielded a 20 paisa average profit per
Rupee invested (equity plus loan).

Net Income x 100

ROE =
Equity

Which one to use? ROI or ROE:

Before discussing this, let us review an example.
Let us take the case of two people, A & B starting identical business and performing identically
in terms of sales, variable cost, fixed costs etc. The only difference is A did not borrow any
money and B did. Interest rate is 10% per annum. Here are some numbers for both A & B.

202
Table 5:

A (`) B (`)
Total investment = x 10,00,000 10,00,000
Source of funds
Equity = y 10,00,000 4,00,000
Loan = z 6,00,000
Total 10,00,000 10,00,000
Interest rate per annum 10%
Income statement for 1 Yr
Sales revenue (a) 7,00,000 7,00,000
Less cost of goods sold (b) (3,00,000) (3,00,000)
Gross margin c= (a-b) 4,00,000 4,00,000
Fixed expenses
Salary etc 2,00,000 2,00,000
Rent, utility etc 50,000 50,000
Interest 60,000
Depreciation & amortization 10,000 10,000
Total fixed expense= (d) 2,60,000 3,20,000
Profit before tax = (c-d) 1,40,000 80,000
Tax @ 20% =e 28,000 16,000
Profit after tax = f= (c-d-e) 1,12,000 64,000
Some Ratios
ROI =(f/x) 11.2% 6.4%
ROE = (f/y) 11.2% 16%
EBITDA= (PBT + Int + Dep & Amrt) 1,50,000 1,50,000
EBITDA/investment 15% 15%
EBITDA/equity 15% 37.5%
EBITDA stands for Earnings Before interest, Tax, Depreciation and Amortization. This is
arrived at by adding interest, depreciation and amortization to PBT. See the section below on
EBITDA

203
In this example, we can see that B makes less profit (whether before or after tax) than A. This is
reflected in lower ROI for B. However, B has invested lesser amount than A and as a result,
when ✁ ✂✄☎✆✝✞✁ ✆✞✄✟✠✡ ✠☛ ✞✁☞✝✡✠✄☛ ✡✄ ✌✄ ☛ ✟✍☛✎✏✑ ✄✞ ✌✁✒✍✠✡✓✑✔ ✕ ✂✄☎✁✏ ✄✍✡ ✝✖✁✝✎ ✄✟ ✗ ✘ 16%
Vs 11.2%.
✙✄✞ ✝ ✡✞✍✁ ☎✁✝✏✍✞✁ ✄✟ ✖✄ ✌✄ ☛ ☎✄☛✁✓✑ ✠✏ ✚✁✠☛✛ ✍✏✁✎✔ ✜✢✣ ✠✏ ✝ ✛✄✄✎ ✠☛✎✠✂✝✡✄✞✤
✜✢✥✔ ✄☛ ✡✖✁ ✄✡✖✁✞ ✖✝☛✎✔ ✛✠✦✁✏ ✝☛ ✠☛✎✠✂✝✡✠✄☛ ✄✟ ✖✄ ✡✖✁ ✌✡✄✡✝☞ ☎✄☛✁✓✑ ✠✏ ✚✁✠☛✛ used.
EBITDA
The acronym EBITDA stands for earnings before interest, taxes, depreciation and amortization.
Why calculate EBITDA and what its utility is.
When financial statements are prepared, the results are a combination of different factors: some
are managerial decisions, others entrepreneurial and some others are government policies. To
measure or compare true effectiveness of one operation and the managerial decisions with
another one, the extraneous factors must be normalized. Let us review these.

Interest
If one business is started with all equity and another one with some loan, the second one will
have an interest element in its cost. This interest is strictly not because of the operational
✁✟✟✠✂✠✁☛✂✓ ✄✞ ✄✡✖✁✞ ✠✏✁✔ ✚✍✡ ✎✍✁ ✡✄ ✡✖✁ ✌✟✍☛✎✠☛✛ ✎✁✂✠✏✠✄☛✑✤ Adding back the interest to PBT,
takes away the effect of this funding decision.

Taxes
Taxes are levied by the government. If you are comparing profits of one period to another, the
✞✝✡✁✏ ☎✠✛✖✡ ✖✝✦✁ ✂✖✝☛✛✁✎✤ ✧✖✁✞✁ ☎✝✓ ✚✁ ✄✡✖✁✞ ✞✁✝✏✄☛✏ ✖✓ ✡✖✁ ✌✡✝★ ✡✞✁✝✡☎✁☛✡✑ ✠✏ ✎✠✟✟✁✞✁☛✡ ✟✄✞
two companies ✘ state taxes, special levies etc. The business owner or manger has no control
over these. To avoid distortion in the profit, tax component is added back to the profit.

Depreciation & amortization

There are different options available to depreciate (tangible asset) or amortize (intangible asset).
One company may use a particular method and another one a totally different one. One may
✘
write off slowly and another one fast both being allowed by the authorities. So to avoid
distortion due to differing practices being followed, Depreciation & Amortization is added back.
✘
When one wants to assess the efficiency of operations either for acquisition or comparison
with benchmarked operations or over different time periods, ability to generate cash by
business is crucial. EBITDA is one such measurement. It is one of the most widely used
measures for evaluating a business for acquisition etc.
Price for a business is often quoted in terms of a multiple of its EBITDA ✘ say (M) x (EBITDA).
M has numerical value that varies from industry to industry.
Note:
Valuation of business for buying or selling uses EBITDA as one of the criteria. Basic philosophy in this
✩✪✫✬✭✪✩ ✮✯✫✰✱✲✲ ✳✲ ✴✪✱✵ ✲✫✶✱✫✵✱ ✷✬✸✲ ✹ ✷✬✲✳✵✱✲✲✺ ✪✱ ✫✯ ✲✪✱ ✷✬✸✲ ✩✪✱ ✻✼✬✩✬✯✱ ✽✹✲✪ ✾✿✫✴✲❀ ✼✯✫✶ ✩✪✹✩

204
 ✁✂✄☎✆✂✂✝ ✞✆☎✟✆ ✠✡✆☛ ☞✌✆ ✍✄✎✎✄☎✏ ✠✑ ✒☞☛ ☞ ✓✔✁✎✠✄✒✎✆✕ of the EBITDA. However, there are timing issues
and people use concepts like DCF (Discounted Cash Flow) or IRR (Internal Rate of Return) etc. These are
beyond the scope of the current topics.

Illustration 1: Please calculate return on investment and return on equity.

You have newly started a beauty parlor business, you spend `1,50,000/- to open the parlor of
which you invested `70,000/- of your own money and borrowed a loan for `80,000/-. Interest
rate per annum is 7%. Sales revenue per month is `80,000/-. Cost of goods sold is `30,000/- per
month. Fixed expenses is `30,000/- (salary `20,000/-, rent and utility `10,000/-), depreciation
`3,000/- and tax @ 14%.
Illustration 2: Please calculate return on investment and return on equity.
You have newly started a restaurant business, you spend `10,00,000/- to open the restaurant.
You have invested `4,00,000/- of your own money and borrowed a loan for `6,00,000/-. Interest
rate per annum is 10%. Monthly sales revenue is `6,00,000/- and cost of goods sold is
`3,00,000/-. Fixed expenses per month `2,00,000/- (salary `1,50,000/-, rent and utility `50,000/-),
depreciation `10,000/- and tax @ 20%.

SUMMARY
✖ Cash flow refers to the movement of money in and out of business
✖ Cash flow projections show how cash is expected to flow in and out of business
✖ Financial management means planning, organizing, directing & controlling the financial activities
such as procurement and utilization of fields of the enterprise.
✖ Budgeting means allocation of resources
✖ Traditional budgeting is based on review of historic performance and the projection of such finding
to the future with modification.
✖ Zero based budgeting is the creation of a completion new budget from the ground up as is no history
existed
✖ Funds needed for day to day operation of business know as working capital
✖ The decision between buying the raw material and receiving the cash from the customer (in form of
✂☞✎✆✂✗ ✄✂ ✘☎✑✍☎ ☞✂ ✠✡✆ ✙✑✒✆✌☞✠✄☎✏ ✟☛✟✎✆✚
✖ Operating cycle is also reference to as the cash consumer cycle
✖ The requirement of working capital depends up length of operating cycle, sales policy, credit policies,
tax liabilities and nature of business
✖ Inventory control system is designed to bring about expected control over the inventory and its
utilization
✖ Pareto principle: The pareto principle (also known as the 80✛20 rule, the law of the vital few, and
the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from
20% of the causes.

205
ABC analysis: The ABC approach states that, when reviewing inventory, a company should rate
items from A to C, basing its ratings on the following rules:
A-items are goods which annual consumption value is the highest. The top 70-80% of the annual
consumption value of the company typically accounts for only 10-20% of total inventory items.
C-items are, on the contrary, items with the lowest consumption value. The lower 5% of the annual
consumption value typically accounts for 50% of total inventory items.
B-items are the interclass items, with a medium consumption value. Those 15-25% of annual
consumption value typically accounts for 30% of total inventory items.
Always better control can help you control you inventory better.
Economic order quantity: Economic order quantity (EOQ) is the order quantity of inventory that
minimizes the total cost of inventory management.
Recorder point: The reorder point ("ROP") is the level of inventory when an order should be made
with suppliers to bring the inventory up by the Economic order quantity ("EOQ").
Carrying cost: In marketing, carrying cost refers to the total cost of holding inventory. This includes
warehousing costs such as rent, utilities and salaries, financial costs such as opportunity cost, and
inventory costs related to perishability, pilferage, shrinkage and insurance.

✁✂✄ ☎✆✝ ☎✆✞✟✄✠✞ ✡✆☛☞ ✆☛ ✞✄ ✞✡✆✠✌✍✟ ☎✆✞✟✄✠✞ ✎✏✄✡✑✒✓

✔ Corneille

206
 REVIEW CROSSWORD PUZZLE

1B

4S

6 7V

D 9

10

11 C

12

Across:
2. Collective process in which operating units prepare their plans in conformity with
corporate goals published by top management.
3. Selling price per unit - cost price per unit
5. It takes place on intangible assets
6. Gain generated on an investment relative to the amount of money invested.
8. The concept by which monetary value of an asset decreases over time due to use, wear
and tear or obsolescence
9. The money needed to fund the normal, day to day operations of your business
10. Time between the initiation of a process and its completion
11. The movement of money in and out of a business during a specific period of time.
12. A party to whom money is owed

Down:
1. A plan that shows how much one can spend against what they earn over a given time
4. An estimate of future sales, often broken down into both units and currency.
7. Costs that vary depending on a company's production volume

207
 ✁✂✄☎ ✆✁✝✞☎✁
A. Answers to these questions should not exceed 15 words:
1. Explain the following terms with proper example:
✟ SKU
✟ Cash flow
✟ Cash inflow
✟ Cash outflow
✟ Re-order point
✟ Cash flow projection
✟ Cash conversion cycle
2. ✠✡☛☞✌✍✎✏ ✑✡✒ ✓✍☛✔☞✕ ✌✖☞ ✗✡✏✘✏ ✓✍☛ ✡ ✌☞✙✖✚✘✛✜☞✢ ✣✡✔☞ ✘✌✢
B. Answers to these questions should not exceed 30 words:
1. What is ABC analysis?
2. ✤✖✡✌ ✘✏ ✠✡☛☞✌✍✎✏ ✠☛✘✚✙✘✥✦☞✧
3. Differentiate between cash flow project & cash flow statement?
4. What is financial management? What is the main objective of financial management?

C. Answers to these questions should not exceed 75 words:

1. There are three key elements in the process of financial management. Explain them.
2. What are the key aspects of financial decision making?
3. What is a budget? What are the essentials of a budget?
4. Explain Inventory Control and state its objectives.

D. Answers to these questions should not exceed 250 words:

1. What is a budgeting process?
2. There is a Budget to suit every business and its need .Elucidate.
3. Explain the two dominant forms of budgeting process.
4. What is working capital? What is the need for a working capital?

E. HOTS (High Order Thinking Skills)

1. Calculate working capital Raja & Co. has the following items in its Balance sheet
Stock -50,000: Trade creditors ★ 32,000; debtors ★ 75000; cash ★ 1,00000 Dividend
payable ★ 50,000; Tax ★ 44,000; Short term loan ★ 61,000; Short term investments ★
76,000 Calculate gross and net working capital.
2. Ramu is buying and selling ice-cream. Explain his working capital requirement.

✩✩✩

208
Business is full of surprises. As an entrepreneur one may face situations that can catch them off
guard. Any situation has the potential to become, either a 'disaster' or an 'opportunity'.

Whether running a home-based business or a mid-sized venture, the first thing required is
money. One cannot imagine a world without money every day's life and every activity of
human being is dependent upon money.

Even, in a bid to minimize losses, it is essential to prepare for the "unexpected" by arranging
and protecting the resources. Thus, 'Finance' refers to funds or monetary resources needed by
individuals, business houses and the government. The significance of finance in enterprise is
elucidated like a lubricant to the process of production. It's one of the most important pre-
requisite to start an enterprise. Finance is the elixir that assists in the formation of new
businesses, and allows businesses to take advantage of opportunities to grow and expand. Right
from the very beginning i.e. conceiving an idea; finance is required to:
a) Promote or establish the business
b) Acquire fixed assets
c) Make market investigations
d) Develop product
e) Keep men and machines at work
f) Encourage management to make progress and create value.
g) Expand, diversify, improve and grow.
h) Be enough to meet unexpected/unplanned business expenses.

'Production', 'Marketing', and Financing', deemed as the most important factors for any
business survival, rates "Financing" as the first because nothing can be done without money.
Thus, the most critical element for success in business is 'Finance'. Before doing anything, an
entrepreneur should clearly answer the following three questions:
1) How much money is required?
2) Where will money come from?
3) When does the money need to be available?

As regards, the money needed, it can be estimated by developing a statement of various assets
required by the enterprise. Integral to total amount needed is to decide about its arrangement or
sources.

Case Study-II
Source of finance
MONEY IS ALWAYS A PROBLEM
"Air India has defaulted on working capital loan interest payment of ` 200 crores due to the financial
crisis that the airlines is facing", confirms Air India sources on 21st May 2011. Air India has high-cost
loans worth about ` 40,000 crores.

210
 Air India is facing a tight financial situation and is in talks with lenders to restructure its debt of
` 40,000 crore. The lenders have agreed to reduce interest rates on part of the debt that is linked to
overseas borrowings. The future of the remaining debt is still uncertain, especially because lenders are
seeking a conversion of their debt into equity or equity like instruments. This is perhaps the first time
that the national carrier has defaulted on its payments to banks. Sources said the airline had approached
banks for more loans but they have declined to help because of the airline's poor financial health.
And they say "Finance is difficult for new entrepreneurs ..........". Its always a major concern.

We have already made mentioned about the various sources from which an in grade XI about
the various sources from which an enterprise can raise the required funds. We know by now
thoroughly that these sources could broadly be classified into 2 major categories.
1) Internal sources
2) External sources

We are even aware that not all of them are equally appropriate to all enterprises at all times as
these different sources carry very different:
Obligations
Responsibilities
Opportunities

Internal sources referred to as owner's own money is also known as 'equity'. Particularly in the
case of small entrepreneurs the owner's money is very small. Therefore, an overwhelming
portion of money is arranged from the external sources. Optimal financing of profitable new
investment opportunities is key issue for all entrepreneurs today. The more successful
entrepreneur is: the more money is required to remain further competitive and visible ✁ NOT
TO FORGET TWITTER'S IPO LAUNCH. Additional funds are "All time requirement".
Nowadays a common growing practice is where the entrepreneur gives up part of his/her
ownership in the enterprise and in return receive money to develop business.

Case Study-III
Financial gaming
Google purchased Motorola Mobility for 9,800,000,000 (in USD), Microsoft Corporation purchased
Skype for 8,500,000,000 (in USD) and Nokia Handset and Service Business for 7,200,000,000 (in
USD) as notable Merges and Amalgamations of 2011 because latters were in financial crisis and
formers were financial strong looking for expansion strategies.

Thus, here we discuss some mushrooming sources available to an entrepreneur to raise finance:
a) Capital markets
b) Angel investors
c) Venture capital
d) Specialized financial institutions

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 c) Diversifying
The 'new issues' may be issued by:
1) New companies also called initial issues.
2) Old companies also called further issues.

Initial issues
The entrepreneurs highly bank on this type of "issue" to generate funds. When for the first time,
entrepreneur for the purpose of obtaining capital funds decides to issue securities to the public
✁ its first sale is in the primary market. Such ✂issues of securities" are even referred as "new
money issues".

Methods of flotation of new issues

An entrepreneur can raise the required capital in the primary market by the following methods:
1. Public issue
2. Rights issue
3. Private placement
4. Offer to the employees

1. Public issue / going public

Public issue is the most popular method of raising capital these days by the entrepreneurs.
This involves raising of funds directly from the public through the issue of prospectus. An
enterprise organizing itself as a public limited company can raise the required funds
commonly by preparing a prospectus.
When an entrepreneur a offers shares to the public for subscription he/she is required to
comply with all the restrictions and formalities pertaining to the initial issues, prospectus
drafting and launch.
One of the most difficult problems in the new venture creation process is obtaining
finance. When an entrepreneur decides to go public and become a public company,
he/she tends to be in advantageous positions because of reaping the following benefits:

1) Access to capital
The primary advantage an entrepreneur stands to gain by going public is access to capital.
In addition, the capital does not have to be repaid and does not involve an interest charge.
The only reward the IPO investors seek is an appreciation of their investment and possibly
dividends.
Entrepreneur can use the capital raised for a variety of purposes including:
(1) growth and expansion,
(2) retiring existing debt,
(3) corporate marketing and development

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 (4) acquisition capital.
An entrepreneur's financing alternatives stands greatly increased.

2) Other advantages
Mergers and acquisitions: Public stock of a company can be used for businesses to
grow through acquisitions.
Higher valuations: Public companies are typically valued more than private
companies.
Benchmark trading price: The trading price of a public company's stock serves as a
benchmark of the offer price of other securities.
Capital formation: Raising capital later is typically easier because of the extra
liquidity for the investors.
Incentives: Stock options and stock incentives can be very helpful in attracting
employees.
Reduced business requirements: While an underwritten initial public offering
requires significant earnings, the lack of earnings does not keep a private company
from going public.
Less dilution: There is less dilution of ownership control compared to an IPO.
Liquidity: A public company provides liquidity for management, minority
shareholders, and investors.
Prestige: Added prestige and visibility with customers, suppliers, as well as the
financial community.

Hungry to grab
If there is one company which everyone is looking towards for a new Netscape moment, it is
FACEBOOK. The company can pretty well go public any time it wants, as it is the 4th
Largest Site in the U.S. and in the world. So far it is said to be on track to beat its $ 550
million revenue projections.
A Facebook IPO would certainly create a halo effect for other teaches offerings. Even if it
doesn't go out in 2010, the prospect that it might could still help other companies go public
as hungry investors grab what they can get.

Drawbacks
While there are benefits to going public, it also means additional obligations and reporting
requirements such as:
Increasing accountability to public shareholders
Need to maintain dividend and profit growth trends
Becoming more vulnerable to an unwelcome takeover
Need to observe and adhere strictly to the rules and regulations by governing bodies

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 Increasing costs in complying with higher level of reporting requirements
Relinquishing some control of the company following the public offering
Suffering a loss of privacy as a result of media interest

As the owner of major shareholder of a private company, it is important to outweigh the

benefits and costs of listing in the light of the plans and goals that have been set by the
entrepreneur. Discussions with lawyers, independent accountants and other professional
advisors will also provide better considerations.

Overall, going public is a complex decision that requires careful consideration and planning.
Entrepreneurs should examine their current and future capital needs, and be aware of how an
IPO will affect the availability of future financing.

Enhance your IQ......

I.P.O.'S (INITIAL PUBLIC OFFER)
A company proposing to raise resources by a public issue should first select the type of securities i.e.
share and/or debentures to be issued by it. The decision regarding the issue of shares to be made at par or
premium should be decided keeping in view the SEBI guidelines.
The whole process of issue of shares can be divided into two parts:
Pre issue activities, and
Post issue activities
All activities beginning with the planning of capital issues, till the opening of the subscription list are
pre issue activities, while all activities subsequent to the opening of the subscription list may be called
post issue activities.
The various steps involved in public issue of shares are enumerated below:
1. Compliance with the SEBI guidelines
Before making any issue of capital, it is to be ensured that the proposed issue complies with the
provision of the SEBI guideline for disclosure and investor protection with regards to Pricing of
issue, promoters, contribution, lock in period, reservation, etc.
2. Holding of general meeting
If it is required by the Articles of Association, that consent of shareholder is to be obtained, then
meeting of the shareholder will be called.
3. Intimation to stock exchange
A copy of the Memorandum and Articles of Association of the company is to be sent to the Stock
Exchanges where the shares are to be listed, for approval.
4. Appointment
A company, which issues shares, has to appoint one or more Merchant Bankers, who act as Lead
managers to the public issues. The company may, also appoint, registrars, underwriter, brokers
etc.

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5. Drafting of prospectus
Apart from the notice of offer to issue shares to public, prospectus should also disclose:
Justification of Premium, if called.
Net Assets value (NAV)
High and Low price of the shares of the company for the last two years.
A clause that company shall refund the entire application money if minimum
subscription is not received.
A statement by the lead managers that in their opinion the assets of the underwriters are
adequate to meet their obligations.
6. Approval of prospectus
The draft prospectus along with the application from the issue of shares should be approved by the
solicitors/legal advisors/stock exchange [where application has been made seeking permission for
shares to be draft in] of the company to ensure that it contains all disclosures and information as
required by various statues, rules, notification, etc.
7. Approval of board of directors
After the concerned parties/agencies have approved the draft prospectus and the application form,
the board of directors of the company should approve the final draft, before filling the Registrar of
companies.
8. Registration of prospectus with ROC
Before the prospectus is issued to the public it must be filed with the registrar of companies, duly
signed thereon by every director or proposed director of the company.
The prospectus must be registered with ROC within 3 months of vetting of SEBI.
9. Application to stock exchange to list shares
Before filling prospectus with the registrar of companies, the company should submit on
application to the stock exchange(s) for enlistment of securities offered to the public by the said
issue. The fact that an application has/have been made to the stock exchange must be stated in the
prospectus.
10. Printing and distribution of prospectus and application forms
After receipt of acknowledgement card from the SEBI and the intimation from Registrar of
Companies regarding registration of prospectus, the company should take steps to issue the
prospectus within 90 days of it's registration with ROC.
For this compliance, requisite steps for printing and distribution amongst banker, underwriter
public etc. should be made.
11. Announcements and advertisement
Announcement regarding the proposed issue should be made at least ten (10) days before the
subscription list opens.
No advertisement should include Brand Names for the issue except the normal commercial name
of the company or commercial brand names of the company or commercial brand names of it's
products already in use.

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12. Subscription list
As stipulated by SEBI guidelines the subscription list for public issue is to be kept open for atleast
three working days and for a total period of not exceeding ten working days, which is to be
disclosed in prospectus as well.
13. Separate bank account
A SEPARATE Bank account is opened for the purpose of collecting the proceeds of the issue.
Further, the date of opening and closing of the subscription list should be intimated to all the
collecting and controlling branches of the bank with whom the company has entered into an
agreement for the collection of application forms.
14. Minimum subscription
As per the SEBI guidelines, if the company does not receive 90% of the issue amount from the
public subscription including development from underwriters within 120 days from the date of
the issue, the amount of subscription received is required to be refunded to the applications. In
case of disputed development also, subscription is required to be refunded if 90% of the issued
amount plus accepted.
Development from underwriters if any is not received within 120 days of the issue of prospectus,
all the money received from the applicants for shares is required to be repaid forthwith without
interest and if any such money is not so repaid in the next 10 days (after the expiry of 120 days),
the directors of the company are jointly and severally liable to repay that money, with interest
from the expiry of the 130 days.
The company should refund the amount within 10 weeks of the closing of the subscription list and
pay interest, if refunds are delayed by more than 8 days after this period.
15. Allotment of shares
A return of allotment in form No. 2 of The Companies (central government's) General Rules and
Form, 1956 should be filed with registrar of companies within 30 days of the date of allotment
along with the fees payable, as prescribed in schedule X of the Act.
In case, the issue is over-subscribed, the basis of allotment has to be decided in consultation with
the stock exchange authorities as per the guidelines laid down by the stock exchange.
16. Over subscription
The over-subscribed amount after the finalization of allotment, should be refunded to the
applicants within 10 weeks of the closure of subscription list. If the money is not so refunded, the
company is liable to refund the money with interest as specified from the expiry of the 8 days after
10 weeks of the closure of subscription list.
17. Compliance report
As stipulated by SEBI guidelines within 45 days of the closure of issue, a report in the prescribed
form along with a compliance certificates from statutory auditor/practicing charted accountant or
by a company secretary in practice is to be forwarded to SEBI by the lead managers.
Source: Advocate Khoj-Law Company

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2. Rights issue
Rights issue is a method of raising additional finance from existing shareholders by
offering securities to them on pro-rata basis i.e. giving them a right to a certain number of
shares in proportion to the shares they are holding.
Normally, through a circular, rights issues are proposed to the existing shareholders and
in case they are not willing to subscribe, they can renounce the same in favour of another
person. This method of issuing securities is considered to be inexpensive as it does not
require any brokers, agents, underwriters, prospectus or enlistment, etc.

3. Private placement
Private placement means the direct sale by a company of its securities to a limited number
of sophisticated investors.
Entrepreneurs, herein, raise funds by selling the issues mainly to the institutional
investors like:
i) Unit Trust of India
ii) Life Insurance Corporation of India
iii) General Insurance Corporation of India
iv) Army Group Insurance
v) State Level Financial Corporations, etc.

Entrepreneurs both from public limited and private limited sector, bank heavily upon
raising funds through the issue of varied financial instruments under this segment as at
times they do not wish to disclose information to the open market.

4. Offer to employees
Stock options or offering shares to the employees has gained much popularity in many
countries of the world. This method enables employees to become shareholders and share
the profits of the company leading to:
a) Higher efficiency
b) Low labour turnover
c) Better industrial locations
d) Low floatation cost
e) Wider/higher generation of funds.

ii) Secondary market

Capital markets aid in the mobilization of individual savings to make them readily
available to those who need them in:
Industry Trade
Finance Government

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 Any transaction in shares or debentures subsequent to its primary offering is called
"Secondary Transaction". Thus, the secondary capital market, which is also known as old
securities market or stock exchange deals with buying and selling of old securities i.e. the
market securities issued earlier are sold by existing investors in this market, thus paving
way for the entrepreneurs that if they offer high returns to market, investors will remain
inclined to invest therein.
The secondary market enhances the marketability of securities and thereby provides
liquidity to investments.
From the investor's point of view, this market imparts liquidity to the long-term securities
held by them by providing an auction market for these securities. It operates through the
medium of stock exchanges which regulate the trading activities in this market and
ensures a measure of safety and fair dealings to the investors.

Stock exchange
A stock exchange means anybody of individuals, whether incorporated or not, constituted for the purpose
of assisting, regulating or controlling the business of buying and selling or dealing in securities."
Securities Contracts (Regulation) Act, 1956

Features of stock exchange

1) Association of persons: A stock exchange is an association of persons or body of
individuals which may be registered or unregistered.
2) Recognition from central government: Stock exchange is an organized market. It requires
recognition from the Central Government.
3) Market for securities: Stock exchange is a market, where securities of corporate bodies,
government and semi-government bodies are bought and sold.
4) Deals in second hand securities: It deals with shares, debenture, bonds and such
securities already issued by the companies. In short it deals with existing or second hand
securities and hence it is called secondary market.
5) Regulates trade in securities: Stock exchange does not buy or sell any securities on its
own account. It merely provides the necessary infrastructure and facilities to its members
and brokers who trade in securities. It regulates the trade activities so as to ensure free and
fair trade.
6) Allow dealings only in listed securities: In fact, stock exchanges maintain an official list
of securities that could be purchased and sold on its floor. Securities which do not figure
in the official list of stock exchange are called unlisted securities. Such unlisted securities
cannot be traded in the stock exchange.
7) Transactions effected only through members: All the transactions in securities at the
stock exchange are effected only through its authorized brokers and members. Outsiders
or direct investors are not allowed to enter in the trading circles of the stock exchange.
Investors have to buy or sell the securities at the stock exchange through the authorized
brokers only.

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8) Working as per rules: Buying and selling transactions in securities at the stock exchange
are governed by the rules and regulations of stock exchange as well as SEBI Guidelines.
No deviation from the rules and guidelines is allowed in any case.
9) Specific location: Stock exchange is a particular market place where authorized brokers
come together daily (i.e. on working days) on the floor of market called trading circles and
conduct trading activities. The price of different securities traded are shown on electronic
boards. After the working hours market is closed. All the working of stock exchange is
conducted and controlled through computers and electronic system.
10) Financial barometers: Stock exchanges are the financial barometers and development
indicators of national economy of the country. Industrial growth and stability is reflected
in the index of stock exchange. Source: Kalyan City Life

Functions of a stock exchange

"Stock exchange are not merely the chief theaters of business transactions, they are also barometers
which indicate the general conditions of the atmosphere of business."
MARSHAL

Stock exchange performs a number of functions in respect of marketability of different types of

securities for investors and borrowing companies. It is important functions are:

a) Continuous and ready market for securities

Stock exchange provides a central market for purchase and sale of securities. It provides
ready and continuous outlet for buying and selling of securities. Buyers and sellers
strongly believe that they would be able to buy and sell securities as and when they want.
b) Facilitates evaluation of securities
Stock exchange is useful for the evaluation of industrial securities. It publishes price
quotation of the shares of the companies that have been listed with them after thorough
analysis of demand and supply position. This enables investors to know the true worth of
their holdings at any time.
c) Checks on brokers
Stock exchanges control the activities of brokers and protect the investors from being
deceived. Now, if any broker is found indulging in malpractices as overcharging or giving
wrong information, his/her licence may be cancelled.
d) Provides safety and security in dealings
Activities of the stock exchange are controlled by the provisions of the Securities Control
(Regulation) Act and all this creates confidence in the minds of investors. As transactions
are conducted as per well defined rules and regulations, fraudulent practices stands
checked effectively ensuring safety, security and justice in dealings.
e) Regulates company management
Listed companies have to comply with rules and regulations of concerned stock exchange
and work under the vigilance of stock exchange authorities.

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f) Intensifying capital formation
Stock exchange accelerates the process of capital formation through creating the habit of
saving, investing and risk taking among the investing class by converting their savings
into profitable, safe investments.
g) Facilitates raising of new capital
Because of stock exchange, for either development, organisation or expansion, the need for
more capital by the existing companies is easily met out.
h) Facilitates public borrowing
Stock exchange serves as a platform for marketing government securities. It enables
government to raise public debt easily and quickly.
i) Facilitates healthy speculation
Healthy speculation, keeps the exchange active. Normal speculation is not dangerous but
provides more business to the exchange. However, excessive speculation is undesirable as
it is dangerous to investors & the growth of corporate sector.
j) Serves as economic barometer
Stock exchange indicates the state of health of companies and the national economy. It acts
as a barometer of the economic situation/conditions and is thus referred as pulse of
economy or economic mirror.
k) Facilitates bank lending
Banks easily know the prices of quoted securities. They offer loans to customers against
corporate securities. This gives convenience to the owners of securities.

Importance of a stock exchange

Stock exchange indicates about the good or bad health of an economy. It is an investment
intermediary which facilities economic and industrial development of a country.
For the smooth and orderly functioning of corporate sector in a free market economy, stock
exchange are indispensable, because of the different roles played by them for different groups.

Importance of stock exchange

In the viewpoint From the viewpoint From the viewpoint

of investors of companies of societies
Dissemination of useful Information Recognition Rapid Capital Formation
Ready Market Wide Market Economic Development
Investors Interests Protected Higher Share Value National Projects
Genuine Guidance about the Securities Listed
Barriers of Distance Removed
Knowledge of Profit or Loss on Investments

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1. From the viewpoint of investors
(a) Dissemination of useful information: Stock exchange publishes useful information
regarding price lists, quotations, etc., of securities through newspapers and journals.
The interested persons buy and sell their securities on the basis of information
provided by the stock exchanges.
(b) Ready market: Persons desirous of converting their shares into cash may easily do so
through a member of stock exchange.
(c) Investors' interests protected: Stock exchanges formulate rules and regulations so that
members may not exploit the investors.
(d) Genuine guidance about the securities listed: The investors can safely depend upon the
information provided by the stock exchanges.
(e) Barriers of distance removed: Stock exchange removes the barriers of distance with
regard to securities listed there. Without stock exchange the securities of a Delhi
company may have a limited market in Delhi only.
(f) Knowledge of profit or loss on investments: The investors can estimate the profit or loss
on the total amount of investments in securities, by comparing the original amount
invested and the price of securities on a particular day.

2. From the viewpoint of entrepreneurs /companies

(a) Recognition: The market values of companies' shares are published in important
dailies. This enhances the reputation of good companies/entrepreneurs.
(b) Wide market: The securities of some companies are listed in some stock exchanges.
The market for the securities of such companies is considerably widened. Thus,
larger amounts of capital may be raised from different types of investors.
(c) Higher share values: People have a tendency to buy shares that have some premium
value. Demand of such shares increases. This leads to further increase in the price of
such shares.

3. From the viewpoint of society

(a) Rapid capital formation: People get tempted to invest in securities when they study the
trend of necessary prices of shares of good companies. This habit leads to investment
of savings in corporate and government securities. The income from these securities
may further be invested in buying more securities. This flow of funds leads to rapid
capital formation.
(b) Economic development: Through easy funds mobilizing, the boosted production fetches
more capital, enhancing economic development.
(c) National projects: As stock exchange promotes, the capital formation rate the projects
which brings National Prosperity can be easily undertaken.

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Organisation and management
The organisation, management, membership and functioning of stock exchanges in India are
governed by the provisions of The Securities Contracts (Regulation) Act, 1956. This Act permits
only recognized stock exchanges to function under the rules, regulations and by-laws approved
by the Central Government

Stay alert
Stock exchanges in India

No. Name of stock Year of Year of Type of organisation

exchange establishment recognition

1. Bombay 1875 1956 Voluntary non-profit

making persons

2 Ahmedabad 1894 1957 "

3 Calcutta 1908 1957 Public limited company

4. Madras 1908 1957 "

5 Indore 1930 1958 Voluntary non-profit

making association of
persons

6 Hyderabad 1943 1958 Company limited by

guarantee

7. Delhi 1947 1957 Public limited company

8 Bangalore 1957 1963 "

9 Kochi (Cochin) 1978 1979 "

10 Kanpur 1982 1982 "

11 Pune 1982 1982 Company limited by

guarantee

12 Ludhiana 1983 1983 Public limited company

13 Jaipur 1983 1989 "

14 Guwahati 1984 1984 "

15 Mangalore 1985 1985 "

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 16 Magadh 1986 1986 Company limited by
guarantee

17 Bhubaneswar 1989 1989 "

18 Saurashtra 1989 1989 "

19 OTC Exchange of 1989 1989 "

India

20. Vadodara (Baroda) 1990 1990 Public limited company

21 Coimbatore 1991 1991 "

22 Meerut 1991 1991 "

23 National stock 1992 1993 Company limited by

exchange (Delhi) guarantee

24 Inter-connected stock 1998

exchange of India

The governing body is responsible for policy formulation and proper functioning of the
exchange, having wide range of powers viz.....
1) Elect the office bearers and set up committees.
2) Admit and expel members
3) Manage the properties and finance of the exchange
4) Interpret rules, regulations and by-laws
5) Adjudicate disputes
6) Conduct the affairs of the exchange.

Jargonic stock exchange

Common terms related to stock and stock market trading
Open The first price at which the stock opens when market starts in the morning.
High The stock price reached at the highest price level in a day.
Low The stock price reached the lowest price level in day.
Close The stock price at which it remains after the end of market timings or the final price of the
stock when the market closes for a day.
Volume Volume is nothing but quantity of shares.
Bid The Buying price is called as Bid price.
Offer The selling price is called offer price.
Bid quantity The total number of shares available for buying is called Bid Quantity.

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 Offer quantity The total number of shares available for selling is called Offer Quantity.
Buying and selling of shares Buying is also called as demand or bid and selling is also called
as supply or offer.
Short selling First selling and then buying only happens in day trading or future trading.
Share trading Buying and selling of shares is called shares trading.
Transaction One cycle of buying and selling of stocks is called One Transaction.
Squaring off This term is used to complete one transaction. Means if you buy then have to sell
(means square off) and if you sell then you have to buy (means square off).
Limit order The order get executes at your mentioned price.
Market order The order rate gets executes at current market rates.

Securities and exchange board of India (SEBI)

The Securities and Exchange Board of India (frequently abbreviated SEBI) is the regulator for the
securities market in India. It was established on 12 April 1992 through the SEBI Act, 1992.

History
SEBI was officially established by The Government of India in the year 1988 and given statutory
powers in 1992 with SEBI Act 1992 being passed by the Indian Parliament. SEBI has it's
Headquarter at the business district of Bandra Kurla Complex in Mumbai, and has Northern,
Eastern, Southern and Western Regional Offices in New Delhi, Kolkata, Chennai and
Ahmedabad respectively.
Initially SEBI was a non✁statutory body without any statutory power. However in the year of 1995,
SEBI was given additional statutory powers by the Government of India through an amendment to
the Securities and Exchange Board of India Act, 1992. In April, 1998 the SEBI was constituted as the
regulator of capital markets in India under a resolution of the Government of India.

SEBI's establishment
SEBI was established as a supervising and regulatory body to curb
certain malpractices and to promote the securities markets in India.
SEBI is managed by its members, which consists of following: a)
Chairman who is nominated by Union Government of India. b) Two
members, i.e. Officers from Union Finance Ministry. c) One member
from The Reserve Bank of India. d) The remaining 5 members are
nominated by Union Government of India, out of them at least 3 shall
be whole-time members.
SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasi-
executive. It drafts regulations in its legislative capacity, it conducts investigation and
enforcement action in its executive function and it passes rulings and orders in its judicial

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capacity. Though this makes it very powerful, there is an appeal process to create accountability.
There is a Securities Appellate Tribunal which is three-member tribunal. A second appeal lies
directly to the Supreme Court.

Powers
For the discharge of its functions efficiently, SEBI has been vested with the following powers:
1. To approve by-laws of stock exchanges, SEBI
2. To enquire the stock exchange to amend their by-laws.
3. Inspect the books of accounts and call for periodical returns from recognized stock
exchanges.
4. Inspect the books of accounts of financial intermediaries.
5. Compel certain companies to list their shares in one or more stocks exchanges.
6. Levy fees and other charges on the intermediaries for performing its functions.
7. Grant license to any person for the purpose of dealing in certain areas.
8. Delegate powers exercisable by it.
9. Prosecute and judge directly the violation of certain provisions of the Companies Act.
10. Power to impose monetary penalties.
Well to conclude, in going public, an entrepreneur should realize that he/she is at the bottom of
the pyramid, with the institutional investors, underwriters, investment bankers, venture and
angel capitalists being higher up. Similarly, young entrepreneurial companies are not always
the spotlight companies in the IPO market. Outside capital should be sought only after all
possible internal sources of funds have been explored.
Length of time, cost and amount of control of each alternative while considering financial
markets as a source should be properly and expertly analysed.

II. Angel investors

High return potentiality is lucrative

Building a car company takes massive amounts of Capital and TESLA, a Silicon Valley's electric
car company is expected to hit the public markets. It has nearly raised $ 800 million so far, with
most of it coming as a government loans, a lot of the capital from Partners DIAMLER and a
Billionaire Founder ELON MUSK ANGEL FOR TESLA.
If an opportunity has high return potential many could like to be its part.

Etymology and origin

The term 'angel' originally comes from Broadway, where it was used to describe wealthy
individual who provide money for THEATRICAL PRODUCTIONS.
In 1978, Willam Wetzel, a professor at the University of New Hampshire and founder of its Center for
Venture Research, completed a pioneering study on how entrepreneurs raised seed capital in the USA,
and he began using the term 'Angel' to describe the investors who supported them.

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 Business angel or informal investor or an angel investor, is an affluent individual who
provides capital for a business start-up and early stage companies having a high-risk,
high-return matrix usually in exchange for convertible debt or ownership equity.

Do you remember.....
Stages of business development funding
Early-stage financing
Seed capital Relatively small amount to prove concepts and
finance feasibility studies.
Start-up Product development and initial marketing, but with
no commercial sales yet; funding to actually get
company operations started.
Expansion or development
financing
Second stage Working capital for initial growth phase, but no clear
profitability or cash flow yet.
Third stage Major expansion for company with rapid sales
growth, at breakeven or positive profit levels but still
private company.
Fourth stage Bridge financing to prepare company for public
offering.
Acquisitions and leveraged
buyout financing
Traditional acquisitions Assuming ownership and control of another company
Leveraged buyouts (LBOs) Management of a company acquiring control by
buying out the present owners.
Going private Some of the owners/managers of a company buying
all the outstanding stock, making the company
privately held again.

Features of angel investors

The job of an angel investor is invaluable. They fill the gap in start-up or early stage financing
between "friends and family", by providing seed funding and formal venture capital.
Humorously, they were once given the acronym FFF ✁ i.e. FRIENDS, FAMILY AND FOOLS.
Although it is usually difficult to raise more than a few thousands from friends and family,
even the venture capitalist are least interested to make investments. Thus, angel investments is
a common second round of financing for high-growth start-ups or early stage companies.
1) Most angel investors are current or retired executives, business owners or high net worth
individuals who have the knowledge, expertise, and funds that help start-ups match up to
industry standards.

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2) As angel investors bear extremely high risk and are usually subject to dilution from future
investment rounds. They expect a very high return on investment.
3) Apart from investing funds, most angels provide proactive advice, guidance, industry
connections and mentoring start-ups in its early days.
4) Their objective is to create great companies by providing value creation, and
simultaneously helping investors realize a high return on investments.
5) They have a sharp inclination to keep abreast of current developments in a particular
business arena, mentoring another generation of entrepreneurs by making use of their
vast experience.

III. Venture capital

Case Study-IV
Interesting history
Before World War II, "Development Capital" were primarily the domain of wealthy individuals
and families. It was not until after World War II that what is considered today to be true private
equity investments began to emerge by the founding of the first two venture capital firms in 1946:
(i) American Research and Development Corporation (ARDC)
(ii) J.H. Whitney Company
ARDC was founded by George's Doriot, the "father of venture capitalism" (former dean of
Harvard Business School and founder of INSEAD), with Ralph Flanders and Karl Compton
(former President of MIT), to encourage private sector investments in businesses run by soldiers
who were returning from World War II. ARDC's significance was primarily that it was the first
institutional private equity investment firm that raised capital from sources other than wealthy
families.
ARDC continued investing until 1971 with the retirement of Doriot. In 1972, Doriot merged
ARDC with Textron after having invested in our 150 companies.

Venture capital is a type of private equity capital provided as seed funding to early-stage, high-
potential, high risk, growth up companies/entrepreneurs who lack the necessary experience
and funds to give shape to their ideas.
We know, the proposals involving new or substantially new or relatively untried technology
put forward by professionally or technically qualified persons involving high risk factors may
fail to attract investments from public, thus, resulting in their death even before they could be
tried.
Thus, venture capital is an equity based investment in a growth-oriented small to medium
business to enable the investors to accomplish objectives, in return for minority shareholding in
the business or the irrevocable right to acquire. It is more accurate to view venture capital
broadly as a professionally managed pool of equity capital. Venture capital is a way in which

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investors support entrepreneurial talent with finance and business skills to exploit market
opportunities and obtain long-term capital gains.
As an industry, Venture Capital has originated in the United States, and American firms have
traditionally been the largest participants in venture deals.

Venture capital has been used as a tool for economic development in a variety of developing
regions. In many of these regions, with less developed financial sectors, venture capital plays a
role in facilitating access to finance for small and medium enterprises (SMEs), which in most
cases would not quality for receiving bank loans.

Features of venture capital

Venture capital can best be characterized as a long-term investment discipline, usually
occurring over a five-year period that helps in the creation of:
a) early-stage companies,
b) the expansion and revitalization of existing businesses, and
c) the financing of leveraged buyouts of existing divisions of major or privately owned
enterprises.
Thus, venture capital finance has the following features:
1) It is basically equity finance in relatively new companies.
2) It is long-term investment in growth-oriented small or medium firms.
3) Venture capitalist not only provide capital but also business skills to investee firms.
4) It involves high risk-return spectrum.
5) It is a subset of private equity.
6) The venture capital institutions have a continuous involvement in the business after
making the investment.
7) Such institutions disinvest the holdings either to the promoters or in the market.

Funding
Obtaining venture capital is substantially different from raising debt or a loan from a lender.
Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the
success or failure of a business.
But, a venture capital is invested in exchange for an equity stake in the business. Because of the
strict requirements venture capitalists have for potential investments, entrepreneurs should
seek funding from this source after a careful evaluation.
Venture capitalists are typically very selective in deciding what to invest in and as a rule of
thumb:
1) They may invest in one in four hundred opportunities presented to it,
2) Looks for the extremely rare, yet sought after qualities, such as :

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 a) innovative technology,
b) potential for rapid growth,
c) a well-developed business model
d) an impressive management team.
3) Looks for an "exit" in the time frame of typically 3-7 years.
4) Is inclined towards ventures with exceptionally high growth potential.

Thus, entrepreneurs are expected to carry out detailed due diligence prior to seeking venture
capital as a source of financing. As venture capitalists investments are illiquid, requiring
extended time frame to harvest, an entrepreneur should carefully evaluate and analyse, the
stage which he/she would require venture capitalist to assist in.

When to seek venture capital finance

Entrepreneurs can typically seek venture capital to assist at any of the following four stages in
the company's development.
1) Early stage financing
This stage includes:
(a) Seed capital
(b) Pre-start up and start up
(c) Second-round financing.

a) Seed capital finance

It refers to the capital required by an entrepreneur for conducting research at pre-
commercialization stage. During this stage, the entrepreneur has to convince the
investor (VC) why his idea/product is worthwhile. The investor will investigate into
the technical and the economical feasibility of the idea.
In some cases, there is some sort of prototype of the idea/product that is not fully
developed or tested. As the risk element at this stage is very high, investor (VC) may
deny to assist if he does not see any potential in the idea. Entrepreneur's ability,
technological skills and competencies are required to match with the market
opportunities so as to successfully convince about product/idea's feasibility to the
venture capitalist.

Are you feasible

A Dutch venture named High 5 Business Solution V.O.F. wants to develop a portal which
allows companies to order lunch. To open this portal, the venture needs some financial resources,
they also need marketers and market researchers to investigate whether there is a market for the
idea. To attract these financial and non-financial resources, the executives of the venture decide
to approach ABN AMRO Bank to see if the bank is interested in their idea.

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 After a few meetings, the executive are successful in convincing the bank to take a look in
the feasibility of the idea. ABN AMRO decides to put a few experts for investigation. After
two weeks time, the bank decides to invest. They come to an agreement of invest a small
amount of money into the venture. The bank also decides to provide a small team of
marketers and market researchers and a supervisor. This is done to help the venture with the
realization of their idea and to monitor the activities in the venture.

b) Start up finance
If the idea/product/process is qualified for further investigation and/or investment,
the process will go to the second stage; this is also called the start-up stage. A
business plan is presented by the entrepreneur to the VC firm. A management team
is being formed to run the venture. If the company has a board of directors, a person
from the VC firms will take seats at the board of directors.
While the organisation is being set up, the idea/product gets its form. The prototype
is being developed and fully tested. In some cases, clients are being attracted for
initial sales. The management-team establishes a feasible production line to produce
the product. The VC firm monitors the feasibility of the product and the capability of
the management-team from the board of directors.

The "Lunch" sails

Now the venture has attracted and investor, the venture needs to satisfy the investor for
further investment. To do that, the venture needs to provide the investor a clear business
plan how to realize their idea and how the venture is planning to earn back the investment
that is put into the venture, of course with a lucrative return.
Together with the market researchers, provided by the investor, the entrepreneur has to
determine how big the market is their region. They have to find out who are the potential
clients and if the market is big enough to realize the idea.
From market research, the venture comes to know that there are enough potential clients for
their portal site. But there are no providers of lunches yet. To convince these providers, the
venture decided to do interviews with providers and try to convince them to join.
With this knowledge, the venture can finish their business plan and determine a pretty good
forecast of the revenue, the cost of developing and maintaining the site and the profit the
venture will earn in the following five years.
After reading the business plan and consulting the entrepreneur, the investor decides that
the idea is worth for further development.

c) Second-round financing
At this stage, we presume that the idea has been transformed into a product and is
being produced and sold. This is the first encounter with the rest of the market, the
competitors and attempt is to squeeze in the market and get some market share from
the competitors.

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 The entrepreneur, at this stage, needs assistance from the Venture Capitalist for
expansion, modernization, diversification so that the economies of scale and stability
could be attained.
As this time, larger funds than the other early stage financing are required,
entrepreneur should be extra careful because only if he and his management team is
able to prove their capability of standing against the competition, only then is the VC
firm interested in financing.

2) Last stage financing /bridge /pre-public stage

In general, this is the last stage of the venture capital financing process. The main goal of
this stage is for the venture to go public so that investors can exit the venture with a profit
commensurate with the risk they have taken.
At this stage, the venture achieves a certain amount of market share. This gives the
venture some opportunities for example:
Merger with other companies
Keeping new competitors away from the market
Eliminate competitors
Development capital
The entrepreneur must examine the product's market position and, if possible, reposition
it to attract new Market segmentation. He/she should introduce the follow-up product/
services to attract new client and markets, for only that is the way to create interest for VC
firms seeks to get their assistance further.

Entrepreneurs to watch out

Unlike public companies, information regarding an entrepreneur's business is typically
confidential and proprietary. As part of the due diligence process, most venture capitalists will
require significant detail with respect to a company's business plan. Entrepreneurs must remain
vigilant about sharing information with venture capitalists that are investors in their competitors.
Most venture capitalists treat information confidentially, but as a matter of business practice, they
do not typically enter into non✁disclosure agreements because of the potential liability issues
those agreements entail. Entrepreneurs are typically well-advised to protect truly proprietary
intellectual property.
Mainly due to the increasing deregulation and the emergence of technocrat entrepreneurs, this
source of financing which has so far not taken deep roots in India, is having enormous scope for
progress.

You will be surprised

According to the study done by Venture Intelligence with the partnership of US-India Venture Capital
Association, the venture capital firms in India invested $508 million across 92 deals in the country in
the year of 2006. It was the IT sector and IT enabled sectors that lured the venture capital investors the

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 most in 2006 in India. 64 among 92 deals contributing to $367 million in the total investment was from
IT and IT-enabled sectors. Other business sectors that attracted the investors were financing services,
healthcare and life sciences, manufacturing and food and beverages.

Venture capital institutions in India

At present, many Venture Capital Companies / funds have been set up in India, in both the public and
the private sectors, for example,
a) Industrial Development Bank of India's Venture Capital Fund

b) Technology Development and Information Company of India Ltd. (TDICI)

c) Risk Capital and Technology Finance Corporation Ltd.
d) Gujarat Venture Finance Ltd. (GVFL)

e) Andhra Pradesh Industrial Development Corporation (APIDC) Venture Capital Fund.

f) National Venture Fund for Software and IT Industry.
g) The Canbank Venture Capital Fund, The Credit Capital Venture Fund Ltd, etc.

IV. Specialised financial institutions

Industrial finance is a very complicated problem. To meet out the growing needs of the
industries and entrepreneurs, heavy inflow of finance is required. The development of any
country depends largely on the industrial development, which in turn depends upon
availability of finance.
Certain sections of the industry face greater difficulties than others in procuring long-term
finance. These include (a) Small and medium sized concerns, (b) new concerns set up by
new entrepreneurial group, (c) specific industries, which required funds for modernization,
(d) enterprises involved in innovation and new technological developments, (e) enterprises
requiring extra-ordinarily large amounts of finance with a long gestation period, (f)
Ventures in backward regions. SFIs were established to meet the long-term financial
requirement of such enterprises on economic and social ground.
These Specialized Financial Institutions in India are not only committed to financial
services but are also devoted towards playing a role of a promotional "mentor" & technical
advisor to a wide range of the upcoming and existing entrepreneurs. Thus, these
Specialized Financial Institutions (SFIs) make an important source of medium and long-
term financing amongst all the financial institutions in India, to the industry.

Need for and Importance of Specialised Financial Institutions (SFIS)

As SFIs provide developmental finance, that is, finance for investment in fixed assets, they are
also known as 'development banks' or 'development financial institutions'. Establishing of SFIs
facilitated:

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a) Provision of sufficient long-term funds in the desired sectors in accordance with planned
priorities to the industrial units and entrepreneurs.
b) New and small entrepreneurs in setting up industry.
c) Development of (i) small scale industry and (ii) projects in backward areas.
d) Provision of technical and managerial advice to the entrepreneurs, facilitating thus, in
identification, evaluation and execution of new investment enterprises.
e) Underwriting of and direct subscription to the issue of shares and debentures in the
capital market of the upcoming ventures.
g) Establishment of enterprises which require extra-ordinarily large amount of finance for
their projects with a long-gestation period.

Types of Specialised Financial Institutions

Entrepreneurs have access to any of the following SFIs to choose from, according to their needs
and requirements:

A) At national level/all India development banks

(i) Industrial Development Bank of India (IDBI)
(ii) Small Industries Development Bank of India (SIDBI)
(iii) Industrial Finance Corporation of India (IFCI)
(iv) Industrial Credit and Investment Corporation of India (ICICI)
(v) National Bank for Agriculture and Rural Development (NABARD)
(vi) Industrial Investment Bank of India Ltd. (IIBI)

B) At state level
(i) State Financial Corporation (SFCs)
(ii) Tourism Finance Corporation of India (TFCI)
(iii) State Industrial Development Corporations (SIDC)

I. Industrial Development Bank of India (IDBI)

Introduction
The Industrial Development Bank of India was set up in July 1964 as a wholly owned
subsidiary of the Reserve Bank of India. The purpose was to enable the new institution to
benefit from the financial support and experience of RBI. Before 16th February, it was
delinked from RBI in 1976 and was made an autonomous corporation. The objective was
to allow RBI to concentrate on its central banking function and allow IDBI to grow into a
development agency. Government's shareholding in IDBI stands at 72.14%.

Objectives
The main objectives of IDBI is to serve as the apex institution for term finance for industry in
India. Its objectives include:

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Objectives
SIDBI's objectives are:
1) Initiate steps for technological upgradation, and/or modernization of existing units.
2) Expand channels for marketing of SSI sector products in India and abroad.
3) Promote employment oriented industries.

Functions
The financial assistance of SIDBI to the small scale sector is channelised through the following
two routes:
i) Indirect assistance
ii) Direct assistance
SIDBI has taken over the responsibility of administering following
two funds which were previously administered by IDBI i.e.
i) Small Industries Development Fund
ii) Small Industries Development Assistance Fund
1) SIDBI's financial assistance to SSS is primarily channelised through the existing credit
delivery system consisting of commercial banks, co-operative banks, RRBs and SFCs.
2) Refinance loans and advances extended by the primary lending institutions to small
scale industrial units, alongwith providing them even resource support.
3) Discounts and rediscounts bills arising from sale of machinery to or its manufacture
by industrial units in the small-scale sector.
4) All forms of business organisation are eligible for refinance assistance for:
a) Setting up of new venture
b) Expansion
c) Modernisation
d) Diversification of existing units for all activities
5) Extends seed capital/loan assistance under the National Equity Fund Mahila Udyan
Nidhi and Mahila Vikas Nidhi and seed capital scheme through specified lending
agencies.
6) Grants direct assistance as well as refinance loans extended by Primary Lending
Institutions for financing export of products manufactured by industrial concerns in
the Small Scale Sector.
7) Provide Venture Capital assistance to the entrepreneurs for their innovative ventures
if they have a sound management team, long term competitive advantage.
8) Leasing and factoring to small-scale units are also provided for by SIDBI.

III. Industrial Finance Corporation of India (IFCI)

IFCI was established as a statutory corporation on 1st July 1948 by a special Act passed in
the Parliament, IFCI Act, 1948. It was converted into a public limited company on July 1,

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 1993. Its main objects is to provide medium and long term credit to eligible industrial
enterprises in corporate sectors of the economy, particularly to those industries to which
banking facilities are not available.

Objectives
The primary role of IFCI is to provide 'direct financial assistance' on medium and long term
basis to industrial projects in the corporate and co-operative sectors. The objectives of the
corporation are stated below.
a) To provide long and medium-term credit to industrial concerns engaged in
manufacturing, mining, shipping and electricity generation and distribution.
b) The period of credit can be as long as 25 years and should not exceed that period;
c) To grant credit to a single concern up to a maximum amount of rupees one crore. This
limit can be exceeded with the permission of the government under certain circumstances;
d) Guarantee loans and deferred payments;
e) Underwrite and directly subscribe to shares and debentures issued by companies;
f) Assist in setting up new projects as well as modernization of existing industrial concerns
in medium and large scale sector;
g) Assist project under co-operatives and in backward areas.

Functions
The main functions of I.F.C.I. are as under:
i) Granting loans and advances for the establishment, expansion, diversification and
modernization of industries in corporate and co-operative sectors.
ii) Guaranteeing loans raised by industrial concerns in the capital market, both in rupees and
foreign currencies.
iii) Subscribing or underwriting the issue of shares and debentures by industries. Such
investment can be held up to 7 years.
iv) Guaranteeing credit purchase of capital goods, imported as well as purchased within the
country.
v) Providing assistance, under the soft loans scheme, to selected industries such as cement,
cotton textiles, jute, engineering goods, etc.
vi) Providing technical, legal, marketing and administrative assistance to any industrial
concern for the promotion, management and expansion of the industrial concern.
vii) Providing equipment (imported or indigenous) to the existing industrial concerns on lease
under its 'equipment leasing scheme'.
viii) Procuring and reselling equipment to eligible exiting industrial concerns in corporate or
co-operative sectors.
ix) Rendering merchant banking services to industrial concerns.

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IV) Industrial Credit and Investment Corporation of India (ICICI)
Industrial Credit and Investment Corporation of India was established as a joint stock
company in the private sector in 1955. Its share capital was contributed by banks,
insurance companies and foreign institutions including the World Bank. Its major
shareholders now are Unit Trust of India, Life Insurance Corporation of India and General
Insurance Corporation and its subsidiaries. They together hold approximately 50% of the
paid up shares capital of ICICI.

Objectives
The ICICI has been established to achieve the following objectives:
i) To assist in the formation, expansion and modernization of industrial units in the private
sector;
ii) To stimulate and promote the participation of private capital (both Indian and foreign) in
such industrial units;
iii) To furnish technical and managerial aid so as to increase production and expand
employment opportunities.

Functions
i) It provides medium and long-term loans in Indian and foreign currency for importing
capital equipment and technical services. Loans sanctioned generally go towards purchase
of fixed assets like land, building and machinery;
ii) It subscribes to new issues of shares, generally by underwriting them or directly
subscribing the same;
iii) It guarantees loans raised from private sources including deferred payment;
iv) It provides technical and managerial assistance to industrial units, along with consultancy
services for new projects;
v) It provides assets on lease to industrial concerns. In other words, assets are owned by
ICICI but allowed to be used by industrial concerns for a consideration called lease rent.
vi) It provides merchant banking services.
vii) Rs. 5 lakhs is the minimum amount sanctioned by it to a single concern and normally it
does not go beyond the maximum limit of Rupees one crore.

V) National Bank for Agriculture and Rural Development (NABARD)

On 15th December, 1981, National Bank for Agriculture and Rural Development
(NABARD) Bill was passed in the Parliament, which started functioning on 1st July, 1982.
NABARD was established according to the preamble to the Act, "for providing credit for
the promotion of:
Agriculture,
Small-scale Industries

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 iv) Contributes to the share capital of eligible institutions.
v) Provides direct loans to centrally approved cases.

III. Regulatory Functions

1) NABARD is empowered to undertake inspection of RRBs and Cooperative Banks,
other than the Primary Cooperative Banks.
2) To open a new branch, a recommendation of NABARD is imperative by RRBs or
Cooperative Banks to seek permission from RBI.
3) RRBs and Cooperative Banks, along with RBI, are required to file returns and
documents with NABARD.

VI. Industrial Investment Bank of India Ltd. (IIBI)

The Industrial Investment Bank of India Ltd. (IIBI) was formed by transforming The
Industrial Reconstruction Bank of India (IRBI). It was set up by IDBI at the instance of the
Government of India in April 1971 for rehabilitation of sick industrial companies.
IRBI was incorporated under the Companies Act, 1956 and renamed as the Industrial
Investment Bank of India Ltd. in March 1997.

Functions
IIBI offers a wide range of products and services such as:
1) Term-loan assistance for project finance.
2) Short duration non-project asset backed financing working capital/other short term
loans to companies,
3) Equity Subscription Asset Credit
4) Equipment finance
5) Investments in Capital Market and Money market instruments.

VII. State Financial Corporations (SFCs)

To meet the financial needs of small and medium enterprises, the government of India
passed the State Financial Corporation Act in 1951, empowering the State governments to
establish development banks for their respective regions. Under the Act, SFCs have been
established by State governments to meet the financial requirements of medium and small
sized enterprises. There are 18 SFCs at present.

Objectives
The objectives of state financial corporations are as under:
1) Provide financial assistance to small and medium industrial concerns. These may be from
corporate or co-operative sectors as in case of IFCI or may be partnership, individual or
joint Hindu family business, engaged not only in the manufacture, preservation or
processing of goods, but also mining, hotel industry, transport undertakings, generation

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 or distribution of electricity, repairs and maintenance of machinery, setting up or
development of an industrial area or industrial estate, etc.
2) Provide long and medium-term loan repayment ordinarily within a period not exceeding
20 years.

3) Grant financial assistance to any single industrial concern under corporate or co-operative
sector with an aggregate upper limit of rupees Sixty lakhs. In any other case (partnership,
sole proprietorship or joint Hindu family) the upper limit is rupees Thirty lakhs.
4) Provide Financial assistance generally to those industrial concerns whose paid up share
capital and free reserves do not exceed ` 3 crore.
5) To lay special emphasis on the development of backward areas and small scale industries.

Functions
1) Grant of loans and advances to or subscribe to debentures of, industrial concerns
repayable within a period not exceeding 20 years, with option of conversion into shares or
stock of the industrial concern.
2) Guaranteeing loans raised by industrial concerns which are repayable within a period not
exceeding 20 years.

3) Guaranteeing deferred payments due from an industrial concern for purchase of capital
goods in India.
4) Underwriting of the issue of stock, bonds or debentures by industrial concerns.
5) Subscribing to, or purchasing of, the stock, shares, bonds or debentures of an industrial
concern subject to a maximum of 30 percent of the subscribed capital, or 30 percent of paid
up share capital and free reserve, whichever is less.

6) Act as agent of the Capital government, State government, IDBI, IFCI or any other financial
institution in the matter of grant of loan or business of IDBI, IFCI or financial institution.
7) Providing technical and administrative assistance to any industrial concern or any person
for the promotion, management or expansion of any industry.
8) Planning and assisting in the promotion and development of industries.

VIII. Tourism Finance Corporation of India (TFCI)

The Tourism Finance Corporation of India (TFCI) was born as a result of the Government
of India's decision, in 1987, to promote a separate all-India financial institution for
providing financial assistance to tourism-related activities/projects. It was incorporated as
a public limited company under the Companies Act, 1956 on 27 January, 1989 and became
operational with effect from 1 February, 1989. It is a specialized all-India development
financial institution to cater to the needs to the needs of the tourism industry.

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Functions
i) TFCI provides financial assistance to enterprises for setting up or the development of
tourism-related projects, facilities and services such as hotels, restaurants, holiday resorts,
amusement parks, entertainment centres, education and sports, rope ways, cultural
centres, convention halls, transport, travel and tour operating agencies, air services,
tourism emporia and sports facilities.
ii) It also provides advisory and merchant banking services in this field.
iii) The projects with a capital cost of ` 1 crore or above are generally eligible for assistance
from TFCI. Smaller projects would also be considered.
iv) TFCI has sanctioned assistance to 2003 projects aggregating to ` 5.2 billion during the last
five years, resulting in more than 12,217 hotel rooms and direct employment to 22,938
people.

IX. State Industrial Development Corporation (SIDCs)

Incorporated under the Companies Act 1956 SIDCs were setup in different states as
wholly owned companies for promoting industrial development in their respective states.
The main functions of SIDCs are as follows:
Providing term finance to all small, medium, and large industrial enterprises set up in
the state,
Underwriting and directly subscribing to shares, and debentures of industrial
enterprises being set up in the state,
Preparing feasibility studies, conducting market surveys and motivating private
entrepreneurs to set up their industrial ventures in the state;
Collaborating with private entrepreneurs to set up industrial ventures in joint and
assisted sector.
Implementing IDBI's scheme of seed capital in the state.
Finance can be procured, just like any other resource, against a cost. Procurement of
finance involves risk and formalities to comply with. Entrepreneurs need a careful
attitude, to sensibly make a choice of sources to generate funds. No one source can be
deemed to be the best source. Thus, it is always advisable to select a combination of
sources so that both cost and risk can be kept at lowest.

SUMMARY
The role of transforming financial resources from the surplus units to the deficit units is referred as
✁✂✄☎✆☎✝✄✆✞ ✄☎✟✠✡☛✠☞✄✆✟✄✌☎
The place where the demand for and the supply of short term funds meet is called as money market
A capital market may be defined as an organized mechanism meant for effective and smooth transfer
of money capital or financial resources from the inventory to the entrepreneur

242
 Financial markets can be for initial issue and further issue
Entrepreneurship may find it difficult to go for equity financing since the goodwill is not yet built
up in the market
Compliance with the SEBI guidelines is to be done for the investor protection
Stock exchange is an investment intermediary & facilitate eco & industrial development of a
country
Stock exchange performs a number of functions in respect of marketability of different types of
securities for investors and borrowing companies
Securities and Exchange Board of India (SEBI) was established as a supervising and regulatory body
to curb certain malpractices and to promote the securities markets in India
Angel investors: They fill the gap in start up between family and friends and venture capitalists.
Venture capital is a type of private equity capital provided as seed funding to early stage, high
potential, high risk, growth up companies/entrepreneurs who lack the necessary experience and
funds to give shape to their ideas.

Specialised Financial Institutions

National Level State Level

1. Industrial Development Bank of India 1. State Finance Corporations (SFC) ✁

(IDBI) ✁ established in 1964 established in 1951

2. Small Industries Development Bank of 2. Tourism Finance Corporation of India

India (SIDBI) ✁ established in 1990 (TFCI) ✁ established in 1989

3. Industrial Finance Corporation of India 3. State Industrial Development

(IFCI) ✁ established in 1948 Corporation (SIDC) ✁ established in 1956

4. Investment Credit and Investment

Corporation of India (ICICI) ✁
established in 1955

5. National Bank for Agriculture and Rural

Development (NABARD) ✁ established
in 1982

6. Industrial Investment Bank of India (IIBI)

✁ established in 1971

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✒✞✌ ✓☛✏✕✠ ☞✆☛✖✏ ☛✏✒✠☎✎✏✑ ✗✖✞✝ ✍✆✎✏✑ ✘✆✖✗✆✓✠✙✚
✛ Adam Osborne

243
 REVIEW CROSSWORD PUZZLE
1.I
2 3

4
5 6.F 8.D
7

9
10.S

11.S

12 I

Across:
2. The costs that a company incurs when it makes a new issue of either stocks or bonds.
4. An individual or party that arranges transactions between a buyer and a seller for a
commission when the deal is executed.
7. A measure of the ability of a debtor to pay their debts as and when they fall due.
8. An excess of expenditures over revenue.
9. An Index computed from performance of top stocks from different sectors listed on NSE.
10. It constitutes the equity stake of its owners.
11. Excess of revenue over expenditure
12. Affluent individual who provides capital for a Business start-ups and early stage
companies using a high-risk, high-return matrix usually in exchange for convertible debt
or ownership equity.

Down:
1. Something that motivates an individual to perform an action
3. The initial capital used to start a business
5. The action of becoming larger or more extensive.
6. The science of money management
11. A form of ownership that can be easily traded on a secondary market.

244
 ✁✂✄☎ ✆✁✝✞☎✁
Section✟A: Finance
Q.1. Answer each of these questions in about fifteen words:
a) What do you understand by finance?
b) Give the significance of finance in an enterprise.
c) Name the most important pre-requisite to start an enterprise.
d) State the most important factors for the survival of any business enterprise.
e) State how sources can broadly be classified into 2 major categories.
f) What do you understand by internal sources of finance?
g) How will you differentiate between financial market with other market? Give one
difference.
h) 'Production', 'Marketing', and Financing' ✠ deemed as the most important factors for
any business's survival rates. Among these name the most critical element and why?

Q.2. Answer each of these questions in about fifty words:

a) Which sources provide the supply for long-term funds?
b) Name the sources of demand for capital comes from.
c) Entrepreneur can use the capital raised for a variety of purposes, what are they?
d) How can an entrepreneur, raises funds by selling the issue mainly to the institutional
investors?
e) How stock options lead to enable employees to become shareholders and share the
profits of the company?

Q.3. Answer each of these questions in about two hundred and fifty words:
a) Explain some important sources of raising finance in business.

Section✟B: Financial Markets

Q.1. Answer each of these questions in about fifteen words:
a) Define capital market.
b) Name the two players in the capital market.
c) Identify the reward IPO investors seek as an appreciation of their investment.
d) Identify the method of raising additional finance from existing shareholders by
offering securities to them on pro-rata basis.
e) What do you understand by pro-rata allotment of securities?
f) What is Right Issue?
g) When the right issue are proposed to the existing shareholders and if they are not
ready to subscribe what is the next step taken by an entrepreneur?
h) Why right issue method of issuing securities is considered to be inexpensive?

245
 i) What do you understand by private placement?
j) What is meant by Stock options or offering shares to the employees?
k) Name the method which enables employees to become shareholders and share the
profits of the company.
l) What is a secondary market?
m) What is the need of secondary market?
n) In what forms company can raise capital through primary market?

Q.2. Answer each of these questions in about fifty words:

a) For what purpose is finance required right from the very beginning i.e. conceiving
an idea?
b) What is the need of finance?
c) An entrepreneur is a person who bears the risks, unites various factors of production
and carries out a creative innovation, and for doing all these, what is the basic
requirement to be reached to this extent.
d) State some mushrooming sources of raising finance in the business.

Q.3. Answer each of these questions in about one hundred and fifty words:
a) State the nature of money market. Who are the major participants in the money
market?
b) Explain how Capital markets are the most important source of raising finance for an
entrepreneur.
c) What do you understand by capital market? How can the capital market in India be
broadly classified into different categories?
d) Write down the sectors of organized and un organized market?
e) What is meant by primary market? Briefly explain the conc✁✂✄ ☎✆ ✝✞✟✠✡✄ ☛☞☞✌✁ ✆☎✍
✁✎✟☞✄✟✏✠ ✑☎✒✂✓✏✟✁☞✔✕

Q.4. Answer each of these questions in about two hundred and fifty words:
a) ✖✗✏ ✁✏✄✍✁✂✍✁✏✁✌✍ ✑✓✏ ✍✓✟☞✁ ✄✡✁ ✍✁✘✌✟✍✁✙ ✑✓✂✟✄✓✚ ✟✏ ✄✡✁ ✂✍✟✒✓✍✛ ✒✓✍✜✁✄ ✖✢ ✣✎✂✚✓✟✏ ✄✡✁
various methods of raising the funds in the primary market by an entrepreneur.
b) When an entrepreneur decides to go public and become a public company, he/she
tends to be in advantageous positions and get many benefit out of it . Explain the
benefits
c) While there are benefits to going public, at the same time additional obligations and
reporting requirements on the companies and its directors means disadvantages too
what are they? Explain.

Q.5. HOTS: (High Order Thinking Skills)

a) Why primary market is also known as new issue market? Give one reason.

246
 Section C: Stock Exchange
Q.1. Answer each of these questions in about fifteen words:
a) What are the responsibilities of governing body?
b) Name the stock exchanges were most of the stock trading in India is done.
c) What is a secondary capital market?

Q.2. Answer each of these questions in about fifty words:

a) What is the alternate name of stock used by different people?

Q.3. Answer each of these questions in about one hundred and fifty words:
a) Explain the importance of Stock Exchange from the viewpoint of companies.
b) Explain the importance of Stock Exchange from the viewpoint of investors.
c) Explain the importance of Stock Exchange from the viewpoint of society.
d) Rahil (Finance) and Anushk (HR) are doing MBA (IIM Indore) While reading the
✁✂✄☎✆✝✆✂✞ ✟✁✠☎✡☛ ☎✝✄ ☞✡✂ ✡✂✝✌✍✁✎ ✏✑✂✁☎✂✒ ✎✓✂☎ ✠✆✔ But last week the heading was
✌✍✕✕✂✞✂✁☞ ☞✡✝☞ ✏✑✂✁☎✂✒ ✎✓✂☎ ✌✓✄✁✔ ✖ ✁✓✄ ☎✓✗✂ ✘✓✁✕✠☎✍✓✁ ✄✝☎ ✎✓✍✁✎ ✓✁ ✡✍☎ ✗✍✁✌✖
immediately he asked his Friend Rahil the same? Now according to you how Rahil
will clear the confusion of Anushk? Explain and give some value points

Q.4. Answer each of these questions in about two hundred and fifty words:
a) Write down the features of stock exchanges.
b) Explain the functions of stock exchange.

Q.5. HOTS: (High Order Thinking Skills)

a) Stock exchange performs a number of functions in respect of marketability of
different types of securities for investors and borrowing companies. Explain the
important functions of stock exchanges.

Section-D: SEBI & Others

Q.1. Answer each of these questions in about fifteen words:
a) What do you mean by stock exchange?
b) What is SEBI?
c) State three functions of SEBI rolled into one body.
d) ✙✚✠✗✓✞✓✠☎✛✜✖ ☞✡✂✜ ✄✂✞✂ ✓✁✘✂ ✎✍✢✂✁ ☞✡✂ ✝✘✞✓✁✜✗ ✣✣✣ ✕✓✞ ✟✁✎✂✛ ✤✁✢✂☎☞✓✞☎ ✙✔ ✥✡✝☞ ✍☎
FFF stands for.
e) What do you understand by angel investors?

Q.2. Answer each of these questions in about fifty words:

a) What is SEBI and what is its role?
b) Who manages SEBI?

247
 c) Explain briefly the three functions of SEBI rolled into one body.
d) What do you understand by venture capital?
e) Enlist several categories of financing possibilities in which smaller ventures
sometimes rely on.
f) Why are Venture capitalists typically very selective in deciding while doing the
investment?

Q.3. Answer each of these questions in about one hundred and fifty words:
a) Explain the powers SEBI has been vested wit for discharging of its functions
efficiently.
b) What are the features of venture capital finance?
c) When can an entrepreneur seek venture capital financing?

Q.4. Answer each of these questions in about two hundred and fifty words:
a) Explain the characteristics of angle investors.

Q.5. HOTS: (High Order Thinking Skills)

a) ✁✂ ✄☎ ✄✆ ✆✝✄✞ ☎✁✝☎ ✟✠ ✡☛☞☎✌✍☛ ✎✝✏✄☎✝✑✄✆☎✆ ✄☞✡☛✆☎✒☛☞☎✆ ✝✍☛ ✄✑✑✄✓✌✄✞✔✕ ✖✄✡☛ ✍☛✝✆✗☞✕
Section✘E: Specialised Financial Institutions
Q.1. Answer each of these questions in about fifteen words:
a) What is the role of Specialized Financial Institutions in India?
b) Enumerate the types of Specialised Financial Institutions from were entrepreneur
can access capital according to their need and requirements.
c) When was SIDBI established?

Q.2. Answer each of these questions in about fifty words:

a) Explain the need and importance of Specialized Financial Institutions in India?
b) Explain the objectives and functions of SIDC.
b) Write the full form of & when it was established.
i) SIDC ii) TFCI
iii) ✙✚✛✜✆ iv) NABARD
v) IFCI vi) IDBI
vii) ICICI

Q.3. Answer each of these questions in about one hundred and fifty words:
a) Apoorva wants to start a new business near to her locality, for which she requires
capital.

248
 State different types of national level and state level financial institutions from where
Apoorva can access capital according to her needs and requirements.
b) Write down the objectives of IDBI.
c) Write an explanatory note on the financing schemes of state level financial
institutions and their importance in promotion of an entrepreneur in India.
d) Write a short note on IIBI.
e) Describe the form of assistance provided by SIDBI to the industrial concern.

Q.4. Answer each of these questions in about two hundred and fifty words:
a) Explain the main objectives and functions of ICICI.
b) Explain in detail objectives and three important Primary functions of NABARD.

Q.5. HOTS: (High Order Thinking Skills)

a) TFCI is playing vital role in the development of entrepreneurship in modern
✁✂✄✂☎✆✝✞ ✟✂☎☎ ✄✠✞
b) Hari is an entrepreneur who wants to start an amusement park in Indore. He knows
that she needs a huge amount of initial capital. According to you which of the
financial institution will be more suitable to him? Suggest and Explain why?
c) Assuming that you wish to start a small scale industry for manufacturing and selling
detergent powder, discuss how would you seek support of financial institutions.
d) Discuss the advantages and disadvantages of financial institutions for an entrepreneur.
e) Distinguish between ICICI and SIDBI.
f) How NABARD is different from TFCI.
g) Company A goes for public issue of 10,000 shares @` 10 each. Application were
received for only 5,000 shares. Can the company proceed with the process of issuing
shares.

Value Based Question

Q1. Harish is working as the chief accountant in ABC infrastructure Ltd. He came to know
that the company is planning to announce an interim dividend. He purchased 2000 shares
of the Co. at the market price of ` 215 with the expectation of an appreciation in the
market price. When the price increased to ` 537 he sold his holdings & made a handsome
profit. Name the related concept which social values have been affected here?
Q2. By offering shares to its employers what values are promoted by a company
Q3. Mr. B the financial Manager of ABC Company purchases 100 shares of the Company just
before the rights issue was announced. Is the behaviour of the manager ethical? What
would you do as a legal advisor of the company.

249
Suggested Activities:
1. Role play
A group of students can represent an entrepreneurial venture & another group individual
should represent venture capitalists.
The entrepreneurs have to present a business idea to seek funds
2. Prepare a fictitious prospectus for an IPO. You have to think of the business, promoters,
future projects, investments initiated.
3. Find out 5 entrepreneurial ventures which have received financial assistance from IDBI.
4. Find out from an existing entrepreneur the problems faced by her/him while seeking
finance.
5. Visit IFCI & enlist its major activities.

250
 SOLUTIONS TO CROSSWORD PUZZLES
Unit 1: Entrepreneurial Opportunity
Across: Down:
1. Customer 1. Creativity
3. Entrepreneur 8. Skill
6. Opportunity 9. Competition
9. Change 10. Product
12. Innovation 4. Resources
13. Economic 5. Funds
14. Vision 7. Profit
11. Capital
Unit 2: Entrepreneurial Planning
Across: Down:
1. Sole proprietor 2. Partnership
4. Balance sheet 4. Breakeven
3. Co-operative society 7. Cash flow
5. Excise duty 9. Collateral
6. Business plan 10. Utility
8. Limited Liability 12. Routing
11. Man power
13. Customer duty
14. Shipping

Unit 3: Entrepreneurial Marketing

Across: Down:
1. Quality 2. Trademark
3. Negotiation 5. Brand
4. Labelling 6. Goodwill
9. Stakeholder 7. Advertising
10. Radio 8. Packaging
12. Skimming 11. Online
13. Goal 15. Logo
14. Tagline
16. Customer relation
Unit 4: Enterprise Growth Strategies
Across: Down:
2. Acquisition 1. Franchise
3. Culture 4. Leadership
4. Logistic 5. Collaboration
6. Merger 7. Expansion
8. Franchisor 11. Conglomerate
9. Infrastructure 12. Leverage
10. Synergy
Unit 5: Business Arithmetic
Across: Down:
1. Unit price 1. Budget
3. Gross profit 4. Sales budget
5. Amortization 7. Variable cost
6. Return on investment
8. Depreciation
9. Working capital
10. Lead time
11. Cash flow
12. Creditor
Unit 6: Resource Mobilization
Across: Down:
2. Flotation cost 1. Incentives
4. Broker 3. Seed capital
7. Liquidity 5. Expansion
8. Deficit 6. Finance
9. Nifty 11. Securities
10. Stock
11. Surplus
12. Angel investors

✁ ✁ ✁

251
APPENDIX
Guidelines for Practical Examination
The main objective of the course in Entrepreneurship is to generate among students the initiative,
creativity, self-reliance and enthusiasm so as to empower them to become entrepreneurs, both in spirit
and performance. A number of skills such as observation, evaluation, communication, resource
mobilization and management, risk assessment, teams building etc. are also to be developed in the
students. Leadership qualities, sensitivity to business ethics and adherence to a positive value system are
the core disciplines that the course highlights while presenting different concepts related to
entrepreneurship.
Such a course should necessarily have a strong experiential component in the form of practical work. The
objectives of the practical work are:
To introduce the world of business by developing core skills and competencies required for an
entrepreneur.
To develop qualities such as leadership, confidence, initiative, facing uncertainties, commitment,
creativity, people and team building, integrity and reliability.
To enable the acquisition of skills and knowledge needed for conducting surveys, collecting,
recording and interpreting data, and preparing simple estimates of demand for products and services.
To enable students to prepare a Project Report.
To equip students with the knowledge and skills needed to plan and manage an enterprise through
case studies, conducted and recorded by the students in different fields such as resource assessment,
market dynamics, finance management, cost determination, calculation of profit and loss etc.
✁ To instill important values and entrepreneurial discipline.

Project Details
Students will have to fulfill the following as a part of the project work:
I. Market survey (options given) 10 marks
II. Business plan 10 marks
III. External practical written paper 5 marks
IV. External viva 5 marks
30 marks

I. Market Survey
Students will have to conduct the survey in any one of the below mentioned topics and follow the
guidelines:
A. Conduct a simple market research with the objective of estimating demand for an existing product
in the market. Students will have to give an innovative suggestion to the product.
B. Conduct a survey for a new innovative product.
C. Conduct a survey for study on
a) Smoking habits

252
 b) Skill Trading Option in an economic backward neighborhood
c) Wearing Helmets
d) Attitudes of Road Users
e) Conservation of Electricity
f) Rainwater Harvesting

Guidelines for Survey No. A

Students will have to find out the demand for any one of given in the boxes:

Mosquito repellant cream Towels Powder Papad

Milk Wall clock Ghee Salt
Curds Organic dals Mineral water Basmati rice
Ball Umbrella Dry fruits Fitness equipment
Car tyres Mattress Hand blender Frozen food
Bed sheets Keyboard Cookies Tiles
Crayons Lip balm Cooking oil Curtain materials
Educational Toys Hair color Plastic chairs Microwave oven
Bathroom fittings Non stick cookware Sweets Toaster
Geyser Cooker Candy
Water dispenser Craft glue Pickle

✁ Students can also select any other product.

✁ An innovative idea regarding the product must be suggested by the student.
✁ The product, along with the innovation may be discussed in class and finalized.
✁ Avoid products whose use is discouraged/banned by the society and government like alcohol/pan
masala, tobacco products, etc.

Identify one product from the given box which you like to manufacture [pre assumption]. Now, make a
project on the identified product, keeping in mind the following:
1. Think of an innovation in the selected product, (innovation could be in product content, feature,
design, packaging, distribution, strategy, service etc.)
2. Test the feasibility of this innovation via market analysis, using an objective questionnaire.
3. Competition analysis (2 3 existing brands in the same category).
4. Questionnaire analysis
5. Recommendation to the company (For example, if you have chosen hair oil and if you want to find
out the demand for Dabur Vatika then please give suggestions to the company as to how they can
improve their product)
Two examples have been provided for students as to how questionnaires have to be framed and analysis to be done.

253
 Market Survey on Hair Oil
Purpose of survey: To collect primary data for the preparation of class XII Entrepreneurship
market survey report, the product being researched is "Hair oil". The idea of attaching a
vibrating scalp massager to the hair oil bottle is also being researched here.
General instruction
1. Filling personal details is optional.
2. All the questions are compulsory.
3. Only one alternative option to be chosen other than the places specified.
4. Answer by tickingof the most appropriate option.
Disclaimer: All information provided will be treated as confidential.
Personal details
Name_______________________________________ Age______________________
Occupation___________________________ Email____________________________
Q1. Do you use hair oil?
Yes No
Q2. Which brand of hair oil do you use?
Keokarpin Daburamla Bajaj almond drops
Mustard oil Olive oil Coconut oil
any other please specify__________________________
Q3. Are you satisfied with the hair oil you are using?
Yes No
Q4. How frequently do you oil your hair?
Daily 2 3 times per week Once a week Once a month
Q5. When do you apply oil on your hair?
10 hour before shampooing 3 6 hours before shampooing
Overnight
Q6. What motivated you to buy this hair oil?
Price Brand image Quality Any other please specify
Q7. Which informative source influences your decision to buy this hair oil?
Family recommendation Beauty clinics Friends Advertisements
Q8. Which pack size do you prefer the most?
50 ml 100 ml 150 ml
200 ml 300 ml Any other please specify
Q9. According to you, what would be the reason for oiling hair regularly?
to make it strong to improve hair luster to control hair fall
to prevent dryness and dandruff to have long hair all the above
Q10. Will you prefer to buy a hair oil attached to a vibrating scalp massager and when you tilt
the bottle on to bottle of head not only will the oil ooze out but your scalp will also get
massaged, thus leaving you with clean hands even after using oil?
Yes No
Thank you for your co operation and precious time.
(As you can see in this questionnaire, the first question asks whether the person uses hair oil or
not. In case more respondents say that they do not use hair oil, then the student has to change
the product. The last question caters to the innovation associated with the product).

254
 Market Survey
Product: Washing Detergent

Purpose of the survey: To collect primary data for preparation of Class XII Entrepreneurship
Market Survey Report. Feasibility of a newly innovated stain removing detergent patch is also
being studied.

General instructions:

1. Filling personal details is optional.

2. All questions are mandatory.

3. Choose only one response.

4. Respond by ticking (✁) the most appropriate option.

Disclaimer: All responses will be treated as confidential and used for academic purpose only.

Personal Details

Name:____________________________________________________ Age: ______________________

Gender: Male Female

Occupation____________________________________ Email:________________________________

Questionnaire

1. How do you wash your clothes?

Hand Wash Washing Machine

Laundry Both hand wash and washing machine

2. Which washing machine detergent are you using now?

Ariel Surf Excel

Tide Rin

Others_________________

3. Which hand wash detergent powder are you using now?

Ariel Surf Excel

Tide Rin

Others_________________

255
4. What motivated you to buy this washing detergent?

Price Quality

Brand Image Any Others_________________

5. From where did you come to know about your detergent?

Friends Family

Retailers Advertisements

6. Do promotional schemes (For example, Buy 1 get 1 free) influence you in buying the product?

Yes No

7. Does your washing machine detergent remove stains from your clothes the very first time
itself?

Yes No

8. Have you faced difficulty in removing stains from clothes during the wash?

Yes No

9. Do you think that stain can be removed only washing by hand?

Yes No

10. Will you buy a new detergent patch (like band aid), which when put on stains on the
clothes, will remove them immediately?

Yes No

Stains on clothes

256
Examples for questionnaire analysis / suggested solutions:
Q1. How do you wash your clothes?
The questionnaire was surveyed from 50 respondents to know which method of washing
clothes they prefer the most. Out of 50 respondents, 20 prefer using the washing machine
whereas 10 respondents prefer to washing clothes by hand, 15 respondents wash their
clothes both by hand and washing machine and only 5 respondents like to give their
clothes to the laundryman. So, we can conclude by saying that maximum number of women likes
to wash their clothes with the help of washing machine on the other hand very few women likes to
give their clothes to laundryman for washing.
25

20

15

10

0
Hand Wash Washing Machine Laundryman Both Hand and
Washing Machine

Preference of ways of washing clothes

Q2. Which washing machine detergent you are using now?
According to the survey conducted 35 women wash their clothes with the help of washing
machine. Surf Excel is the detergent which is preferred most by 15 respondents. Tide is the
next detergent which is preferred by 7 respondents whereas, Ariel and Rin are used by 6
and 4 respondents respectively.
So, we can conclude that Surf Excel washing machine detergent has the greatest demand in the
market whereas Tide and Ariel are gaining demand among customers. There were a few more
detergents like Asset,Amway etc. which are used by very fewrespondents.
16
14
12
10
8
6
4
2
0
Ariel Surf Excel Tide Rin Any Other

Preference of washing machine detergent

257
Q3. Which hand wash detergent are you using now?
As per the bar diagram alongside 15 respondents wash their clothes by hand. Tide is the
detergent which is preferred most by 6 respondents whereas Ariel, Surf Excel and Rin are
used by 4, 3, and 2 respondents respectively.
Tide is the detergent which has a great demand among the respondents who washclothes
by hand. As it provides good quality at a reasonable price. Whereas Ariel, Surf Excel and
Rin have to improve in order to gain market demand.

13% Surf Excel

20%

Tide
27%
Ariel
40%
Rin

Preference of hand wash detergent

Q4. What motivated you to buy this washing detergent?
On the basis of the survey, the maximum numbers of respondents are motivated to buy a
washing detergent because of the quality of detergent, 25 respondents look at quality
whereas 12 and 8 respondents focus on price and brand image of the detergent,
respectively.
So, we conclude that quality is the most important factor in selecting a detergent followed by brand
image and price.
30
25
20
15
10
5
0
Price Brand Image Quality

Factor motivating to buy the product

258
Q5. From where did you come to know about your detergent?
According to the survey, 47% of the 50 respondents came to know about the detergent
from TV advertisements, whereas 12 and 4 respondents came to know about it from
family and friends, respectively. 9 respondents came to know about their detergents from
retailers.
As the maximum number of respondents got to know about their detergent from
advertisements, this shows us how effective TV advertisements are as a means of
promoting brands.

18%
25% Family
10% Retailer
Friends
Advertisement
47%

Source of information
Q6. Do promotional schemes (For example, Buy 1 get 2 free) influence you in buying the
product?
As depicted in the bar diagram, maximum number of respondents i.e. 39 out of 45
respondents are influenced by the promotional schemes like buy 1 get 1 free, whereas 6
respondents are not influenced by such promotional schemes.
So we conclude say that promotional schemes play a major role in influencing customersbuying the
product.
40
35
30
25
20
15
10
5
0
Yes No

Effect of promotional schemes

259
Q7. Does your washing machine detergent remove stains from clothes after the very first use?
According to the survey, 37 respondents say that their washing machine detergent does
not remove the stain from their clothes the very first time, whereas 8 insist that their
washing machine detergent removes stains from their clothes the very first use.
From this we infer that the maximum number of respondents face difficultieswhile removing stains
from clothes.
40

35

30

25

20

15

10

0
Yes No

Q8. Have you faced any difficulty in removing stains from your clothes while washing by
hand?
According to the survey, 40 respondents face difficulty while washing by hand, whereas 5
respondents did not face any problem.
The maximum number of respondents face difficulty. If a new detergent patch is introduced which will
remove stains people may accept that product.
60

50

40

30

20

10

0
Yes

260
Q9. Do you feel that stains can be removed only washing by hand?
According to the survey, 42 respondents believe that the stains can be removed only
washing by hand, whereas 3 believe that the stain cannot be removed by washing by
hand.
Can stains be removed only washing by hand?
45
40
35
30
25
20
15
10
5
0
Yes No

Q10. Will you buy a new detergent patch (like band aid) which can be put on a stained portion
of the cloth, to remove the stain immediately?
On the basis of survey, 43 respondents agree to use the new detergent patch which when
puton a stained portion of cloth, will remove that stain immediately. On the other hand, 2
respondents did not accept the new detergent patch.
From this we conclude that if the product,the washing detergent patch, when introduced in the
market will have a good demand.

6%

Yes
No

94%

Preference of new detergent patch

261
Guidelines for Survey no. B

Students can choose any new innovative product which does not exist in the market as of now,
and find out the demand for that product.

1. Test the feasibility of this innovation via market analysis, using objective questionnaire as
a tool.

2. Questionnaire analysis: Frame all the 4 P's of marketing:

i) Product

a) Features

b) Design

c) Brand name

d) Logo tagline

e) Package

f) Label

ii) Price

a) Pricing strategy

b) Price to retailers, wholesalers

c) Price for different segments

iii) Place

a) Transportation

b) Warehousing

c) Distribution strategy

d) Channel

iv) Promotion

a) Techniques

b) Strategy

c) Design at least 5 advertisings using different mediums

3. Social responsibility/message

262
 Market Survey
Product: Printer
Purpose of the survey: To collect primary data for the preparation for Class XII
Entrepreneurship project on Market Survey. The product being researched is a printer.
Feasibility of a newly innovated pencil printer for home use by students, is also being studied.
General instructions:
1. Filling personal details is optional.
2. All questions are mandatory.
3. Only one answer has to be chosen, unless specified otherwise.
4. Answer by ticking (✁) the most appropriate option.
Disclaimer: All information provided will be kept confidential and used for academic purpose
only.
Personal Details
Name:____________________________________________________ Age: ______________________
Gender: Male Female
Occupation____________________________________ Email:________________________________
Questionnaire
1. Which brand of printer do you own?
HP Dell Epson Lenovo Any other___________________
2. What type of printer do you own?
LaserJet Inkjet All in one printer (scanner, fax, printer)
3. Which printer do you prefer?
Colour Black and White Both
4. For what do you use the printer?
Printing pictures Printing assignments Printing documents
5. How many pages do you print in a month?
5 10 pages 10 20 pages 20 30 pages 50 and above
6. Who influenced you at home to buy the current printer?
Own decision Family Friends Printer retailers Others
7. From where did you purchase it?
Company showroom Online purchase Friends/relatives (second hand)
Department store, like Croma etc. Abroad (specify where)____________
8. The price range of your printer is.
` 5000 10000 ` 10000 15000 ` 15000 20000 ` 20000 and above

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9. What is most important feature of your current printer?
Wi-fi connectivity Compatible with all types of computers
Quality of printout Scanner, fax and photocopy features.
Any other_____________________
10. What features do you consider while purchasing a printer?

Most important Somewhat important Not important

Brand name
Quality
Price
Size
Speed
Style/design
Durability
Guarantee
Warranty
After sales service
Accessories

11. Which new feature would you like in your (next) new printer? (tick if more than one is
required)
Speed Quality of print Wireless Light weight Ink free
Eco friendly (uses pencil for printing)
12. Do you face any problem in refilling the toner/frequent purchasing of toner/jamming of
ink because of not using the printer for a long time?
Yes No
13. Would you buy a printer which uses lead pencils for printing black and white prints and
colour pencils for colour printouts?
Yes No

Thank you for your co operation and precious time.

264
Guidelines for Survey no. C
Students can choose any one of the given topics (mentioned on page 1) or any other topic
suggested by the teacher which is of social relevance.
1. A questionnaire must be framed
2. Analysis for the questionnaire should be done
3. Solutions for the social problem to be given.
Outreach Programme: Survey Format for Parents
Name ______________________________
Age______________ Tel. No.________________________ Income____________________________
Occupation: Business/Profession/Service
1. No. of children.
a) One b) Two c) Three
2. Which two wheeler have you given to your child?
a) Scooty b) Scooter c) Bike d) Cycle
3. Which brand?
4. When did you get the vehicle for your child?
a) 14 yrs b) 15 yrs c) 16 yrs d) 17 yrs e) 18 yrs
5. What was the reason for getting him the vehicle?
a) School transport b) Evening transport c) reward
6. How did your ward convince you?
a) Emotionally b) Good result c) Birthday gift d) Any other
7. Any mishaps? Extent:
8. Does your ward wear a helmet?
a) Always b) At times c) rarely
9. Did your ward go through any formal training?
a) Yes b) No
10. Do you feel that your city needs "Two wheeler" training school?
11. Did your child get his/her license himself/herself?
a) Yes b) No
12. When did your child get his/her license?
a) At 18 years b) After 18 years c) Before 18 years d) Not yet
13. What amount of money you spend monthly for the maintenance of two-wheeler?
a) Less than `1000 b) `1000-1500 c) `1500-2000 d) More than `1000
14. Are you happy by giving him/her a two wheeler?
a) Yes b) No

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 Format for Presentation of Market Survey Report
1. The project should be done individually.
2. The project should be hand written in white one side ruled sheet or single colored sheets only.
3. Page limit 20 to 25.
4. The survey report should be original and proper analysis for all questions in the
questionnaire should be done.
5. The format for presentation of report which should be arranged in the following sequence:
a) External cover page
b) Acknowledgement
c) Executive summary
d) Index
e) Introduction to the topic (Introduction, objectives)
f) Profile of the organization
g) Data analysis and interpretation
h) Conclusion and recommendation
i) Photographs
j) Bibliography
k) Appendix
l) Teacher's observation
m) Signature of teacher
a) Example: Format for external cover page.
Market Survey Report on Hair Oil

Under the guidance of: Submitted by:

(Name of the teacher) (Name of the student)
Roll No.:

(Logo of the school)

(Name and address of the school)
Batch 2014 15
b) Acknowledgement
I, (name of the student) do hereby declare that this project is my original work and I
would like to thank (name of the teacher) for her wholehearted support and guidance for
making it possible to complete this project on time.
I would also like to thank my friends and family members for their kind support and
guidance without which this project would not have completed.
(Name and sign of student)

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c) Executive summary
This should not be more than a page and it contains in a concise form the details about the
entire project. Any person who wants to know about the project should be able to
understand it once they read the executive summary.
d) Index
The entire chapter list should be indicated along with page numbers
e) Introduction to the topic
This will be around 1 2 pages having details about the project. For Example, in the above
mentioned topic you can write in detail about the reason as to why you have chosen hair
oil (in this case) as your product and what do you expect to find out.
Objectives: 1 page (3 4 points)
For example:
✁ To understand the oil industry as a whole.
✁ To find out the possibility of marketing a new hair oil product in the market etc.
f) Profile of the organization/product
Write in detail about the organization/competitive product or brands that you have
chosen. (Page limit for this chapter will depend upon the project).
g) Data Analysis and interpretation
A questionnaire should be prepared for the purpose of analysis
Guidelines for preparation of questionnaires:
i) The number of questions should be a minimum of 8 and maximum 12.
ii) Either typed or handwritten.
iii) All questions should be closed ended, except of one open ended question.
iv) Minimum number of questionnaires to be filled should be least 20.
v) Analysis of all the questions to be done.
vi) Analysis in the form of a pie diagram or bar chart (on a graph sheet).
vii) Interpretations of the analyses based on the pie diagram/bar chart to be mentioned.
h) Conclusion and recommendations
The complete findings of the project is to be presented in this chapter, in point form (2
pages)
i) Bibliography
Names of books used and website addresses
j) Appendix
Definitions of terms used;
All the filled in questionnaires to be attached here
k) Market survey proforma
See attached proforma

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 Market Survey Evaluation Proforma (For teacher's use)
Student's name: ______________________________________
Roll no.: ______________________________________
Class: ______________________________________
Section: ______________________________________
Teacher's assessment

Basis Maximum marks Marks obtained

1. Initiative, cooperativeness and participation 2

2. Creativity in presentation 2

3. Content, observation and research work 3

4. Analysis of situations 3

Overall remarks
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________

................................................. ....................................................
Internal teacher's signature External teacher's signature
Date......................................... Date............................................

School stamp

268
 Project II Business Plan (10 Marks)
Outline for the Business Plan Presentation

1) Your business idea: (Main product or service)

Product Services Trading

Chocolates Tiffin service Stationery
Soap Crèche Flower shop
Detergent powder/liquid soap Pet care center
Sandwiches

2) Name of your business, its logo and tagline

(Refer to unit 3, Class XII Entrepreneurship Book)
3) Are there similar products or services in the market?
4) What is your competitive advantage and what is your unique selling proposition (USP)?
5) Your marketing plan:
a) Your market research plan (Describe your competitor, demand for your product/service
✁ is it available or you think you can create it?)
Talk about atleast 3 competitors if it is an existing product. If it is a new product, then
analyse the demand for the product.
b) Your target customers and how will you reach them?
Example: children, teenager, homemaker, working persons etc.
c) Your advertising and promotion ideas
Just mention the tools of promotion mix which you will be using.
d) Packaging (if applicable)
Eco-friendly packaging
e) Distribution (How do you intend reaching your customers?)
Channel of distribution ✂ direct and indirect
f) What does quality mean for your product or service?
ISI, Agmark, FPO etc.

6) What is the cost per unit of your product or service? Also, show the computation or
explain the logic.
Compute fixed cost ✂ ANY of the following details can be added
1) Consultancy charges 2) Salary
3) Rent 4) Insurance
Variable cost ✂ Any of the following details can be added
1) Packing charges 2) Raw material
3) Power 4) Wages

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7) What is your selling price and your reason for it?

8) Give details of your start up costs here.

1) Land 2) Building
3) Computers 4) Equipment
5) Machinery 6) Vehicles
7) Vessels 8) Software
9) Inauguration ceremony 10) Raw material
11) Salary 12) Rent advance

9) How would you meet your startup costs (be realistic)?

10) What are the likely risk factors in your business and how do you plan to mitigate them?
11) Suppose it is now a year since you started your business. Give us one month's profit and
loss statement for the first month of the second year to cover the following main items:
(All figures to be for one whole month.)

S. No. Particulars Units Rupees

a) Sales
b) Cost of sales
c) Gross profit = a b
Fixed expenses (cash)
Salaries
Rent
Utilities
Monthly interest only on the loan taken
Transport
Miscellaneous
d) Total fixed expenses (cash)
e) Depreciation (non-cash)
f) Total fixed exp(cash &non-cash) = d+e
g) Operating profit or loss = c f
h) Taxes = use 25% on profits only
i) Net profit/or loss = g h

12) What is the break-even point of your business? Show the computation assuring the selling
price and units which will be sold.

270
 Proforma for evaluation (For teacher's use)
Business plan evaluation proforma
Student's name: ______________________________________
Roll no.: ______________________________________
Class: ______________________________________
Section: ______________________________________
Teacher's assessment

Basis Maximum marks Marks obtained

1. Product selection and details 1

2. Profit and loss statement 2

3. Fixed and variable cost details 2

4. Start up cost calculation 2

5. Computation of breakeven point 3

Overall remarks
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________

................................................. ...................................................
Internal teacher's signature External teacher's signature
Date......................................... Date...........................................

School stamp

271
 III. External Practical Written Paper
Teachers who will be conducting the external practical examination should frame their questions
for 5 marks from any one OR a combination of the following topics:
1. Calculation of EOQ
2. Calculation of working capital requirements
3. Calculation of breakeven point
4. Identification and calculation of start up costs/fixed cost/variable cost

Permission Letter
In an attempt to facilitate better understanding of the subject
"Entrepreneurship", CBSE has made it mandatory for the student opting for
the subject, to undertake an "Industrial visit/Survey" as a part of the Photo of
curriculum. student

This is to certify that ..............................................................................of class

..............section..............is a bonafide student of ...................................................................................

......................................................................................................... and has been permitted within the

framework of CBSE to undertake this visit.

Looking forward to your cooperation in making this activity a success and a great learning
experience for the student.
Thanking you.

.............................. ..............................
Principal Teacher Incharge

✁✁✁

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 BIBLIOGRAPHY
Resource Credits
1. Entrepreneurship: New Venture Creation
By: Holt (EEE)
2. Entrepreneurship
By: Roy (Oxford)
3. Mergers and Acquisitions
By: Rajesh Kumar (Mc. Graw Hill)
4. Mergers and Acquisitions
By: Aurora, Shetty, Kale (Oxford)
5. Market Your Way To Growth
By: Kotler, Kotler (Times Group Books)
6. Entrepreneurship
By: Hisrich, Peters, Shepherd (Mc Graw Hill)
7. http://en.wikipedia.org/
8. XII entrepreneurship text book (previous edition)
Entrepreneur magazine
Marketing management - Philip Kotler.
9. The Journal of Private Enterprise/What Business Ethics Can Learn from Entrepreneurship
By: Stephen, R. C. Hicks, Rockford College Illinois
10. http://www.thehindubusinessline.com/features/weekend-life/the-earth-at-this-
innovators-feet/article 3865588.
11. Entrepreneurship
By: Robert D Hisrich; Michael P Peters: Dean A Shepherd / Tata McGraw Hills Education
Private Limited
12. Every Day Entrepreneurs: The Harbingers of Prosperity and Creators of Jobs
By: Aruna Bhargava/Vikas Publishing House Pvt. Ltd
13. Theories of Entrepreneurship
By: Vasant Desai/Himalaya Publishing House
14. Entrepreneurship in Action
By: Mary Coulter/PHI Learning
15. Entrepreneurship Development
By: Dr. T.N. Chhabra/Sun Indai Publications.

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16. Entrepreneurship Class XIth
By: CBSE
17. Intelligent Entrepreneur (Magazine)
By Network 18
18. Entrepreneurship Formulas
By: ARK Sarma
19. Entrepedia
By: Professor Nandini Vaidyanathan
20. Technology Blurs Boundaries
Article by Ernst & Young client portal
21. Personality Types: Entrepreneur.com
Article by Bill Wagner dated April 1, 2006
22. Mansukhbhai Prajapati: Hindu Business Line

For images
Web links
http://discoveryourpowerteam.com/wp-content/uploads/2010/08/keys-colour-in-a-
circle-817549_73710812.jpg
http://www.fatpurse.ru/images/1_b.jpg
http://www.chinagaoduan.cn/uploadfile/day_140404/201404041049377330.jpg
http://www.uni-altai.ru/uploads/posts/2013-03/1364283287_ipuzzle-pieces.jpg
http://www.createmixedmedia.com/wp-content/uploads/IMG_1426.jpg
http://www.kaamkaj.com/wp-content/uploads/Universities-in-Delhi-NCR.png
http://1.bp.blogspot.com/-QfeaBnGfHt0/UvyOrcpuN6I/AAAAAAAAApo/y-
6VXwj6Frg/ s1600/CBSE+Recruitment+2014.gif
https://theworldenergyfoundation.org/wp-content/uploads/2014/02/nav_bar_twitter_
logo.png
http://www.crsvat.com/images/VAT.jpg

Recommended Readings
1. Men of Steel
By: Vir Sanghavi
2. Women of Vision
By: Alam Srinivas
3. Stay Hungry Stay Foolish
By: Rashmi Bansal

274
4. Connect The Dots
By: Rashmi Bansal
5. Follow Every Rainbow
By: Rashmi Bansal
6. Everyday Entrepreneur
By: Aruna Bhargava
7. Entrepedia
By: Prof. Nandini Vaidyanathan
8. Entrepreneurship Formulas
By: Ark Sarma
9. The Game Changers
By: Yuvnesh Modi, Rahul Kumar, Alok Kothari
10. The Game Changer
By: A.G. Lafely & Ram Charan

275