BUSINESS ENTREPRENEURSHIP - Vycmou.digitaluniversity.ac/WebFiles/BEG 301_mcom_iii_Sem_book.pdf ·...

BEG. 301

BUSINESSENTREPRENEURSHIP - V

M. Com. Part II

Semester III

YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITYDnyangangotri, Near Gangapur Dam, Nashik 422 222, Maharashtra

Copyright © Yashwantrao Chavan Maharashtra

Open University, Nashik.

All rights reserved. No part of this publication which is materialprotected by this copyright notice may be reproduced or transmittedor utilized or stored in any form or by any means now known orhereinafter invented, electronic, digital or mechanical, includingphotocopying, scanning, recording or by any information storageor retrieval system, without prior written permission from thePublisher.

The information contained in this book has been obtained byauthors from sources believed to be reliable and are correct to thebest of their knowledge. However, the publisher and its authorsshall in no event be liable for any errors, omissions or damagearising out of use of this information and specially disclaim anyimplied warranties or merchantability or fitness for anyparticular use.

YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY

Vice-Chancellor : Dr. M. M. Salunkhe

Director (I/C), School of Commerce & Management : Dr. Prakash Deshmukh

State Level Advisory Committee

Dr. Pandit Palande Dr. Suhas Mahajan Dr. V. V. Morajkar

Hon. Vice Chancellor Ex-Professor Ex-Professor

Dr. B. R. Ambedkar University Ness Wadia College of Commerce B.Y.K. College, Nashik

Muaaffarpur, Bihar Pune

Dr. Mahesh Kulkarni Dr. J. F. Patil Dr. Ashutosh Raravikar

Ex-Professor Economist Kolhapur Director, EDMU,

B.Y.K. College, Nashik Ministry of Finance

New Delhi

Dr. A. G. Gosavi Dr. Madhuri Sunil Deshpande Dr. Prakash Deshmukh

Professor Professor Director (I/C)

Modern College, Swami Ramanand Teerth Marathwada School of Commerce & Management

Shivaji Nagar, Pune University, Nanded Y.C.M.O.U., Nashik

Dr. Parag Saraf Dr. S. V. Kuvalekar Dr. Surendra Patole

Director, Associate Professor and Assistant Professor

Institute of Management Science, Associate Dean (Training)(Finance ) School of Commerce & Management

Pimpri, Pune National Institute of Bank Management, Y.C.M.O.U., Nashik

Pune

Dr. Latika Ajitkumar Ajbani

Assistant Professor

School of Commerce & Management

Y.C.M.O.U., Nashik

Authors Editor

Dr. Madhuri Sunil Deshpande Dr. Parag Saraf

Professor, School of Commerce & Management Sciences Director, Institute of Management Science

Swami Ramanand Teerth Marathwada University, Nanded Pimpri, Pune


Assistant Professor,

School of Commerce & Management, Y.C.M.O.U., Nashik

Instructional Technology Editing & Programme Co-ordinator


Assistant Professor, School of Commerce & Management, Y.C.M.O.U., Nashik

Production

Shri. Anand Yadav

Manager, Print Production Centre, Y.C.M. Open University, Nashik - 422 222.

Copyright © Yashwantrao Chavan Maharashtra Open University, Nashik.

(First edition developed under DEB development grant)

q First Publication : January 2016

q Type Setting : M/s. Master Graphics, Nanded.

q Cover Print :

q Printed by :

q Publisher : Dr. Prakash Atkare, Registrar, Y.C.M.Open University, Nashik - 422 222.

CONTENTSM. Com. Part II (Business Entrepreneurship - V)

Semester III

Contents Pages

Unit 1 : Entrepreneurship And Strategy 9

Unit 2 : Entry Strategies 29

Unit 3 : Strategies For Growth And Development –I 45

Unit 4: Strategies For Growth And Development –II 64

Unit 5 : Strategies For Growth And Development –III 81

Unit 6 : Strategies For Growth And Development –IV 97

Unit 7: Managing Business Growth 115

Unit 8: Financing For Business Growth 131

Unit 9: Exit Strategies 147

Unit 10: Networking 162

Unit 11: Project Management - I 182

Unit 12: Project Management – II 198

INTRODUCTION

Business Entrepreneurship –V comprises of some contemporary issues in

entrepreneurship management with reference to developmental dynamics for

MSMEs comprising entry strategies, growth strategies as well as exit strategies.

This book acclimatizes the students with the practices to sustain and grow an

entrepreneurial venture. It talks about aspects like managing growth, financing

growth, networking, collaboration, franchising, and also project management.

It is intended to encourage thoughts on various possible scenarios and

challenges that arise during the entrepreneurial growth journey.

This book is designed to be friendlier to the users by means of special care to

make the text easier to read and understand. I hope it would enthuse the

students about entrepreneurship as a career option.

With Best Wishes!

Dr. Madhuri Sunil Deshpande

Professor

School of Commerce & Management Sciences

Swami Ramanand Teerth Marathwada

University, Nanded

6

NOTES

Business

Entrepreneurship - V

Unit 1 : Entrepreneurship And Strategy

Understanding Strategy and Strategic Management- Approaches to Strategy,

Strategy Hierarchy

Strategy and Small Business

Unit 2 : Entry Strategies

Enterprise Survival and Growth

Entry Strategies

Buying an Existing Business

Unit 3 : Strategies For Growth And Development –I

Business Growth

Growth Strategies – Ansoff’s Growth Strategies,

Kotler’s Growth Strategies,

Glueck’s Growth Strategies

Unit 4 : Strategies For Growth And Development –II

Corporate Level Strategies

Business Level Strategies

Functional Level Strategies

Unit 5: Strategies For Growth And Development –III

Franchising

Ancillarization

Collaboration

BUSINESS ENTREPRENEURSHIP - VM. Com. Part II

SYLLABUS

7

NOTES

Business



SYLLABUS

Unit 6 : Strategies For Growth And Development –IV

Acquisitions

Mergers

Joint Ventures

Strategic Alliances

Unit 7 : Managing Business Growth

Management of Growth

Designing the Organization – Organization Culture

Leadership – Succession Planning

Management of Change

Unit 8 : Financing For Business Growth

Management of Financial Resources

Venture Capital

Incubators

Accelerators

Angel Investors

Unit 9 : Exit Strategies

Exit Strategy – Succession of Business,

Harvesting Strategy,

Going Public (IPO),

Liquidation

Bankruptcy

Unit10 : Networking

Meaning of Networking

Entrepreneurs’ Networks

8

NOTES

Business



SYLLABUS

Unit11 : Project Management - I

Project Management

Need for Project Management

Challenges of Project Management

Project Classification

Unit12 : Project Management – II

Project Life Cycle Approach

Network Analysis

PERT

CPM

9

NOTES

Business


Entrepreneurship And

StrategyUNIT 1 : ENTREPRENEURSHIP AND

STRATEGY

Structure

1.0 Introduction

1.1 Unit Objectives

1.2 Understanding Strategy and Strategic Management

1.2.1 Approaches to Strategy

1.2.2 Strategy Hierarchy

1.3 Strategy and Small Business

1.4 Summary

1.5 Key Term

1.6 Questions and Exercises

1.7 Further Reading

1.0 Introduction

“The best way to predict your future is to create it”. – Peter Drucker

Until now you have become familiar with the conceptual framework of

entrepreneurship. Also you have studied the dynamics of initiating and managing

small enterprises. You also went through the procedural formalities of setting up

micro, small and medium enterprises (MSMEs). Then you leant the problems and

prospects of small enterprises in the light of government policy and legislative

framework. Over a period of time, through trials and errors, entrepreneurs setup

their businesses so as to ensure smooth functioning and streamlined routine

operations. At this stage, the crucial issue is how to sustain and scale up the

business. This requires strategic orientation and thinking. Let us begin with the

theoretical background of some essentials of strategic management.

1.1 Unit Objectives

After going through this unit, you will be able to

• Comprehend the relationship between entrepreneurship and strategic

management

• State the meaning of strategy and strategy hierarchy

• Know about various approaches to strategy

• Explain the association of strategy with small business

10

NOTES

Business


1.2 Understanding Strategy and Strategic

Management

“Trying to predict the future is like trying to drive down a country at

night with no lights while looking at the back window”. – Peter Drucker

For knowing the significance of strategic management in entrepreneurship,

we have to discuss and comprehend some concepts and terms from the discipline

of strategic management.

Strategy can be considered as a resource for accomplishment of goals. It

is one of the most significant concepts in management and in entrepreneurship. It

is a crucial issue for fetching success for an enterprise. It ensures survival, progress

as well as success.

Henry Mintzberg identified 5 different types of strategies:

• Strategy as a plan - Strategy is defined as being a guide for a specific

course of action. This view is pioneered by George Steiner.

• Strategy as a pattern - On the basis of analysis of patterns of past decisions

and actions, strategy has to be designed and developed.

• Strategy as position - This view is propounded by Michael Porter.

Strategies defined as reflection of a decision to offer particular products/

services in particular markets. Formulations of strategies are affected

by the developments in the competitive environments.

• Strategy as perspective - Peter Drucker views strategy as a system of

values and beliefs of the strategists who are instrumental in shaping a

future of the organization

• Strategy as a ploy - Strategy is seen as behavioral rather than perceptual.

William F. Glueck defines strategy as a “unified, comprehensive and

integrated plan relating the strategic advantages of the firm to the challenges of

the environment. It is designed to ensure that the basic objectives of the enterprise

are achieved”. In this manner, strategy is a unified plan. It binds all the divisions,

departments, sections together. It is comprehensive. It comprises of all the aspects

of the enterprise in a holistic manner.

‘Tackling competition’ is the fundamental nature of strategy. As Kenichi

Ohmae observes, “Without competitors, there would be no need for strategy, for

the sole purpose of strategic planning is to enable the company to gain, as efficiently

as possible, a sustainable edge over its competitors”. Strategy is formulated in

anticipation of the possible moves and counter moves of the competitors. It is a

well thought out plan of action which visualizes the probable actions and reactions

of competitors and embarks upon them. It takes into consideration the strengths

and weaknesses of the competitors, their possible reactions and moves and then

the future course of action is designed in a systematic manner. Along with

‘competitive spirit’, another perspective of strategy can be denoted as ‘future

orientation’.

One has to be very much particular about the relevance and applicability

of strategy. In the words of D. Hambrick, strategy is defined as “the patterns of

the decisions that shape the venture’s internal resource configuration and deployment

and guide alignment with the environment” On similar lines, strategic management


Strategy

11

NOTES

Business



Strategycan be considered as dealing with decisions which determine a business venture’s

internal resource structure and implementation; these decisions influence the

interaction of the business venture with the external environment.

Fred R. David defines strategic management as “the art and science of

formulating, implementing and evaluating cross-functional decisions that enable

an organization to achieve its objectives”.

Strategic management deals with future. Peter Drucker says,

“Management has no choice but to anticipate the future, to attempt to mold it, and

to balance short-range and long-range goals. The future shall not just happen if

one wishes hard enough. It requires decision – now. It imposes risk – now. It

requires action - now. It demands allocation of resources – now. It requires work

- now”.

Strategy formulation deals with planning as well as analysis. Strategic

management comprises of strategy formulation, strategy implementation, evaluation

and control. Strategy formulation deals with planning as well as analysis. It

comprises of determination of mission, and objectives; analysis of strengths and

weaknesses of the enterprise along with environmental opportunities and threats.

The entrepreneur has to begin with defining the mission of the enterprise which

indicates the very purpose of existence of the enterprise. It relates the enterprise

to the needs of the society. Then the entrepreneur establishes objectives of the

organization. Objectives define the enterprise to the society. These are the end

results end results towards which enterprise’s activities are directed. The enterprise

pursues its mission through the objectives.

Figure 1.1: The Process of Strategic Management

In the words of Ansoff, the term strategy indicates the relation between

the enterprise and its environment. The entrepreneur has to pay attention to appraisal

of the organization i. e. internal environment as well as the external environment.

The external environment is composed of various constituents such as economy,

demographics, technology, politics, government, society and culture, ecology and

the like. SWOT analysis plays a crucial role in strategic management. On the

basis of SWOT analysis, the enterprise makes a decision regarding the portfolio

strategy and other strategies to be followed.

The mission and objectives are now clear. The entrepreneur has analyzed

the strengths and weaknesses of his/her enterprise, and also the environmental

opportunities and threats. Now he/she proceeds to generate alternative strategies

in the light of the objectives established. Different strategic alternatives are evaluated

on the basis of predetermined criteria like suitability, feasibility, acceptability etc.

12

NOTES

Business


The strategy has to be in line with the corporate philosophy, mission and objectives.

It should capitalize on the enterprise’s strengths and relevant environmental

opportunities. It should overcome enterprise’s weaknesses and avoid environmental

threats. Further, the strategy should be realistic and practical. The required

resources, inputs, technology should be accessible. The strategy needs to be

evaluated on the basis of profitability as well as its impact on the enterprise with

reference to employees, stockholders, customers etc.

Fred David says, “Strategy formulation is largely an intellectual process

whereas strategy implementation is more operational in character. Strategy

formulation requires good conceptual, integrative and analytical skills but strategy

implementation requires special skills in motivating and managing others. Strategy

formulation requires primarily at the corporate level of an organization while strategy

implementation permeates all hierarchical levels. Strategy formulation requires

coordination among a few individuals, but strategy implementation requires

coordination among many”. Strategy implementation is concerned with execution

and evaluation of the activities and operations that make up the strategy. This is

the action phase of the process of strategy implementation. It comprises of

mobilization and allocation of resources.

1.2.1 Approaches to Strategy

Strategists, academicians, researchers are always in search for an effective

approach to strategy. Let us see some important approaches to strategy.

Peter Drucker on Strategy

“…the continuous process of making present entrepreneurial (risk-

taking) decisions systematically and with the greatest knowledge of their

futurity; organizing systematically the efforts needed to carry out these

decisions; and measuring the results of these decisions against the

expectations through organized, systematic feedback”. – Peter Drucker

According to Peter Drucker, it is not desirable to emphasize only the profit

objective. Because if managers emphasize only on profit objective, they will make

decisions and actions for maximization of profits at present; which he thought,

may be against future of the organization. He suggested eight key areas in which

managers should set objectives:

1. Market standing- Management should set objectives in a way so as to

indicate where it would like to be in relation to its competitors

2. Innovation- Management should set objectives with innovation as the

essence.

3. Productivity- Management should set objectives outlining the target levels

of production

4. Physical and financial resources- management should set objectives

regarding acquisition, application and maintenance of various resources.

5. Profitability- Management should set objective so as to specify the profit

target of the company in a specific manner.

6. Managerial performance and development- Management should set

objectives with a clear focus on productivity by motivating the employees

and improving their morale.

Check Your

Progress

1. Define strategy in

your own way.

2.State the meaning

of strategic

management.


Strategy

13

NOTES

Business


7. Worker performance and attitude- Management should set objectives in

the light of increase in workers’ motivation levels and morale.

8. Public responsibility- Management should set objective which indicate

the enterprise’s responsibility towards the various stakeholders including

its customers and society.

Peter Drucker calls the strategic management process as ‘self-

assessment’. This is considered as the most effective and workable approach to

strategic planning. He advocated that the initial step is to ensure that customers

have input into the process. Customer interviews reveal what they value and why

they buy. Such in-depth interviews provide innovative ideas. Innovation objectives

are usually set around problems which affect growth and profitability. Innovative

opportunities may lie in the Eight Essential Areas of Objectives as mentioned

above. All these objectives need to be clearly communicated and understood by

all the relevant stakeholders.

According to Peter Drucker, every business must answer the five questions:

• What is our mission?

• Who is our customer?

• What does our customer value?

• What are our results?

• What is our plan?

He says, “The five questions appear simple, but they are not. Give them

time to sink in; wrestle with them”.

Peter Drucker says,” Strategic planning is not a box of tricks, a bundle of

techniques”. It is not forecasting. Actually, it is necessary precisely because we

cannot forecast. “Forecasting does not serve the purposes of planners who seek

to direct their organizations to the future”. He opines that strategic planning does

not deal with future decisions. It deals with futurity of present decisions. The

crucial issue is “What do we have to do today to be ready for an uncertain

tomorrow?” It is not about what will happen in the future. It is not the organization

should do tomorrow. It’s about NOW and not about the future. It is not an attempt

to eliminate or minimize risk. Necessarily right risks are to be taken in a rational

manner through the systematic process of planning.

In his essay “Entrepreneurial Strategies”, Peter Drucker talked about the

following strategies. He believes that entrepreneurial strategies are as important

for any business as entrepreneurial management. According to him, entrepreneurial

management means practices and policies within the enterprise and entrepreneurial

strategies mean practices and policies outside the enterprise i.e. the marketplace

in which the enterprise operates. He proposes the following entrepreneurial

strategies:

• Being fustest with the mostest: This is being the unchallenged leader in

the industry by creating an innovative and unique product/service.

• Hitting them where they ain’t i.e. creative imitation: This is sensing

potential opportunities in the innovation of others. This strategy aiming

at market leadership is less risky than the first one.


Strategy

14

NOTES

Business


• Finding and occupying a specialized ‘ecological niche’: This is developing

a monopoly in a small area in which others may not be interested. There

are three possible ways of applying this strategy – the toll-gate strategy,

the specialty skill strategy, the specialty market strategy.

• The entrepreneurial judo aims at entering a market where the established

leaders do not defend it or do not care about it.

• Changing the economic characteristics of a product, a market, or an

industry: This is adapting an existing, well-known product as per the

customer requirements. This strategy can be applied in various ways

such as creating customer utility, pricing, the customer’s reality, delivering

value to the customer.

He states that a strategy may actually be a combination of some of those

listed above; and that different strategies require different behaviours by

entrepreneurs and a different type of innovation.

Michael Porter’s Competitive Analysis

“The essence of strategy is choosing what not to do”- Michael Porter

The five forces model was developed by Michael Porter to help enterprises

assess the nature of an industry’s competitiveness and develop corporate strategies

accordingly. The framework enables an enterprise to identify and analyze the

forces that determine the profitability of an industry. It is aimed to provide a new

way to use effective strategy to identify, analyze, and manage external factors in

an organization’s environment. It is used to evaluate an enterprise’s position in its

industry and to assess its level of competitiveness.

Figure 1.2: Porter’s Five Forces Model

The five forces identified by Porter are categorized into: horizontal forces

– threat of substitutes, threat of new entrants, competitive rivalry; vertical forces

– bargaining power of buyers and bargaining power of customers.

Competitive rivalry is the degree of rivalry between the enterprises in the

market. Competitive rivalry may be higher when similar sized companies operate

in one market. These companies have similar strategies and products have similar

features and offer same benefits. Growth in the industry is slow. There are high

barriers to exit or low barriers to entry. The intensity to rivalry is influenced by the

number of firms, slow market growth, high fixed costs, high storage costs, low

level of product differentiation etc.

If an industry is profitable, it will attract new enterprises. With low barriers,

there is a greater risk of depletion of market share. Barriers to entry comprise

Check Your

Progress

3. Enlist the five

questions of Peter

Drucker.

4. State the eight key

areas in which

managers should set

objectives.


Strategy

15

NOTES

Business


access to inputs, economies of scale, access to infrastructure and/or innovative

technology, patents, high initial investment etc.

With more substitutes for a product, the potential for profit is lesser with

more competitive environment. If the substitutes are lower priced and/or effective

in fulfilling customer needs, it will affect in an adverse manner for the existing

products of the enterprise.

Power of suppliers with reference to their position to dictate terms, setting

of prices etc is an important factor. If the suppliers are few, they would exercise

more power due to high dependency upon them. The bargaining power of suppliers

depends upon brand reputation, geographical coverage, quality, relationship with

customers etc.

Power of customers to affect prices and quality is a crucial issue. If the

buyers either buy in bulk or can easily switch to competitors, their bargaining

power is high. With little or no product differentiation, the customers would dictate

terms. If customers purchase in small quantity, their bargaining power is low. With

high product differentiation, buying power is low.

The situation of concern is: the threat of new entry is quite high, competitive

rivalry is extremely high, buyer power is strong and there is a threat of substitution.

For survival, entrepreneur has to change the situation. He/she need to specialize

in a sector that is protected or find a related business which is strong.

After a systematic analysis, an entrepreneur has to choose and execute a

strategy for the sake of competitive advantage. Porter has propounded three

‘generic strategies’ to be deployed in any industry or any enterprise:

Cost leadership: In this strategy, profit is increased with reduction in costs

by charging competitive prices or market share is increased with reduction in

sales price by retaining profits.

Differentiation: In this strategy, entrepreneur makes the products/services

significantly different from the competition. This strategy fetches success with

good research and development and effective marketing efforts.

Focus: In this strategy, entrepreneurs select niche markets for offering

their products/services. This strategy brings desired results with an in-depth study

of market, customers, competitors and the like. This strategy at times applies a

cost leadership or differentiation option.

Porter suggested execution of strategy at corporate, business unit and

departmental levels. He considered the business unit most significant.

Porter’s competitive ‘diamond’ model is used for assessing relative

competitive strength of nations; and by implication their industries:

• Factor conditions: production factors required for the industry

• Demand conditions: extent and nature of demand within the nation for

product/service

• Related industries: existence, extent and international competitive strength

of other industries in the nation concerned that support or assist the

industry

Check Your

Progress

5.Porter’s five forces

model consisting of

five competitive forces

determine the ——.

6. State the three

generic strategies

propounded by Porter.

7. Enlist the five forces

of Michael Porter.


Strategy

16

NOTES

Business


• Corporate strategy, structure and rivalry: conditions in the home market

that affect the creation, growth and management of corporations.

Core Competence

“What’s the use of running if you are not on the right road” – German

proverb

Competencies are special qualities of an enterprise which facilitates them

to withstand in the face of competition in the market. An enterprise develops its

competencies over a period of time and develops an expertise in using the

competencies. Such competencies are termed as core competencies. Such kind

of specific ability developed by an enterprise is also called as distinctive competence.

A. Sharplin defines distinctive competence as ‘any advantage a company has

over its competitors because it can do something which they cannot or it can do

something better than they can’.

Many organizations achieve strategic success by building distinctive

competencies around the critical success factors (CSFs). CSFs are those factors

which are crucial for enterprises’ success. They are also referred as strategic

factors or key factors for success. Strategies consciously look for CSFs while

exercising strategic management. With CSFs, they are likely to be more successful.

The term core competence has been popularized by Prahalad and Hamel

as an idea around which strategies could be formulated by an organization.

According to Prahalad and Hamel, the competitive/strategic advantage can be

attributed to the core competencies of an enterprise. They discussed analogy of

the tree while discussing core competence. ‘The diversified corporation is a large

tree. The trunk and major links are core products, the smaller branches are business

units; the leaves, flowers, fruits are end products. The root system that provides

nourishment, sustenance and stability is the core competence.’ To identify the

core competence, Prahalad and Hamel prescribed three tests:

• It should be able to provide potential access to a wide variety of markets;

• It should make significant contribution to perceived customer benefit of

the end products and ;

• It should be difficult for the competitors to imitate.

BCG Growth-share Matrix

‘’ A company should have a portfolio of products with different growth

rates and different market shares. The portfolio composition is a function of

the balance between cash flows…Margins and cash generated are a function

of market share.’’-Bruce Henderson

In the early 1970s, the Boston Consulting Group (BCG) developed a model

for managing a portfolio of different business units of major product lines. The

BCG Matrix aims to identify high growth prospects. It categorizes the company’s

products according to growth rate and market share. The BCG matrix is a portfolio

planning model developed by Henderson. A company’s business units are classified

into four categories based on combinations of market growth and market share

relative of the largest competitor. The growth share matrix maps the business unit

position within these two determinants of profitability. BCG matrix has four cells.

The horizontal market represents relative market shares and the vertical access

represents growth rate. Resources are allocated to the business units according to

the situation on the grid. The four cells of this matrix are called as stars, cash

Check Your

Progress

8. What is meant by

core competence?

9. To identify the core

competence, Prahalad

and Hamel prescribed

three tests. Which

ones?

10. CSF means ——

11. The term core

competence has been

popularized by ———


Strategy

17

NOTES

Business


cows, question marks and dogs. Each of these cells represents a particular type

of business.

1. Stars (High share and high growth) - Stars generate large amounts of

cash because of their strong market share. They consume large amounts

of cash because of their high growth rate. If successful, a star will

become a cash cow when its industry matures. The portfolio of a

diversified company should have stars that will become the next cash

cows and ensure future cash generation. Entrepreneurs are advised to

invest in stars. Stars represent business units having large market shares

in a fast growing industry. They may generate cash but because of fast

growing market, stars require huge investments to maintain their lead.

2. Cash cows (High share and low growth) - Cash cows require little

investment. They generate cash that can be utilized for investment in

other business units. They generate more cash than they consume.

Entrepreneurs are advised to invest in cash cows to maintain the current

level of productivity. Such business units usually follow stability strategies.

With further deterioration, retrenchment strategy may be followed.

3. Dogs (Low share and low growth) - Dogs neither generate nor consume

a large amount of cash. They are generally considered cash traps.

Businesses have money invested in dogs. They are likely to make loss

or a very low profit. It is advised to avoid dogs and minimize them in an

enterprise.

4. Question mark (Low share and high growth) - Question mark (or problem

child) grows rapidly and consumes large amounts of cash. Due to low

market share, they do not generate much cash. A question mark has a

potential to gain market share and become a star and eventually a cash

cow when the market growth slows. If huge investment is made, question

marks may become stars. If ignored, the question marks may become

dogs. Question mark is a business unit with a small market share in a

high growth market. Such units require resources, grow market share

but whether they will succeed and become stars is unknown.

BCG matrix is a useful framework which guides for allocation of resources

among different business units. It also enables comparison of various business

units at a glance. It can also be used for resource allocation among products with

a single business unit

Figure 1.3: BCG Growth –Share Matrix

Check Your

Progress

12. What is BCG

matrix?

13. The four cells of

this matrix are called

as ———


Strategy

18

NOTES

Business


Blue Ocean Strategy

Blue ocean strategy is a new way of thinking; it is a new strategic mind-

set. It is a shift in focus from competing to creating new market space, thereby

making the competition irrelevant. The goal is not to hit the competition, but to

make the competition extraneous.

Chan Kim and Renee Mauborgne developed ‘blue ocean strategy’ on the

basis of a study of 150 strategic moves over a period of more than 100 years and

30 industries. They observed that businesses compete with each other for market

share. Typically they work in ‘red ocean’ conditions. According to blue ocean

strategy, businesses work in market place which is free of competitions. Blue

oceans can be created by introducing completely new industries; it can also be

created from within a red ocean while expanding the operations beyond the

boundaries of an existing business. The proponents of blue ocean strategy

propounded that too much emphasis on competition and competitive advantage is

not desirable. Instead, there is a need to find and develop blue oceans; and also to

exploit and protect blue oceans.

According to Kim and Mauborgne, It is not proper for businesses to

succeed by beating competitors. Instead they should systematically create ‘Blue

oceans of uncontested market space’. The strategy is based on high product

differentiation and low cost. It is a systematic approach which makes the competition

irrelevant. Blue ocean strategy creates uncontested market space whereas red

ocean strategy competes in existing market space. Red ocean strategy aligns the

whole system of a firm’s activities with its strategic choice of differentiation or

low cost. Blue ocean strategy aligns the whole strategy of a firm’s activities in

pursuit of differentiation and low cost. Blue ocean strategy makes the competition

irrelevant while red ocean strategy beats the competition.

Blue ocean strategy creates and captures new demands and red ocean

strategy exploits existing demand. In Blue Ocean, demand is created rather than

fought over. It is believed that there is ample opportunity for growth that is both

profitable and rapid. Red ocean strategy makes the value-cost trade-off. Blue

ocean strategy breaks the value-cost trade-off.

The essence of blue ocean strategy can be expressed as follows:

• Make the competition irrelevant

• Don’t compete, create

• Create uncontested market space

Kim and Mauborgne suggested ‘Four Actions Framework’ for businesses

and entrepreneurs instead of Porters ‘five forces’ model. To break the tradeoff

between differentiation and low cost, and to create a new value curve, the

framework possesses four key questions:

• Eliminate: which factors that the company has long competed should

be eliminated?

• Reduce: which factor should be reduced well below the industry’s

standard?

• Raise: what factor should be raised well above the industry’s

standard?

Check Your

Progress

14. ———— devel-

oped blue ocean strat-

egy

15. What is meant by

blue ocean strategy?


red ocean strategy?


Strategy

19

NOTES

Business


• Create: which factor should be created that the industry has never

offered?

The Four Actions framework is expressed as Eliminate-Reduce-Raise-

Create (ERRC) Grid.

1.2.2 Strategy Hierarchy

In the initial phases, entrepreneurs deal with a single or few products,

local market, few customers and simple technology. But, of course, in due course

of time after getting success and stabilizing operations; many of them may think of

including new products/services, new customers, new markets, new technology.

They may plan to increase the scale and scope of operations of their enterprises.

For such enterprises who deal with different business lines holding a variety of

products/services, markets or technology; a single strategy may not be adequate

and appropriate. For such multi business enterprises, there is a need of multiple

strategies at different levels. Such companies organize their activities on the basis

of different divisions. These divisions may be termed as profits centers or strategic

business units (SBUs).

Arthur Sharplin defines an SBU as “any part of a business organization

which is treated separately for strategic management purpose”. Generally SBUs

are involved in a single line business. Ansoff uses the term SBA i.e. strategic

business area so as to refer to external environment of an enterprise. He defines

it as ‘a distinctive segment of the environment’. Multi business enterprises have a

number of SBUs for different SBAs. Each of the SBUs has its own functional

departments. Or they may have a few major functional departments while common

functions are grouped under the corporate level. The different levels of strategy

could be at the corporate level, the SBU level and the functional level. This strategy

hierarchy is also sometimes referred as strategy pyramid.

Figure 1.4 Strategy Hierarchy

The strategy hierarchy is concerned with two types of levels – levels of

management and levels of strategy. The organizational levels are the levels of

strategy of corporate, SBU and functional levels. The strategic levels are the

corporate level, business level and functional level strategies.


Strategy

20

NOTES

Business


According to Sharplin, corporate level strategic management is the

management of activities which define the overall character and mission of the

organization, the product/service segments it will enter and leave, and the allocation

of resources and management of synergy among its SBUs. Corporate strategy is

formulated by the top level corporate management. It is related with the basic

purpose of the enterprise. It deals with decisions regarding the business/businesses

it would engage in; and also about entry into and expansion of such business/

businesses.

Corporate level strategies are directed at achievement of the overall

corporate objectives. These strategies are long term strategies which comprise

the whole organization. These strategies deal with decisions for allocation of

resources among different businesses of an enterprise. They also make decisions

regarding transferring resources from one set of businesses to others. In all,

corporate strategies are meant for managing and nurturing a portfolio of businesses.

The corporate level strategy covers various functions that are performed

by different SBUs. It focuses on the corporate objectives, resource allocation,

and coordination of the SBUs for optimal performance.

Corporate strategy deals with business portfolio i.e. type of business and

makes decisions about strategy/strategies to deploy in the business/businesses.

According to Ansoff, SBU level strategic management is the management

of an SBU’s effort to compete effectively in a particular line of business and to

contribute to overall organizational purposes. SBU level strategies are formulated

by the business heads i.e. senior executives in the light of corporate philosophy

and strategy.

Business level strategy is based on the objectives of SBUs, allocation of

resources among functional areas and coordination of various SBUs for the sake

of contribution to the corporate level objectives.

In the words of Ansofff, “functional-level strategic management is the

management of relatively narrow areas of activity, which are of vital, pervasive,

or continuing importance to the total organization”. Functional-level strategies are

strategies formulated for different functional areas such as marketing, finance,

production/operations, human resources etc. They are formulated by the heads of

functional areas.

Functional strategy is focused on the objectives for specific function,

allocation of resources among different operations within that functional area and

coordination between them so as to contribute to the achievement of SBU and

corporate level objectives.

In a common manner, strategic plans are made at three levels of strategy

i.e. at corporate level, business level and functional level as discussed above.

However, at some other levels also strategic plans are developed. Enterprise level

strategy is concerned with the relationship between the enterprise and the society.

Sometimes strategies are set at a level higher than the corporate level which are

termed as the societal strategies which are also called as enterprise strategies. In

the words of Sharplin, “Enterprise strategy is the organization’s plan for establishing

desired relationship with other social institutions and stockholder group and

maintaining the overall character of the organization”. Societal strategy is based

on a mission statement. It presents a view of how the enterprise relates itself to

the society in terms of a particular need or a set of needs. Corporate level strategies

are based on the societal strategies.


Strategy

21

NOTES

Business


Some strategies may be set at still lower levels. After the functional level,

operational level strategy may be set. Each functional area may need a set of

operational level strategies. Such operational strategies deal with a highly specific

and narrowly defined area. Thompson Strickland says, “Operating strategies

concern how to manage key organizational units and within a business (plants,

sales districts, distribution centres) and how to perform strategically significant

operating tasks (materials purchasing, inventory control, maintenance, shipping,

advertising campaigns)”. These operating strategies are at the bottom of the

strategy pyramid. They are formulated by operating or front-line mangers after

seeking approval from the top bosses through proper channels.

Activities in each of the operational areas contribute to the functional

objectives. Different functional strategies are interlinked with each other. All these

functional strategies operate under the SBU level. Different SBU level strategies

operate under corporate level strategy, which, in turn, operate under societal level

strategy of the corporation. All these strategies at all levels need to coordinate and

synchronize with each other.

1.3 Strategy and Small Business

“It is more important to do what is strategically right than what is immediately

profitable” – Philip Kotler

Small entrepreneurs commonly are not found to practice strategy. They

may talk about strategy, but commonly they do not apply strategic orientation for

their enterprise. They do not deal with strategic planning and strategic decision

making. What might be the reasons behind this lack of interest among small

entrepreneurs in strategy and consequently in strategic management? They may

not be aware about the meaning and significance of strategy for the purpose of

ensuring success for their enterprise. They may perceive strategy as a complex

tool which is needed for large enterprises only which possess multiple businesses

in its portfolio.

Small entrepreneurs are under the impression that strategy is required for

big corporates which are engaged in complex operations mostly at international

level; and that strategic management has no role to perform in small business.

Even if some of them wish to adopt strategic approach, they find it difficult to

visualize and formulate strategy. And implementation of strategy is found to be a

gigantic task for them. There are difficulties associated with manpower, budget,

long time span, scarcity of resources etc.

However, it is highly desirable that all the perspectives and dimensions of

strategy should be understood by the entrepreneurs, so that they would be in a

better position to adopt the framework for their own enterprise.

There are many approaches to strategy formulation some of which are

narrated above in the section 1.2. The essence of strategy lies in creation of a

unique, and exclusive position for the enterprise. It consists of a set of distinctive,

inimitable activities that the enterprises is engaged in, which qualifies the enterprise

to gain a competitive advantage; an edge over its competitors. Competitive

advantage is not easily sought. It not easy to be adapted by any of the competitors

– present as well as future. This feature of competitive advantage results in a

specific and definite position for the enterprise.

The strategy is to be clearly communicated to all the employees of the

enterprise. Everyone has to be encouraged to reflect on strategy. A strategy

Check Your

Progress


strategy hierarchy?

18. What do you know

about the term

‘SBU’?

19. Small

e n t r e p r e n e u r s

commonly are ———

——— to practice

strategy (not found,

found)


Strategy

22

NOTES

Business


document has to be circulated among all levels of the employees from all the

areas of the enterprise. It needs to be unmistakably understood by everyone.

Strategy formulation is not enough. The strategy has to be converted into activities,

operations, actions and goals with a clear focus on key result areas.

Strategy formulation takes place through the process of strategic planning.

This is not a one-time activity. The continuous cycle of strategy formulation,

execution, measurement, review and repositioning has to go on in a consistent

manner.

1.4 Summary

Strategy is a resource for accomplishment of goals. It is a plan of action

to achieve a goal or a set of goals. It comprises of a set of unique activities which

enable an enterprise to gain a competitive advantage.

Strategic management deals with future. Strategy formulation deals with

planning as well as analysis. Strategic management comprises of strategy

formulation, strategy implementation, evaluation and control. Strategy formulation

deals with planning as well as analysis. It comprises of determination of mission,

and objectives; analysis of strengths and weaknesses of the enterprise along with

environmental opportunities and threats. Different strategic alternatives are

evaluated on the basis of predetermined criteria like suitability, feasibility,

acceptability etc. The strategy has to be in line with the corporate philosophy,

mission and objectives. It should capitalize on the enterprise’s strengths and relevant

environmental opportunities. It should overcome enterprise’s weaknesses and avoid

environmental threats. Strategy implementation is concerned with execution and

evaluation of the activities and operations that make up the strategy. This is the

action phase of the process of strategy implementation. It comprises of mobilization

and allocation of resources.

An entrepreneur needs to understand the concept of strategy at different

levels. Enterprise level strategy is the apex level of the strategy. It relates enterprise

with the society at large. Corporate strategy deals with various issues related with

diversification and the management of a portfolio of businesses. Corporate level

strategy manages diversification within the enterprise. Business level strategy

focuses on competitors within the industry. It is concerned with acquisition,

organization and employment of resources. It deals with industry conditions.

Functional strategies manage marketing, finance, accounting and human resource

policies.

According to Peter Drucker, managers should set objectives in eight areas

–market standing, innovation, productivity, physical and financial resources,

profitability, managerial performance and development, worker performance and

attitude, public responsibility. Every business must answer the five questions: what

is our mission, who is our customer, what does our customer value, what are our

results, and what is our plan? He proposed various entrepreneurial strategies such

as being fustest with the moistest, hitting them where they ain’t, finding and


Strategy

23

NOTES

Business


occupying a specialised ‘ecological niche’, and changing the economic

characteristics of a product, a market, or an industry.

Michael Porter developed the five forces model consisting of threat of

substitutes, threat of new entrants, competitive rivalry, bargaining power of buyers,

and bargaining power of customers. He propounded three generic strategies of

cost leadership, differentiation and focus.

The term core competence has been popularized by Prahalad and Hamel

as an idea around which strategies could be formulated by an organization.

According to Prahalad and Hamel, the competitive/ strategic advantage can be

attributed to the core competencies of an enterprise.

The BCG Matrix aims to identify high growth prospects. It categorizes

the company’s products according to growth rate and market share. The four

cells of this matrix are called as stars (High share and high growth), cash cows

(High share and low growth), question marks (Low share and high growth) and

dogs (Low share and low growth).

According to blue ocean strategy, businesses work in market place which

is free of competitions. Blue oceans can be created by introducing completely

new industries; it can also be created from within a red ocean while expanding the

operations beyond the boundaries of an existing business. The proponents of blue

ocean strategy propounded that too much emphasis on competition and competitive

advantage is not desirable. Instead, there is a need to find and develop blue oceans;

and also to exploit and protect blue oceans.

Majority of the small businesses do not practice strategy. Regardless of

the size of the enterprise, strategic planning benefits immensely for advancement

of the enterprise. It brings focus to the enterprise.

1.5 Key Term

• Substitute products: Those products that exist in another industry but

may be used to fulfill the same need.


Questions

1. Why is strategy not a popular tool amongst small business owners and

entrepreneurs?

2. Describe some popular approaches to strategy.

3. Write in detail about blue ocean strategy.

4. Write an essay on Peter Drucker’s views on strategy and strategic

management.

5. Comment on the significance of strategy for small entrepreneurs.


Strategy

24

NOTES

Business


6. What do you know about BCG matrix? Explain in detail.

7. Analyze the terms ‘core competence’ and ‘competitive advantage’ in

the context of strategic management.

8. While formulating strategy, which questions a business must answer,

according to Peter Drucker?

Exercise

Activity 1.1

Meet at least three small entrepreneurs and ask them about application of

strategy and strategic management for their enterprises.

Multiple Choice Questions

1. Peter Drucker says, “The future will not just happen if one wishes hard

enough. It requires ————

i. Decision –now

ii. Allocation of resources – now

iii. Action – now

iv. All the above

2. Pick the odd one out

i. Strategy is a unified plan

ii. Strategy is not relevant in entrepreneurship

iii. Strategy binds all the divisions, departments, sections together

iv. Strategy comprises of all the aspects of the enterprise in a holistic

manner

3. The sole purpose of strategic planning is to enable the company to gain,

as efficiently as possible, a sustainable edge over its —————

i. Competitors

ii. Suppliers

iii. Customers

iv. None of the above

4. Which one of the following is not among the five forces identified by

Porter?

i. Threat of substitutes

ii. Threat of new entrants

iii. Government

iv. Bargaining power of buyers

5. ————— in this strategy, entrepreneurs select niche markets for

offering their products/services


Strategy

25

NOTES

Business


i. Focus

ii. Cost leadership

iii. Differentiation


6. —————— in this strategy, entrepreneur makes the products/services

significantly different from the competition

i. Focus

ii. Cost leadership



7. —————— in this strategy, profit is increased with reduction in costs

by charging competitive prices

i. Focus

ii. Cost leadership



8. “Without competitors, there would be no need for strategy, for the sole

purpose of strategic planning is to enable the company to gain, as

efficiently as possible, a sustainable edge over its competitors”. Who

said this?

i. Kenichi Ohmae

ii. Peter Drucker

iii. Arthur Sharplin


9. Pick up the right alternative

i. Stars – High shares and high growth

ii. Cash cows – Low share and High growth

iii. Dogs – High share

iv. Question mark – Low growth


i. Cash cows require little investment

ii. If successful, a star will become a cash cow when its industry

matures

iii. Dogs neither generate nor consume a large amount of cash

iv. All the above


Strategy

26

NOTES

Business


11. Which one of the following is not associated with strategy?

i. Competitive spirit

ii. Future orientation

iii. Both i and ii


12. Which one of the following alternatives is right?

i. George Steiner viewed strategy as a plan

ii. Michael Porter defined strategies as reflection of a decision to offer

particular products/services in particular markets

iii. Peter Drucker views strategy as a system of values and beliefs of

the strategists

iv. All the above alternatives are right

13. Strategy is defined as being a guide for a specific course of action. This

view is pioneered by ———

i. George Steiner

ii. Michael Porter

iii. Peter Drucker


14. ——————views strategy as a system of values and beliefs of the

strategists who are instrumental in shaping a future of the organization A

strategy is the means to achieve objectives.

i. Peter Drucker

ii. William Glueck

iii. Kenichi Ohmae


15. Strategic management comprises of ———————

i. strategy formulation

ii. strategy implementation

iii. strategy evaluation

iv. all the above

16. Which one of the following is not suggested by Peter Drucker among

the eight key areas in which mangers should set objectives?

i. Market standing

ii. Innovation

iii. Personality


Strategy

27

NOTES

Business


iv. Profitability

17. Which of the following is not associated with a good strategy?

i. Short-term focus

ii. Risk based

iii. Clarity

iv. Flexibility

18. Which of the following is true?

i. Strategy should be known only to the strategists

ii. Strategy should be known to everyone in the organization

iii. Strategy should be known only to mangers

iv. Strategy should be known to strategists and managers

19. Which of the following approach focuses on competition

i. Michael Porter’s five forces model

ii. Blue ocean strategy

iii. Both i and ii


Answers

5. intensity of industry competition and profitability

10. critical success factors

11. Prahalad and Hamel

13. stars, cash cows, question marks and dogs

14. Chan Kim and Renee Mauborgne


1. iv

2. ii

3. i

4. iii

5. i

6. iii

7. ii

8. i


Strategy

28

NOTES

Business


9. i

10. iv

11. iv

12. iv

13. i

14. i

15. iv

16. iii

17. i

18. ii

19. i

1.7 Further Reading

Cherunilam Francis, Business Policy and Strategic Management Text and

Cases, Himalaya Publishing House, Mumbai, 2010

Drucker Peter, Management: Tasks, responsibilities, Practices, Harper &

Row, New York, 1974

http://www.genesismc.co.uk/GenesisGenie/peter-drucker-strategy-

entrepreneurs/

https://www.blueoceanstrategy.com

Kazmi Azhar, Business Policy and Strategic Management, Tata McGraw

Hill Publishing Company Limited, New Delhi, 2005

Taneja Satish, Entrepreneur Development, Himalaya Publishing House,

Mumbai, 2010

www.businessnewsdaily.com/5647-blue-ocean-srategy.html

www.chris-kimble.com/Courses/World-Med_MBA/Strategy-and-

Tactic.html

www.grainnet.com/pdf/additionalmaterials.pdf


Strategy

29

NOTES

Business


UNIT 2 : ENTRY STRATEGIES

Structure

2.0 Introduction

2.1 Unit Objectives

2.2 Enterprise Survival and Growth

2.3 Entry Strategies

2.4 Buying an Existing Business

2.5 Summary

2.6 Key Terms


2.8 Further Reading

2.0 Introduction

The organizational life cycle (OLC) comprises of five stages: start-up,

expansion/growth, maturity, revival and decline. It is observed that almost all or-

ganizations pass through the same phases of OLC. However, some enterprises

enter decline phase immediately after the start-up phase; they cannot pick up

growth due to lack of sustainability.

New entrepreneurs must learn the dynamics of enterprise survival and growth

while planning the launch of their ventures. And this needs strategic approach right

from the beginning. Rather, there is a need of learning strategic framework and

adoption of strategic tools not only from the beginning but ‘before the beginning’.

This is the essence of strategy. This unit deals with how to make a strategic beginning

with the acceptance and application of entrepreneurial entry strategies.

2.1 Unit Objectives


• Understand the concept of growth and development of an enterprise

• Be aware about initial entrepreneurial strategies

• Know about the dynamics of buying an existing business

• Know the advantages and disadvantages of buying an existing

business

• Explain the process of evaluation of an existing business

• Discuss the steps involved in buying a business

Entry Strategies

30

NOTES

Business


2.2 Enterprise Survival and Growth

“By three methods we may learn wisdom; first, by reflection, which is

noblest; second, by imitation, which is easiest; and third, by experience, which

is the bitterest”. – Confucius

In this age of cut-throat competition, enterprises must create and sustain

competitive advantages for their survival and growth. In absence of core

competence/distinctive competence, entrepreneurs cannot hope survival of their

enterprises. This is possible with strategic decision making, well planned and skillfully

chosen strategic moves and countermoves and application of general management

principles. Enterprise survival can never be ensured in absence of strategic

orientation. Those who think big and dare to dream about creation of high growth

enterprises, plan the launch of their enterprises by adoption of entry strategies.

Majority of the small enterprises cannot taste the fruits of success. May

be they are too casual in their approach. May be without giving a deliberate and

systematic thought, they had ventured into the unknown and paid the price for that

in the form of failure. Some small enterprises achieve success, but their achievement

is limited. May be because of sheer luck, or owing to the situational factors they

could see growth of their ventures. And then there are entrepreneurs who are

planners, dreamers, visionaries, strategists; who try to touch the sky and see

phenomenal growth of their ventures and they experience waves of success in

the chain of their ventures in series.

2.3 Entry strategies

Let us discuss new entry of an entrepreneur. Entry of an entrepreneur may

be in the form of introduction of a new product/service to a new market or an

existing market. It may be in the form of offering an established product to an

established/a new market or creation of a new organization. When an entrepreneur

deals with a new product/a new market/a new organization, there are good chances

of market acceptance of such innovations due to their uniqueness. The innovative

features of the product/service/organization differentiate it from the offers of various

competitors. At the same time, there is a possibility of non-acceptance of such

innovations by the market. At one side, there are high chances of success if newness

is accepted by the customers; and at the other side, there are several threats in

case of non-acceptance by the customers. In order to reduce the risk and

uncertainty associated with new entry of an entrepreneur, there is a need of strategic

approach in entrepreneurship i.e. adoption of entrepreneurial strategies.

In the words of Robert D. Hisrich, Michael P. Peters and Dean A.

Shepherd, “Entrepreneurial strategies represents a set of decisions, actions and

reactions that first generate, and then exploit overtime, a new entry in a way that

maximizes the benefits of newness and minimizes its costs”. An entrepreneurial

strategy comprises of generation of a new entry opportunity, and also exploitation

of a new entry opportunity. An entrepreneur is able to generate a new entry

opportunity on the basis of knowledge, technology and other resources. If the

entrepreneur perceives new entry opportunity as valuable, unique and not very

easy for others to copy/imitate, he/she proceeds forward with suck kind of new

entry opportunities. Whether such kind of new entry opportunity will fetch success

or not depends on various factors like the capability and competence of the

entrepreneur, his/her organizing skills, human resource capability etc. When an

entrepreneur succeeds with a new entry opportunity, it doesn’t imply that he/she

would be successful with another new entry opportunity. If the enterprise is unable

Entry Strategies

31

NOTES

Business


to find another new entry opportunity then, life cycle of that enterprise enters

maturity stage and then declines. The long term success of an entrepreneur and

his/her enterprise depends upon the ability to generate and exploit a variety of

numerous new entry opportunities.

Generation of a New Entry Opportunity

When an entrepreneur selects a new entry opportunity, he/she expects

that this opportunity would serve as a competitive advantage. He/she is always in

search of sources of such opportunities for building a strong base of competitive

advantage. Resources can be considered as a source of sustainable competitive

advantage. They provide the foundation for efficient functioning and excellent

performance of the enterprise. Various resources such as money, materials, methods,

man power, market etc can be combined in a variety of ways. Such bundles of

resources enable an enterprise to exhibit good performance. A single resource

may not bring the desired results, but a bundle of resources can certainly exceed

the expectations and give rise to superior performance. According to J. B. Barney,

‘In order for a bundle of resources to be the basis of a firm’s superior performance

over competitors for an extended period of time, the resources must be valuable,

rare and inevitable (including non-substitutable)’. By being ‘valuable’, it indicates

that the resources develop valuable products and services for the customers. The

term ‘rare’ resources implies that there is a rare possibility of competitors to be

present and a rare possibility of a similar offer by any of the competitors in the

market. By being ‘inimitable’ implies that this combination of resources would be

very difficult for competitors to copy/imitate and/or would involve enormous

expenditure of money and efforts.

In the words of Robert D. Hisrich, Michael P. Peters and Dean A.

Shepherd, ‘The ability to obtain and then recombine resources into a bundle that is

valuable, rare and inimitable represents an important entrepreneurial resource.’

The basis of this entrepreneurial resource is knowledge. To quote J.B. Say, “An

entrepreneur may or may not supply capital but he must have judgement,

perseverance and the knowledge of the world of business”. This knowledge is

sought by the entrepreneurs through their day to day experiences accumulated

over a number of years. Such kind of experiences are unique to each and every

entrepreneur. It may not be possible to share this knowledge with others. On the

basis of this knowledge, innovations take place.

For generation of new entry opportunities, entrepreneurs need to be

equipped with market knowledge. They need to be familiar with target customers,

their profile, their needs/wants/preferences, buying habits, buying motives etc.

Technological breakthroughs also are found in several cases having given

rise to new entry opportunities. Technological innovations and inventions create

new products/services, new organizations, new markets.

Exploitation of a New Entry Opportunity

An entrepreneur may find the competitive advantage in being ‘the first’

that is being the ‘first-mover’. He/she may be the first to choose to be ‘the first’

in introducing a new product/service and/or the first to create a new market.

Being the first, there may be only a few customers in the market in the beginning

after the initial launch of the new product/service. But with the right decisions at

proper time and with the help of an appropriate opportunity, market grows speedily

and consequently, the number of customers increase rapidly. And with growth in

market size, competitors are attracted towards the industry. With entry of

competition, market share may be reduced.

Entry Strategies

32

NOTES

Business


Check Your

Progress

1. Do you know the

meaning of

e n t r e p r e n e u r i a l

strategy?

2. An entrepreneurial

strategy comprises

of———————

—, and also ———

————

3. What is a new

entry strategy?

4. Resources can be

considered as a source

of sustainable

c o m p e t i t i v e

advantage.

First-movers select and target the most attractive, profitable market

segments and position their offer in an innovative manner. Being the pioneer, they

position their product as industry standard. First-movers nurture and develop strong

relationships with all the stakeholders including suppliers, distribution intermediaries

etc. They build up their own network.

Along with availing the benefits of being the first-movers, there are several

disadvantages for being the first. Being the first to market, first-movers literally

enjoy monopoly for some time. But the moment at which competition enters, the

dynamics changes. However, the first mover entrepreneur can stop or delay

potential competitors in the industry with the help of entry barriers. He/she strives

to build customers loyalty. The quality, uniqueness of the product/service may

serve as a competitive advantage. The first-movers make efforts to maintain product

uniqueness. It may be in the form of protecting intellectual property such as patents,

copy rights, trademarks and trade secrets. Entrepreneur may choose some entry

barriers so as to discourage competition at least for some time. First-movers may

build switching costs. Customer’s switching costs are the costs that must be borne

by customers if they stop purchasing from current suppliers and begin purchasing

from others. First-movers develop exclusive relationships with the stakeholders

such as suppliers, trade channels, etc. Such kind of entry barriers may prevent or

reduce the extent and degree of competition faced by first-movers.

With increase in competition, typically prices are reduced, marketing and

promotion costs are increased and profits are curtailed. Of course, healthy

competition enhances the performance of enterprises in the industry. With

competitive spirit, each and every enterprise improves its performance and

contributes to increasing trend of industry growth. Each market player strives to

offer more value in their products/services for customers. They want to create a

special position in the mind of the customer by being more innovative and more

efficient.

While developing their products/services, entrepreneurs have to pay

attention to the environmental happenings. They have to analyze key success

factors of the industry in which they are planning to enter. With correct judgment

and application of the key success factors, there is a high probability of success.

However, the speed with which the environment changes, the key success factors

also change accordingly. The entrepreneur has to develop the ability to sense,

understand and adapt to the changes in the environment and organize the resources

in view of that. The success of an entrepreneur depends upon his/her skills in

anticipating the change and then adapting to the change in an intelligent manner.

The environment poses uncertainty in terms of demand, trends, fashions, technology

and the like. The first challenge is to detect the change and another is an intelligent

adaptation to the change.

It is difficult to estimate the demand in the market. Further, the growth

rate of demand in the market has to be assessed. Being the first, there is no past

information available for estimation of potential size of the market. If demand is

overestimated, the entrepreneur may be in trouble. He/she may find that size of

the market is inadequate for sustenance of the entrepreneurial venture. On the

other hand, over estimation of demand may lead to the danger of overcapacity

and the costs associated with it. With an underestimation of market demand, the

entrepreneur may suffer from costs of under capacity. He/she may not be able to

fulfill the demands of the customers and consequently the customers may switch

over to the competitors.

Entry Strategies

33

NOTES

Business


Customers’ needs, preferences, urges and drives may change over a period

of time. Entrepreneur has to pay attention to such kind of changes and make an

adaptation accordingly. If demand is unstable and unpredictable, the first-mover

may have to face several inconveniences. It is advised to the entrepreneur about

delaying the entry in such a situation.

Technological environment presents various threats to the first-movers. Sometimes,

technology may not perform as expected. The entrepreneur may incur problems

of meeting the customer’s promises, maintaining his/her reputation, additional

expenditure on R and D and on production. In this techno savvy world, there is

always a possibility of a new superior technology replacing the previous one.

There is a risk of loss as well as of failure due to various kinds of

uncertainties associated with market demand, technological development,

competitors etc. In a systematic, planned and strategic manner, entrepreneurs

attempt to reduce the uncertainties and risks of various kinds while launching their

new entry strategies.

Imitation strategy

Karl Vesper’s Entry Wedges

It is interesting to learn about Vesper’s entry wedges. Karl Vesper

discussed the concept of ‘entry wedges’ in his book ‘New Venture Strategies’.

These entry wedges are the ways, courses of actions adopted by entrepreneurs

while launching their start-up ventures. These methods deserve attention since

they may affect the manner in which the enterprise would move in a particular

direction and shape its future. The entry wedge can be a part of the enterprise’s

sustainable competitive advantage.

According to Karl Vesper, all new ventures employ one or more of the

three major entry edges: new product or service, parallel competition, and

franchising. Let us discuss these entry wedges one by one.

New product/service: It may not be easy for a new entrepreneur to

make a decision about a new product/service to deal with in the beginning. He/she

typically goes through the process of decision making through an analysis of a

number of variables such as his/her interests, hobbies, skills, expertise, and demand

potential and so on.

The new product/service wedge is denoted by Peter Drucker as “being

first, with the most” strategy. This is high-risk, high-reward entry wedge. It is not

easy to design, develop and launch truly new product/service. New technology

has a fundamental role to play in development of new product/service. ‘Being

first’ speaks about newness. Innovation is instrumental in the launch of new product/

service. With new product/service wedge, entrepreneurs can generate a new

industry or can become market leader of the existing industry. Copying/imitating

of an innovative product/service is not possible for any of the competitors. However,

if the product/service is not an entirely new concept or idea, competitors can

focus on that aspect and snatch the market share to their side. “With the most’’

speaks about comprehensiveness of the product/service. If the strategy do not

cover all the comprehensive aspects such as product features/attributes, guarantee,

warrantee, service, delivery etc, then there is risk of competitor’s entry. Competitors

pick up the missing component and capitalize on that weakness for grabbing the

market share.

Check Your

Progress

5. What is meant by

‘first-mover’?

6. What are the

benefits of being first-

mover?

7. Enlist the

disadvantages of being

the first-mover.

Entry Strategies

34

NOTES

Business


Parallel Competition: Parallel competition is called by Peter Drucker

as ‘creative imitation’. It is a “me too” strategy which introduces competitive

duplications into the market. These competitive duplications are not identical to

existing products/services. Rather, they are parallel. They may involve an innovative

feature. There may be some variation from the existing products/services. If there

is some gap in the existing market offerings, an entrepreneur recognizes such

small/minor shortcomings in the market and attempts to fill the niche i.e. a small

segment of the market. There is no need of distinctive competence. With a minor

variation in any of the aspects of product/service, entrepreneurs make customers

happy and delighted with parallel wedge strategy.

Franchising: The third major wedge is franchising. The entrepreneur

may be either the franchisor or franchisee. The franchisor is the seller of franchises.

He/she expands the business on the basis of his/her long standing in the market,

experience, good image, reputation and expertise. The franchisee invests money,

time and energy to sell product/service developed by the franchisor. The franchisee

pays franchise fee and royalties (usually based on sales). He/she gets support of

the franchisor in terms of training, marketing, operations etc.

Karl Vesper enlists minor entry wedges as follows:

1. Exploiting partial momentum

i. Geographic transfer

ii. Supply shortage

iii. Tapping underutilized resources

iv. Creating or modifying existing distribution channels

2. Customer sponsorship

v. Customer contract

vi. Second sourcing

3. Parent company sponsorship

vii. Joint venture

viii. Licensing

ix. Market relinquishment

x. Spin-off

4. Government sponsorship

xi. Favoured purchasing

xii. Rule change

xiii. Direct assistance

The entrepreneur is familiar with the market. He/she is aware about

product(s) with good potential and exploits this information either by geographical

transfer, or by filing a supply shortage, or by putting underutilized resources to

work, or by creating or modifying existing distribution channels. Geographical

transfer means establishing a successful business in another area. Franchising is a

meaningful entry strategy. Entrepreneurs may start new business by fulfilling market

Check Your

Progress

8. Do you know the

meaning of

franchising?

9. Name the entry

wedges devised by

Karl Vesper.

10. Parallel

competition is called

by Peter Drucker as

——

11. The new product/

service wedge is

denoted by Peter

Drucker as ———

strategy

Entry Strategies

35

NOTES

Business


gaps such as supply shortages. It could also be considered as geographical transfer

when product/service is transferred from one area to another where it is in short

supply. Any of the underutilized resources, may be human, physical, financial,

technological or organizational and the like, may be put to productive use by

launching a new venture. Underutilized physical resources may be by-product,

waste or worn-out product.

Customers may encourage entrepreneurs for launching new ventures either

by customer contract or by second sourcing. With customer contract, the new

entrepreneurs can get guarantee of sales and initial financing. Entrepreneurs can

choose to become a second source with the support of customers. The customers

may provide financial, technical, managerial assistance for getting supply as per

their needs and requirements.

A parent company can help establish a new venture by joint venturing,

licensing, market relinquishment, or spin-off. Under a licensing agreement, the

entrepreneur contracts with the parent company to produce a product/service or

employ a system or technology. The entrepreneur gets the benefit of experience

and expertise of the parent.

2.4 Buying an Existing Business

Entrepreneurs may launch their own businesses, or purchase a franchise or

buy an existing business. Some of them find it easy and convenient to evaluate

and purchase existing business and develop it to suit and fulfill their requirements.

They do not wish to take the pains of detailing a comprehensive business plan,

working out on all the particulars, entering into various procedural formalities,

seeking approvals, sanctions etc and then see the enterprise functioning with full

momentum. They do not wish to experiment with trial production runs, test

marketing, human resource challenges and then wait for getting market acceptance

and develop their own standing in the market. Instead they buy an existing, mostly

a profit making business. By purchasing existing business, entrepreneurs save

time, money and energy required to launch a new business. In an existing business,

almost all the trials and errors for establishing an efficient product operation have

been proved successful. The product/service is well received by the target

customers. The enterprise is well settled with streamlined operations and efficient

functioning and well placed in a good location. A successful business may continue

to be successful in future also. On the basis of these assumptions, buyer

entrepreneur decides to buy existing running businesses. And now after such

purchase, the buyer entrepreneur needs to make few changes and modifications

in the business, for improvement. History of the business, various previous records

and documents would be a good beginning to gain command over the newly bought

business. The past employees of the business and especially the previous owner

entrepreneurs can provide useful information. It’s always easier to raise money

for existing business than for a new business.

Along with advantages, various disadvantages also can be attributed with

reference to buying an existing business. There is a high probability that business

may not be as attractive and as profitable as it seems. It is quite probable that the

business may have been incurring loss. There is possibility of an attempt to cover

up the facts and manipulation of accounting figures so as to project rosy picture of

the business. There is always a risk. The business may have been poorly managed.

The previous employees of the business may not be able to accept change and

Check Your

Progress

12. What are the

benefits of buying an

existing business?

13. Are there some

disadvantages in

buying an existing

business?

Entry Strategies

36

NOTES

Business


cope up with the new leadership, management style and corporate culture.

Customers may not accept the change in ownership and consequent changes

regarding product/service etc. If proper attention is not paid at the time of purchase,

there is a probability that the equipment, machinery and facilities may be outdated

and inefficient. That might contribute to high operating costs, reduced profit margins,

may be losses. The business location may not be appropriate and suitable for the

buyer entrepreneur.

The Steps in Buying a Business

In the light of some of the probable disadvantages of buying an existing

business as discussed above; an entrepreneur has to be very much careful in

selection of a suitable business for buying in. He/she has to decide the criterion

while planning to buy out an existing business. He/she has to follow a systematic,

logical and methodological approach in acquiring the existing business as described

below:

• Self-appraisal to determine suitability to the type of business

The entrepreneur has to begin with a self-appraisal to determine the type

of business which suits him/her: self-appraisal in terms of strengths, abilities,

hobbies, interests, skills etc. He/ she has to deliberate on various relevant issues

such as which business activities he/she might be interested in, the type of businesses

to be preferred and to be avoided, area of his/her expertise and experience, the

type and degree of agreeable risks, size of the business, preference towards

geographical locations etc. The entrepreneur has to consider the product/service

which suits him/her. The product/service should be suitable to his/her skills,

knowledge, expertise etc.

• Selection criterion for buy out

Entrepreneurs need to bring out their personal preferences for certain

geographical locations. There may be some personal reasons, family reasons, and

business reasons for setting up businesses in particular places. Business prospects

also dictate the location in several cases. Some may restrict their selection to the

places of their liking where they would like to settle down. Sometimes family

needs also mean an essential consideration. Financial capacity is also a vital

parameter for choosing a suitable business. The entrepreneur has to clearly assess

the amount of money he/she is able to raise from various available sources in the

light of their paying capacity. He/she has to think about availability and size of his/

her own contribution, debt arrangement from banks and other financial institutions.

The entrepreneur has to analyze carefully his/her expectations and comfort

level about the size and type of business, the scope of its operations in terms of

sales, turnover, profitability etc. Consequently he/she needs to make an assessment

about the time, effort and energy he/she would have to put in the business they

may buy in.

• Sources of search for buy ins

Now the entrepreneur has decided the criteria, he/she has to search for

the potential businesses most likely to be bought in. There are various sources for

search of suitable businesses which meet the buyer’s criteria. Typical sources

include business brokers, and consultants. They have a list of prospective sellers

which they share with their clients by charging a fee. They get brokerage also

after finalizing the deal. Consultants help their clients by providing them market

information alternative financing method and the like. They negotiate with the

Entry Strategies

37

NOTES

Business


sellers on behalf of their client. Now a day, the internet and the World Wide Web

has become a popular source for entrepreneurs to identify the businesses available

for buying. Business brokers have developed their own websites Bankers,

accountants, investment bankers, venture capitalists, chartered accountants,

financial institutions, trade associations etc also constitute important sources of

business information. Entrepreneurs may use professional advisers also for selling

and buying their business. Industry contacts such as suppliers, distributors,

customers, insurance brokers etc are other sources of search for buy ins along

with newspapers and trade journals which maintain listing of businesses for sale.

Sometimes, some important clues are given through networking that is through

social and business contacts with friends and relatives. And if entrepreneurs are

interested in a particular business, the option of knocking on doors of the business

is always open for the entrepreneurs even if such businesses are not advertised as

being ‘for sale’.

• Identification and evaluation of candidate businesses

There are various advantages of buying an existing business. There is

every probability that the successful existing business may continue to be successful

in future also. The successful business already has loyal and satisfied customers.

It may mean a well-developed linkage with suppliers, vendors, bankers, creditors,

financiers and other intermediaries. The employees and the managers are well-

acquainted with the organizational culture on the basis of their associations and

experience with the business. After buying the existing business, immediately the

revenue from the business begins. There is no waiting time for earning money as

in case of a new venture.

On the basis of past performance, existing business needs to be evaluated.

The prospective buyer should evaluate the business’s assets to determine their

value. He/she should also check the condition of equipment, building with the help

of professionals. He/she should also assess inventories and other assets, accounts

receivables, accounts payable. Past data of profits, sales as well as turnover over

a number of years is to be analyzed for consistency and to get an idea about the

future growth prospects. Financial condition of the business has to be assessed

with the help of financial statements, income tax returns, sales records, legal

documents, and cash flow.

It is needed to have some idea about the motives of the seller entrepreneurs

before finalizing the decision. There is a possibility that the product/service has

become outdated. So as to avoid the probable future losses, the entrepreneur may

have taken the decision about selling the venture. There is also a probability that

the seller entrepreneur may not have been able to cope up with the speed with

which technological changes are taking place. For some products/ processes,

technology changes very rapidly. The seller entrepreneur may not have been able

to arrange resources for acquisition or development of new technology and the

infrastructure needed to manufacture and market the product/service. An

apprehension of technological obsolescence may direct an entrepreneur to sell the

enterprise. Entrepreneurs may get frustrated due to increasing competition.

Sometimes it is observed that, when a successful enterprise is offered good price

for his/her venture, it works out an irresistible temptation to make money. Personal

reasons or family needs may have prompted the seller entrepreneur to wind up

the venture. Some entrepreneurs may be interested in changing their careers.

They may sell out their ventures for starting a new venture or enjoy the comforts

of life out of the wealth generated by the sale. Entrepreneurs launch their small

ventures; the business flourishes speedily and the entrepreneurs may not be able

Entry Strategies

38

NOTES

Business


Check Your

Progress

14. What are the

motives of selling an

existing business?

15. Name some

sources of search for

buy-ins.

16. State the steps in

acquiring a business in

the right way.

to manage the business growth independently on their own. For managing such

high growth businesses, the business needs to be corporatized. However, if the

entrepreneurs do not like to share their ventures with others, the only option left is

to sell the business. Entrepreneurs may face succession problem. After getting

old, he/she may not find a suitable, eligible family member to continue with his/her

business. In such case, he/she is left with no option but to dispose of the business.

Several times seller entrepreneurs do not reveal their motivations for sale of their

business. However, the buyer entrepreneur has to investigate and probe further

before finalizing his/her buying decision.

Thomas W. Zimmerer and Norman M. Scarborough suggest the potential

buyer to explore the business opportunity by examining five critical areas:

1. Why does the owner want to sell?

2. What is the physical condition of the business?

3. What is the potential for the company’s products or services?

4. What legal aspects should be considered?

5. Is the business financially sound?

Evaluating these five areas of a business is known as performing due

diligence i.e. the process of investigating the details of a company that is for sale

to determine the strengths weaknesses, opportunities and threats facing it.

Determining the Value of a Business

The decision to buy an existing business depends upon proper valuation of

the business. For proper valuation of the business, information about assets of the

business needs to be collected. On the basis of the information, future performance

and prospects of the business can be appraised. Business assets are tangible as

well as intangible. Tangible assets include land and buildings, plant and machinery,

inventory, accounts receivable, trademarks, patents, vehicles; etc. Intangible assets

are in the form of goodwill, reputation, human resources and the like. It is somewhat

easy to assess the tangible assets whereas being subjective, intangible assets are

somewhat difficult to evaluate. For evaluating goodwill, the important aspects to

be considered are reputation, image, credit rating, clientele, etc. The valuation of

intangible assets should be fair to both the buyer entrepreneur and the seller

entrepreneur.

Buyer entrepreneur is keenly interested in assessing performance of the

enterprise which is under consideration for buying. He/she wants to know about

the profitability of the enterprise on the basis of operational performance. Health

of the enterprise can be assessed by reviewing the functional areas of marketing,

finance, production and human resources. Marketing performance has to be

appraised on the basis of sales, growth in sales, market share, changes in market

share, credit policy and the like. Distribution policy, sales force management,

customer service etc also matter a lot with reference to marketing effectiveness.

Efficiency of production and operations system of the enterprise also

contributes to profitability in a major way. The issues to be investigated relating to

the operations system comprise of plant and machinery, production planning and

control, inventory management, quality assurance, production efficiency, plant and

equipment maintenance, etc. Issues related with safety, waste disposal, pollution

control policy etc also deserve attention.

Entry Strategies

39

NOTES

Business


Operational performance of several financial parameters also has to be

looked into such as profitability and the like and financial deficiencies also through

an analysis of various financial statements such as account books, balance sheets,

profit and loss account etc.

For evaluation and appraisal of functional areas, services of professionals

and experts such as consultants, chartered engineers, surveyors, lawyers, chartered

accountants should be hired.

The buyer entrepreneur needs to conduct market research and study the

customers, competitors, marketing strategies of competitors also. He/she can make

an assessment of the existing market, its growth rate, changes in customers’

motivations, preferences etc and make future projections.

For valuation of the business to be bought, there are two approaches – the

assets approach and the earning approach.

The assets approach is based on the assets of the enterprise and does

not have any relation to their earning potential. The assets valuation of an enterprise

may be based on the following methods:

Book value of the assets: It is also called as ‘balance sheet method’ and

‘net worth approach’. In this method, the values of various assets given in the

latest balance sheets of the enterprise are taken as worth of the assets. From the

total book value of the assets, the amount of external liabilities is deducted to find

out the net worth of the enterprise. Net worth = total assets – total liabilities. This

is the value of the business without considering goodwill.

The adjusted book value method: in this method, the book value of assets

and liabilities are adjusted so as to reflect their real (realizable) value. The value

an intangible asset such as good will is added to the value of total assets. This

method is also called as adjusted balance sheet technique.

Selected assets method: in this method, the buyer selects only selected

assets of the seller for evaluation. Equipments and inventories remain with the

seller if not needed by the buyer entrepreneur.

The earnings approach is based on the earning capacity of the target

enterprise. The assumption is regarding positive correlation between funds invested

in the enterprise with the profits. The earnings approach focuses on the future

income potential of the business based on the proposition that an enterprise’s value

depends on its ability to generate consistent earnings over time.

The market approach (or price/earnings approach) uses price/earnings

ratios of similar businesses listed on a stock exchange to establish the value of a

company. A company’s price/earnings ratio is the price of one share of common

stock in the market divided by its earnings per share (after deducting preferred

stock dividends). To get a representative price/earnings ratio, a buyer should average

the price/earnings of as many similar businesses as possible. To compute the

company’s value, the buyer multiplies the average price/earnings ratio by the

company’s estimated earnings.

Buyer entrepreneur faces a dilemma regarding use of the abovementioned

methods for determining value of a business, No single method can be said to be

the best. Each of these methods may yield a range of values. Buyer should look

for values that might cluster together and then determine a reasonable offering

price on the basis of their judgement.

Check Your

Progress

16. Name a few

tangible assets.

17. Do you know some

intangible assets?

18. Which techniques

can be used for

determining the value

of a business?

Entry Strategies

40

NOTES

Business


2.5 Summary

Entry of an entrepreneur may be in the form of introduction of a new product/

service to a new market or an existing market. It may be in the form of offering

an established product to an established market or a new market or creation of a

new organization. In order to reduce the risk and uncertainty associated with new

entry of an entrepreneur, there is a need of strategic approach in entrepreneurship

i.e. adoption of entrepreneurial strategies.


that is being the ‘first-mover’. He/she may be the first to choose to be ‘the first’

in introducing a new product/service and/or the first to create a new market.

An entrepreneurial strategy comprises of generation of a new entry

opportunity, and also exploitation of a new entry opportunity. An entrepreneur is

able to generate a new entry opportunity on the basis of knowledge, technology

and other resources. If the entrepreneur perceives new entry opportunity as

valuable, unique and not very easy for others to copy/imitate, he/she proceeds

forward with suck kind of new entry opportunities. Whether such kind of new

entry opportunity will fetch success or not depends on various factors like the

capability and competence of the entrepreneur, his/her organizing skills, human

resource capability etc.


that is being the ‘first-mover’. First-movers nurture and develop strong relationships

with all the stakeholders including suppliers, distribution intermediaries etc. They

build up their own network. Being the first to market, first-movers literally enjoy

monopoly for some time. The quality, uniqueness of the product/service may serve

as a competitive advantage. The first-movers make efforts to maintain product

uniqueness. It may be in the form of protecting intellectual property such as patents,

copy rights, trademarks and trade secrets. Entrepreneur may choose some entry

barriers so as to discourage competition at least for some time.

According to Karl Vesper, all new ventures employ one or more of the

three major entry edges: new product or service, parallel competition, and

franchising. The new product/service wedge is denoted by Peter Drucker as “being

first, with the most” strategy. This is high-risk, high-reward entry wedge. Innovation

is instrumental in the launch of new product/service. Parallel competition is called

by Peter Drucker as ‘creative imitation’. It is a “me too” strategy which introduces

competitive duplications into the market. The third major wedge is franchising.

The entrepreneur may be either the franchisor or franchisee. The franchisor is

the seller of franchises. The franchisee invests money, time and energy to sell

product/service developed by the franchisor.

Entrepreneurs may launch their own businesses, or purchase a franchise

or buy an existing business. By purchasing existing business, entrepreneurs save

time, money and energy required to launch a new business. Along with advantages,

various disadvantages also can be attributed with reference to buying an existing

business. The steps in buying an existing business are: self-appraisal to determine

the suitability to the type of business, selection criterion for buyout, sources of

search for buy ins, identification and evaluation of candidate businesses.

The decision to buy an existing business depends upon proper valuation of

the business. For valuation of the business to be bought, there are two approaches

– the assets approach and the earning approach. The assets approach is based on

the assets of the enterprise and does not have any relation to their earning potential.

Entry Strategies

41

NOTES

Business


The assets valuation of an enterprise may be based on methods such as book

value of assets, the adjusted book value method, selected assets method. The

earnings approach is based on the earning capacity of the target enterprise. The

assumption is regarding positive correlation between funds invested in the enterprise

with the profits. The market approach (or price/earnings approach) uses price/

earnings ratios of similar businesses listed on a stock exchange to establish the

value of a company.

2.6 Key Terms

• Risk: The probability, and magnitude of downside loss which could result

in bankruptcy

• First-mover: Also called as market pioneer, the first company to enter

a market

• Core competence: A concept introduced by C. K. Prahalad and Gary

Hamel. It is defined as a harmonized combination of multiple resources

and skills that distinguish a firm in the marketplace


Questions

1. What are the advantages of buying an existing business? Write down

the disadvantages of buying an existing business?

2. How to evaluate a target business for buying in?

3. What are the advantages to an entrepreneur in buying an existing business

over starting a new one?

4. Explain in detail the issue of evaluating an existing business.

5. Outline the steps involved in buying a business.

6. Why do many entrepreneurs run into trouble when they buy an existing

business? What areas of an enterprise should an entrepreneur consider

when he/she plans to purchase it?

Exercise

Activity 2.1

Meet at least three entrepreneurs who have purchased existing businesses

and seek information about the dynamics of entrepreneurial buy-ins.


1. Pick up the wrong alternative

i. A single resource may not bring the desired results, but a bundle of

resources can certainly exceed the expectations and give rise to

superior performance

Entry Strategies

42

NOTES

Business


ii. Resources can be considered as a source of sustainable competitive

advantage

iii. Both i and ii are wrong

iv. Both i and ii are right


i. Entry of an entrepreneur may be in the form of introduction of a

new product/service to a new market or an existing market.

ii. Entry of an entrepreneur may be in the form of offering an established

product to a new market or creation of a new organization

iii. Both i and ii are wrong

iv. Both i and ii are right

3. Which of the following is a disadvantage to first-mover?

i. Environmental instability

ii. Customer uncertainty

iii. Short lead time

iv. All the above

4. Which of the following is a first-mover advantage?

i. Cost advantages

ii. Less competition

iii. Both i and ii


5. Which of the following is the entry wedge devised by Karl Vesper?

i. New product/service

ii. Parallel competition

iii. Franchising

iv. All the above

6. Which of the following is not related with the ‘new product/service’

strategy?

i. Competitive duplication

ii. High-risk, high-reward entry wedge

iii. Innovation

iv. Comprehensiveness

7. Which of the following alternative is not related with ‘parallel competition’

strategy?

i. Creative imitation

Entry Strategies

43

NOTES

Business


ii. Being first, with the most

iii. Competitive duplications

iv. All the above

8. Which of the following is associated with ‘parallel competition’ strategy?

i. Competitive duplications

ii. A minor variation from the existing product/service

iii. Franchising

iv. Creative imitation

9. ———— is a seller motive

i. Outdated product/service

ii. Technological changes

iii. Both i and ii


10. Pick the odd one out:

i. There is a high probability that business may not be as attractive

and as profitable as it seems.

ii. It is quite probable that the business may have been incurring loss.

iii. The business may have been poorly managed

iv. By purchasing existing business, entrepreneurs save time, money

and energy required to launch a new business

11. Pick the odd one out:

i. It’s always easier to raise money for existing business than for a

new business

ii. By purchasing existing business, entrepreneurs save time, money

and energy required to launch a new business.

iii. In an existing business, almost all the trials and errors for establishing

an efficient product operation have been proved successful.

iv. There is a high probability that business may not be as attractive

and as profitable as it seems

Answers

Check Your Progress

2. generation of a new entry opportunity, exploitation of a new entry

opportunity

4. True

10. Creative imitation

11. Being first, with the most

Entry Strategies

44

NOTES

Business



1. iii

2. iii

3. iv

4. ii

5. iv

6. i

7. ii

8. iii

9. iii

10. iv

11. iv

2.8 Further Reading

Dollinger Marc J., Entrepreneurship Strategies and Resources, Pearson

Education, Delhi, 2003

Hisrich Robert D., Peters Michael P., Shepherd Dean A, Entrepreneurship,

Tata McGraw Hill Education, New Delhi, 2010

Raichaudhuri Anjan, Managing New Ventures Concepts and Cases on

Entrepreneurship, PHI Learning Pvt. Ltd., New Delhi, 2010

Shankar Raj, Entrepreneurship Theory and Practice, Vijay Nicole Imprints,

Chennai, 2012

Taneja Satish, Entrepreneur Development, Himalaya Publishing House,

Mumbai, 2010

Zimmerer Thomas W., Scarborough Norman M., Essentials of

Entrepreneurship and Small Business Management, PHI Learning, New Delhi,

2011

Entry Strategies

45

NOTES

Business


UNIT 3 : STRATEGIES FOR GROWTH

AND DEVELOPMENT –I

Structure

3.0 Introduction

3.1 Unit Objectives

3.2 Business Growth

3.3 Growth Strategies

3.3.1 Ansoff’s Growth Strategies

3.3.2 Kotler’s Growth Strategies

3.3.3 Glueck’s Grand Strategies

3.4 Summary

3.5 Key Terms


3.7 Further Reading

3.0 Introduction

Many big corporates were started as small enterprises. Typically, small

enterprises are expected to grow to medium scale and then become large

enterprises. However, in actual practice, this is not commonly found as a natural

recourse. Some enterprises remain in the startup phase for a long period of time.

Some entrepreneurs may not be interested in growth. They create their enterprises

out of their hobbies, interests, expertise, skills and the like. Individual capability is

the major factor for initiation of such enterprises. Obviously, such entrepreneurs

do not aspire for growth and expansion of their enterprises. They take pleasure in

managing their enterprises on their own. They apprehend that they may not be

able to manage the increase in scale of their operations beyond a particular limit.

Because increased scale of operations would mean delegation of authority, reduced

control over the operations, sharing of authority and responsibility which such type

of entrepreneurs do not like. Growth of enterprises beyond a particular limit

presupposes a strong business model independent of the owner entrepreneur.

An entrepreneur has to visualize clearly about the motive to grow and

analyze the reasons behind the growth urge. The issue is whether the business

model is supportive of business growth and capable of adequate profitability.

There are enterprises that have grown to be medium and then large

enterprises. Some enterprises pick up growth and then fall down. Some enterprises

become sick and then are closed down. Some enterprises continue their existence

for years together with a rich history of profits and goodwill.

Strategies For Growth And

Development –I

46

NOTES

Business


There is a wide diversity in the evolution and growth of small enterprises.

The life cycle stages of startup, expansion/growth, maturity/saturation, revival

and decline vary for each and every enterprise. The duration of time for each

phase of the life cycle varies. Some enterprises stay at a particular stage for a

longer duration and for some stages quickly they may move from one stage to

another. There are some enterprises which take fifty to sixty years to grow to

medium/large size whereas some businesses grow rapidly to a large size in a short

span of time.

There are ups and downs over the life history of enterprises. While moving

from one phase to another, there are innumerable risks and challenges. The journey

from the initiation to the stage of being small, medium or large enterprise is also

not without facing countless threats and hazards. Let us be cognizant about all

these matters which impact an enterprise’s growth and also with the ways and

strategies through which growth is achieved.

Entrepreneurship development and enterprise creation deals with two major

aspects. The first is initiation and startup of a new venture. And the second part is

‘how to sustain and expand the business?’ This unit speaks about various issues

relating to making the entrepreneurial ventures bigger.

3.1 Unit Objectives


• Be aware about possible growth opportunities

• Know how to look for and create business growth opportunities

• Learn the factors and issues which impact an enterprise’s growth

• Explain the framework of growth strategies propounded by Ansoff,

Kotler and Glueck

• Describe the various types of expansion strategies

3.2 Business Growth

A natural urge for growth is commonly found among entrepreneurs. If

such kind of growth drive is supported by environmental opportunities, then the

entrepreneurs certainly grab such openings and achieve growth. An entrepreneur

may like to grow for increasing its market share. Even to protect the market share

in a growing market, growth is essential. When the competitors are growing,

there is no option left but to grow for any enterprise. Otherwise it may lag behind

the competition. Growth may be a competitive strategy. Sometimes entrepreneurs

follow their competitors in terms of their growth options. Sometimes they attempt

to surpass competition with excellence, improvement over competitors’ offers and

grow.

A certain level of growth is needed even for survival. An enterprise has to

maintain operations at a particular level; otherwise, if the scale of operations falls

below the optimal level, then the enterprise may not be able to break-even. The

overheads and fixed cost may not be recovered and it may result in losses.

Sometimes growth is targeted for the sake of full utilization of human as

well as non-human resources. In absence of this approach, the potential of the

Check Your

Progress

1. Name few busi-

nesses which took a

long time to grow.

2. Can you name

some businesses

which have grown to

a large size in a short

span of time?


Development –I

47

NOTES

Business


enterprises may remain untapped and unexploited. Good people stay in the

organization only if it is a growing concern. Talented human resources are motivated

only with challenges, opportunities and growth. Sometimes exploitation of growth

can be a motivation for growth.

Some entrepreneurs aspire for growth with an eye on seeking market

leadership. They may diversify their businesses to reduce risks. To increase profits

is often an objective of growth.

By looking at some indicators, we can see growth in an enterprise such as

increase in net worth, increase in total assets, increase in turnover, increase in

profits, increase in market size, increase in market share, increase in the scale of

operations, increase in the number of employees. All of these indicators may not

be shown at the same time.

Business growth is a positive sign. It is welcome by almost all enterprises.

However, sometimes growth is not found to be without risks and dangers. By

inviting growth, the business may be putting itself in trouble. It may invite some

hazards also.

New activities, in the initial phases, require more care, more energy, more

time and continued focus. They may consume prime resources, prime time and

energy of the entrepreneurs. Entrepreneurs may pay more attention to new business

and existing business may remain unattended which is not desirable. If the new

business is in loss, consequently the old/existing business also get adversely affected

by such failure. With growth, it may become difficult for entrepreneurs to manage

the expanded scale of operations. They may become ineffective in their approach

in management. Further, sometimes expanded business would suffer if the demand

decreases. It may be unfortunate if growth is not supported by favourable

environment. With growth, entrepreneurs may have to forgo several gains, subsidies,

reimbursements, paybacks, and concessions which are meant for small enterprises

only. They may not avail benefits of several government schemes. And on the

other side, their increasing growth curve may attract the attention of competitors,

government and public.

3.3 Growth Strategies

In the previous unit 2, we have studied new entry strategy. An

entrepreneurial entry strategy consists of generation of a new entry opportunity

and also exploitation of a new entry opportunity. With a successful new entry, the

entrepreneur grabs an opportunity to grow his/her business. He/she introduces a

new product/service into the existing market and seeks an opportunity to increase

his/her market share. He/she makes an entry into new market and gets an

opportunity to deal with new customers segments. In a structured manner with a

step by step approach, it is difficult to talk about generation of attractive growth

opportunities. However, we can explore the probabilities of suggesting some models

which would guide entrepreneurs while searching for growth opportunities on the

basis of a sustainable competitive advantage. Let us begin with Ansoff’s growth

strategies, then we will describe Philip Kotler’s growth strategies followed by

expansion strategies covered under William Glueck’s grand strategies as one out

of the four types of strategic alternatives.

3.3.1 Ansoff’s Growth StrategiesWe have seen in the previous unit that, new entry opportunities arise on

the basis of knowledge of the entrepreneur and organizational knowledge.

Entrepreneurs and their enterprises have knowledge about the product/service

Check Your

Progress

3. State few reasons

for growth.

4. Can you write

some indicators of

growth?

5. Explain some risks

of growth.


Development –I

48

NOTES

Business


they currently produce and market (the existing product) and about the group of

customers to whom they currently sell the product/service (the existing market).

Figure 3.1: Growth Strategies based on Knowledge of Product and/or

Market

Figure 3.1 presents Ansoff’s Product/Market expansion grid which can

be considered as a model of different growth strategies. It shows different

combinations of different levels of these types of knowledge. These growth

strategies capitalize on some aspect of the entrepreneur’s and enterprise’s

knowledge base. In this manner, they can lead to a competitive advantage. These

growth strategies are: penetration strategy, market development strategy, product

development strategy and diversification strategy.

3.3.2 Kotler’s Growth Strategies

Philip Kotler talked about growth strategies in terms of three major

categories: Intensive growth strategy, Integrative growth strategy, and

Diversification growth strategy.

Figure 3.2: Growth Strategies

Check Your

Progress

6. Name the growth

strategies devised by

Ansoff.

Source: H.I. Ansoff, “Strategies for Diversification”: Harvard Business Review, 1957, 5. pp. 113-124,

Quoted in Kazmi Azhar, Business Policy and Strategic Management, Tata McGraw Hill Publishing

Company Limited, New Delhi, 2009, p. 150


Development –I

49

NOTES

Business


Intensive Growth Strategies :

Intensive growth strategies achieve further growth for existing products

and/or in existing markets. There are three important intensive growth strategies:

market penetration, market development, and product development.

Market penetration strategy

Market penetration strategy emphasizes on the enterprise’s existing product

in existing market. And the entrepreneur endeavors to penetrate this product or

market further by encouraging existing customers to buy more and more of the

enterprise’s existing products. The efforts are directed towards more frequent

repeat purchases. This strategy aims to expand the size of the existing market by

increasing market share. It does not involve anything new for the enterprise.

This strategy is aimed towards increase of the sale of existing/current

products in the existing/current markets. There are various approaches to achieve

this. The entrepreneur attempts to increase the enterprise sales to the current

customers. Again there is a big opportunity of increasing sales by appealing non-

users for using the product. Several non-users can certainly be converted into

users. Some new uses of the existing products need to be communicated to non-

users for motivating them for trial purchases. Alternatively the entrepreneur can

attempt to attract the competitors’ customers along with maintaining its existing

customers. On the basis of core competencies/distinctive competencies,

competitors’ customers could be switched over to the entrepreneurs’ products/

services/brands.

Market development strategy

Market development strategy is meant for growth. This involves selling

the enterprise’s existing products to new groups of customers. New groups of

customers can be categorized on the basis of geographics, demographics, and/or

based on a new product use.

This strategy strive to widen the market for a product/service by selling

the existing product in new locations. This can be done in several different ways.

The entrepreneur can enter into a new geographical market. It may expand to

other cities, other areas, other regions, other states, other countries etc. He/she

may add new market segment/segments and broaden the market. In this manner

the sales are increased by offering the product/service to the customers who

never purchased the product in the past. However, the entrepreneur has to take

into consideration the possibility of regional variations in customer preferences,

cultural differences, language etc and also legal requirements and adapt the product,

packaging accordingly, if needed. Also, there is a possibility of extending the market

by adding new channels of distribution and thereby reaching to more and more

customers.

Like new geographical market, growth can occur through market

development strategies by offering the enterprise’s existing products to new

demographic market. Currently, the entrepreneur is catering to the requirement of

a specific demographic group. Now for growth, the entrepreneur can offer the

same product to a different demographic group.

An entrepreneur may find that the customers use the product in a way

that was not expected or intended. On the basis of this knowledge, an entrepreneur

is in a better position to offer the product to a new group of customers with few

modifications in the existing product if required.


Development –I

50

NOTES

Business


Product development Strategy

This strategy comprises of developing and selling new products to the

existing customers of the enterprise. Acquaintance with the existing customers is

a source of knowledge and helps the entrepreneurs to sense their problems and

find out the solutions in the form of improved product versions with modification

of some of the product features. Knowledge works as an important resource in

new product development. This strategy enables an enterprise to capitalize on the

goodwill and image of the enterprise. The existing distribution system and the

productive set up can be utilized with this strategy.

This strategy increases the current business by improving the existing

product or by introducing new products with new features. Continuous improvement

of the products is a common and popular strategy adopted by many market leaders.

Integrative Growth Strategies

Integrative growth strategies achieve growth in the same industry either

at the same level/stage of business or at different levels/stages of business. There

are two important integrative growth strategies: horizontal integration, and vertical

integration.

Horizontal integration

This strategy strives to integrate market at the same level/stage of business.

It involves acquisition of one or more competitors. This strategy eliminates or

reduces competition.

Vertical integration:

This strategy aims at integration of different levels/stages of business in

the same industry. It may be backward integration or forward integration.

Backward integration: This strategy involves adding the previous stages

of the current business. An entrepreneur who manufactures a product, decides to

take up the manufacturing of its raw material required for the finished product

under backward integration strategy. This strategy is advantageous to the

entrepreneurs in several ways. It ensures smooth and uninterrupted flow of

materials for manufacturing and/or products/services for marketing and distribution.

It saves money and increases profit margin. This option enables the entrepreneur

to ensure quality of products/services. The entrepreneur may get the benefit of

this arrangement in payment of taxes. On the other hand, sometimes the

entrepreneur may find the cost of making higher than the cost of buying. Due to

backward integration, it may become difficult for the entrepreneur to change the

business or make an exit from the business.

Forward integration: This strategy involves adding the subsequent stages

of the existing business. The manufacturer of a product may take up marketing/

distribution of the product. When a manufacturer of a raw material takes up

manufacture of the finished product, it amounts to forward integration. The

arrangement of forward integration increases revenue of the entrepreneur.

However, there is always a risk of failure. There can be no guarantee of success

with forward integration.

Diversification Growth Strategies :

Diversification means expansion of the market to new geographical areas.

It means selling a new product to a new market. It means making new products

Check Your

Progress

7. Do you know the

growth strategies of

Philip Kotler?

8. ——— this strat-

egy comprises of de-

veloping and selling

new products to the

existing customers of

the enterprise


egy involves selling the

enterprise’s existing

products to new

groups of customers


egy emphasizes on the

enterprise’s existing

product in existing

market


Development –I

51

NOTES

Business


for new markets. The concept of diversification is related to the newness of products

or markets or both. It seems that this strategy is based on a completely new

knowledge base. Some diversification strategies are related to entrepreneur’s

knowledge. By adopting diversification, an entrepreneur does something new such

as making new products or serving new markets or doing both simultaneously.

The diversification strategy comprises of addition of new lines of business. These

new businesses may be related to the existing business or they may be completely

unrelated to the existing business. In the words of Azhar Kazmi, “diversification

involves a substantial change in business definition – singly or jointly – in terms of

customer functions, customer groups or alternative technologies of one or more of

a firm’s businesses”. We can refer to Ansoff’s product-market matrix in figure

3.1 and the diversification matrix in figure 3.2 to understand the concept of

diversification. Figure 3.2 provides a clear classification of diversification strategies.

Related diversification or concentric diversification is when the new

business is related with the enterprise’s existing technology, production facilities

or distribution channels. According to Azhar Kazmi, “when an organization takes

up an activity in such a manner that it is related to the existing business definition

of one or more of a firm’s businesses, either in terms of customer groups, customer

functions or alternative technologies, it is concentric diversification”. The relatedness

is with reference to three dimensions of the business definition. Concentric

diversification is when an enterprise adds new products which have technological

and/or marketing synergies with existing product lines, even though they are meant

for new customer segments. It may be backward or forward integration. Backward

integration denotes a step back (up) on the value-added chain toward the raw

materials. The manufacturer entrepreneur can also become a supplier of raw

materials i.e. the entrepreneur becomes his/her own supplier. Forward integration

is taking a step forward (down) on the value-added chain toward the customers.

The manufacturer entrepreneur also becomes a finished goods wholesaler i.e. the

entrepreneur becomes his/her own buyer. Backward or forward integration are

attractive opportunities for growth of business which are related to the

entrepreneur’s existing knowledge base. The entrepreneur could have some

advantage over others who do not have such experience or knowledge. Being

own supplier and/or buyer provides synergistic opportunities which enables

entrepreneurs to perform the business activities more efficiently than the other

manufacturer entrepreneurs. Further, being own supplier and/or buyer,

entrepreneurs gain a deep insight into the entire business process in such a manner

as to sense and identify new processes and/or new product improvements. Such

kind of learning opportunities would not have been possible in absence of such

types of integration. Horizontal integration is the third type of related diversification.

In this integration, growth opportunity occurs at the same level of the value-added

chain but involves a different, but complementary value-added chain. This is an

opportunity to increase sales of existing products. The new product and the existing

product are complementary. They need each other to work/function. The

relatedness of the new product to the existing product may provide learning

opportunities. It may provide increased value to customers and increase sales.

When an enterprise introduces a product/service which is meant for current

customer but which is technologically unrelated to the current product line, it is

horizontal diversification.

Azhar Kazmi describes three types of concentric diversification:

Marketing-related concentric diversification – A similar type of product is offered

with the help of unrelated technology; Technology-related concentric diversification

– A new type of product/service is provided with the help of related technology;

Check Your

Progress

11. ——— strategy

involves adding the

previous stages of the

current business.

12. ——— strategy

involves adding the

subsequent stages of

the existing business


Development –I

52

NOTES

Business


Marketing- and technology-related diversification – A similar type of product/service

is provided with the help of a related technology.

Related diversification is an attractive strategy. It enables diversification

of the organization from its original business and at the same time it is close to the

original business in terms of relatedness. It enables an enterprise to avail the

benefits of various types of synergies such as managerial synergies, financial

synergies, marketing synergies, operational synergies and human resources

synergies.

Conglomerate diversification is unrelated diversification. Unrelated

diversification is expansion of business in unrelated industries. The new business

is completely different from the enterprise’s existing/current product/service,

markets, technology. This strategy deals with activities which are unrelated to the

existing business definition of any of its businesses, either in terms of their respective

customer groups, customer functions or alternative technologies. Some

entrepreneurs go in for conglomerate diversification within the same enterprise.

Some entrepreneurs establish separate enterprises for managing different types

of products. Many entrepreneurs achieve conglomerate diversification by mergers

and acquisitions.

With unrelated diversification, the entrepreneur manages business risks

by dealing with different industries. He/she manages to invest in profitable

businesses and sell out unprofitable ones with unrelated diversification. With

favourable business conditions, they can capitalize on emerging opportunities and

migrate when the environmental threats are to be avoided. On the basis of their

own choice, entrepreneurs can enjoy ownership and management of diverse

businesses.

When the market for the current business is not growing or declining, an

entrepreneur may want to enter into new business and achieve growth.

Diversification provides additional new opportunities for growth. These opportunities

may be from high growth industry. Entrepreneurs choose diversification opportunities

in such a manner so as to have limited competition, stable demand and high

profitability.

Typically entrepreneurs may opt diversification to eliminate or reduce the

risks associated with confining the operations to a single product or limited products,

limited market, single industry etc. it enables entrepreneurs to make better utilization

of the available resources such as talented human resources, marketing skills,

technological capabilities, financial rationale, production facilities etc.

Diversification may be need related. An entrepreneur may introduce new

products to fulfill the customer needs in a better manner, to satisfy the current

customers by fulfilling their all related needs.

Diversification may also be pursued as a strategic option to tackle

competition. An enterprise may opt for diversification so as to develop a competitive

edge. Or otherwise sometimes, they follow the competitors for the sake of business

expansion.

Diversification may be pursued so as to make the most of its capabilities

and business model so as to maximize its strengths. It enables entrepreneurs to

consolidate their position, image etc. It makes talented people to stay with the

enterprise.


Development –I

53

NOTES

Business


If growth in the existing business is hampered due to environmental and

regulatory factors, then diversification remains the only option for the entrepreneur.

Diversification i.e. new business requires more time and energy which

may deprive the old business of adequate attention, energy and needed resources.

And if the new business fails, there is an adverse impact on the existing business

lines. There is no guarantee of success in a new business. In fact, there are more

instances of failures in diversification of many enterprises.

Various types of synergies are possible with diversification. Management

synergy results when diversification requires managerial expertise available in the

enterprise and new business is facilitated by the existing management practices

and techniques. When products/services use common marketing set up such as

distribution channels, sales force management, advertising campaigns, sales

promotion etc; marketing synergy results. Operating synergy can occur by proper,

and effective utilization of facilities, and efficient operations. Investment synergy

is realized from the utilization of same production facilities, technology, materials,

management etc. Synergistic diversification is diversification that results in

realization of synergistic effects. It enjoys the advantages of synergy. However,

due to undue importance of synergy, the entrepreneur may oversee some promising

business opportunities if they do not have with the existing business.

However, diversification is not without risks and threats. It is a complex

strategy to formulate and implement. It requires diverse skills and a wide variety

of competencies. Management of a varied portfolio of businesses need enormous

costs of administration, coordination and control.

3.3.3 Glueck’s Grand Strategies

In the words of W. F. Glueck and L.R. Jauch, “strategic alternatives revolve

around the question of whether to continue or change the business the enterprise

is currently in or improve the efficiency and effectiveness with which the firm

achieves its corporate objectives in its chosen business sector”. According to William

Glueck, there are four grand strategic alternatives: expansion, stability, retrenchment,

and any combination of these three. These strategic alternatives are termed as

grand strategies. Let us discuss the expansion strategies in detail in this unit. The

next Unit 4 will deal with the other strategic alternatives of stability strategies,

retrenchment strategies and combination strategies.

Expansion Strategies:

Expansion strategies are also known as growth or intensification strategies.

This strategy is adopted by entrepreneurs who wish high growth for their

enterprises. This can be achieved by widening the scope of one or more of its

businesses – singly or jointly – for improving their performance.

For better clarity and effectiveness, it is desirable to refer to the concept

of business definition. Derek Abel has suggested defining a business along the

three dimensions of customer groups, customer functions and alternative

technologies. ‘Customer groups’ refer to ‘who’ is being satisfied, ‘customer needs’

state ‘what’ is being satisfied and ‘alternative technologies’ describe ‘how’ the

need is being satisfied.

The enterprises pursuing expansion strategies focus expansion either in

terms of customer groups, customer functions or alternative technologies. The

enterprise moves in one or the other direction and changes its present business

definition significantly. Expansion strategies are the most popular strategies. There

Check Your

Progress

13. Do you know what

diversification means?

14. What are the

reasons for

diversification?

15. State the risks of

diversification.

16. Conglomerate

diversification is ——

d i v e r s i f i c a t i o n

(unrelated / related)


Development –I

54

NOTES

Business


is a natural urge for growth. Almost all enterprises aspire for expansion and

substantial growth. Expansion can be sought through: i. Concentration, ii. Integration,

iii. Diversification, iv. Co-operation, v. Internationalization, vi. Digitalization.

i. Concentration strategies: concentration strategies are also known as

intensification, focus or specialization strategies. Concentration strategies are

expansion strategies which converge resources in one or more of enterprises’

businesses in terms of their respective customer groups, customer functions, or

alternative technologies. It involves investment of resources in a product line for

an identified market with the help of proven technology. Ansoff’s product-market

matrix (please refer to figure 3.1 above) provides us three types of concentration

strategies: market penetration, market development, product development which

we discussed above in detail.

For expansion, concentration is often the first preference of the

entrepreneurs. It deals with indulging in the same activity of its expertise. There is

a natural and obvious preference of the entrepreneurs to continue with the same

business and to invest more in known business rather than experimenting with

unknown ones. So they prefer concentration in familiar businesses.

Concentration requires very few organizational changes so planning,

decision making and overall management is easy and simple. By continuing this,

one or a few businesses over a period of time, entrepreneurs develop a deep

insight and expertise in these businesses. It enables them to develop competitive

advantage and outmaneuver the competitors with core competencies. Past

experiences help a lot to the entrepreneurs.

However, concentration strategy is not without limitations. Too much

dependence on only one industry is risky. There are threats of product obsolescence,

changing technology, changes in market, needs, etc to concentrated enterprises.

ii. Integration strategies: integration means combining activities related to the

present activity of an enterprise. Such a combination may be done on the basis of

the value chain. The enterprise may move up or down the value chain to concentrate

more comprehensively on the present customer groups and their present needs.

Igor Ansoff presented the following matrix shown in Figure 3.3 which

explains different types of integration as well as diversification strategies.

Figure 3.3: Ansoff’s Matrix for Diversification Strategies

According to Ansoff, enterprises operate on two dimensions of new prod-

ucts and new functions. On the basis of these two dimensions, there are four

different types of integration and diversification strategies. The integration strate-

gies are of two types: horizontal and vertical integration which we discussed above.

Check Your

Progress

17. Name the strate-

gies to seek expan-

sion.

18. Enlist the three

types of concentration

strategies stated by

Ansoff.

19. What are the limi-

tations of concentra-

tion strategy?

Source: H.A. Ansoff, Corporate Strategy, McGraw-Hill, New York, 1965, Quoted in Kazmi Azhar,

Business Policy and Strategic Management, Tata McGraw Hill Publishing Company Limited, New

Delhi, 2009, p. 153

Check Your

Progress

20. The two types of

integration strategies

are —— and ——


Development –I

55

NOTES

Business


iii. Diversification strategies: Diversification involves substantial change in

business definition in terms of customer functions, customer groups or alternative

technologies of one or more of an enterprise’s businesses. Diversification is when

new products are made for new markets. As we discussed above, diversification

can be of two types – related and unrelated. Ansoff refers them as concentric and

conglomerate diversification respectively. Horizontal integration is actually horizontal

diversification. It involves moving laterally into new types of products.

iv. Cooperation strategies: Generally, strategic orientation assumes the exist-

ence of competition and the essence of strategy lies in tackling competition. Sev-

eral strategy experts like Michael Porter analyzed strategies with reference to

competition. On the other hand, thinkers such as James Noorda, Barry J. Nalebuf

and Adam M. Bradenburger pronounced that competition could co-exist with co-

operation. While developing corporate strategies, along with competing with the

competitors, the possibility of mutual cooperation with the competitors has to be

taken into account. This could increase market potential. The concept of compe-

tition and co-operation among the rival firms for the sake of mutual benefit and

sharing of interests is expressed as ‘co-opetition’. Such type of co-opetition could

occur in various ways. The main types of co-operative strategies are: Mergers

and acquisitions (or takeovers), Joint ventures, and Strategic alliances. We will

discuss all these co-operative strategies in the unit 5.

v. Internationalization strategies: International strategies require entrepreneurs

to market their products/services beyond the domestic or national market. He/she

has to analyze the international environment, appraise the capabilities of the

enterprise and then formulate strategies to enter and capture foreign markets.

Michael Porter, has extended his idea of competitive advantage of firms

to the analysis of competitive advantage of nations. In his opinion, four national

characteristics create an environment that is conducive to creating globally

competitive firms in particular industries. These four national characteristics are

interrelated with each other in the form of a diagram known as the Porter’s diamond.

The four factors, called as the diamond determinants, are:

1. Factor conditions: the special factors or inputs of production such as

natural resources, raw materials, labour etc., that a nation is especially

endowed with

2. Demand conditions: the nature and size of the buyer’s needs in the

domestic market

3. Related and supporting industries: the existence of related and supporting

industries to the ones in which a nation excels.

4. Firm strategy, structure and rivalry: the conditions in the nation determining

how firms are created, organized and managed

On the basis of analysis of these four sets of factors, a country can

determine the industry or industry niche in which a cluster of companies that are

globally competitive can be developed.

Check Your

Progress

21. ——— involves

substantial change in

business definition in

terms of customer

functions, customer

groups or alternative

technologies of one or

more of an

enterprise’s busi-

nesses

Check Your

Progress

22. The main types of

co-operative strate-

gies are ——


Development –I

56

NOTES

Business


Figure 3.4: The Porter’s Diamond

An entrepreneur’s decision to adopt international strategies depend upon

two factors: cost pressures and pressures for local responsiveness. Cost pressures

refer to the efforts of the entrepreneur to minimize its unit costs. He/she tries for

economies of scale and location economies. Pressures for local responsiveness

refer to the efforts of the entrepreneur to customize the products/services to each

country-market on the basis of variables like customer preferences and wants,

government policies, culture, climate etc. While designing and developing products/

services for every country—market, it is found that both the factors - cost and

local responsiveness act in a contradictory manner. Both the approaches of low-

cost and differentiated products/services across different countries are difficult to

adopt. According to Bartlett and Ghoshal, there are four types of international

strategies: international strategy, multi domestic strategy, global strategy and

transnational strategy, as shown below in figure 3.5.

Figure 3.5: Four Types of International Strategies

Source: M.E. Porter, ‘The Competitive Advantage of Nations’, Harvard Business Review, March-April

1990, p.77 Quoted in Kazmi Azhar, Business Policy and Strategic Management, Tata McGraw Hill

Publishing Company Limited, New Delhi, 2009, p. 173

Source: Azhar Kazmi, Strategic Management and Business Policy, Tata McGraw-Hill Publishing Company

Ltd., New Delhi, 2009, p. 175


Development –I

57

NOTES

Business


Entrepreneurs adopt international strategy and offer standardized products/

services in different countries with little or no differentiation. Entrepreneurs adopting

a multidomestic strategy try to achieve a high level of local responsiveness i.e.

they attempt to extensively customize their products/services according to the

local conditions in different countries. This requires a high cost. Entrepreneurs

who adopt a global strategy rely on low-cost approach. They offer undifferentiated

products/services in various countries usually at competitive prices. A transnational

strategy refers to a combined approach of low-cost and high local responsiveness

simultaneously. Bartlett and Ghoshal advise to adopt the transnational strategy

being the only viable strategy in a competitive world. They suggest that a

transnational firm should transfer the expertise from its foreign subsidiaries to its

headquarters and from one foreign subsidiary to another subsidiary through a

process termed as global learning.

When an entrepreneur adopts one or more of the international strategies,

he/she has to make a decision about the mode of entry i.e. the manner in which

he/she would commence its international operations. F. R. Root presents different

entry modes in three different categories as follows:

Export entry modes: Under these modes, the entrepreneur produces in

the home country and markets in the overseas markets. Indirect exports take

place with the help of intermediaries in the home country. Direct exports take

place either through a direct agent/distributor or through a direct branch/subsidiary

in the overseas markets. Home-country intermediaries are not involved in direct

exports.

Contractual entry modes are non-equity associations between an

international company and a company or any other legal entity in the overseas

markets. Licensing is an arrangement where the international enterprise transfers

knowledge, technology, patent etc for a limited period of time, to an overseas

entity, in return for some form of payment, usually a royalty payment. Franchising

involves the right to use a business format, usually a brand name, in the overseas

market, in return for the franchiser receiving some form of payment. Along with

licensing, franchising, the other forms of contractual arrangements are technical

agreements (for technology transfers), service contracts (for technical support or

expertise provision), contract manufacturing, production sharing, turnkey operations,

build-operation-transfer (BOT) arrangements etc.

Investment entry modes involve ownership of production units in the

overseas market, based on some form of equity investment or direct foreign

investment. Entrepreneurs can enter into a cooperative partnership through joint

venture or strategic alliances on the basis of financial interests.

In independent ventures or wholly-owned subsidiaries the parent

international enterprise holds 100 per cent equity and is in full control. Such facilities

may be created either through a new venture known as greenfield venture or

acquired through takeover strategies.

After finalizing a decision to enter international markets, the entrepreneur

has to take decisions about which international markets to enter, when to enter the

markets and on what scale. Each of the foreign markets is unique in terms of

risks, benefits, costs etc. Regarding timing of entry into international markets, it is

important to decide whether to be the first mover or make an entry after the other

international players. Being the first mover, an entrepreneur can avail various

benefits like creation of demand, building up image and market share. However,

first movers face more risks and incur high introduction costs.

Check Your

Progress

23. What are the vari-

ous types of interna-

tional strategies?


Development –I

58

NOTES

Business


vi. Digitalization strategies: This strategic alternative result from digitization of

information. Due to digitalization, information is readily available in an economic manner.

O. Bomsel and G. Le. Blanc define digitalization as digital coding of information and

the growing productivity gains in processing and transmission it enables.

Digitalization influenced the business environment and society in a profound

manner. The early applications of computerization were found in accounting

department where there was a need for database management and for managing

repetitive and routine transactions on a large scale. With computerization, the

processes became more productive and efficient. Later on with further

developments in information technology, progress was observed in not only recording

and storing of data but also in retrieving the desired data in desired formats at the

right time and with needed contents. With further sophistication in computer

connectivity, increasingly entrepreneurs are facilitated in proper management of

information. With provision of right information at the right time to the right person,

the functions of decision making, planning become more timely and effective.

With merging of computing and telecommunication technologies, internet,

networking; enterprises could get more and more help in the form of internet,

intranet as well as extranet. With emergence of e-markets; customers,

entrepreneurs as well as other intermediaries enjoy various conveniences.

Digitalization influences all the dimensions of business definition of

customer groups, customer functions, and alternative technologies. It transforms

the value chain. The business could be redefined in a profitable manner by creation

of new customer groups, and/or focusing on different customer functions, and/or

alternate technologies by application of innovative thinking.

3.4 Summary

This unit deals with various issues concerned with growth of businesses.

For the sake of being aware about possible growth opportunities, we explore

Ansoff’s growth strategies, then Kotler’s growth strategies followed by expansion

strategies covered under William Glueck’s grand strategies as one out of the four

types of strategic alternatives.

Ansoff’s growth strategies can be listed as market penetration strategy,

market development strategy, product development strategy and diversification

strategy. Market penetration strategy aims to penetrate the enterprise’s existing

product/service further by encouraging existing customers to buy more and more

of the enterprise’s existing products. Market development strategy involves selling

the enterprise’s existing products/services to new groups of customers. New groups

of customers can be categorized on the basis of geographics, demographics, and/

or based on a new product use. Product development strategy comprises of

developing and selling new products to the existing customers of the enterprise.

Philip Kotler talked about growth strategies in terms of three major

categories: Intensive growth strategy, Integrative growth strategy, and

Diversification growth strategy. Intensive growth strategies achieve further growth

for existing products and/or in existing markets. There are three important intensive

growth strategies: market penetration, market development, and product

development.

Integrative growth strategies achieve growth in the same industry either

at the same level/stage of business or at different levels/stages of business. There

Check Your

Progress

24. Explain the term

digitalization.


Development –I

59

NOTES

Business


are two important integrative growth strategies: horizontal integration, and vertical

integration. Horizontal integration strategy strives to integrate market at the same

level/stage of business. It involves acquisition of one or more competitors. This

strategy eliminates or reduces competition. Vertical integration strategy aims

integration of different levels/stages of business in the same industry. It may be

backward integration or forward integration. Backward integration strategy involves

adding the previous stages of the current business. Forward integration involves

adding the subsequent stages of the existing business.

Diversification strategy comprises of addition of new lines of business.

These new businesses may be related to the existing business or they may be

completely unrelated to the existing business. Related diversification or concentric

diversification is when the new business is related with the enterprise’s existing

technology, production facilities or distribution channels. Conglomerate

diversification is unrelated diversification. Unrelated diversification is expansion

of business in unrelated industries. The new business is completely different from

the enterprise’s existing/current product/service, markets, technology.

According to William Glueck, there are four grand strategic alternatives:

expansion, stability, retrenchment, and any combination of these three. These

strategic alternatives are termed as grand strategies. The expansion strategies

are discussed in detail in this unit.

Expansion can be sought through: i. Concentration, ii. Integration, iii.

Diversification, iv. Co-operation, v. Internationalization, vi. Digitalization.

Concentration strategies are expansion strategies which converge resources

in one or more of enterprises businesses in terms of their respective customer groups,

customer functions, or alternative technologies. It involves investment of resources

in a product line for an identified market with the help of proven technology.

Integration means combining activities related to the present activity of an

enterprise. Such a combination may be done on the basis of the value chain. The

enterprise may move up or down the value chain to concentrate more

comprehensively on the present customer groups and their present needs. The

integration strategies are of two types: horizontal and vertical integration.

The concept of competition and cooperation among the rival firms for the sake

of mutual benefit and sharing of interests is expressed as ‘co-opetition’. Such type of co-

opetition could occur in various ways. The main types of co-operative strategies are:

Mergers and acquisitions (or takeovers), Joint ventures, and Strategic alliances.

International strategies require entrepreneurs to market their products/

services beyond the domestic or national market. There are four types of

international strategies: international strategy, multi domestic strategy, global strategy

and transnational strategy. Entrepreneurs adopt an international strategy and create

value by transferring products/services to foreign markets where these products/

services are not available. Entrepreneurs who adopt a multidomestic domestic

strategy try to achieve a high level of local responsiveness by matching their products

and services to the national conditions operating in the countries they operate in.

Entrepreneurs adopt a global strategy and they rely on a low-cost approach on the

basis of their experience and location economies and offer standardized products

and services across different countries. By adopting a transnational strategy,

entrepreneurs adopt a combined approach of low-cost and high local responsiveness

for their products and services. Then we discussed export entry modes, contractual

entry modes and investment entry modes. There are three strategic decisions


Development –I

60

NOTES

Business


related to international entry modes – which international markets to enter, when

to enter those markets and on what scale.

Digitalization strategies are the strategic alternatives available for the

entrepreneurs which result from digitalization of information.

3.5 Key Term

• Value chain: A set of interlinked activities performed by an organization,

right from procurement of basic raw materials down to the marketing of

finished products to the ultimate consumers


Questions

1. ‘Related diversification is an attractive corporate strategy as it offers

the best of both the worlds’. Discuss.

2. Explain the various types of concentration strategies.

3. Under what conditions are firms motivated to adopt integration strategies?

4. What is the difference between forward and backward integration?

5. Why is a concentric or relate diversification strategy adopted? Why is a

conglomerate or unrelated diversification strategy adopted?

6. Describe the four types of international strategies. What are the various

types of international entry modes entrepreneurs adopt to enter

international markets?

7. Discuss the advantages and disadvantages of expansion through

internationalization.

8. How do entrepreneurs decide which international market to enter and

when to enter it?

9. Which factors motivate the entrepreneurs to internationalize? Describe

the four types of international strategies.

Exercises

Activity 3.1

Visit at least two medium scale and two large scale enterprises and seek

information about their growth journey.

Activity 3.2

Visit at least three enterprises and discuss with them their growth strategies.


1. Which of the following is not true regarding forward integration?

i. This strategy involves adding the subsequent stages of the existing business


Development –I

61

NOTES

Business


ii. An entrepreneur who manufactures a product, decides to take up

the manufacturing of its raw material required for the finished product

iii. The manufacturer of a product may take up marketing/distribution

of the product

iv. The arrangement increases revenue of the entrepreneur

2. Which of the following is a type of related diversification?

i. Backward integration

ii. Forward integration

iii. Horizontal integration

iv. All the above

3. Which of the following is true regarding backward integration?

i. This strategy involves adding the previous stages of the current

business.

ii. An entrepreneur who manufactures a product, decides to take up

the manufacturing of its raw material required for the finished

product

iii. Both i and ii are true

iv. Both i and ii are wrong

4. Which of the following is associated with market development strategies?

i. New geographical market

ii. New demographic market

iii. New product use

iv. All the above

5. Which of the following is connected with integrative growth strategies?

i. Horizontal integration

ii. Backward integration

iii. Forward integration

iv. All the above

6. Which one of the following is associated with product development strategy?

i. Improving the existing product

ii. Introducing new products with new improved features

iii. Both i and ii


7. Which of the following is associated with market penetration strategy?

i. Market development strategy


Development –I

62

NOTES

Business


ii. Product development strategy

iii. Market penetration strategy

iv. All the above

8. Which one of the following is associated with market development strategy?

i. Entering new market segments

ii. Entering new geographical markets

iii. Adding a new channel of distribution

iv. All the above

9. Which one of the following is associated with market penetration strategy?

i. Increase sales to current customers

ii. Convert non-users into users

iii. Pull customers of competitors’ products/services

iv. All the above

10. Which of the following is associated with integrative growth strategies?

i. backward integration

ii. forward integration

iii. horizontal integration

iv. all the above


i. Integrative growth strategies achieve growth in the same industry

either at the same level/stage of business or at different levels/

stages of business

ii. Horizontal integration strives to integrate market at the same level/

stage of business Vertical integration strategy aims integration of

different levels/stage of business in the same industry

iii. Backward integration strategy involves adding the previous stages

of the current business

iv. All the above

12. Related diversification or concentric diversification is when the new

business is related with the enterprise’s

i. Existing technology

ii. Production facilities

iii. Distribution channels

iv. i and/or ii and/or iii

Answers


Development –I

63

NOTES

Business


Check Your Progress

8. product development strategy

9. market development strategy

10. market penetration strategy

11. ackward integration

12. Forward integration

16. unrelated

20. horizontal integration, vertical integration

21. Diversification

22. Mergers and acquisitions , joint ventures, and strategic alliances


1. ii

2. iv

3. iii

4. iv

5. iii

6. iii

7. iv

8. iv

9. iv

10. iv

11. iv

12. iv

3.7 Further Reading

Cherunilam Francis, Business Policy and Strategic Management, Himalaya

Publishing House, Mumbai, 2010

Hisrich Robert D., Peters Michael P., Shepherd Dean A., Entrepreneurship,

Tata McGraw Hill Education Private Limited, New Delhi, 2007

Jaunch Lawrence R., Glueck William F., Strategic Management and

Business Policy, McGraw-Hill Book Co., New York, 1989

Kalakota Ravi, Robinson M., e-business 2.0: Roadmap for Success, Addison

Wesley, 2001

Kotler Philip, Marketing Management, Pearson Education, Delhi, 2004

Shankar Raj, Entrepreneurship Theory and Practice, Vijay Nicole

Imprints, Chennai, 2012


Development –I

64

NOTES

Business


UNIT 4: STRATEGIES FOR GROWTH

AND DEVELOPMENT –II

Structure

4.0 Introduction

4.1 Unit Objectives

4.2 Corporate Level Strategies

4.3 Business Level Strategies

4.4 Functional Level Strategies

4.5 Summary

4.6 Key Terms


4.8 Further Reading and References

4.0 Introduction

We have seen, in unit 1, that strategies could be formulated at different

levels: corporate level, business level and functional level. We will discuss strategic

alternatives at these three levels in this unit. An entrepreneur has to make a decision

about strategic alternatives at these three levels. He/she makes decisions about

corporate strategy at first and then about business level strategy. Then functional

level strategies are worked out in the form of functional plans and policies and

then operational implementation takes place.

4.1 Unit Objectives


• Learn the context of corporate strategies

• Know and explain the four types of generic corporate-level strategies

consisting of the expansion, stability, retrenchment and combination

strategies

• Understand the framework of business strategies on the basis of

corporate-level strategies, and business definition

• Examine functional strategies comprising of functional plans and

policies

• Study the development of functional plans and policies in the areas of

marketing, finance, operations and human resource management


Development –I

65

NOTES

Business


4.2 Corporate Level Strategies

The corporate level generic strategies guide entrepreneurs regarding the

decision about which business(es) the entrepreneur shall deal with. Corporate

strategies deal with decisions related with allocation of resources among different

businesses of an enterprise, transferring resources from one business to other

businesses. Actually corporate strategies manage a portfolio of businesses in such

a manner as to contribute to achievement of the corporate objectives.

There are four alternative strategies of stability, expansion, retrenchment

and combination. We have seen all the details of expansion strategies in the previous

Unit 3. Now let us discuss all the remaining corporate level strategies one by one.

Stability Strategies:

Stability strategies are followed by small and medium enterprises for a

short period of time. These strategies are relevant for enterprises which are doing

well presently and which operate in a stable environment.

According to Jauch and Glueck, a stability strategy is a strategy that a

firm pursues when it continues to serve the customers in the same product or

service, market using the existing technology as demarcated in its business definition;

its main strategic decisions focus on incremental improvement of functional

performance. It is less risky since it involves less changes. When the environment

is quite stable, certain and predictable; and expansion may seem to be threatening;

entrepreneurs adopt stability strategies. There are a number of reasons for pursuing

stability strategy.

Stability strategy is not a ‘do nothing’ strategy. It may involve incremental

improvement in the enterprise’s performance by slightly changing one or more of

its businesses in terms of the customer groups, customer functions, and alternative

technologies.

Stability strategies could be of three types: no change strategy, profit

strategy, and pause/proceed-with-caution strategy.

No change strategy:

No change strategy is a deliberate decision to continue with the present

business decision. It may seem to be an absence of strategy but actually it is a

decision to take no decision. This stability strategy is a deliberate decision to do

nothing new.

In the face of certain and predictable external environment and stable

organizational environment, an entrepreneur adopts no change strategy. He/she

finds no need to change the present situation by adopting new strategy. The

organization possesses no major strengths and weaknesses. The external

environment presents no significant opportunities or threats. There is no significant

and remarkable competition. There is no threat of competitors and/or substitute

products. With such kind of internal and external environment, an entrepreneur

decides not to do anything new.

Profit strategy:

The ‘no change strategy’ cannot be continued for a long period of time.

When the situation changes, accordingly the entrepreneur has to change his/her

decision regarding adoption of strategy. When an entrepreneur comes across some

problems and he/she assumes that these problems may remain only for a short

Check Your

Progress

1. Name the four al-

ternative corporate

level generic strate-

gies.

2. What do corporate

strategies deal with?


Development –II

66

NOTES

Business


time; the entrepreneur may decide that until the situation becomes favorable, it

would be better to adopt a profit strategy and sustain profitability. If the problems

are temporary, profit strategy would be a right decision. Otherwise profit strategy

would result into further deterioration of the enterprise.

Pause/proceed-with-caution strategy:

This is a temporary strategy like the profit strategy. It is a deliberate and

conscious attempt to postpone major strategic changes till the environmental

conditions become favorable or when the entrepreneur would find it appropriate

to choose a right strategy. This is a tactic to check the situation before taking a

major decision.

Retrenchment Strategies:

When an enterprise is in a state of decline, efforts are required to find out

the problem areas and make a diagnosis of the reasons leading to decline. An

entrepreneur follows retrenchment strategies of different kinds in response to

such kind of decline. The entrepreneur has to monitor and control the signals of

decline, analyze the causes of decline and their impact and then provide an

appropriate response to decline. Some of the major consequences of decline are

declining sale, shrinking market share, deteriorating cash flow, reducing profitability,

loss of goodwill and credibility etc. The three types of retrenchment strategies

are: turnaround strategy, divestment (or divestiture) strategy, and liquidation strategy.

Turnaround strategy:

An entrepreneur senses if there is a need of turnaround for survival of the

organization on the basis of several indicators such as negative profits, persistent

negative cash flow, declining market share, deterioration in public facilities,

mismanagement, high turnover of employees and low morale. G. A. Mirchandani

suggests three ways in which turnarounds can be handled: i. the existing chief

executive team handles the entire turnaround strategy with the advisory support

of a specialist external consultant; ii. The existing team withdraws temporarily

and an executive consultant or turnaround specialist is employed to handle the

entire turnaround. This person is usually deputed by banks and financial institutions

and, after the job is over, reverts to the original position; iii. The existing team,

especially the chief executive, is replaced or the sick enterprise is merged with a

healthy enterprise.

Divestment strategies:

Divestment strategy is also called as divestiture or cutback strategy. It

involves sale or liquidation of a portion of a business, or a major division, profit

centre or SBU. It is usually a part of rehabilitation or restructuring plan. An

entrepreneur resorts to divestment strategy, when a turnaround has been proved

to be unsuccessful. Harvesting strategies are a variant of divestment strategies. It

involves a process of gradually letting a company or business wither away in a

controlled and calibrated manner.

There are two approaches to divestment: a part of the company is divested

by spinning it off as a financially and managerially independent company, with the

parent company retaining partial ownership or not; the organization may sell a unit

outright and there is a chance that the unit could be sold profitably.

Many entrepreneurs do not take the decision to divest. They may take it

as an act of failure. It is painful for them to admit their failure.

Check Your

Progress

3. Do you know the

meaning of stability

strategy?

4. State the different

types of stability strat-

egies.

5. Does a no-change

stability strategy in-

volve doing nothing?

6. Name the three

types of retrenchment

strategies

7. List the conditions

that indicate that a

turnaround is needed.

8. Which are the three

ways in which turn-

around can be

handled?

9. What is meant by

divestment?

State whether the fol-

lowing is true or false:

10. An entrepreneur

resorts to divestment

strategy, when a turn-

around has been

proved to be unsuc-

cessful.


Development –II

67

NOTES

Business


Liquidation strategies:

The liquidation strategy involves closing down an enterprise and selling its

assets. It is the most extreme and unattractive retrenchment strategy. It is generally

considered to be the last resort. This strategy leads to serious consequences such

as loss of employment for the workers and other employees, feeling of humiliation,

no further hope of any possible future opportunity.

Many small enterprises, proprietorship and partnership ventures liquidate

frequently. However, medium and large enterprises liquidate rarely. The

entrepreneurs are unwilling to liquidate due to fear of failure. The government

may not readily agree to liquidate due to political and other reasons. Trade unions

oppose liquidation for loss of employment. It is not easy to get buyers for the

assets. The assets may be unusable and cannot fetch good price.

Combination Strategies:

Combination strategies, also known as mixed or hybrid strategies, are a

combination of stability, expansion or retrenchment strategies, applied either at the

same time in different businesses (simultaneous combination) or at different times

in the same business (sequential combination). Along with simultaneous

combination, and sequential combination; the third type of combination strategies

are combination of simultaneous and sequential strategies.

It is not possible for any enterprise to survive and grow by adoption of a

single ‘pure’ strategy. Entrepreneurs adopt different strategies as per the

requirements of the enterprise and circumstances. An entrepreneur may adopt

any combination of strategies like growth and retrenchment strategies, stability

and growth strategies, stability and retrenchment strategies etc.

4.3 Business-Level Strategies

Strategies at the corporate-level provide the broad direction to the

enterprise. At business-level, entrepreneurs set their strategies. To quote C. A.

Montgomery and M. E. Porter, it is ‘……. at the level of the individual business or

industry where most competitive interaction occurs and where competitive

advantage is ultimate won or lost’.

Corporate-level strategies lay down the foundation in which business

strategies function. At the corporate level, an entrepreneur makes a decision regarding

adoption of expansion, or stability or retrenchment strategies. Then these strategies

are applied at the business level. With appropriate choice of strategies, individual

businesses are able to contribute for accomplishment of the corporate objectives.

Corporate-level strategies are basically about the decisions related to

allocating resources among different businesses of an enterprise, transferring

resources from one set of businesses to others. These strategies manage businesses

in such a manner so as to achieve the corporate objectives.

As we have seen, Abell defines business along the three dimensions of

customer needs, customer groups and alternative technologies. On the basis of

these three dimensions, business strategies are formulated. The formulation of

strategies is based on ‘what, who and how’ related to the business. The ‘what’ of

the business definition refers to the customer needs. Business offers products/

services for satisfaction of these needs. Entrepreneurs try to identify the needs/

Check Your

Progress

11. Do you know the

consequences of liqui-

dation strategy?

Check Your

Progress

Choose the correct

word:

12. It is —— for any

enterprise to survive

and grow by adoption

of a single ‘pure’ strat-

egy. (possible/not pos-

sible) not possible

13. Can you tell the

meaning of combina-

tion strategies?


Development –II

68

NOTES

Business


wants of the customers and earn money by creating customer satisfaction through

products and services. Customer delights is one step ahead of customer satisfaction

in the sense that it adds more value in the product/service than the expectations of

the customers. Entrepreneurs develop their competitive advantage on the basis of

creation of customer value provided through the products/services. The ‘who’ of

the business definition refers to the customer groups targeted by the business.

Customer groups are categorized on the basis of the needs/wants which the business

seeks to satisfy. Customer groups may be categorized on the basis of demographic

variables such as age, gender, education, income, occupation etc; geographic

characteristics such as rural/urban, south territory/east territory/north territory/

west territory etc); or lifestyle (traditional/modern). On the basis of these customer

groups, entrepreneurs know which needs of these target customer groups are to

be targeted. The ‘how’ of business definition refers to the alternative technologies

used to satisfy the needs/wants of selected target customers groups. The term

alternative technology refers to technical knowledge, skills, and competencies

required to produce products/services. The distinctive competence regarding the

alternative technology would lead to customer delight. In this manner, on the basis

of the three dimensions of business definition, the entrepreneurs could develop

competitive edge and could hope to serve the customers in a far better manner

than that of the competitors.

Business-level strategies are formulated for each business separately for

each customer group to satisfy their needs and create value. Michael E. Porter

worked on business strategies which he referred as competitive strategies. His

areas of focus comprise industry analysis, competitive dynamics and competitive

strategies. He is considered to be a major exponent of the positioning school of

strategy thought.

Porter views industry as a group of competitors producing products/

services that compete directly with each other. It is the industry where competitive

advantage is ultimately won or lost. For winning the battle of competition,

competitive strategy is required.

According to Porter, the choice of a competitive strategy is determined by

two factors: the industry structure and the positioning of an enterprise in the industry.

The industry structure is determined by the competitive forces of the threat of

new entrants, the threat of substitute products/services, the bargaining power of

suppliers, the bargaining power of buyers, and the rivalry among the existing

competitors in an industry. These five factors vary from industry to industry. These

factors determine profitability and prospects of an enterprise in the industry. Each

industry has a distinctive structure. Another determinant for choice of a competitive

strategy of an enterprise is its positioning within the industry. On the basis of

positioning, an enterprise tackles competition. Positioning enables an enterprise to

seek a sustainable competitive advantage which is based on two variables – the

competitive advantage and the competitive scope. Competitive advantage can be

in the form of lower cost and differentiation. Competitive scope can be in terms of

two factors – broad target and narrow target.

There are two generic types of competitive advantages that an enterprise

could seek – the lower cost approach and the differentiation approach. Lower

cost approach is possible out of the competence of an enterprise to design, develop

and market a product/service more efficiently than the competitors. Differentiation

approach is based on the competence of the enterprise to offer unique and superior

value to the consumers regarding durability, aesthetics, economy, superior product

features and the like.


Development –II

69

NOTES

Business


Porter defines competitive scope as the breadth of an enterprise’s target

within its industry i.e. the range of products, distribution coverage, types of

customers, scope of market. Enterprises require various competencies and

strategies for satisfying customer needs. Because the markets are heterogeneous,

needs of customers are varied. The enterprise has to make a choice of a broad

target approach or a narrow target approach. With broad target approach, the

enterprise offers an extensive range of products/services to a wide range of

customer groups located in a widely-scattered geographical area. A narrow target

approach implies selection of a limited range of products/services to a few customer

groups in a limited geographical area.

These two factors of positioning i.e. the competitive advantage and

competitive scope, when combined together, generates a set of generic competitive

strategies which are known as the business-level strategies.

Competitive advantage is derived from the two approaches of lower cost

and differentiation. Competitive scope may be a broad target or a narrow target.

Porter uses the matrix of competitive scope and competitive advantage and indicates

three types of competitive or business strategies as follows:

• Cost leadership (lower cost/broad target)

• Differentiation (differentiation/broad target)

• Focus (lower cost or differentiation/narrow target)

Figure 4.1: Porter’s generic competitive strategies

Cost leadership business strategy involves offering products/services at

relatively lower cost than the competitors. The competitive advantage consists in

the lower cost of products/services. For achieving cost leadership, the enterprise

strives for offering standardized products/services, attaining economies of scale

etc through operational effectiveness.

Porter observes that the low cost firm “has a broad scope and serves

many industry segments, and may even operate in related industries-the firm’s


Development –II

70

NOTES

Business


breadth is often important to its cost advantage”. Cost leadership requires efficient

operations, a wide experience in cost reduction, strict cost and overhead control,

cost reduction etc Low cost position enables the enterprise to achieve above

average returns. This revenue can be reinvested for better prospects.

Low cost leaders are in a better position to defend the enterprise against

all the five competitive forces. Regarding the intensity of rivalry, cost leaders are

in a far better position to tackle price competition. Even in recession the cost

leaders can manage to maintain themselves with the help of discounts, trade

promotions, etc.

The additional revenue generated owing to the low cost enables the firm

to reinvest. The effect of buyer’s bargaining power would be lower on the cost

leader than on the competitors. The cost leader is in a better position than the

competitors to cope up with the increasing input prices by the suppliers and also

they are in a better position than the rivals regarding the threats from substitutes.

Further the low cost positioning works as an entry barrier.

There is a threat of imitation of low cost positioning by the rivals because

in that case cost leadership would be easily and rapidly lost. There is a possibility

of non-price competition becoming more important in the industry. Those who

adopt cost focus strategy may have to lower cost further in the chosen segment.

In case of technological changes, cost leadership may become irrelevant.

Differentiation business strategy involves offering differentiated products/

services with special features and attributes. The competitive advantage consists

in differentiated products/services which offers utility and adds value to the products/

services. Of course, customer do not mind paying higher price for differentiated

offer. As long as customers value differentiation, they willingly pay more price for

the offer. However, the differentiator enterprise has to maintain a balance between

the premium price charged and the additional costs incurred for adding

differentiation.

In the words of Porter, with differentiation strategy, “a firm seeks to be

unique in its industry along some dimensions that are widely valued by key buyers.

It selects one or more attributes that many buyers in an industry perceive as

important and uniquely position itself to meet those needs. It is rewarded for its

uniqueness for a premium price”. Necessarily the price premium should be more

than the cost of differentiating.

There are a number of parameters for differentiation such as product

features, after sale service, terms of delivery. The level of differentiation is based

on creativity, innovation, motivation for innovation, R&D.

Differentiation, if copied by the rivals, loses its advantage. With changes

in customer tastes, fashions etc the impact of differentiation may become less

important. If the premium pricing of the differentiating firm and the prices charged

by the rivals widely differ, it would be difficult to pick up the sales.

The entrepreneurs who adopt differentiation strategy are in a strong and

advantageous position while coping up with the five competitive forces. They can

win in competitive rivalry on the basis of the brand loyalty associated with

differentiation. This strong brand loyalty would also act as an entry barrier. The

differentiators are strong enough to ward off threats from substitutes regarding

suppliers. Differentiators enjoy higher margins.


Development –II

71

NOTES

Business


Focus business strategy is basically either cost leadership or differentiation.

But it serves a narrow segment of the total market. In terms of the market, focus

strategy is niche strategy. Customer groups may be categorized on the basis of

demographic characteristics (age, gender, education, income, occupation etc),

geographic segmentation (rural/urban), or lifestyle (traditional/modern). For the

selected target market segment, a focused enterprise adopts either the lower-cost

or differentiation strategy.

The focus strategy is based on a narrow competitive scope within an

industry. It may be in various forms such as a specific customer segment, a

geographical area of a particular product line etc. The focus strategy has two

variants- cost focus and differentiation focus. In cost focus, an entrepreneur

seeks cost advantage in its target segment and with differentiation focus,

differentiation is sought in its target segment.

In the words of Porter, “while the low cost and differentiation strategies

are aimed at achieving their objectives industry wide, the entire focus strategy is

built around serving a particular segment very well and each functional policy is

developed with this in mind. It is assumed that, with focus strategy the entrepreneur

would be able to serve its narrow strategic segment efficiently or effectively than

competitors who serve broad targets. With focus strategy, the entrepreneur caters

to the needs of a particular target on the basis of differentiation or lower cost in

serving this target or both.

Focus strategy may be imitated by the competitors which is harmful to the

entrepreneurs. There is a probability of change in the customer base and their

needs, wants, preferences etc.

Now, let us deal with tactics for business strategies. A tactic is a sub-

strategy. In the words of J. D. Hunger and T. L. Wheelen, a tactic is a specific

operating plan detailing how a strategy is to be implemented in terms of when and

where it is to be put in action. By their nature, tactics are narrower in their scope

and shorter in their time horizon than are strategies. Azhar Kazmi considered two

tactics of timing (when) and market location (where) used in formulating and

implementing business strategies.

A business strategy, may be - low-cost strategy, differentiation strategy,

or focus strategy –, would prove to be a right move, if it is made at the right time.

The timing of application of a business strategy is an important issue. George

Stalk recognized time as a strategic weapon and a source of strategic advantage.

Timing Tactics

The first enterprise to manufacture and sell a new product/service is the

pioneer or the first- mover enterprise. The enterprises which react immediately to

the first-movers are second-movers and those enterprises which enter the industry

subsequently are the late mover enterprises. Actually, the second-movers are also

late-movers, however fast they might be to react.

It is difficult to make a generalization about whether being a first-mover is

advantageous or not. Whether you are a first mover or late-mover, there are

advantages and disadvantages in both the cases.

First-movers can become market leaders. Their image as a pioneer, will

establish their reputation and image. They are most likely to gain commitment of

suppliers, distribution channels etc. First time customers are likely to remain loyal.

However, being a first-mover is often a costlier option in comparison with being a


Development –II

72

NOTES

Business


follower. Creation of market, customer awareness and education is not easy. Later-

movers can imitate the first-movers easily. There is no guarantee of customer

loyalty. There is every possibility of first time customers switching over to the

late-movers.

Market Location Tactics

Market location tactics deal with the issue of where to compete i.e. regarding

the target market that the enterprise marks in applying its business strategies.

Each industry consists of a number of enterprises that offer the same or substitute

products/services. Philip Kotler classified market location tactics in four types:

leader, challenger, follower and nichers - on the basis of the role that the enterprises

play in the target market.

Market leaders are the enterprises which have the largest market share

in the relevant product market. They lead the industry with reference to

technological developments, product/service features, trade channel design etc.

Philip Kotler proposes three strategies to take up the market leader position and to

retain it: expanding the total market through new users, new uses, and more

usage; defending the market share through position defense, flank defense,

counteroffensive defense, mobile defense, and contraction defense; expanding

the market share through enhancement of operational effectiveness by means

such as new product development, raising manufacturing efficiency, improving

product quality, providing superior support services or increasing market

expenditure.

Market challengers are the enterprises with second or lower ranking in

the industry in terms of market share. They can either challenge the market leaders

or decide to follow them. The challenger first defines the objectives, the opponents,

choose a general attack strategy and then choose a specific attack strategy. A

general attack approach could be of five types: frontal attack involving matching

the opponent in terms of product, price, promotion and distribution; flank attack

involving challenging the opponent’s weak or uncovered geographical or segmental

areas; encirclement attack involving a grand move to capture the opponent’s market

share through means such as launching an advertising blitzkrieg, making an

unbeatable product-related offering; bypass attack involving ignoring the opponent

and attacking the easier markets such as moving into new geographical areas,

diversifying into unrelated products etc; guerilla attack involving small, recurrent

attacks to annoy and discourage the opponent by means such as price cuts, price

discounts, intensive comparative advertising etc.

Market followers are the enterprises that imitate the market leaders but

do not constitute a significant share of the market. They may adopt four broad

approaches as: counterfeiter strategy which involves duplicating the market leader’s

products and packaging and selling it in black market; cloner strategy involves

emulating the market leader’s products, name and packaging; imitator strategy

involves copying some things from the market leader while retaining some other

features such as pricing, packaging; adapter strategy involves adapting one’s own

products to those of the market leader and selling them.

Market niches are the enterprises that carve out a distinct niche that is

left uncovered by other enterprises in the industry or a niche that is of little or no

interest to others. Market nichers can adopt three approaches: creating niches,

expanding niches, protecting niches.

Check Your

Progress


lowing are true or

false:

14. Whether you are a

first mover or late-

mover, there are ad-

vantages and disad-

vantages in both the

cases.

15. First-movers can

become market lead-

ers

16. Later-movers can

imitate the first-mov-

ers easily

Check Your

Progress

17. On the basis of the

role that the enter-

prises play in the tar-

get market, Philip

Kotler classified mar-

ket location tactics in

four types as ——


Development –II

73

NOTES

Business


4.4 Functional-Level Strategies

Functional strategies are defined in terms of functional plans and policies.

These are the plans or tactics to implement business strategies. Functional strategies

are derived from business and corporate strategies. These are carried out through

functional and operational implementation. Functional implementation is done

through functional plans and policies in different functional areas like finance,

marketing, operations and human resources. Functional plans and policies are

developed to ensure implementation of strategic decisions by all parts of the

enterprise. It is the basis for controlling enterprise activities.

Strategy implementation aligns activities and capabilities of an enterprise

with its strategies. Strategies operate at different levels. There has to be congruence

and coordination among these strategies. Such congruence is the vertical fit. There

has to be a coordination among different activities taking place at the same level

of the enterprise hierarchy. This is the horizontal fit.

Any functional strategy becomes strategic when it is vertically fitted to

higher levels and corporate strategies. In this manner, we could have various

functional strategies like strategic marketing management, strategic financial

management, strategic operations management and strategic human resource

management. Strategic marketing management focuses on the alignment of

marketing management within an enterprise with its business and corporate to

gain strategic advantage. Strategic financial management focuses on alignment of

financial management within an enterprise with its business and corporate strategies

to gain strategic advantage. Strategic operations management focuses on alignment

of operations management within an enterprise with its business and corporate

strategies to gain strategic advantage. Strategic human resource management

focuses on alignment of human resource management within an enterprise with

its business and corporate strategies to gain strategic advantage. Strategic marketing

management implies that such marketing is done in the light of objectives and

strategies of the enterprise. It has a long-term commitment and deals with the

future of the enterprise. Such marketing should have a vertical fit with the business

and corporate strategies as well as a horizontal fit with other functional areas of

the enterprise.

Horizontal fit has to take place during operational implementation.

Operational implementation enables an enterprise to achieve operational

effectiveness.

Functional strategies operate below business strategies. There might be

several sub-functional areas within functional strategies. Functional strategies are

defined in terms of functional plans and policies. These are the plans or tactics to

implement business strategies. They are made on the basis of guidelines set at

higher levels. Functional plans deal with ‘what’ is to be done for guiding functional

managers. Functional policies guide the functional managers regarding ‘how’ the

plans are to be implemented.

Glueck states five reasons while explaining the need for functional plans

and policies. Functional plans and policies are developed to ensure that:

1. The strategic decisions are implemented by all the parts of an organization;

2. There is a basis available for controlling activities in the different functional

areas of business;


Development –II

74

NOTES

Business


3. The time spent by functional managers in decision-making is reduced as

plans lay down clearly what is to be done and policies provide the

discretionary framework within which decisions need to be taken;

4. Similar situations occurring in different functional areas are handled in a

consistent manner by the functional managers; and

5. Coordination across the different functions takes place where necessary.

Let us discuss some aspects of each functional areas for which plans and

policies are needed on the basis of functional capability factors.

Financial plans and policies of an enterprise are related to management

of money. The financial strategy is aimed towards competitive advantage through

low cost of funds and maximization of wealth of the enterprise. It deals with

sources of funds, and uses of funds, accounting and budgeting, cash management,

credit management, management of risk, cost control, tax planning and the like.

Also working capital management, relationship with borrowers, banks and financial

institutions. The capital structure decision is concerned with optimum debt-equity

ratio i.e. optimum mix of equity capital and debt capital. There are two sources of

funds – external sources and internal sources. Some enterprises depend on external

borrowings while other may adopt a policy of internal financing. Investment

decisions deal with capital investment, acquisition of fixed assets, current assets,

dividend decisions, relationship with shareholders. Management of funds is related

with efficiency and effectiveness of resource utilization in strategy implementation.

Dividend decision affects availability of capital. It influences the cost of capital.

Marketing strategies revolve around the 4 Ps of marketing mix i.e.

product, price, place and promotion. Plans and policies related with product mix

deal with quality, product features, service, branding, packaging, guarantee and

the like. Price related characteristics comprise of discounts, allowances, payment

terms and condition, credit terms, payment period. Price reflect the exchange

value of money. It is the value assigned to satisfaction of needs and wants of the

valued customers. The marketers may choose penetration pricing policy or

skimming pricing policy. Then another issue is of price discrimination, the factors

influencing pricing decisions and various techniques of pricing. Distribution plans

and policies deal with various trade channels, transportation, logistics, storage,

warehousing, inventory management. The success of marketing plans and policies

depend in a major way upon the distribution efficiency, customer relationship

management, supply chain management. The distribution coverage may be intensive,

extensive or selective. The promotion plans and policies comprise of advertising,

personal selling, sales promotion, publicity, public relations as well as direct

marketing.

The operations plans and policies depend upon production system,

operational planning and control, inventory management, materials requirement

and planning, quality control, purchase management, materials management and

the like. The effectiveness of operations strategies depend upon layout, location,

capacity, work systems, research and development. The option of outsourcing

also matters a lot in deciding operations policies and efficiency.

The human resource plans and policies assess human resource needs,

and deal with human resource planning in a systematic and scientific manner.

Recruitment, selection and placement policies are crucial for the success of an

enterprise. The functions of compensation, appraisal, communication, motivation

of human resources are the crucial factors. Effective staffing policy attracts and

retains talented human resources.

Check Your

Progress


about operations plans

and policies?

19. Write a note on

operations plans and

policies.


Development –II

75

NOTES

Business


4.5 Summary

Corporate strategies deal with a portfolio of businesses. These strategies

guide the businesses to achieve growth. The business definition comprising the

‘what, who and how’ related to a business indicate Business strategies operate

below corporate level strategies. They are derived from corporate level strategies.

Businesses need strategies to seek their competitive advantage. Business

strategies strive to develop competitive advantage in each of the individual

businesses which an entrepreneur has in his/her portfolio. Corporate-level strategies

transfer resources and skills, and create synergies between different businesses.

Business-level strategies apply these resources, skills and synergies for the sake

of enhancing the competitive advantage. Business-level strategies are reinforced

by functional strategies and operational implementation in each and every business.

An expansion strategy is adopted when he/she focus on high growth.

When the entrepreneur aims at contraction of its activities, it indicates that he/she

follows a retrenchment strategy. And when he/she deals with a combination of

stability, expansion and retrenchment strategies. It implies that he/she adopts a

combination strategy. The combination strategy may be followed either at the

same time in its different businesses or at different times in the same business for

the purpose of improving its performance.

A stability strategy is adopted by an entrepreneur when he/she attempts

at incremental improvement of its functional performance. Stability strategy is

appropriate for an enterprise which faces reasonably certain and predictable

environment. Stability strategies could be of three types: no change strategy, profit

strategy, and pause/proceed- with-caution strategy. When an entrepreneur

consciously decides to do nothing in a particular point in time, it is no change

strategy. When the entrepreneur attempts to sustain the enterprises profitability

by artificial measures, it is known as profit strategy. An entrepreneur follows

pause/proceed with caution strategy when he/she intends to test the market before

adapting a full-fledged corporate strategy or they have adopted expansion strategy

and before moving ahead, they wish to rest awhile.

When an entrepreneur substantially reduces the scope of its activities,

either because of external factors or internal factors, it implies that he/she follows

a retrenchment strategy. There is a need to find out the problems and then diagnose

the causes of the problems. Then several steps are taken for problem solving.

These actions are different kinds of retrenchment strategies. In the face of decline,

an entrepreneur can choose retrenchment strategy out of the three options of a

turnaround strategy or a divestment strategy or a liquidation strategy. In a

turnaround strategy, the entrepreneur focuses on various approaches and methods

to reverse the process of decline. In divestment or divesture strategy, the

entrepreneur gets rid of the loss making units, division or SBUs, curtails product

line or reduces the activities, functions performed. If this does not work, then the

entrepreneur as a last resort may choose a liquidation strategy i.e. to abandon the

activities totally. Turnaround strategy reverses the negative trend and turns around

the enterprise towards profitability. When a turnaround is attempted but proves to

be unsuccessful, divestment is adopted as a part of a rehabilitation or restructuring

plan. It involves the sale or liquidation of a portion of business or a major division

or profit center or SBU. There are two ways to adopt divestment strategy. A part

of the enterprise is divested by spinning it off as a financially and managerially

independent enterprise with the parent enterprise retaining partial ownership or

not or the enterprise may sell a unit outright managers may dislike the decision to


Development –II

76

NOTES

Business


divest since they perceive it as failure. Liquidation strategy involves closing down

an enterprise and selling its assets. It is the most extreme and unattractive strategy.

Entrepreneurs do not depend on only one strategy. They involve a complex

network of combination strategies. Combination strategies are a mixture of stability,

expansion or retrenchment strategies, applied either simultaneously i.e. at the same

time in different businesses or sequentially i.e. at different times in the same

business.

Functional strategies operate below the corporate and business level

strategies. Functional strategies are defined in terms of functional plans and policies.

These are the plans or tactics to implement business strategies. Functional strategies

are derived from business and corporate strategies and are carried out through

functional and operational implementation.

Financial plans and policies are based on financial needs regarding raising

of money, determining sources of finance, application of funds, cost of capital,

capital budgeting decisions and the like.

Marketing plans and policies are set in terms of identification of needs

and wants of customers, segmentation, targeting, positioning, marketing mix

constituents of product, price, place and promotion.

Operations plans and policies are done in terms of production/operations

planning and control, research and development, production systems.

Human resources plans and policies are based on the functions such as

recruitment, selection, training, placement, induction, compensation, appraisal etc.

4.6 Key Terms

• Plan: a future course of action aimed at achieving predetermined

objectives. It explains what needs to be done, who is to do it, when, how

and where it would be done

• Policy: A definite course of action selected in the light of given conditions

to guide and determine present and future decisions


Questions

1. Explain the different types of stability strategies.

2. When does an entrepreneur decide to adopt a turnaround strategy? What

actions are required to adopt a turnaround strategy?

3. What is meant by business strategy? How is business strategy related to

corporate-level strategy? Explain the importance of business strategies.

4. Explain the three types of business strategies- cost leadership,

differentiation and focus.


Development –II

77

NOTES

Business


5. What is meant by being a first mover in an industry? A late mover?

Discuss the advantages and disadvantages in being a first mover in an

industry? A late mover?

6. Discuss Michael Porter’s approach to defining generic competitive/

business strategies.

7. Write a descriptive note on the nature, need and development of functional

plans and policies.

8. Discuss how combination strategies can be adopted sequentially?

Simultaneously?

9. How can a turnaround be managed? List the conditions that indicate

that a turnaround is needed.

10. Under what conditions an enterprise decides to adopt divestment

strategies? What approaches can be adopted?

Exercise

Activity 4.1

Consider any organization of your choice. Outline the various functional

plans and policies that are being formulated and implemented by the organization.


1. Which of the following is associated with stability strategies?

i. No-change strategy

ii. Profit strategy

iii. Pause/proceed-with-caution strategy

iv. All the above

2. Which of the following is wrong?

i. Corporate-level strategies lay down the foundation in which business

strategies function

ii. At the corporate level, an entrepreneur makes a decision regarding

adoption of expansion, or stability or retrenchment strategies

iii. i and ii are wrong

iv. i and ii are right

3. Which of the following is wrong?

i. There are two generic types of competitive advantages that an

enterprise could seek – the lower cost approach and the

differentiation approach.

ii. Lower cost approach is possible out of the competence of an

enterprise to design, develop and market a product/service more

efficiently than the competitors.


Development –II

78

NOTES

Business


iii. Differentiation approach is based on the competence of the

enterprise to offer unique and superior value to the consumers

regarding durability, aesthetics, economy, superior product features

and the like.

iv. i, ii, and iii are wrong

4. Pick the wrong alternative

i. Market challengers are the enterprises which have the largest market

share in the relevant product market

ii. Market leaders lead the industry with reference to technological

developments, product/service features, trade channel design etc

iii. Market challengers either challenge the market leader or decide to

follow them

iv. Market followers are the enterprises that imitate the market leaders

but do not constitute a significant share of the market

5. Which of the following is a type of retrenchment strategy?

i. Liquidation strategy

ii. Divestment strategy

iii. Turnaround strategy

iv. All the above

6. Which of the following is true?

i. Focus business strategy is basically either cost leadership or

differentiation

ii. Focus strategy serves a narrow segment of the total market


iv. Both i and ii are false

7. Which one is wrong?

i. Functional policies guide the functional managers regarding ‘how’

the plans are to be implemented

ii. Functional strategies operate below business strategies

iii. Functional strategies are defined in terms of functional plans and

policies

iv. i, ii and iii are wrong

8. Which of the following is a type of retrenchment strategy?

i. Turnaround strategy

ii. Divestment strategy

iii. Liquidation strategy

iv. All the above


Development –II

79

NOTES

Business


9. Which one of the following is associated with turnaround strategy?

i. The existing chief executive team handles the entire strategy with

the advisory support of a specialist external consultant

ii. The existing chief executive team withdraws temporarily and an

executive consultant or specialist deputed by banks and financial

institutions handles the entire strategy

iii. The existing team, especially the chief executive, is replaced or the

sick enterprise is merged with a healthy enterprise

iv. All the above

10. Which one of the following is true regarding divestment strategies?

i. A part of the company is spin off as a financially and managerially

independent company with the parent company retaining partial

ownership or not

ii. The organization may sell a unit outright and there is a chance that

the unit could be sold profitably


iv. Both i and ii are wrong

11. Which one of the following applies to divestment strategies?

i. Many entrepreneurs do not take the decision to adopt the strategy

ii. Many entrepreneurs look at the strategy as an act of failure It is

painful for the entrepreneurs to admit the failure

iii. Entrepreneurs resort to this strategy when a turnaround has been

proved to be unsuccessful

iv. All the above

Answers

Check Your Progress

14. True

15. True

16. True

17. Leader, challenger, follower and nicher


1. iv

2. iii

3. iv

4. i

5. iv

6. iii


Development –II

80

NOTES

Business


7. iv

8. iv

9. iv

10. iii

11. iv

4.8 Further Reading

Cherunilam Francis, Business Policy and Strategic Management, Himalaya

Publishing House, Mumbai, 2010

Jaunch Lawrence R., Glueck William F., Strategic Management and

Business Policy, McGraw-Hill Book Co., New York, 1989

Kazmi Azhar, Strategic Management and Business Policy and, Tata

McGraw-Hill Publishing Company Limited, New Delhi, 2009

Porter Michael E., Competitive Strategy: Techniques for Analyzing

Industries and Competitors, the Free Press, New York, 1980


Development –II

81

NOTES

Business



AND DEVELOPMENT –III

Structure

5.0 Introduction

5.1 Unit Objectives

5.2 Franchising

5.3 Ancillarization

5.4 Collaboration

5.5 Summary

5.6 Key Terms


5.8 Further Reading

5.0 Introduction

In this book we are attempting to explore the framework for growth strategies

which are generally embraced by small entrepreneurs. Growth strategies vary from

enterprise to enterprise. While having a holistic view of growth strategies, we have

seen internal growth strategies such as expansion, diversification etc. which are

pursued by enterprises on their own without the help and support of other enterprises.

Also we intendto discuss external growth strategies i.e. those strategies which

enterprises adopt with the help and co-operation of external agencies i.e. other

enterprises such as mergers, joint ventures, acquisitions and the like in the next unit.

Entrepreneurship is chiefly associated with establishing and running a new

venture and not buying an existing business. However, nowadays many entrepreneurs

buy well established and successful businesses rather than taking the pains to launch

their own enterprises from a scratch. Buying an existing business has become as

common as starting a new one. Entrepreneurs increasingly adopt the option of buying

into the business through franchise contract. Franchising may be pursued as an

entry strategy to reduce the risk of loss/failure and establish the presence of an

entrepreneur and his/her enterprise in the society. Also franchising can be pursued

as a growth strategy by an entrepreneur to expand his/her business. In franchising,

entrepreneurs play the role both as a franchiser as well as a franchisee.

5.1 Unit Objectives

After going through this unit, you will able to

• Learn the concept of franchising as a strategy to reduce the risk of new

entry and also as a growth strategy to expand business operations


Development –III

82

NOTES

Business


• Identify the different types of franchise

• Explain advantages and limitations of franchise

• Understand how franchising works

• Steps involved in setting up a franchising system

• Be aware about the meaning and importance of ancillarization

• Discuss the concept of vendor development

• Appreciate the significance of collaboration in entrepreneurial ventures

• Describe various aspects that are required for collaboration

• Analyze the reasons why entrepreneurs collaborate and with whom

5.2 Franchising

“Suppliers and especially manufacturers have market power because

they have information about product or service that the customer does not

and cannot have and does not need if he can trust the brand. This explains

the profitability of the brand” -Peter F. Drucker

There are several ways in which an entrepreneur begins his/her business:

initiating a new enterprise, or buying an existing business or franchising. We will

discuss the option of becoming franchised.

The term franchising is derived from the French word ‘Franchis’ which

means privileged or freedom.It originally meant ‘to free from slavery’. Now we

use the term franchise to mean an agreement between a buyer and a seller. This

agreement permits the buyer i.e. the franchisee to sell the product/service of the

seller i.e. the franchiser. It is a system for selective distribution of products/services

through the outlets owned by retailers or dealers.Entrepreneurs can achieve growth

through franchising without making big investments for creation of infrastructure.

Franchiser is the entrepreneur who owns the product/service or brand whereas

franchisee is a partner entrepreneur who operates the business with permission

from the owner entrepreneur. The process of functioning between a franchiser

and a franchisee is franchising.

The International Franchise Association defines franchise as a ‘continuing

relationship between the franchiser and the franchisee in which the sum total of

franchiser’s knowledge, image, success, manufacturing and marketing techniques

are supplied to the franchisee for a consideration’.

According to David D. Settz,a franchise is a form of business ownership

created by contract thereby a company grants a buyer the rights to engage in

selling or distributing its products or services under a prescribed format in exchange

for royalties or shares of profits. The buyer is called the ‘franchisee’ and the

company that sells rights to its business concept is called a franchiser. He defines

franchising 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”.

Check Your

Progress

Fill in the blanks with

appropriate words:

1. The process of

functioning between a

franchiser and a fran-

chisee is ——

2. —— is the entre-

preneur who owns the

product/service or

brand whereas —— is

a partner entrepreneur

who operates the busi-

ness with permission

from the owner entre-

preneur


Development –III

83

NOTES

Business


David H. Holt has defined franchising as “a business system created by a

contact between a parent company called the franchiser and the acquiring business

owner, called the franchisee, giving the acquiring owner the right to sell goods/services,

to use certain products, names, or brands or to manufacture certain brands”.

In the words of Thomas Zimmerer and Norman M. Scarborough, “in franchising

semi-independent business owners (franchises) pay fees and royalties to a parent company

(franchiser) in return for the right to become identified with its trademark, to sell its

products or services, and often to use its business format and system”.

Basically, franchising is a form of contractual arrangement in which retailer

(franchisee) enters in to an agreement with a producer (franchiser) to sell the producer’s

goods/services for a specified fee or commission. Franchising is the transfer of rights

to sell a trademarked product/ service through a system prescribed by an entrepreneur

who is a franchiser owning the trademark. Franchising is a system of distribution in

which franchisees pay fees and royalties to a parent company i.e. the franchiser in

return for the right to become identified with its trademark, to sell its product/services

and use its business format and system. Franchisees are semi-independent business

owners. They don’t have the freedom to change the way they run their businesses.

They purchase a successful business model. Don DeBolt says “if you are overly

entrepreneurial and you want to invent your own wheel, or if you are not comfortable

with following a system, then don’t go down (the franchise) path. Deviation from the

business model of the franchiser may lead to failure”.

Franchising is an enduring relationship between a franchiser and a

franchisee. Franchiser develops a business system and franchisee operates the

business on a day to day basis with the support of franchiser. The franchiser

offers a proven business system, name, recognition etc. In return, the franchiser

pays an initial franchisee fees as well as an ongoing percentage of his/her outlets

sales to the franchisers as a royalty and agrees to operate the outlet according to

the franchiser’s system. Franchisers develop the business system. The franchisee

use their distribution method. Franchisers exercise substantial control over their

franchisees. Standardization is the basis of franchising success. Franchisee choose

the site with franchiser’s approval. Franchiser provides the prototype design and

franchisee pays for the design implements it. Franchiser decides about products/

services and franchisee modifies products/services if required with franchiser’s

approval. Franchiser recommend prices and franchisee sets final prices. Franchiser

provides general suggestions for employees and their training. Franchisee hires

and manages employees. Franchiser establishes quality standards and franchisees

meet those. Franchisers may require franchisees to purchase from them.

Franchisees purchase from franchiser approved suppliers only.Franchiserpay for

national advertising campaigns. They may require a minimum expenditure on local

advertising. Franchiser sets quality standards and they are maintained by franchisee.

Franchiser inspect quality system and train franchisee for quality assurance.

Franchiseestrain their employees for proper implementation of quality norms and

practices. Franchisers earn money from the franchisees in the form of royalties

and franchisee fees. Sometimes there is a sharing of profit or revenue.

In franchising, an entrepreneur can play a role both as a franchiser as

well as a franchisee. As a franchiser, an entrepreneur creates a business concept

and its replica are sold to others. As a franchisee, an entrepreneur buys a business

which is a part of a chain of similar business units. Entrepreneurs play a foremost

role in developing as well as buying the franchises.

The most common franchise relationship is between a retailer and a

manufacturer or sometime a wholesaler. In our country, manufacturer-manufacturer


Development –III

84

NOTES

Business


relationship is the oldest. One manufacturer produce products/service for the other

under license. Exclusive dealership is manufacturer-wholesaler franchise

relationship. Manufacturer-retail franchise system is found commonly in India with

emergence of retail and service franchise relationships.

Individual franchise agreement involves the sale of a single franchise for

a specific location. An area level franchise allows the franchisee to own and

operate a specific number of outlets in a particular geography. Master franchise

agreement involves the right to open and operate number of stores or units to

master franchise and also the right to offer to sell the franchise to other people in

the area. The entrepreneurs who buy franchise from a master franchisee are

called sub-franchisees. Sub-franchising involves taking the rights from the franchiser

to sell the rights to operate other individuals who act as sub-franchising units.

Entrepreneurs should plan about franchising activity after a careful

deliberation. Franchising may seem to be an easy way for business growth which

may need meager capital investment. If the right franchisees are not chosen,

there is a possibility of inadequate cash generation. If a product/ service or a

brand is not well established, then there is risk involved. When the entrepreneur is

confident about acceptance of product/service or brand by the market in positive

manner and about growth in demand then the option of franchising should be

pursued for further consideration. Issue such as managing the franchise, developing

the relationship, collection of payments, legal issues, matters regarding relating to

integrity etc. should be carefully looked in to. An entrepreneur who intends to buy

a franchise has to understand all the intricaciesinvolved before deciding to actually

get into franchising. Typically an entrepreneur has to pay attention to an established

product/ service with a good image, trade names, trademarks, a patented design.

Before finalizing the decision, consultation with management experts and field

professionals would always be desirable regarding matters like financial

management, economies of scale for advertising and purchasing, services to be

sought from the franchisers and the like.

Selection of a Franchise

Before starting the journey of franchising, an entrepreneur goes through

the following process:

An entrepreneur sets up a franchise system in a systematic manner. He/she

has to ensure that instead of setting up his/her independent business from the scratch,

he/she wants to be a franchisee. He/she has to critically analyze the pros and cons of

both the options of independent business and a franchise. A careful self-appraisal

would help to ensure the suitability of entrepreneur to the requirements of a franchise.

He/she has to survey market to choose suitable product/service and franchiser. Further,

he/she has to tap various sources of information such as business magazines, trade

journals etc and meet industry professionals, experts as well as existing franchisees if

needed, for ascertaining the market demand and growth prospects.

The franchiser is expected to assess the franchisee in terms of his/her

ability and competence, sincerity and seriousness. The franchisee also seeks

information about a franchiser for evaluation of the prospects on the basis of various

documents such as an estimate of franchise’s initial investment i.e. fixed assets,

working capital, opening inventory, furnishing, décor, real estate expenses etc.;

information about the initial franchise fee and other payments including security

deposits etc; royalties and profit sharing agreements; financial statements of the

franchiser; support services to be provided by the franchiser such as advertising and

merchandising, training of staff, purchase of equipment etc. After seeking information


Development –III

85

NOTES

Business


Check Your

Progress

8. Enlist the steps in

starting a franchise.

about the franchiser, and studying all the relevant documents, the prospective

franchisee evaluates the franchiser in a critical manner. If the entrepreneur has a

choice of two or more franchisers, he/she has to prepare and study comparative

data and then negotiate with the franchisers. After negotiations, decisions regarding

location, purchasing accounting, training of employees, leasing etc are finalized along

with the other crucial matters like franchise fees, royalty, patents, trademarks,

inventory branding etc. Before signing the franchise documents, it is desirable to get

the advice of chartered accountants, lawyers etc. for legal rights etc.

Types of Franchising

Franchising arrangements are broadly classified into three types: product

distribution franchising/trade name franchising, manufacturing franchising, business

–format franchising.

Product distribution franchise is the earliest type of franchising. Under

this, dealers are given right to distribute goods for a manufacturer. For this right,

the dealer pays a fee for the right to sale the trademarked goods of the producer.

Product distribution franchising involves a franchiser licensing a franchisee to sell

specific products under the franchiser’s brand name and trade mark through a

selective, limited distribution network.

Tradename franchising involves a brand name. The franchisee purchases

the right to use the franchiser’s trade name without distributing particular products

exclusively under the franchiser’s name. A product/trade mark franchise is one in

which the franchiser gives the franchise the right to buy its product and use its

name. In such kind of approach, a manufacturer works with several dealers and

distributors. The franchisee uses the brand name of the franchiser and sells the

franchiser’s products. The product is controlled by the franchiser. The franchisee

decides the way in which the product to be marketed and distributed at local level.

The franchiser earns money on the product sold by the franchisee.

Manufacturing franchising is an arrangement in which the franchiser gives the

dealer the exclusive right to produce and distribute the product in a particular area.

Business- format franchising (also known as pure franchising or

comprehensive franchising) is the recent type of franchising which is the most

popular one at present. It is an arrangement in which the franchiser offer wide

range of services to the franchise including marketing, advertising, training, strategic

planning, communication system and quality control guidelines. It provides the

franchisee with a complete business format including license for a tradename, the

products or services to be sold, the physical plant, the methods of operations, a

marketing plan, a quality control process, and the necessary business support

services. In this manner, the franchisee purchases the right to use all elements of

a fully integrated business operation. The business format franchise is a popular

approach to franchising. The franchiser provides the way of doing business, along

with training, advertising etc. it includes not only a product and trade name but

also operating procedure such as design facilities, accounting procedures and

practices, quality assurance standards, appearance of business.

Advantages of Franchising

Franchising arrangement is mutually beneficial for both the franchiser as

well as franchisee. Entrepreneurs adopt franchising as a growth strategy and it is

advantageous for both the franchiser entrepreneur as well as franchisee

entrepreneurs.

Check Your

Progress

9. Do you know the

meaning of franchis-

ing?

10. State the types of

franchising

11. What do you mean

by product franchis-

ing?

12. Write down the

meaning of business

format franchising.


Development –III

86

NOTES

Business


A franchisee gets an opportunity to own the business and expand the

market with low capital investment. Buying a franchise is safer and easier than

trying to launch a new business.There is lesschance of failure because of association

with an established product and brand name.Franchisees benefit from the

franchiser’s business experience, market standing as well as goodwill.

Franchising is less risky than building the business from the ground up.

The success in franchising depends on the franchisee’s managerial skill and

motivation and on the franchiser’s business experience and business model.

Franchiser offerstraining to franchisees before opening a new outlet. Many

franchisers provide follow-up training and counseling also. Training programs equip the

franchisees with day to day operations for running the business in a successful manner.

Franchisee gets protected or privileged rights to franchise within a given

area. Franchising facilitates the process of obtaining loans from banks and other

financial institutions on the basis of brand image, market reputation and goodwill

of the franchiser.

Franchisee benefits from the franchiser’s proficiency in research and

development.Franchisees provide a lot of input and ideas for improving the business

to the franchisers.

It is but natural and obvious that franchisees are highly motivated to run

the business efficiently and earn profit. This relieves the franchiser of strict control

and attention.

Franchisee may increase the franchiser’s purchasing power for inventory,

equipment, services and the like with the increased scale of operations over wide

geographical areas and extensive coverage by numerous outlets of different franchisees.

Franchisers get quick returns on their investment immediately in the form

of franchise fees and royalty.

Disadvantages of Franchising

Along with advantages,there are fewdisadvantages also associated with

a franchise arrangement.

Franchisee has to follow the business model very strictly. There no scope

for deviation for any reason. There is no scope for creativity. Importance is attached

torunning the outlet in a uniformand standardized manner. There are many

restrictions imposed on franchisee regarding holding of a product line, a particular

geographic location, standardized procedures, operations and the like.

There is a possibility of conflict between franchisee and franchiser. There

are a plethora of terms, conditions, dos, and don’ts mentioned in the agreements

and contracts of franchising arrangement which are expected to be honoured by

both the parties. However, there is a probability of confusion, misunderstanding,

and miscommunication when interpreting the agreement/contract. If there is

mishandling, then it may lead to a wrong direction.

Franchise royalty belongs to the enterprise. There is profit sharing between

franchiser and franchisee. Franchiser imposes some type of fees and demands a

share of franchisees’ sales revenue in return for the use of the franchiser’s name,

products/services, and business system.

Check Your

Progress

13. Explain the ben-

efits of a franchise

from a franchiser’s

perspective.

14. Explain the ben-

efits of a

franchisefrom a

franchisee’s perspec-

tive


Development –III

87

NOTES

Business


Franchiser generally requires franchisees to purchase products, equipment

etc. from the franchiser or from a list of approved suppliers by franchisers. There

is no freedom to franchisee for exercise of the choice.

There may be a stipulation in franchise agreement about sale of products

approved by franchisers only. In case of franchise selling any unapproved products

through the franchise, there is a risk of cancellation of their license .A franchise

may be required to carry an unpopular product or be prevented from carrying a

popular one by the franchise agreement.

The franchise contracts are always written in favor of the franchiser.

Franchiser may or may not be willing to negotiate the terms of their contract. By

signing a contract, a franchisee agrees to sale the franchiser’s product with a

strict uniformity and monitoring of franchisee’s performance to ensure that

franchisee follows system’s specifications.

If unfortunately, franchiser fails in the business due to any reason, there is

a possibility of consequent failure of the franchisee also.

Franchisee may buildup goodwill for his/her business by own efforts;

however, goodwill still remains property of the franchiser.

Franchisee may not be able to sell the business to the highest bidder or

hand it over to any eligible person in absence of the franchiser’s approval.

5.3 Ancillarization

When an enterprise’s scale of operations grows beyond a particular limit,

entrepreneurs are left with no choice but to sub-contract some parts, components,

some items of production to ancillaries. Large enterprises, especially public sector

undertakings sub-contract the standard and low technology items to small

enterprises. This arrangement helps develop a sound base for ancillarization and

support small enterprises.The concept of ancillary development is based on the

principles of division of labour, specialization and optimum utilization of resources.

Previously ancillary unit is used to be defined as an industrial unit which is

engaged in or is proposed to be engaged in the manufacture or production of parts,

components, sub-assemblies, tooling or intermediaries, or the rendering of services

and the undertaking supplies or renders or proposes to supply or render not less

than 50 per cent of its production or services, as the case may be, to one or more

other industrial takings and whose investment in fixed assets in plant and machinery

whether held on ownership terms or on lease or on hire purchase, does not exceed

Rs. 75 lakhs.

The above definition is obsolete. It has no relevance at present in the

business environment, but it is presented just as a basis for the sake of developing

clarity about the concept of ancillarization in your mind. However, in the Micro,

Small and Medium Enterprise (MSME) Development Act, 2006, there is no mention

of ancillary units. No definition of ancillary units is given anywhere in the Act. But

the concept of ancillarization is found in practice being adopted by large enterprises

and small enterprises as a mutually beneficial idea.

The size and scale of operations of large enterprises is increasing

enormously. They are compelled to sub-contract some of the items of production

to ancillary units. It is convenient for them to get some parts, components etc

Check Your

Progress

15. Explain the draw-

backs of buying a fran-

chise


Development –III

88

NOTES

Business


produced by the small enterprises. This enables them to concentrate on core areas

of their operations and relieve them from the routine, simple, also tedious tasks

such as management of labours, make them work, contacting suppliers, checking

availability of raw materials and so on for manufacture of tools, parts, components

etc. Small enterprises produce the parts, components etc in a cost effective manner

which may not be possible for large enterprises. Large enterprises can save on

transportation costs, storage costs etc. They are free from labour problems,

problems related with supply of raw materials, fluctuations in prices of raw materials,

transportation costs, labour costs etc to the extent of contract for the supply of

parts, components etc. to the ancillary units.

Ancillarization is a mutually beneficial commercial relationship. An

entrepreneur,i.e. a contractor, places an order with another enterprise i.e. sub-

contractor for the production of parts, components, sub-assemblies or assemblies

to be incorporated into a product sold by the entrepreneur. The orders comprise of

processing, transformation, finishing of materials, parts by the sub-contractor as

per the requirement of the contractor entrepreneur. Sometimes, sub-contracting is

associated with ‘job-work’ where parent enterprise supplies raw materials to small

enterprises, and small enterprises process on the materials on the basis of

specifications at a pre-determined rate. Large enterprise provide raw materials

and financial assistance, and marketing support and small enterprises supply

manufactured parts and components. The concept of ancillarization is based on

this type of mutual inter dependence. Large enterprises provide an assured market

for the products produced by small enterprises who work as ancillary units.

Ancillary development idea is beneficial for large as well as small enterprises

and also for the economy as well as the country. Ancillarization contributes to growth

of entrepreneurship. Large enterprises minimize investment since the required production

can be sourced at a lower rate through subcontracting from an ancillary unit. The large

enterprises minimize investment in inventory. Ancillary units are usually located near

the large enterprises. They work with the parent enterprises for product as well as

process development. Ancillary development increases employment opportunities. It

also increases productivity of small enterprises.

If large enterprise delays payments, then ancillary units face difficulties.

It is tough for them to take any legal action. With changes in technology,

modifications in specifications etc, ancillary units find it difficult to survive. With

proliferation of suppliers, ancillary units may not be able to utilize their capacity to

their fullest which may put them in losses.

Large enterprises work with ancillary units based on the model of

partnership and sub-contracting. This arrangement provides assured orders to

ancillariesalong with technology support, specialized manufacturing facilities, raw

materials, tooling and testing facilities, financial assistance etc. Large enterprises

sub-contract their components in a big proportion to ancillaries.

Vendor Development

As we have seen above in ancillarization, there is a need for small as well

as large enterprises to partner with each other for production proficiencies and

symbiotic benefits. Micro, Small and Medium Enterprises Development Institute

(MSME-DI) provides a common platform for MSMEs and large enterprises to

match the requirements through Vendor Development Programmes (VDPs). These

Exhibition-cum-Vendor Development Proogrammes aim at bringing this gap

between support systems and Government departments, public sector units (PSUs),

navy and other defense departments and large enterprises etc.

Check Your

Progress


ancillarization?


Development –III

89

NOTES

Business


According to MSME-DI, Mumbai, the objectives of National Vendor

Development Progrmmes (NVDPs) are:

• To publicize Public Procurement Policy

• To provide business opportunities to micro, small enterprises (MSEs) to

expand their market base in Government/Public Sector Undertakings

and large enterprises

• To bring MSEs & PSUs on common platform for business exchange

through Industrial exhibitions and events during the exhibition.

Every year MSME-DIs organizes VDPs at major industrial centres in the

state. Major public sector units in the state are invited to exhibit their requirements.

Representatives of the PSUs explain to the interested MSEs, their procedure of

procurement and the documentation involved. The standards and specification

are discussed in detail. At the same time, MSMEs also put up stalls to showcase

their capabilities. Such events in the past have resulted in many enduring vendor-

vendee relationships and have led to sustained partnerships.

Entrepreneurs have to go through all the phases of vendor development

process in a systematic manner. They should analyze their own requirements and

needs carefully and then start the search for a suitable vendor for particular

materials. Various sources of information include trade directories, trade journals

and magazines, telephone directories, salesmen, suppliers’ catalogues etc.

Information about the background, experience, expertise of vendors, financial

capacity, reputation, location conveniences etc has to be collected. Then the

shortlisted vendors should be assessed on the basis of vendors’ proposals and

negotiations regarding quality specifications, quantity discount, trade credit etc.

An effort is made to strike a right match between entrepreneur’s needs and

vendor’s needs and experience. In this manner, the vendor development process

comprises of market search, enquiry, negotiation, experience and evaluation.

5.4 Collaboration

The term collaboration is generally used to refer to two individuals who

work together for accomplishment of a common purpose. In business strategy,

collaboration has become an effective growth strategy. Globalization, increasing

focus on quality at lower prices, fierce cut throat competition etc. make it increasingly

difficult for entrepreneurs to grow independently. In the face of such challenges,

collaboration is a dynamic strategy which brings two or more enterprising individuals

together to sense and exploit numerous promising opportunities.

Resources by their very nature are limited. In the face of resource constraints,

collaborative partnering enables two or more entrepreneurs together to join their

hands, share the resources and exploit new opportunities, enter new markets,

showcase their wide experience, and versatile skills. At times, for entering in to the

local market, a strategic partnership can be entered into a local player. Partnering

with collaborative partners may be prove to be an easy and quick route to grow by

means of diversification. Collaborating partnering and planned alliances may prove

to be effective for encouraging research and development for sharing resources and

competencies and decreasing the costs. Strategic partnering in specialized areas of

marketing, research, distribution and the like would fetch competitive advantage for

the entrepreneurs. Whatever can be done individually, tremendous synergies would

Check Your

Progress


about vendor develop-

ment?


Development –III

90

NOTES

Business


be observed with strategic partnering in a collective manner. In this manner,

collaboration is sought by the entrepreneurs to achieve business growth.

The growth journey through collaboration may come across various stakeholders

like competitors, enterprises with complimenting skills and supporting competencies,

vendors, suppliers, academic institutions, research institutions and the like.

Sometimes, there is a need to collaborate with competing organizations.

Sometimes an entrepreneur may not be able to fulfill the entire demand of the

market. Sometimes the scale of demand is beyond the capacity of the entrepreneur.

There may not be adequate time at the disposal of the entrepreneur to cater to the

need of the market at right time. The entrepreneur may not be eligible to pick up

an order in terms of investment required, past experience, capacity etc. In several

such situations, entrepreneurs have no choice but to enter into collaboration with

competitors which can be termed as co-opetition i.e. cooperation with the

competition. For the sake of getting a big project, several competitors come together,

form a consortium and bid for valued projects.

In the initial phase, the new entrepreneur may not be able to give justice

for the changing wants/preferences of the customers. In such cases, the

inexperienced entrepreneurs may enter into partnership with experienced

entrepreneurs who are proficient in some skills. Such entrepreneurs may partner

with resourceful entrepreneurs who possess distinctive competencies and learn

from them while ensuring their survival and sustenance.

An entrepreneur has to interact with many vendors for acquiring day to

day necessitiesand for smooth functioning of the enterprise. The transactions with

such vendors are guided by cost benefit analysis. If there is a gap, within no time

incompetent and inefficient vendors can be replaced. There is no specific

preference for a particular vendor.

An entrepreneur is dependent upon a few valuable suppliers. They are an

integral part of the value chain and the delivery process. They provide critical

inputs in the operational process. The relationship with the suppliers is governed

by not just cost but other considerations such as quality, expertise, delivery process,

time frame, sustainability etc. If one or few suppliers are discontinued due to any

reason even for a short while, it would affect the enterprise in an adverse manner.

There is a definite and distinctly identifiable role of innovation, invention

and consequently of research in the success and growth of every enterprise. In

the startup phase, a small entrepreneur may not be able to pay attention to innovation,

research and development. In absence of this, it would be difficult to enter into the

growth phase, typically in such situations entrepreneurs collaborate with academic

institutions, research centers and institutions.

There is a need to throw light on the terms vendors and suppliers in terms

of similarities and dissimilarities. Both a vendor and a supplier provide product/

service to entrepreneurs with an eye in profit. The general usage of the term does

not differentiate between these two terms. However, with reference to partnering

and collaboration it does. Let us discuss the differences.

In the words of Raj Shankar, a vendor is an agency with whom the enterprise

has a transactional relationship; and supplier is an agency who becomes a critical

part of enterprise’s delivery chain. Commercial value of the transaction drives the

relationship with vendor. The value delivered for money, aspects like quality, on time

delivery, specification,fulfillment drive the relationship with the supplier. There is

little differentiation between two vendors offering the same commodity or service.

Check Your

Progress


collaboration?


Development –III

91

NOTES

Business


It is crucial to choose the aligned supplier. Though cost is an important criterion for

consideration, it cannot be the only criterion for selection of supplier.

Vendor transacts mostly with a defined product/ service with very clear

specification. Mostly suppliers are expected to deliver expertise. Vendor is at the

bottom level of value chain of partnering whereas supplier occupies a higher value

position of partnering. With good collaboration, a key supplier can be developed

into a strategic partner.

Types of Collaboration

Collaboration can be categorized on the basis of need, value, benefits,

structure, and characteristics. Need-based collaboration, as the name implies, revolves

around an immediate requirement of the entrepreneurs. There may not be a motive

to develop long-term relationship. It is vendor based relationship, mainly of

transactional nature. This is an arrangement for the sake of commercial benefits by

enterprises with traders or non-core services. Value based collaboration is based on

a long-term survival and sustenance need of enterprises. It is driven by mutually

beneficial aspects of relationship. It can involve enterprises with complementary

and at times supplementary skills. Strategic collaboration is directed at future benefit

with a focus on mutual cooperation and collaborative leadership. It is a symbiotic

arrangement for the concerned enterprises based on individual capabilities. It is

sharing between large enterprises, government, research institutions or with academia.

Need based collaborations are of temporary nature. The concerned

enterprises are interested in cost benefit analysis and not in long-term benefits.

Value based collaborations look for quality, sustainability of the relationship. Strategic

collaboration are based on trust and confidence.

For a successful collaborative engagement, there is a need to pay attention to

relationship interface which comprises of trust, transparency, good governance, problem

solving, human dignity. Collaboration, to be sustainable, has to be based on rules,

regulations and a good legal framework so as to protect interests of the concerned

enterprises who have varied motives and goals. For getting success in collaboration,

the entrepreneurs need to communicate with their team members about the reasons

and motives of collaboration and the kind of benefits it would fetch for them. They

have to overcome the differences in their culture, style of work as well as knowledge.

Otherwise there are various challenges for effective collaboration such as cultural

differences, non-acceptance of risks, leadership issues etc. If such maters remain

unattended, then they would pose a threat to the continuity and success of collaboration.

5.5 Summary

Entrepreneurs use franchising as a strategy for achieving business growth.

Some entrepreneurs may not wish to take the risk of launching a new business

venture. Such franchising provides an established model of success and entrepreneurs

take this opportunity to grow and expand on the basis of this proven approach. For

running a successful franchise, there is a need of entrepreneurial mind who is ready

to take risk. Franchisers permit franchisees to run their brand within the framework

of rules and regulations. The franchisee operate the business within a defined

framework. Franchisee operates business with the assistance and support of the

franchiser. The franchiser develops product/service line, sets quality standards.

Franchising is a system of distribution in which franchisees who are like

semi-independent business owners pay fees and royalties to franchiser i.e. parent

Check Your

Progress

19. Are the terms ven-

dors and suppliers dif-

ferent from each

other?

Check Your

Progress

State whether true or

false:

20. Need-based

collaboration, as the

name implies, revolves

around an immediate

requirement of the

entrepreneurs


Development –III

92

NOTES

Business


company in return for the right to become identified with its trademark, to sell its

products/services, and to use its business format and system. Franchising is the

transfer of rights to sell a trademarked product/service through a system prescribed

by a franchiser who owns the trademark. Franchising is beneficial to franchiser

also who grows rapidly using franchisees’ money.

Franchising is advantageous to both franchiser as well as franchisee.

Franchiser gains market expansion with low cost capital investment. It is possible

to receive return on investment in the immediate future. Franchiser gets valuable

inputs and lot of ideas for improvement from franchisee. Franchiser is relieved of

work pressures of day to day operations. Franchisee is relieved of investments

needed for running franchise. Expertise and specialized knowledge is available

easily from franchiser. There is a continuous ongoing support of franchiser to

franchise which is a proven business model. This reduces risk for the franchisee.

Several disadvantages are experienced by both franchise and franchisee

regarding franchising arrangements. Franchisee has to deal with huge initial

investment and there is a risk of failure. Strict control is exercised by franchiser

over franchisee and operations of franchise. There is limited freedom and restricted

independence regarding decisions, actions and day to day activities. Franchiser

avails only a small share of profit with franchising arrangement. There cannot be

complete control over the franchisee by franchiser.

Ancillarization is a mutually beneficial commercial relationship. An

entrepreneur, i.e. a contractor, places an order with another enterprise i.e. sub-

contractor for the production of parts, components, sub-assemblies or assemblies

to be incorporated into a product sold by the entrepreneur. The orders comprise of

processing, transformation, finishing of materials, parts by the sub-contractor as

per the requirement of the contractor entrepreneur.

Ancillary development fulfills various objectives such as: growth of

entrepreneurship, development of employment opportunities, increase in productivity

of small enterprises, development of expertise or specialization in several fields,

bringing about economies of scale and reduced production costs etc.

The term collaboration is used to represent working together of two

enterprises to achieve a particular goal. It is accepted by entrepreneurs as a growth

strategy. Collaborations take place for diversification, for entering new markets,

for gaining competitive advantage etc.

Entrepreneurs may want to collaborate with competitors, vendors, suppliers,

academic institutes, research centres etc. collaboration with vendors is of transactional

nature and relationships with suppliers are based on quality, and sustainability.

There are three levels of collaboration – need based collaboration, value

based collaboration and strategic collaboration. Need based collaboration is

transactional in nature. Strategic collaboration seeks long-term future benefits.

5.6 Key Terms

• Royalty: A payment to an owner for the use of property, especially

patents, copyrighted works, franchises or natural resources by those

who make use of it for earning income. Mostly royalties are designed to

compensate the owner for the asset’s use and are legally binding


Development –III

93

NOTES

Business


• Tradename: A name under which a product/service is marketed or

under which a business operates; a name with status of a trademark

• Trademark: A name, symbol or other depiction identifying a product; a

recognizable sign, design, or expression which identifies products/services

of a particular source from those of others. A trademark may be located

on a package, a label, a voucher, or on the product itself


Questions

1. Explain the benefits and drawbacks of buying a franchise.

2. The franchisor-franchisee relationship is a symbiotic one. Explain.

3. Explain the role of franchising in developing entrepreneurship with the

help of examples.

4. Define the concept of business franchise. Franchise is a smart

entrepreneur. Do you agree? Explain.

5. How would you evaluate a franchise option?

6. What a franchisee can expect from buying into a franchise?

7. What are the pitfalls of becoming a franchisee? What precautions you

recommend to a potential franchisee.

8. Explain the benefits and drawbacks of buying a franchise.

9. Describe the various types of franchising.

10. Discuss the right way to buy a franchise.

11. Discuss the significance of ancillarization in India.

12. What do you know about the term ‘vendor development’?

Exercise

Activity 5.1

Visit a local franchise service business and seek information about the

pros and cons of the franchising arrangement.


1. An enterprise’s strategic collaboration are usually with

i. R&D institutes

ii. Vendors

iii. Suppliers

iv. Competitors

2. The relationship between a product manufacturer and its distributor falls

under


Development –III

94

NOTES

Business


i. Value based collaboration

ii. Need based collaboration

iii. Strategic collaboration


3. Pick the wrong one

i. As a franchiser, an entrepreneur creates a business concept and

its replica are sold to others

ii. As a franchisee, an entrepreneur buys a business which is a part of

a chain of similar business units


iv. i and ii and right

4. Franchising is a tool for ——

i. Growth

ii. Collaboration

iii. Networking

iv. Vendor identification

5. —— is to be paid by franchisee to start the business

i. Franchise fee

ii. Legal fee

iii. Capital investment


6. —— is one where franchiser gives franchisee the right to buy its products

and use its name

i. Business format franchise

ii. Product and tradename franchise

iii. Sub-franchise


7. Which of the following is not a misconception about franchising?

i. Franchising is a proven system

ii. Franchising is like an investment

iii. Franchising is a safe investment

iv. Franchising is a medium through which growth can be achieved

without making large investments in creating internal infrastructure


i. A strong industry ensures franchise success


Development –III

95

NOTES

Business


ii. Franchiser’s stake is very high so he/she would go all out to support

franchisee

iii. i and ii are not correct

iv. i and ii are true

9. Which of the following is a growth strategy?

i. Mergers & acquisitions

ii. Collaboration

iii. Diversification

iv. All the above

10. Which of the following is a level of collaboration?

i. Need based collaboration

ii. Value based collaboration

iii. Strategic collaboration

iv. All the above

11. Which one of the following is wrong?

i. Franchisees are semi-independent business owners

ii. Franchisees have freedom to change the way they run their business

iii. Franchising is a system of distribution in which franchisees pay

fees and royalties to a parent company i.e. the franchiser

iv. All the above i, ii, and iii are wrong


i. Individual franchise agreement involves the sale of a single franchise

for a specific location

ii. An area level franchise allows the franchisee to own and operate a

specific number of outlets in a particular geography

iii. Master franchise agreement involves the right to open and operate

number of stores or units to master franchise and also the right to

offer to sell the franchise to other people in the area


13. Which one of the following is true?

i. Entrepreneurs can achieve growth through franchising without

making big investments for creation of infrastructure.

ii. Franchising is a system for selective distribution of products/services

through the outlets owned by retailers or dealers




Development –III

96

NOTES

Business


Answers

Check Your Progress

1. Franchising

2. Franchiser, franchisee

3. True

4. False

5. True

6. True

7. True

20. True


1. i

2. ii

3. iii

4. i

5. i

6. ii

7. iv

8. iii

9. iv

10. iv

11. ii

12. iv

13. iii

5.8 Further Reading

http://msmehyd.ap.nic.in/VendorDevelopment.htm

http://www.msmedimumbai.gov.in/html/nvdps.html

Khanka S.S., Entrepreneurial Development, S. Chand & Co., Ltd., New

Delhi, 2010

Shankar Raj, Entrepreneurship Theory and Practice, Vijay Nicole Imprints,

Chennai, 2012

Zimmerer Thomas W., Scarborough Noman M., Essentials of

Entrepreneurship and Small Business Management, PHI Learning Private Limited,

New Delhi 2011


Development –III

97

NOTES

Business



AND DEVELOPMENT –IV

Structure

6.0 Introduction

6.1 Unit Objectives

6.2 Acquisitions

6.3 Mergers

6.4 Joint ventures

6.5 Strategic alliances

6.6 Summary

6.7 Key Terms


6.9 Further Reading

6.0 Introduction

“Businesses once grew by one of two ways: grass roots up, by

acquisitions…Today businesses grow through alliances – all kinds of

dangerous alliances. Joint ventures and customers partnering which, by the

way, very few people understand” –Peter F. Drucker

In this book, we are trying to explore numerous models which would help an

entrepreneur to look for and/or create opportunities for growth as well as expansion

of existing business. As we have seen in the previous unit 4, co-operative strategies

could be of various types such as mergers and acquisitions (or takeovers), joint

ventures and strategic alliances. The focus is on complementarities among the

interests of rival enterprises based on the view that competition could co-exist with

competition. This view is expressed by thinkers such as James Moore, Ray Noorda,

Barry J. Nalebuff and Adam M. Brandenburger. Co-opetition propagates the idea

of simultaneous competition and co-operation among rival firms for mutual benefit.

This unit continues with the theme of expansion strategies and discusses

various types of co-operative strategies such as mergers and acquisitions (or

takeovers), joint ventures and strategic alliances. Let us see how these strategies

can be pursued by an entrepreneur as a way to grow his/her business.

6.1 Unit Objectives


• Appreciate various types of co-operative strategies for growth and

expansion


Development –IV

98

NOTES

Business


• Explain the meaning of mergers and acquisitions along with various

strategic, financial, managerial and legal issues involved in mergers

• Be aware about the pros and cons of acquisition as a growth strategy

• Know the meaning of strategic alliances

• Be familiar with joint ventures

• Understand the role of joint ventures in bringing out growth of

entrepreneurial ventures and the challenges of developing and nurturing

a meaningful joint venture relationship

6.2 Acquisitions

An entrepreneur can expand his/her enterprise by acquiring an existing

business. It is an effective approach of expanding the business by entering new

markets or new product areas. An acquisition is purchase of another enterprise,

or part of an enterprise. The enterprise gets completely absorbed and that ends its

independent existence.

While planning for acquisition, from a strategic perspective, an entrepreneur

pays attention for successful integration of acquisition into the entrepreneur’s

venture. He/she strives for synergy in the exiting business with the acquired

business. Otherwise there is a probability of failure to achieve the planned objectives

of acquisition. The acquisition should strengthen the existing business. It has to

supplement the existing set up - may be in the form of a distribution outlet, production

set up, sales efforts and the like. Anyhow, strategic entrepreneurship fits the

acquisition into the overall framework and structure of the present business and

moves the enterprise in the right direction.

There are many advantages in acquiring an existing business. The cost of

acquisition is less than the costs involved with other strategies of expansion. The

acquired enterprise has its own customers, wholesalers, retailers, suppliers, the

entire distribution, sales and marketing structure. Existing employees of the acquired

business would be a great help to the entrepreneur. They are familiar with the

business and are well versed with various stakeholders such as customers, suppliers,

vendors, dealers, distributors and the like. Their association with the business and

experience in running the business would be an assurance to the entrepreneur

about smooth conduct of the business. He/she need not spend time in searching

for new suppliers, trade channels, recruiting new employees, training them and so

on. If the acquired business has been profitable, has an established image and

goodwill, then the entrepreneur would be more successful by continuing with the

existing strategy in the existing customers and markets. He/she can thus focus on

improving and expanding the acquired business.

Along with various benefits, there are several inconveniences and difficulties

associated with acquisition of an existing business. There is a possibility of

overvaluation of the business may be because of its image, customer base etc. In

that case, the return on investment may not be satisfactory. The entrepreneur has

to take a prudent decision regarding the investment required in acquiring a business

in terms of income generation ability, expected profit and future prospects. The

buyer entrepreneur has to carefully review the track record of the business which

is being planned for acquisition. Many of the times such ventures for sale has an

irregular, inconsistent record. Sometimes the buyer entrepreneur may be


Development –IV

99

NOTES

Business


overconfident about the success in acquisition. There may be a mismatch between

existing venture(s) and to be acquired venture. The possibility of overcoming such

gap has to be tapped in advance. Often key employees leave when the business is

being acquired and this may be harmful for the future in terms of its sustainability.

The buyer entrepreneur has to look into this matter and devise a plan to retain the

talent with the acquired business and infusion of new blood, if required, with a

judicious mix.

There are professional business brokers, like real estate brokers, who can

help buyer entrepreneurs in locating good business ventures through referrals,

advertising or direct sales. They get commission on sale. The other sources of

assistance constitute consultants, accountants, bankers, business associates. Such

type of professionals are familiar with the business environment. They can help in

negotiations. The other important sources of information include the classified

sections of newspaper advertisements, trade magazines.

The buyer entrepreneurs seek information about promising business

opportunities, analyze the information carefully, consult with professionals, and

advisors, find out the suitability of businesses to his/her own situation and then

take the decision about acquisition.

Leveraged Buyouts

In the words of Robert D. Hisrich, Michael P. Peters, Dean A. Shepherd,

a leveraged buyout (LBO) occurs when an entrepreneur (or any employee group)

uses borrowed funds to purchase an existing venture for cash. Most LBOs occur

because the buyer entrepreneur considers that he/she could run the enterprise

more efficiently than the existing owners. The present owner may be an

entrepreneur who wants to retire. The present owner may be a large enterprise

interested in divesting itself of a subsidiary that is too small or that does not fit its

long-term strategic plans.

The buyer entrepreneur needs a large amount of money. The personal

financial resources for acquisition of the enterprise are typically inadequate. The

issuance of additional equity as a means of funding is usually not possible. The

capital is acquired in the form of long-term debt financing and the assets of the

enterprise being acquired serve as collateral. banks, venture capitalists, and

insurance companies provide the debt needed in LBOs.

In most LBOs, the debt capital usually exceeds the equity by a ratio of 5

to 1 with some ratios as high as 10 to 1. This is typically more debt relative to

equity than in a typical capital structure. This involves more financial risk. Success

in LBO depends upon the ability of the entrepreneur to increase sales and profits

so as to cover the principal and interest payments.

6.3 Mergers

Merger is another strategy of expansion. It is joining of two or more

enterprises in which only one enterprise survives. Merger means combination of

two or more existing enterprises into one. It may take place in two ways: an

enterprise or enterprises may be acquired by another, usually a big enterprise it is

called ‘absorption’; or two or more existing enterprises merge into one to form a

new enterprise, it is called amalgamation. In absorption, no new enterprise is formed

whereas, in case of amalgamation, a new enterprise is formed.

Check Your

Progress

1. What is meant by

acquisition?

2. State the advan-

tages of acquisition.

3. Write down the dis-

advantages associated

with acquisition.

4. What are the

sources of information

for locating acquisition

candidates?

State whether follow-

ing is true or false:

5. The cost of acquisi-

tion is less than the

costs involved with

other strategies of ex-

pansion

Check Your

Progress

6. What do you know

about ‘leveraged

buyout’?


Development –IV

100

NOTES

Business


Mergers may lead to monopoly in some cases which is not desirable.

Mergers and acquisitions (or takeovers) strategies can be considered as the external

approach to expansion in which basically two or occasionally more than two parties

are involved in assisting the entrepreneur to grow his/her enterprise. These three

terms- mergers, acquisitions, takeovers – are used as if they are synonymous and

are not different from each other. However, minor differences are technically

seen in the usage of the terms. In case of mergers, the objectives of the buyer

enterprise and the seller enterprise are similar to a noticeable extent. On the other

hand, acquisitions or take overs usually take place on the basis of strong impetus

of the buyer enterprise to acquire another enterprise for growth and expansion. In

literature of strategic management, it is found that mergers and acquisitions are

covered side by side and are commonly referred as M & A as the combined

acronym. They are so similar with each other.

Takeover is a common way for acquisition. A. A. Thompson and A. J.

Strickland define takeover as ‘the attempt (often sprung as a surprise) of one firm

to acquire ownership or control over another firm against the wishes of the latter’s

management (and perhaps some of its stockholders)’. However, many turnovers

in practice, may not have an element of surprise and may not necessarily be

against the wishes of the acquired firm. Actually takeovers are frequently classified

as hostile turnovers and friendly turnovers. Hostile turnovers take place against

the wishes of the acquired firm whereas friendly takeovers take place by mutual

consent, in which case they could also be described as a merger.

A merger is a combination (also known as amalgamation, consolidation or

integration) of two or more enterprises in which one acquires the assets and

liabilities of the other in exchange for share or costs or both the enterprises are

dissolved and assets and liabilities are combined and new stock is issued. For the

enterprise which acquires another, it is acquisition. For the enterprise which is

acquired, it is a merger. If both the enterprises dissolve the identities to create a

new enterprise, it is consolidation.

Mergers and acquisitions are of different types and can be classified as

follows:

1. Horizontal mergers take place when there is a combination of two or

more enterprises in the same business or of enterprises engaged in certain

aspects of production or marketing processes.

2. Vertical mergers take place when there is a combination of two or more

enterprises, not necessarily in the same business, which create

complementarities either in terms of supply of materials (inputs) or

marketing of goods/ services (output).

3. Concentric mergers take place when there is a combination of two or

more enterprises related to each other either in terms of customer

functions, customer groups, or alternative technology used.

4. Conglomerate mergers takes place when there is a combination of two

or more mergers unrelated to each other, either in terms of customer

functions, customer groups or alternative technologies used.

Mergers carried out in reverse are known as demergers or spin-offs.

According to N. Venkiteswaran, demerger involves spinning of an unrelated

business/division in a diversified company into a standalone company, along with a

free distribution of its shares to the existing shareholders of the original company.

Check Your

Progress

7. What is a merger?

8. Are the terms

merger, acquisition,

takeover synonymous?

9. How mergers are

different from acquisi-

tions?

10. State the meaning

of amalgamation.

11. Enlist the types of

mergers.


Development –IV

101

NOTES

Business


Merger takes place with two enterprises- the buyer enterprise and the

seller enterprise. The buyer and the seller enterprise have different motives for

entering into mergers. Glueck and Jauch identified the reasons for mergers and

acquisitions as follows:

Why the buyer wishes to merge:

• To increase the value of the organization’s stock

• To increase the growth rate and make a good investment

• To improve the stability of its earnings and sales

• To balance, compete or diversify its product line

• To reduce competition

• To acquire a needed resource quickly

• To avail tax concessions and benefits

• To achieve advantage of synergy

Why the seller wishes to merge:

• To increase the value of the owner’s stock and investment

• To increase the growth rate

• To acquire resources

• To stabilize operations

• To benefit from tax legislation

• To deal with top management succession problems

While dealing with merges and acquisitions a number of issues need to be

tackled. These issues are related with specialized areas like accounting, finance,

legal matters, negotiations and the like. Actually mergers and acquisitions are

handled by consultancy and legal firms. Azhar Kazmi discusses some strategic,

financial, managerial and legal issues involved in mergers as follows:

Strategic issues: Strategic issues deal with strategic interests between

buyer and seller enterprises. What matters is the extent to which a merger will

achieve positive synergistic results. To achieve this, the strategic advantages and

distinctive competencies of the merging firms have to be analyzed. Further, there

has to be a match between the objectives of the firms. A careful attention of all

these strategic aspects would lead to a successful merger which would accomplish

its goals in a gainful manner.

Financial issues: There are three financial issues- the valuation of the

business and shares of the target firms, sources of financing for mergers and

taxation matters after merger. The valuation of the business of the target firm is a

detailed and comprehensive process. We should take into consideration various

factors such as tangible and intangible assets, the industry profile of the firm and

its prospects and the future earnings and the prospects of the target firm. The

valuation of the shares in a merger has to consider the factors like stock exchange,

price of the shares of the target firm, dividends paid, growth prospects of the firm,

value of assets, quality and integrity of top management, industry and competitive


Development –IV

102

NOTES

Business


conditions, opportunity cost assessment by computing yields on comparable

investments and market sentiments.

The second financial issue is of sources of financing for acquiring firms.

There are several sources of funds such as acquiring company’s own funds or

borrowed funds, raised through the issue of debentures, bonds, deposits, external

commercial borrowings, global depository receipts, loans from central or state

financial institutions or rehabilitation finance provided to seek industrial companies.

The third issue is of taxation matters that are dealt with under relevant

provisions of the income tax act of 1961 and which are related to various technical

aspects such as the carrying forward or set-off of losses and unabsorbed

depreciation, capital gains tax and amortization of expenses.

Managerial issues: Managerial issues are the problems that arise in

managing firms in the post-merger phase. The perception of post-merger

management is an important aspect which has an impact on the process of merger.

Post-merger phase is characterized by changes in staff, specially chief executives

and top managers. If mangers are reassured that there would be no threat to their

status and their position or that professional management would be adopted then

the process of merger may take place smoothly. If managers perceive the merger

as threatening, then they oppose the process which would hamper it severely.

Several times the mergers don’t go as planned if managers perceive uncertainty

in the post-merger phase; managers get worried about their jobs, their salaries,

promotions, their income, status, positions. If the post-merger phase seems

threatening to them, there would be low morale and low productivity of the workers.

They would strongly resist such changes as a result of mergers and react to the

process of merger severely.

Legal issues: Legal issues in mergers deal with legal provisions regarding

mergers. In our country, the provisions relating to mergers and amalgamations

etc. are contained in the Companies Act 1956 and the Companies (Court) rules,

1959. The strategies of mergers and takeovers can be implemented in a smooth

manner only after proper study of the related provisions in the Act. The term

merger is not used in the Companies Act, instead the term amalgamation is used.

Along with the Companies Act, the Income Tax Act also is relevant for taxation

purposes for amalgamation purposes and provides for carrying forward of

accumulated losses and unabsorbed depreciation of the amalgamating company.

Prasanna Chandra recommended a six step procedure for an acquisition

as follows:

1. Spell out the objective

2. Indicate how the objective would be achieved

3. Assess managerial quality

4. Check the compatibility of business styles

5. Anticipate and solve problems early

6. Treat people with dignity and concern

N. Maluste discusses the reality about mergers and acquisitions in actual

practice. In the first step, the motivation for the takeover is defined, albeit informally.

There are many reasons for takeover such as quick growth, diversification,

establishing oneself as an industrialist, reducing competition, increasing the market


Development –IV

103

NOTES

Business


share or even creating goodwill (if sick units are taken over for rehabilitation).

Along with these rational reasons, there might be other purely irrational reasons

such as greed or lust for becoming rich, to accumulate wealth, to build an industrial

empire or to humble competitors and business opponents. The second step in a

takeover is to arrange for financing. There are different modes for financing of

mergers and acquisitions. Also, there are leveraged buyouts (LBOs) or bootstrap

acquisitions which involve raising of funds by pledging the assets of the firm to be

taken over. After making an arrangement for money, the next step is taken by a

trusted intermediary who may be an accountant, a lawyer, a businessman, or

development and merchant banker. Then the process of negotiation is carried on

which focuses on factors like valuation of assets, business goodwill, market

opportunities, growth potential etc. and price to be paid for shares transfer is

fixed. In this manner, friendly takeovers take place. Hostile takeovers take place

in a different manner. The shares are picked up from the open market and

controlling interest is obtained. Then with the help of other majority shareholders,

usually one or more of the financial institutions, a bid is made to enter the company’s

board and to acquire control. There is a resistance from the existing management.

The existing management refuses to register the transfer of shares. It may forestall

the moves by deals through court orders and injunctions. There is a noteworthy

role of political support in the success achieved in a bid to takeover a firm.

Why should an entrepreneur merge? There are many defensive and

offensive strategies for a merger devised by F. T. Haner. Merger motivations

range from survival to protection to diversification to growth. Survival requirements

such as capital structure deterioration, technological obsolescence, loss of raw

materials, and market loss to superior products may motivate entrepreneurs for

mergers. The merger may protect against market infringement, lower cost position

of a competitor, product innovations by others, an unwanted takeover. A merger

can support diversification such as countercyclical, counter seasonal, international

operations and multiple strategic plans. A merger may be sought for the sake of

gains in market position, technological edge, financial strength, managerial talent.

Merger offers easy growth opportunities. Entrepreneurs increase their

sales revenue and enlarge their product and brand portfolios with mergers. It

mobilizes resources and facilitates utilization of resources. Mergers provide a

chance to sick enterprises to survive and provide alternatives for selective

divestment. Sick enterprises are rehabilitated by merging into healthy and strong

enterprises. It enables diversification by venturing into new businesses and markets.

It increases market share and decrease competition by consolidation of rival

companies. Mergers ensure management accountability.

There is a negative side also attached with mergers and acquisitions. It is

argued that takeovers do not create any real assets for society and that they are

harmful to the economy. Professionalism gets replaced by money power. The interests

of the minority shareholders are not protected and stresses and strains are created

in the companies taken over or exposed to the threat of takeovers. Takeovers reduce

competition and consequently facilitate monopolistic or oligopolistic tendencies among

the firms. Prices are increased. Employees loss their jobs. Further, there is a probability

of cultural mismatch and resultant strain among the merging firms. Also, hidden

liabilities of the target firms may give rise to some difficulties.

Merger requires meticulous planning for being successful.

Check Your

Progress

12. State merger mo-

tivations.


appropriate words:

13. In — no new en-

terprise is formed

whereas, in case of —

a new enterprise is

formed


false:

14. In case of merg-

ers, the objectives of

the buyer enterprise

and the seller enter-

prise are similar to a

noticeable extent

15. Acquisitions or

takeovers usually take

place on the basis of

strong impetus of the

buyer enterprise to

acquire another enter-

prise for growth and

expansion

16. Usually, mergers

are classified as —

17. —— means com-

bination of two or more

existing enterprises.

18. Why do buyer

firms wish to merge?

19. Why do seller

firms wish to merge?


Development –IV

104

NOTES

Business


6.4 Joint Ventures

Joint venture is a temporary partnership between two or more enterprises

to undertake a venture jointly. The parties who enter into agreement are called co-

ventures. After completion of the joint venture, the agreement comes to an end.

Profit or loss is shared between the co-ventures in their agreed ratio. In the absence

of such agreement, profit or loss is shared equally.

M .A. Hitt, R. D. Ireland and R. E. Hoskisson say, joint venture occur

when an independent firm is created at least by two other firms. In this globalized

era, for enterprises which aspire for expansion opportunities, joint ventures offer

an appropriate strategic alternative.

Joint venture increases competitive strength of the business. It enables latest

technology, up-to-date knowledge which is not available in the enterprises. The risk is

reduced. Joint ventures increase sales and reduces production and marketing costs.

If there is no proper understanding between the co-ventures, the business

would suffer and the expected benefits would not be seen. There is a possibility

of conflict between co-ventures.

In the words of Azhar Kazmi, a joint venture could be considered as an

entity resulting from a long term contractual agreement between two or more

parties to undertake mutually beneficial economic activities, exercise joint control

and contribute equity and share in the profits or losses of entity. Reserve Bank of

India defines joint venture as: ‘A foreign concern formed, registered or incorporated

in accordance with the laws and regulations of the host country in which the

Indian party makes a direct investment, whether such investment amounts to a

majority or a minority shareholding’.

According to Thompson and Strickland, joint ventures may be useful to

gain access to new business, mainly under four conditions:

1. When an activity is uneconomical for an organization to do alone.

2. When the risk of business has to be shared and, therefore, is reduced for

the participating firms.

3. When the distinctive competency of two or more organizations can be

brought together.

4. When setting up an organization requires surmounting hurdles such as

import quotas, tariffs, nationalistic-political interests and cultural road

blocks.

In this manner, joint ventures are an effective strategy when development

costs have to be shared, risk spread out and expertise combined to make effective

use of resources.

K. Gopalan identified five triggers for a joint ventures: technology,

geography, regulation, sharing of risk and capital, intellectual exchange. Indian

enterprise is well-acquainted with local market. The foreign partner in the joint

venture is expected to introduce high class technology. A foreign player may have

a presence in many global markets. For Indian partner, it is a good opportunity to

participate in a good venture. With opening up of a highly regulated market sector,

tremendous opportunities are seen to attract a flow of foreign players.


Development –IV

105

NOTES

Business


Joint ventures take place within industries, across industries and across

countries. They are more meaningful and effective for entering international

markets. Indian enterprises enter foreign market in a joint venture with a foreign

enterprise. Also, a foreign enterprise enters into a joint venture with an Indian

enterprise. Various types of joint ventures from the point of view of Indian enterprises

are listed below by Azhar Kazmi as:

1. Between two Indian enterprises in one industry

2. Between two Indian enterprises across different countries

3. Between an Indian enterprise and a foreign enterprise in India

4. Between an Indian enterprise and a foreign enterprise in the foreign

country

5. Between an Indian enterprise and a foreign enterprise in a third country

There are various advantages of joint ventures. Joint ventures may

eliminate, control or reduce competition. They increase market share in an effective

manner. When a joint venture takes place across different countries, the

participating firms may follow diversification strategy. With technology as an

important parameter of strategy, joint venture with foreign companies can be

feasible. Sometimes while adopting external expansion, there are constraints from

the legal and regulatory environment. In such kind of difficulties the appropriate

option is in the form of a joint venture strategy with a foreign enterprise in that

foreign country or in a third country. In case of environmental threats within the

country or promising opportunities abroad, enterprises undertake joint venture as

a suitable solution. Joint ventures are seen as a viable strategic alternative regarding

external expansion strategy. For joint ventures, strategic advantage is an appropriate

basis at the time of launching, the joint venture and also for its sustained existence.

Now a days, Indian companies are increasingly adopting joint ventures abroad.

Azhar Kazmi lists various advantages of joint ventures as:

• Minimizing risk

• Reducing investment of individual enterprises

• Getting access to foreign technology

• Broad based equity participation access to governmental and political

support and

• Entering new fields of business and synergistic advantage.

Azhar Kazmi lists the various disadvantages that may arise in joint venture

as:

• Problems in equity participation

• Foreign exchange regulations

• Lack of proper co-ordination among participating firms

• Cultural and behavioral differences and the possibility of conflicts among

the partners.

It is found that many of the joint ventures are not functioning properly as

per the expectations. K. Gopalan analyzed the reasons for failures of joint ventures

and presented some meaningful conclusions which are noted below:


Development –IV

106

NOTES

Business


• Change of strategy: Interest of a foreign partner in the local market may

get changed. The enterprise may realize that the market was not strategic.

• Regulatory changes: This factor is uncontrollable by the partners. There

is a change in the limit on FDI - either it has been increased or it has

been reduced. It has not been increased in time or if it has been reduced.

• Success of joint venture: The joint venture functions well. One of the

partners wishes to increase its holdings which is not acceptable to the

other partner.

• Having partners hampers growth. Sometimes having a partner hampers

growth prospects. Both the partners felt that they could have done better

on their own.

• Lack of transparency. If the information is not disclosed, it may create

mistrust among partners which may lead to serious consequences.

Joint venture is a risky strategy. It would be effective if the partners share

strategic interests with each other and work diligently and pay attention to all the

aspects of partnership carefully.

6.5 Strategic Alliances

In the words of M .A. Hitt, R. D. Ireland and R. E. Hoskisson, strategic alliances

are partnerships between firms whereby their resources, capabilities and core

competencies are combined to pursue mutual interest to develop, manufacture or distribute

goods/services. Like joint venture, strategic alliances are increasingly adopted by

entrepreneurs who aspire for co-operation among national as well as international partners.

Yoshino and Rangan define strategic alliances in terms of three necessary

and sufficient characteristics:

• Two or more firms unite to pursue a set of agreed upon goals, but remain

independent subsequent to the formation of the alliance;

• The partner firms share the benefits of the alliance and control over the

performance of assigned tasks - perhaps the most distinctive

characteristics of alliances and the one that makes them so difficult to

manage; and

• The partner firms contribute on a continuing basis, in one or more key

strategic areas.

Lando Zeppei defines strategic alliance as a co-operative arrangement

between two or more companies where:

• A common strategy is developed in unison and a win-win attitude is

adopted by all parties

• The relationship is reciprocal, with each partner prepared to share specific

strengths with each other, the spending power to the enterprise

• A pooling of resources, investment and risks occurs for mutual rather

than individual gain

Check Your

Progress

20. Match the pairs:

i. Joint venture

a. People who sell

companies

ii. Acquisition

b. Purchasing all or

part of an enterprise

iii. Brokers

c. Two or more com-

panies forming a new

company

21. What is the mean-

ing of a joint venture?

22. State the advan-

tages of joint ventures

23. What are the limi-

tations of joint ven-

tures?


Development –IV

107

NOTES

Business


In the words of Mehta and Samanta, strategic alliances are ‘co-operation

between two or more independent firms involving shared control and continuing

contributions by all partners for mutual benefit’.

According to Wakeam, strategic alliances by definition cannot be tactical.

In order to be strategic, an alliance must satisfy one of these criteria:

• It must be critical to the success of a core business goal or objective

• It must be critical to the development or maintenance of a core

competency or other source of competitive advantage

• It must enable blocking of a competitive threat

• It must create or maintain strategic choices for the firm

• It must mitigate a significant risk to the business

Enterprises adopt strategic alliances to enhance their organizational

capabilities and thereby gain competitive or strategic advantage. They continually

endeavor to get a hold of new markets and new sources of supply. They use latest

technology and ensure optimum utilization of resources. When entrepreneurs realize

that it is not feasible to create resources internally or to acquire them; for creating

a network of beneficial relationships they enter in to strategic alliances.

According to Walters Peters and Dess, strategic alliances are adopted for

reasons like entering new markets, reducing manufacturing cost and developing

and diffusing technology. An enterprise with a successful product/service strives

for new markets. It is not very easy to explore foreign markets; however, the best

option is partnership with a local enterprise. By means of strategic alliances with

suppliers and buyers, it is possible to reduce manufacturing cost, via economies of

scale and better utilization of resources. With strategic alliances, technological

capability is developed by leveraging technical expertise of two or more enterprises.

Yoshino and Rangan classify strategic alliances on the basis of two

dimensions of extent of organizational interactions and conflict potential between

alliance partners. The four types of strategic alliances are:

• Pro-competitive alliances (low interaction/low conflict): These are

generally inter industry, vertical, value chain relationships between

manufacturers and their suppliers or distributors. Supplier and buyer firms

entering upon long term contacts constitute pro- competitive alliance

• Non-competitive alliances (high interaction/low conflict): These are intra

industry partnerships between non-competitive firms. Such alliances can

be entered upon by enterprises that operate in the same industry, yet

don’t perceive each other as rivals.

• Competitive alliance (high interaction/ high conflict): These are

partnerships between two rival enterprises, from the same or different

industries, in a co-operative arrangement where intense interaction is

necessary

• Pre-competitive alliance (low interaction/high conflict): These are

partnerships between two different. These are partnerships between

two different enterprises from unrelated industries to work on well-defined

activities. To work on activities such as new product development, new

technology development, joint research and development, activities, mass

awareness campaigns etc.


Development –IV

108

NOTES

Business


Strategic alliance is a difficult co-operative strategy to manage. Walter,

Peters and Dess devised four principles to manage alliances successfully:

1. Clearly define a strategy and assign responsibilities

2. Phase in the relationship between the partners

3. Blend the cultures of the partners

4. Provide for an exit strategy

There are several difficulties in strategic alliances such as lack of trust

and commitment, perceived misunderstandings among partners, conflicting goals

and interests, inadequate preparation for entering into partnership, hasty

implementation of plans and focusing on controlling the relationship rather than on

managing it for mutual benefit. Because of such kind of pitfalls, most of the strategic

alliances don’t achieve the desired results. Also the other dangers of strategic

alliances may be dynamic external conditions. For successful adoption of strategic

alliances, there is a need of leadership and human relation skills of entrepreneurs.

6.6 Summary

This unit continues with the theme of expansion strategies and discusses

various types of co-operative strategies such as mergers and acquisitions (or

takeovers), joint ventures and strategic alliances.

An entrepreneur can expand his/her enterprise by acquiring an existing

business. It is an effective approach of expanding the business by entering new

markets or new product areas. An acquisition is purchase of another enterprise,

or part of an enterprise.

Merger is another strategy of expansion. It is joining of two or more

enterprises in which only one enterprise survives. Merger means combination of

two or more existing enterprises into one. It may take place in two ways: an

enterprise or enterprises may be acquired by another, usually a big enterprise it is

called ‘absorption’; or two or more existing enterprises merge into one to form a

new enterprise, it is called amalgamation. In absorption, no new enterprise is formed

whereas, in case of amalgamation, a new enterprise is formed.

A merger is a combination (also known as amalgamation, consolidation or

integration) of two or more enterprises in which one acquires the assets and

liabilities of the other in exchange for share or costs or both the enterprises are

dissolved and assets and liabilities are combined and new stock is issued. For the

enterprise which acquires another, it is acquisition. For the enterprise which is

acquired, it is a merger. If both the enterprises dissolve the identities to create a

new enterprise, it is consolidation.

Merger takes place with two enterprises- the buyer enterprise and the

seller enterprise. The buyer and the seller enterprise have different motives for

entering into mergers.

Usually, mergers are classified as: horizontal merger, vertical merger,

concentric merger and conglomerate merger.

Mergers carried out in reverse are known as demergers or spin-offs.

Demerger involves spinning of an unrelated business/division in a diversified

Check Your

Progress

24. Why are strategic

alliances ‘strategic’?

25. What are the rea-

sons for using strate-

gic alliances?


Development –IV

109

NOTES

Business


company into a standalone company, along with a free distribution of its shares to

the existing shareholders of the original company.

Joint venture is a temporary partnership between two or more enterprises

to undertake a venture jointly. The parties who enter into agreement are called co-

ventures. After completion of the joint venture, the agreement comes to an end.

Profit or loss is shared between the co-ventures in their agreed ratio. In the absence

of such agreement, profit or loss is shared equally.

Joint ventures take place within industries, across industries and across

countries. They are more meaningful and effective for entering international markets.

Indian enterprises enter foreign market in a joint venture with a foreign enterprise.

Also, a foreign enterprise enters into a joint venture with an Indian enterprise.

Joint venture is a risky strategy. It would be effective if the partners share

strategic interests with each other and work diligently and pay attention to all the

aspects of partnership carefully.

Strategic alliances are partnerships between firms whereby their resources,

capabilities and core competencies are combined to pursue mutual interest to

develop, manufacture or distribute goods/ services. Like joint venture, strategic

alliances are increasingly adopted by entrepreneurs who aspire for co-operation

among national as well as international partners.

Enterprises adopt strategic alliances to enhance their organizational

capabilities and thereby gain competitive or strategic advantage. They continually

endeavor to get a hold of new markets and new sources of supply. They use latest

technology and ensure optimum utilization of resources. When entrepreneurs realize

that it is not feasible to create resources internally or to acquire them; for creating

a network of beneficial relationships they enter into strategic alliances. For

successful adoption of strategic alliances, there is a need of leadership and human

relation skills of entrepreneurs.

6.7 Key Term

• Leverage: To use something that you already have in order to achieve

something new or better; to use borrowed money to buy an investment

or company; the ability to influence a system, or an environment in a

way that multiplies the outcome of one’s efforts without a corresponding

increase in the consumption of resources


Questions

1. How do friendly takeovers take place? Hostile takeovers?

2. Under what conditions are joint ventures created?

3. Discuss the different types of mergers and acquisition strategies.

4. Discuss the four types of strategic alliances.

5. Write in detail about digitalization strategies.


Development –IV

110

NOTES

Business


6. Discuss the strategic, financial, managerial and legal issues involved in mergers.

7. How can entrepreneurs manage strategic alliances successfully? What

are the pitfalls in strategic alliances? How the pitfalls can be avoided?


1. Joint ventures include sharing of

i. Revenue

ii. Assets

iii. Expenses

iv. All the above

2. Joint ventures take place

i. Within industries

ii. Across industries

iii. Both i and ii


3. Which one of the following is not a reason for failure of joint ventures?

i. Change of strategy

ii. Regulatory changes

iii. Success of joint venture


4. Joint venture would be effective if the partners ————

i. Share strategic interests with each other

ii. Work diligently

iii. Pay attention to all aspects of partnership

iv. All i, ii, iii

5. Joint ventures are an effective strategy when ——

i. Development costs have to be shared

ii. Risk spread out

iii. Expertise combined to make effective use of resources

iv. i, ii, and iii


i. Joint venture is a temporary partnership between two or more

enterprises to undertake a venture jointly

ii. Profit or loss is shared between the co-ventures in their agreed

ratio


Development –IV

111

NOTES

Business


iii. i, ii are wrong

iv. i, ii are right

7. ———— is characterized by high interaction, high conflict

i. Competitive alliance

ii. Non-competitive alliances

iii. Pre-competitive alliance

iv. Pro-competitive alliances

8. ———— is purchase of another enterprise, or part of an enterprise

i. Acquisition

ii. Joint venture

iii. Strategic alliance

iv. Collaboration


i. In case of mergers, the objectives of the buyer enterprise and the

seller enterprise are similar to a noticeable extent

ii. Acquisitions or takeovers usually take place on the basis of strong

impetus of the buyer enterprise to acquire another enterprise for

growth and expansion

iii. Both i, ii are wrong

iv. Both I, ii are right


i. Merger facilitates utilization of resources

ii. Mergers may lead to monopoly in some cases

iii. Sick enterprises are rehabilitated by merging into healthy and strong

enterprises

iv. Merger enables diversification.

11. Joint venture is ———

i. Two or more companies forming a new company

ii. Purchasing all or part of a company

iii. Purchasing an existing venture by any employee group



i. Merger means combination of two or more existing enterprises

into one

ii. In absorption, no new enterprise is formed


Development –IV

112

NOTES

Business


iii. In case of amalgamation, a new enterprise is formed

iv. i, ii, iii are true

13. Which of the following is associated with acquisition?

i. An effective approach to expand business by entering new markets

or new product areas

ii. Purchase of another enterprise or part of an enterprise

iii. Purchased enterprise gets completely absorbed and that ends its

independent existence

iv. All the above

14. Which of the following is associated with mergers?

i. It is another strategy of expansion

ii. It is joining of two or more enterprises in which only one enterprise

survives

iii. An enterprise or enterprises may be acquired by another

iv. All the above

15. Which of the following is true regarding mergers?

i. An enterprise or enterprises may be acquired by another, usually a

big enterprise

ii. Two or more existing enterprises merge into one to form a new

enterprise



16. Two or more existing enterprises merge into one to form a new

enterprise. It is called ——

i. Amalgamation

ii. Absorption

iii. Acquisition

iv. All the above

17. Which one is true?

i. Takeover is a common way for acquisition

ii. Many takeovers, in practice, may not have an element of surprise

and may not necessarily be against the wishes of the acquired firm

iii. Friendly takeovers take place by mutual consent, in which case

they could also be described as a merger

iv. All the above



Development –IV

113

NOTES

Business


i. Hostile takeovers take place against the wishes of the acquired

firm

ii. Friendly takeovers take place by mutual consent




i. For the enterprise which acquires another, it is acquisition

ii. For the enterprise which is acquired, it is a merger

iii. If both the enterprises dissolve the identities to create a new

enterprise, it is consolidation

iv. All the above

20. Which one of the following is right?

i. The merger may protect against market infringement, lower cost

position of a competitor, product innovations by others, an unwanted

takeover.

ii. A merger can support diversification such as countercyclical, counter

seasonal, international operations and multiple strategic plans.

iii. A merger may be sought for the sake of gains in market position,

technological edge, financial strength, managerial talent.

iv. All the above are true

Answers

Check Your Progress

5. True

13. Absorption, Amalgamation

14. True

15. True

16. Horizontal merger, vertical merger, concentric merger and conglomerate

merger

17. Merger

20. i. c

ii. b

iii. a


1. i

2. ii


Development –IV

114

NOTES

Business


3. iv

4. iv

5. iv

6. iii

7. i

8. i

9. iii

10. ii

11. i

12. iv

13. iv

14. iv

15. iii

16. i

17. iv

18. iii

19. iv

20. iv

6.9 Further Reading

Cherunilam Francis, Business Policy and Strategic Management Text and

Cases, Himalaya Publishing House, Mumbai, 2010

Kazmi Azhar, Business Policy and Strategic Management, Tata McGraw

Hill Publishing Company Limited, New Delhi, 2005




Development –IV

115

NOTES

Business


UNIT 7: MANAGING BUSINESS GROWTH

Structure

7.0 Introduction

7.1 Unit Objectives

7.2 Management of Growth

7.3 Designing the Organization

7.3.1Organization culture

7.4 Leadership

7.4.1Succession Planning

7.5 Management of Change

7.6 Summary

7.7 Key Terms


7.9 Further Reading

7.0 Introduction

Once a new entrepreneurial venture is launched, it commences its journey

into the future. The entrepreneur grooms the enterprise in a systematic manner.

He/she has to plan for satisfactory growth of the enterprise. Growth is a natural

phenomenon and a continuous process in the business. Small enterprises start

small and grow big in due course of time.

Growth ensures not only prosperity but it is essential for survival also

especially in the face of hard times, adversities, difficulties and challenges. A

business enterprise is established in a particular type of business environment at a

particular moment in time with a set of business opportunities as well as

environmental threats. It functions in the business environment with a network of

contacts, relationships and associations. With changing times, business environment

undergoes several changes and consequently enterprises must cope up with the

changes and challenges arising out of those changes. This underlies the need for

growth of business enterprises. Adaptation to change as well as growth is

fundamental to business success.

The organization structure and style of management that contributes to

success for a small enterprise in the startup phase may not support the enterprise

in the growth phases. With growth in the business, organization structure tends to

change. The organization culture, the style and philosophy of management, role of

leadership also requires change consequent to growth stage. There is a need to

imbibe the culture of change management.

Managing Business Growth

116

NOTES

Business


7.1 Unit Objectives

After going through this unit you will be able to

• Understand the challenges for managing business growth

• Appreciate the implications of business growth

• Be prepared for managing the challenges of business growth

effectively

• Know the need for restructuring a growing organization and explain the

ways and approaches adopted by entrepreneurs for redesigning his/her

enterprise for sustaining growth

• Be in a position to appreciate the role of leadership in a growing enterprise

in the light of various challenges posed by growth

• Realize the significance of organization culture for sustaining growth

through retention of human resources

• Learn the dynamics of change management

7.2 Management of Growth

“To open a shop is easy, to keep it open is an art”

Strategy is a well-planned course of action aimed at achievement of pre-

determined objectives. A growth strategy is a plan of action to expand business

operations, generate money and make profits, seek desired status in the society

and gain the satisfaction of self-realization and fulfilment. With the help of growth

strategies, enterprises grow big. When the enterprise is able to generate satisfactory

income to survive, then it is said to be in the growth phase. If the growth is very

slow, then the entrepreneur has to pay attention to proper utilization of the enterprise

resources. With expected growth, the entrepreneur would be able to manage it in

a comfortable manner with the help of strategic plans – short term as well as long

term. However, with rapid growth, it may be difficult for the entrepreneur to cope

up with the growth. The entrepreneur has to maintain proper financial control.

He/she has to pay attention to cash flows, management of inventory, receivables,

human resource planning and development etc. With growth, organization structure

need to be revised and redesigned appropriately in terms of delegation of authority,

acceptable span of control, decision making pattern, communication system and

the like. Entrepreneurs are required to make bold decisions. They need to lead the

venture into new areas for exploring new horizons.

An entrepreneur has to tackle various multifarious issues while managing

growth in his/her small enterprise. Increased scale of operations pose challenges of

maintaining competitiveness of products/services. Enterprise operations and processes

are to be modified for achieving increasing scale of operations and activities. Functional

specializations are to be developed for the sake of sustaining efficiency. Also various

types of collaborations and partnerships are to be established.

There are tremendous stresses and strains of getting accustomed to growth

and enhanced scale of operations. Leadership issues emerge. Improper delegation,

ineffective control may hamper the enterprise functioning. Communication gaps

and misunderstandings take place.


117

NOTES

Business


A growing business provides more command and supremacy to the

entrepreneur. Higher scale of operations enhances acceptability of the enterprise

to the customers, financiers, suppliers, and other stakeholders also. It confers

more power and strength to the entrepreneur for influencing the performance as

well as efficiency. However, growth take along change and an entrepreneur has

to learn and implement adaptation to change consequently.

7.3 Designing the Organization

In the initial startup phase of an entrepreneurial venture, the organization

is usually small in size and simple in structure. It is generally of informal type

characterized by informal processes and procedures. In the start-up phase, the

entrepreneur manages the entire show all alone. He/she mostly performs all the

functions single handed on his/her own.

Small enterprises are typically characterized by a simple organization

structure and a personal, unique style of management. With growth of the enterprise,

its culture tend to change. Scale of operations grow wide-spread. Procedures

become more formal. Jobs become more structured. The communication dynamics

change drastically. Consequently management infrastructure requires a change

for supporting the pace of growth. Entrepreneurs must be prepared to cope up

with the challenges of rapid growth.

While swimming on the tides of growth waves, entrepreneurs scrap

traditional organizational structures. They maintain maximum elasticity. Instead of

following rigid policies and procedures, they adopt flexibility. They are quick to

respond and react. While pursuing growth, entrepreneurs must realize that they

should change their management styles, organization structure, business strategy

and methods of operating.

Entrepreneurs need to hire more employees to fulfill the needs of a growing

enterprise. Entrepreneurs strive to keep the employees and the enterprises focused

on growth. The entrepreneur directs the enterprise employees towards achievement

of goals and objectives and whole-hearted commitment for the enterprise’s mission.

As the enterprise grows from a small to a medium enterprise, the

entrepreneur has to take care to continue with the human relations and his/her

personal rapport with all the stakeholders. He/she has to understand that he/she is

not enough to run the business. He/she has to acquire and retain human talent.

Human resource management is an important aspect for all enterprises – small as

well as large. The enterprise performance depends on quality and quantity of

human resources. It is the management of human capital. It began with an

independent personnel department to take care of regulatory aspects of employees

in a factory in the industrial era. Now it has been transformed into a sophisticated

discipline comprising of various themes such as talent management, performance

management, human capital management and the like.

In a small enterprise, there may not be an independent and well-developed

HR department. There may not be an independent HR professional appointed in

the enterprise. But necessarily, the human resource function has to be managed

with focus and attention. In a small enterprise, the entrepreneurs handles it with

care and concern. He/she do not delegate this task unless and until a competent

and reliable person is appointed.

Check Your

Progress

1. Enlist few problems

of rapid growth being

faced by entrepre-

neurs.

2. What are the imme-

diate consequences of

growth for entrepre-

neurs and their enter-

prises?

3. State the benefits of

business growth.

4. Why do entrepre-

neurs aspire for

growth?


118

NOTES

Business


The initial entrepreneurial organization is usually simple which may not

cater to the needs of a growing enterprise. With growth in business, there is a

need to develop proper organization design by bringing out modifications and

improvements in the present organization structure as per the needs and

requirements. There is a need to organize the work in a professional manner. It

requires delegation of responsibilities. It requires establishment of a formal structure

to facilitate coordination of individuals, groups, activities, operations, sections and

divisions. In contrast with the ad hoc responses used by small entrepreneurs to

face challenges; now growth entrepreneurs have to develop systematic procedures

and systems, document rules and regulations and disseminate those to all levels of

the organization hierarchy.

Growth of an enterprise means increased scale of operations which demands

additional human resources possessing varied skills and competencies. Entrepreneurial

style of management now changes drastically. Increasingly now entrepreneurs need

to delegate authority and responsibility. It is difficult for entrepreneurs to delegate

effectively. They are enthusiastic, highly inspired and action oriented. Typically they

set and achieve ambitious and challenging targets and obviously they expect the

same from their employees. They wish to control everything and everyone around

them. They may not give adequate time and freedom for proper discharge of duties

and responsibilities to their employees. They may interfere with the work of their

subordinates. The entrepreneur should lay down objectives to be achieved and the

plans/courses of action to achieve the set objectives. Also he/she should clarify how

the performance would be measured and evaluated.

While moving from the startup phase into the growth phase, entrepreneurs

experience drastic changes in the organizational culture. With growth in the number

of employees, the entrepreneurs loose personal touch with the employees. The

kind of compact and cozy environment in the enterprise undergoes a transformation

in the name of growth.

7.3.1 Organization Culture

“The greatest difficulty in the world is not for people to accept new ideas,

but to make them forget about old ideas” – John Maynard Keynes

Entrepreneurs nurture specific organization culture right from the launch

of their ventures. They have a clear vision about their ventures and progress

towards future with the help of well-articulated business strategies. Entrepreneurs

influence the behaviour and performance of their employees and create a strong

culture and value system. The culture of an enterprise influences everything that

people do. It is manifested in various ways.

According to Thomas W. Zimmerer and Norman M. Scarborough, “a

company’s culture is the distinctive, unwritten, informal code of conduct that govern its

behavior, attitudes, relationships, and style”. Like strategy, culture also has a significant

potential to achieve a competitive edge. Culture of an enterprise influences all those

concerned with the enterprise in a substantial manner, especially the enterprise

employees. It affects the employees’ way of working, their performance, the manner

in which they tackle customers and the like. In the words of Michael H. Morris,

Donald F. Kuratko Jeffrey G. Covin, “Culture can be defined as an organization’s

basic beliefs and assumptions about what the company is all about, how its members

should behave and how it defines itself in relation to its external environment”.

Imbibing of right organization culture begins with recruitment and selection

of proper employees. Good employees are attracted towards organizations when

they believe that the environment of the enterprise is conducive for their growth

Check Your

Progress


false:

5. In the initial startup

phase of an

e n t r e p r e n e u r i a l

venture, the

organization is usually

small in size and simple

in structure


119

NOTES

Business


and development. And when they are convinced about quality of work life, then

they continue to stay with the enterprise with total dedication.

For inculcating a desirable culture comprising of values such as honesty,

empathy, integrity, respect, customer concern etc, an entrepreneur need to set

objectives, plans, policies, performance measures in a manner so as to reflect

those cherished values. Such kind of positive culture has a good impact on the

enterprise performance. Employees like working for enterprises which value

honesty, human dignity and integrity. Entrepreneurs define the enterprise’s vision

and endeavour consistently to communicate it effectively to all the stakeholders.

Several researchers believe that entrepreneurship is not an activity; it is a

culture. It instils values, symbols, myths, rules of conduct, and methodology of the

enterprise. Values are the things which employees think as desirable and are worth

having or doing. Entrepreneurial values comprise of creativity, achievement, integrity,

perseverance, change etc. Rules of conduct guide the behaviour in an accepted

way for achievement of goals. The rules are the accepted norms of an organization.

Vocabulary in the form of the language, jargon, signs, slogans, gestures, gossips

etc is also a part of culture. Another component of culture is rituals such as

ceremonies, conferences, parties like the manner in which employees are welcome,

retire and the like. Entrepreneurial organizations have legends, myths, histories

which refer to values, beliefs and norms.

The important issue is which of the elements are most conducive to

entrepreneurship. Timmons stated the components of an entrepreneurial culture

as: clarity, being well-organized, high standards, pressure for excellence,

commitment, responsibility, recognition, esprit de corps. Cornwall and Periman

listed the various components of an entrepreneurial culture as: risk, earned respect,

ethics of integrity, trust, credibility, people, emotional commitment, work is fun,

empowered leadership through firm, value wins, relentless attention to detail, people.

Structure, and process, effectiveness and efficiency. Peters perceived

entrepreneurial culture in terms of: listening, embracing change, customer focus,

total integrity, excellence, involve everyone in everything, experimentation, fast-

paced innovation, small starts and fast failure, visible management and

measurement/accountability. According to Michael H. Morris, Donald F. Kuratko,

Jeffrey G. Covin, the entrepreneurial culture would seem to have the following

elements: focus on people and empowerment, value creation through innovation

and change, attention to the basics, hands-on management, doing the right thing,

freedom to grow and to fail, commitment and personal responsibility, emphasis on

the future and a sense of urgency.

Entrepreneurs make their enterprises ‘learning organizations’. All the

employees are ‘knowledge workers’ who possess high level of learnability.

Entrepreneurs encourage and support the concept of lifelong learning among their

employees. They provide them opportunities to improve their knowledge and skills.

They invest in human capital.

Entrepreneurs offer numerous job-design techniques such as job rotation,

job enrichment, job sharing, jog enlargement, flextime and the like and enhance

employee motivation. Job rotation involves cross-training employees and enable

them to perform a variety of tasks and perform various jobs. Job enrichment offers

every employee an opportunity to be a manager of his/her job i.e. letting him/her to

perform managerial tasks such as planning, decision making, organizing and

controlling. Job sharing is a system in which two or more employees share a full time

job. Job enlargement is a system which make the job varied. Flextime is a system in

which employees have flexibility about performance of the job in terms of time.


120

NOTES

Business


Entrepreneurs have noted that the young generation desires to have work-

home role balance. In response they offer flexi-time i.e. flexible work schedules,

part-time jobs, work-from-home convenience, on-site day care, telecommuting,

job sharing, sabbatical leave etc. Flexi-time arrangement enables employees to

work for normal working hours without losing their lifestyle. They have flexibility

about the work schedules. Job sharing enables two or more employees to share a

full-time job and thereby achieve life-and-work balance. Salary and benefits are

prorated between the employees sharing a job. Flexplace is a system in which

employees enjoy the flexibility of working at a place other than the office. They

can work at a place of their convenience, near their home or at home if required.

The convenience of flexi-place is possible because of telecommuting i.e. using

modern communication technology. With the help of telecommuting, employees

choose to remain connected with the workplace 24x7 wherever they are.

Attractive remuneration and fair compensation also contributes for creation

of a culture which attracts and retains human resources and make them stay in

the enterprise. Good reward system encourages employees for good performance

and keep them motivated always.

7.4 Leadership

Entrepreneurship essentially deals with the dynamics of initiating a new

enterprise. It chiefly focuses on activities and operations concerned with starting

an enterprise, sustaining its activities, and its development and growth. The journey

is not without pressures and challenges of various kinds. To cope up with these

challenges, and facilitate the process of building up the organization, an entrepreneur

has to learn and apply management theories and principles.

An entrepreneur essentially is inspired to convert his/her dream into actual

reality. In the initial phases, an entrepreneur may perform all the tasks concerned

with his/her venture all alone. However, typically in a growing organization, the role

of a manager becomes more prominent. In the context of a growing venture, it is

interesting to analyze the different perspectives of entrepreneurial personality – as a

leader, as a manager along with being an innovator, a visionary and a risk taker.

Some entrepreneurs may not feel comfortable in the role of a leader. However, they

must assume the role of an effective leader especially in the growth phase of their

enterprises. For attracting as well as retaining talented workforce, leaders play a

vital role. In absence of effective leadership, it is not possible to retain talent.

Entrepreneurship, management and leadership are very closely linked with

each other. There is overlapping in several aspects. Stephen Covey explains the

difference between management and leadership in this way: “Leadership deals

with people; management deals with things. You manage things; you lead people.

Leadership deals with vision; management deals with logistics toward that vision.

Leadership deals with doing the right thing; management focuses on doing things

right. Leadership deals with examining the paradigms on which you are operating;

management operates within those paradigms. Leadership comes first, then

management, but both are necessary”.

Leadership and management both are crucial for a small business. Leaders

lead and managers manage. A leader is driven by vision. A manager works with

available resources. Leader is an architect whereas manager can be considered

as a builder of small business.

Check Your

Progress

6. Can you explain the

meaning of

organization culture?


121

NOTES

Business


Leadership is especially important for enterprises in the growth phase. It

needs to be created within a small business. Growth implies exploring the new, the

unknown. There may be an ambiguity, a fear of the unknown. In such a situation,

with leader’s vision of achieving something new, others are driven towards the

goal and make efforts in the new direction. Leaders influence and inspire others

towards a common group goal. He/she empowers them and provides them

favourable and supportive environment as well as freedom to realize their full

potential to achieve the organizational goals. They have to keep faith in employees

and respect their talent and ability.

In small enterprises, all the organization members handle multiple roles

and diverse responsibilities. They deal with multitasking. In large organizations,

everyone has well defined roles and responsibilities to perform. As the enterprise

starts growing, staffing is required to keep the organization equipped with right

human resources possessing right talent. The entrepreneur has to instill a sense of

ownership among the employees. He/she has to create such an environment in

which everyone gets a feeling of belongingness. Entrepreneurs should always

communicate with their team members and keep them motivated always. They

should share their dreams, their goals so that there would clarity regarding what is

expected of them. The leaders are required to build trust and confidence among

their team members. The team members need to constantly upgrade their skills.

Thomas W. Zimmerer, Norman M. Scarborough with Doug Wilson

discussed certain behaviours that effective leaders exhibit. They:

• Create a set of values and beliefs for employees and passionately pursue

them

• Define and then constantly reinforce the vision they have for the company

• Respect and support their employees

• Set the example for their employees

• Create a climate of trust in the organization

• Build credibility with their employees

• Focus employees’ efforts on challenging goals and keep them driving

toward those goals

• Provide the resources employees need to achieve their goals

• Communicate with their employees

• Value the diversity of their workers

• Celebrate their workers’ successes

• Are willing to take risks

• Encourage creativity among their workers

• Maintain a sense of humour

• Create an environment in which people have the motivation, the training,

and the freedom to achieve the goals they have set

• Become a catalyst for change

• Keep their eyes on the horizon


122

NOTES

Business


7.4.1 Succession Planning

In large enterprises and also in family business, entrepreneurs need to

deal with succession planning otherwise there would be problems with continuity

of operations and people. The entrepreneur has to make sure that there is continuity

of business. Critical operations, activities and roles need to be identified with

priorities. Reliable, fair and consistent persons should be identified so as to continue

with the enterprise functioning with full efficiency. There is a need to identify

backup for every role and task. The entrepreneur has to take care of knowledge

transfer and sharing of knowledge and information. Overdependence on few people

has to be avoided in any case. Right from the beginning, knowledge dissemination

practices should be developed and encouraged.

7.5 Change Management

“Change is not mandatory. Survival is optional”.

Change is the only thing which does not change. It is an important feature

of many organizations. Every organization has to change itself from time to time

to cope up with the changing environment. For survival, it is necessary to adapt to

the changes. Otherwise the organization will be left behind or be swept away by

the forces of change. Influence of many factors make organizational changes not

only desirable but also inevitable. It is the responsibility of the entrepreneur to

manage change properly.

The reasons for these changes are varied. Change may be externally imposed

or self-imposed. For acceptance of any change, commitment of the entrepreneur to

practice the desired change is a must. Otherwise this will result in failure.

External environmental change comprises of various trends and issues

which impact on organizations and tasks performed by the entrepreneurs and

managers. Economic factors like economic cycles, interest rates, foreign currency

fluctuations and the like can trigger the need for organizational change. Technology

influence jobs and organizations as a whole. Technological breakthroughs as well

as consequent inventions as well as innovations affect business environment

substantially. Competitive pressures may dictate the need for change. Only the

organizations which can adapt to the changes succeed. Such type of external

environmental influences necessitate changes in internal organizational factors

such as machinery, equipment, human resources dynamics, technology, tasks,

structure, policies, procedures and the like.

Joseph Massie discussed various types of changes in the management field

as: changes in knowledge, information and techniques; changes in the scope of

management; changes in the issues and problems facing managers; and changes in

environments. Being a multidisciplinary subject, the scope of management gets

enhanced with subsequent changes and developments in the related disciplines. In

the initial phases of development, the scope of management was restricted to technical

aspects of production. Subsequent developments made it an all-pervasive, all-

encompassing discipline in the form of an interdisciplinary approach characterized

by the principle of universality. With changes in the economy, society, environmental

components and the like; management undergoes drastic changes regarding the

tasks, approaches, problems etc. Issues like globalization, information revolution,

liberalization policies, global warming, climate changes etc. need to be taken into

consideration by the managers. Values, culture of the society is changing drastically.

Check Your

Progress

7. Why is delegation

important for entrepre-

neurial growth?

8. Leadership and

management are same

or different?

Fill in the blanks:

9. The prime respon-

sibility of a — is to

work with the available

resources and achieve

a pre-determined ob-

jective.

Check Your

Progress


succession planning?


123

NOTES

Business


Social norms and conditions, political situations, economic trends have been changing

continuously and putting the impression of such changes on business environment.

Consumerism is picking up. Consumption patterns are changing drastically. Several

population shifts are seen. Consumer markets are expanding. The number of players

in the market is increasing rapidly. The world is changing fast. Consequently, the

organizational variables need to be transformed for the sake of survival and growth.

For this transformation to take place, entrepreneurs have to introduce changes in the

enterprise – may be with reference to technology, people, task or structure.

Resistance to Change

There is nothing more difficult of success, nor more dangerous to

handle than to initiate a new order of things” - Machiavelli

The natural and most obvious reaction to change is resistance. It is but

sure that change upsets many people. Very rarely changes are adopted without

opposition. This behaviour of opposing change arises from the fear of the new and

the unknown. There is uncertainty about the impact of change. There is a typical

human tendency to avoid the unfamiliar. There is an apprehension about the change

process, the adjustments required to accommodate change, and about the adverse

effects of change. Naturally, if there is a negative perception about change, people

will try to resist such king of changes. It is also observed in several situations that

people oppose change agent and not change itself. The resistance may be in the

form of careless performance, submissive approval, aggressive refusal, violent

behaviour and the like. If it is not analyzed carefully, it may be harmful for the

enterprise from the ling-term perspective.

Opposition to change may be triggered by people’s attitudes which are

shaped by several economic, psychological and social factors. Let us discuss some

of these causes to resistance:

Economic needs like job security, safety may lead to oppose change. There

is an apprehension about unemployment due to technological changes. People

may fear that they may be unable to cope up with the new technology. They

worry about the acquisition of new skills associated with the demands of the new

job and new technology. They may not get overtime, bonus or incentives with

new job. There is a possibility of demotion, transfer or loss of job.

People may resist change because they do not have confidence to learn

new methods, techniques. They may fear that it would be difficult for them to

learn about new things. They may not be interested in taking trouble to learn new

techniques. They may not have knowledge about the change or they may be

incapable to realize the impact of change on their jobs and on their future. They

may fear of being exposed in front of their juniors. They may take change as a

blame on their work in the sense change implies that present work is not up to the

mark. The change challenges their way of operations and they feel insecure.

They may feel that change reduces their personal pride since it speaks about

inadequacy of their work method. Sometimes, people oppose change because the

group to which they belong, resist it. There is a tendency to adhere to the group

norms and support the group attitudes.

People oppose change it is brought abruptly without any prior intimation

and when they are not consulted in advance. They may consider that change

would benefit the enterprise and the entrepreneur rather than the employees or

the society. Change may bring some adjustments regarding organization structure

which may disturb social needs such as friendship, companionship etc. They may


124

NOTES

Business


feel alienated due to loss of some social bonds and relationships. They may

apprehend that the new organizational set up would not be comfortable for them.

Resistance to change arises mostly out of some obvious human tendencies

and human relations problems. People oppose changes when they contemplate

that change will affect their status, security and social relationships. They may not

know it well. It is not easy for them to give up their old habits and approaches.

Change Process

The process of change involves several steps. According to Kurt Lewin,

organizations should follow three steps to achieve acceptance of change: unfreeze

the status quo, move and refreeze the new change. He believes that change has

to be accepted readily and willingly. Change should not be a surprise because

unexpected changes are found to be unhelpful and unaccommodating. Instead, by

‘unfreezing the situation’; if at all there is any initial resistance, it can be neutralized.

Change refers to any alteration of the status quo. The status quo can be

regarded as a state of equilibrium. Unfreezing is the first step in the change process.

The unfreezing process prepares individuals for the change. It is concerned with

the realization of the need for change so as to convince individuals, groups,

organizations about accepting the change. According to Edgar H. Schein, unfreezing

is the process of breaking down the old attitudes and behaviours, customs and

traditions, so that they start with a clean slate. The idea of change has to be

popularized in the organization with the help of meetings, announcements, personal

contacts, bulletin boards etc.

Unfreezing is required to move from the equilibrium, to overcome the

resistance to change. This can be done in three ways: the driving forces which

direct behavior away from the status quo can be increased; the restraining forces

which hamper movement from the existing equilibrium can be decreased; or the

combination of the first two approaches will serve the purpose.

The next step in the change process is moving through the efforts of a

trained change agent. After developing preparedness to accept changes, the

behaviour patterns are to be redefined and changed. The change agent inculcates

new values, attitudes and behaviour. He/she introduces change in a highly convincing

manner so as to make it desirable and acceptable among the individuals, groups

and organizations. H. C. Kelmn proposed three methods of reassigning new patterns

of behaviour such as: compliance, identification and internalization. Compliance

involves adhering to the reward and punishment strategy for good or bad behaviour.

Reward or fear of punishment influences the behaviour in a desired manner.

Organizational members are made to identify themselves with their role models

and adopt their behaviour and follow them. Internalization consists in giving freedom

to the members to learn and adopt new behaviour which would fetch success. To

adjust with the changing situation, there is a need to refine the thinking process

and modify the behaviour.

Refreezing happens when the new behaviour becomes a normal and routine

pattern by totally replacing the former behaviour. It stabilizes the change and the

new situation by striking a right balance between the new restraining and driving

forces. The new behaviour should be permanent in nature.

The process of change is continuous one since the environment continuously

changes. Consequently, the activities of unfreezing, moving/changing, and refreezing

remain continuously in process.

Check Your

Progress

11. Enlist the reasons

for resistance to

change.

12. Can you write

some psychological

causes of resistance to

change?

13. What are the so-

cial reasons for resis-

tance to change?


125

NOTES

Business


Figure 7.1: Lewin’s Model of Change

Management of Change

In the light of the role of innovation and flexibility, entrepreneurs must

learn the dynamics concerned with change management. It can be considered as

the ability to adapt to the changing situations in the business environment. It has to

be a part of the organization culture.

Entrepreneurs should introduce change in a systematic and planned manner.

He/she has to define the change to be introduced in the enterprise. It is essential to

lay down the objectives of change and reflect upon its implications. The plan should

state the significance of change for the organization in the prevailing situation. Those

who would be affected by change should be identified separately and the nature of

impact should be studied in detail. Then the time, speed and mode of introduction of

change has to be decided systematically. Prepare a proper schedule for implementation

of change. Give adequate time for each step of the process of change.

According to Warren Bannis, the method of planned change encompasses

the application of systematic and appropriate knowledge to human affairs for the

purpose of creating intelligent action and choices. Planned change aims to relate

to the basic disciplines of the behavioural sciences as engineering does to the

physical sciences or as medicine relates to the biological sciences.

It is desirable to anticipate likely responses and reactions of the employees to

the proposed change. They should be given an opportunity to participate in the planning

process. It will develop a feeling of belongingness and commitment to the proposed

change. They get a feeling of importance being a part of the planning process.

The change should be planned in such a way that it would be easy to

implement it. The planned change should strike a balance between the needs of

the enterprise and the needs of the employees. They need to take a few

representative employees into confidence about the nature and need for change


126

NOTES

Business


which would minimize the resistance and increase the acceptability. It would

minimize the difficulties in implementing change.

There is a need to create about awareness about change and educate the

concerned stakeholders about the change. There is a need to maintain proper

communication with all the stakeholders during the process of management of

change. Feedback should be encouraged to know the responses of the employees

to the organizational change. They should be given opportunities to clarify their

doubts, queries and confusions. They should be satisfied about the proposed change.

For successful implementation of change, the employees should be trained

to acquire new skills, to change their attitudes, and behaviour patterns. They should

be provided with the necessary information details regarding change, the manner

in which they are required to accept change, their role in the process of change.

It is always better to introduce change in a small scale and see the reactions

of the concerned employees in terms of acceptability, fears, as well as

apprehensions. The change process has to be monitored initially and then the

results of change should be compiled in a systematic manner. After analyzing the

reactions to change, if required, with necessary modifications change can be

introduced at the proper time in an appropriate manner. Proper timing is crucial in

increasing acceptance of change.

Leadership plays a vital role in successful launch of change. If the change

agent is dynamic; then he/she has a good influence upon the employees. If he/she is an

authorized leader/informal leader because of expertise, respect; then the followers

would willingly bring about the intended change. The change agent should be a person

with open mind and positive thinking. He/she should be willing to take risks. He/she

should be a creative person who considers organization’s interest above self-interest.

There is a possibility of conflicts of ideas, opinions, views and various

issues during the process of change. The change agent should be dynamic and

influential enough to resolve such type of conflicts.

Everyone in the organization must be made to believe that the proposed

change is beneficial for them. It is an opportunity to be seized and not a threat to

be avoided or be apprehensive about. The particulars of success stories of same

type of change in other places and organizations should be brought to the notice of

the organizational members. Everyone must be involved in the change process.

Those who are not involved may spoil the others.

At group level, it would be effective to introduce change and implement it

effectively. When the basic unit of change is group and not the individual, group

dynamics would help to bring about change. Group interactions facilitate adaptation

to change. Group discussions should be encouraged. Entrepreneurs should convince

the group leaders about the rationale of change and that the change would protect

and support the interests of the group members.

7.6 Summary

The organization structure and style of management that contributes to

success for a small enterprise in the startup phase may not support the enterprise

in the growth phases. With growth in the business, organization structure tends to

change. The organization culture, the style and philosophy of management, role of

Check Your

Progress

14. Which factors ne-

cessitate change?

Write down.


about planned change?


127

NOTES

Business


leadership also requires change consequent to growth stage. There is a need to

imbibe the culture of change management.

With rapid growth, it may be difficult for the entrepreneur to cope up with

the growth. The entrepreneur has to maintain proper financial control. He/she has

to pay attention to cash flows, management of inventory, receivables, human

resource planning and development etc. With growth, organization structure need

to be revised and redesigned appropriately in terms of delegation of authority,

acceptable span of control, decision making pattern, communication system and

the like. Entrepreneurs are required to make bold decisions. They need to lead the

venture into new areas for exploring new horizons.

A growing business provides more command and supremacy to the

entrepreneur. Higher scale of operations enhances acceptability of the enterprise

to the customers, financiers, suppliers, and other stakeholders also. It confers

more power and strength to the entrepreneur for influencing the performance as

well as efficiency. However, growth take along change and an entrepreneur has

to learn and implement adaptation to change consequently.

Small enterprises are typically characterized by a simple organization

structure and a personal, unique style of management. With growth of the enterprise,

its culture tend to change. Scale of operations grow wide-spread. Procedures

become more formal. Jobs become more structured. The communication dynamics

change drastically. Consequently management infrastructure requires a change

for supporting the pace of growth. Entrepreneurs must be prepared to cope up

with the challenges of rapid growth.

The initial entrepreneurial organization is usually simple which may not

cater to the needs of a growing enterprise. With growth in business, there is a

need to develop proper organization design by bringing out modifications and

improvements in the present organization structure as per the needs and

requirements. There is a need to organize the work in a professional manner. It

requires delegation of responsibilities. It requires establishment of a formal structure

to facilitate coordination of individuals, groups, activities, operations, sections and

divisions. In contrast with the ad hoc responses used by small entrepreneurs to

face challenges; now growth entrepreneurs have to develop systematic procedures

and systems, document rules and regulations and disseminate those to all levels of

the organization hierarchy.

Imbibing of right organization culture begins with recruitment and selection

of proper employees. Good employees are attracted towards organizations when

they believe that the environment of the enterprise is conducive for their growth

and development. And when they are convinced about quality of work life, then

they continue to stay with the enterprise with total dedication.

For inculcating a desirable culture comprising of values such as honesty,

empathy, integrity, respect, customer concern etc, an entrepreneur need to set

objectives, plans, policies, performance measures in a manner so as to reflect

those cherished values. Such kind of positive culture has a good impact on the

enterprise performance. Employees like working for enterprises which value

honesty, human dignity and integrity. Entrepreneurs define the enterprise’s vision

and endeavour consistently to communicate it effectively to all the stakeholders.

Some entrepreneurs may not feel comfortable in the role of a leader.

However, they must assume the role of an effective leader especially in the growth

phase of their enterprises. For attracting as well as retaining talented workforce,

leaders play a vital role. In absence of effective leadership, it is not possible to


128

NOTES

Business


retain talent. Management and leadership are not the same, but both are vital for

the success of a small business.

Every organization has to change itself from time to time to cope up with the

changing environment. For survival, it is necessary to adapt to the changes. Otherwise

the organization will be left behind or be swept away by the forces of change. Influence

of many factors make organizational changes are not only desirable but also inevitable.

It is the responsibility of the entrepreneur to manage change properly.

Very rarely changes are adopted without opposition. This behaviour of

opposing change arises from the fear of the new and the unknown. There is

uncertainty about the impact of change. There is a typical human tendency to

avoid the unfamiliar. There is an apprehension about the change process, the

adjustments required to accommodate change, and about the adverse effects of

change. Naturally, if there is a negative perception about change, people will try to

resist such king of changes.

Opposition to change may be triggered by people’s attitudes which are

shaped by several economic, psychological and social factors.

The process of change involves several steps. According to Kurt Lewin,

organizations should follow three steps to achieve acceptance of change: unfreeze

the status quo, move and refreeze the new change.

In the light of the role of innovation and flexibility, entrepreneurs must

learn the dynamics concerned with change management. It can be considered as

the ability to adapt to the changing situations in the business environment. It has to

be a part of the organization culture.

7.7 Key Terms

• Learning Organization: An organization that facilitates the learning of

the members with an ideal environment for learning, knowledge

management, innovation etc

• Human Capital: skills, knowledge and experience possessed by an

individual or population viewed in terms of their value or cost to an

organization or country


Questions

1. What is organization culture? What role does it play in a small enterprise’s

success? What threats does rapid growth pose for an organization’s culture?

2. Why is it important for a small entrepreneur to develop a management

succession plan? Why is it difficult for most entrepreneurs to develop

such a plan?

3. Explain the challenges involved in the entrepreneur’s role as a leader?

What it takes to be a successful leader?


129

NOTES

Business


4. How to create an organization culture that encourages employee

retention?

5. What are the steps that are involved in creating a management succession

plan?

6. Why is managing cash flow important for new ventures?

7. Explain why growth is important but can be dangerous. State some of

the major problems created by rapid growth.

8. What are the differences between a leader and a manager? How do

leaders of a small enterprise differ from that of a large enterprise?

9. Why is change resisted in organization? What can the management do

to overcome it?

10. How can group dynamics be used to overcome resistance to change?

11. “People sometimes resist change for the sake of resistance”. Comment.

12. Trace the reasons for human resistance to change. How can this be

overcome?

13. Describe some of the factors that increase resistance to change. What

steps can be taken to contain this resistance and mange it effectively?

14. What it takes to be a successful leader? Explain the challenges involved

in the entrepreneur’s role as leader.


1. Leaders overlook ————

i. Opportunities

ii. Theory

iii. Constraints

iv. Practicality

2. In the initial startup phase of an entrepreneurial venture, ————-

i. Organization is usually small in size and simple in structure

ii. Organization is generally of informal type characterized by informal

processes and procedures

iii. The entrepreneur manages the entire show all alone

iv. All the above

v. With growth of an enterprise Procedures become more formal Jobs

become structured Communication dynamics change drastically All

the above

3. With growth of an enterprise

i. Procedures become more formal

ii. Jobs become structured


130

NOTES

Business


iii. Communication dynamics change drastically

iv. All the above

4. Culture can be defined as an organization’s basic beliefs and assumptions

about ———

i. What the organization is all about

ii. How organizational members should behave

iii. How organization defines itself in relation to its external environment

iv. All the above

Answers

Check Your Progress

5. True

9. Manager


1. iii

2. iv

3. iv

4. iv

Exercise

Activity 7.1

Interview a CEO/General Manager of an entrepreneurial venture and

discuss with him/her about leadership in the organization. Try to appreciate the

initiatives being taken to develop leaders within the organization.

7.9 Further Reading



Morris Michael H., Kuratko Donald F., Covin Jeffrey G., Entrepreneurship

and Innovation in Corporations, Cengage Learning, New Delhi, 2008


Entrepreneurship, PHI Learning Private Limited, New Delhi, 2010

Zimmerer Thomas W., Scarborough Noman M., Essentials of

Entrepreneurship and Small Business Management, PHI Learning Private Limited,

New Delhi, 2011


131

NOTES

Business


UNIT 8: FINANCING FOR BUSINESS

GROWTH

Structure

8.0 Introduction

8.1 Unit Objectives

8.2 Management of Financial Resources

8.3 Venture Capital

8.4 Incubators

8.5 Accelerators

8.6 Angel investors

8.7 Summary

8.8 Key Terms


8.10 Further Reading

8.0 Introduction

Growth is essential. Even for survival and sustenance of an enterprise at

a particular level, growth is a must. In absence of growth, at least proportionate

with the rate of inflation, the very existence of the venture would be endangered.

Quite often, there is a talk of raising money for new entrepreneurs while

initiating their new ventures. Also, there is a need to focus attention on cash

requirements of growth phase of enterprise. With rapid growth of business, there

is a change in the normal cash flow patterns, working capital management, costs,

profits and the like. The requirement of cash increases tremendously so as to

maintain business growth. There is a pressure of expanded operations in terms of

acquisition of increased quantity of raw materials, higher production, research and

development etc. Growth entrepreneurs need to be more careful about proper

working capital management.

For fulfilling financial needs of growth enterprises, along with the

conventional sources of financing, new and newer sources are emerging and

increasingly being adopted by the entrepreneurs. Business incubators, accelerators,

angel investors have become vital resources for startups. They help increase

entrepreneurial success by enabling them to exploit various attractive business

opportunities. These organizations nurture small startup enterprises. They provide

them with various services which they may not be able to acquire on their own.

Financing For Business

Growth

132

NOTES

Business


8.1 Unit Objectives


• Be familiar with the challenges of managing business growth and explain

how to be prepared to manage these challenges

• Comprehend the management of financial resources

• Understand the relevance of venture capital

• Learn about incubators, accelerators and angel investors

• Explain the dynamics involved in financing for business growth

8.2 Management of Financial Resources

Growth is an essential component of entrepreneurial journey. A growth

entrepreneur has to develop complete clarity on the level of growth, type of growth

and the speed with which growth is to be achieved. He/she has to begin with

defining growth. Growth is commonly measured in terms of business parameters

such as sales, profitability, return on investment etc. The growth parameters are

defined on the basis of nature of business, the industry in which the business

operates, business model, etc. Not only the entrepreneur, and senior managers but

everyone in the organization has to think of growth. While planning for growth, the

sustainability of the growth has to be achieved. Growth has to be planned at a

speed at which the entrepreneur would be able to manage it. Along with the rate

of growth, the entrepreneur has to pay attention to cost implications of growth

also. For the desired business growth, the business requires various resources. To

enable growth, the needed resources of desired quality are to be obtained in adequate

quantity and this requires availability of enough and timely cash.

To manage the demands of growth, the entrepreneur aims for generation

of cash flow. He/she has to manage working capital in a proper manner. Working

capital management is concerned with management of short term assets and

liabilities. It requires the growth entrepreneur to pay attention to debtors/account

receivables, creditors/account payables and inventory. Cash gets locked up in

debtors, creditors as well as inventory. For availability of adequate amount of cash

at the right time, growth entrepreneurs have to carefully manage these three items

of working capital.

The entrepreneur has to maintain a sound working capital position. He/

she needs adequate working capital to run the business operations. Both the dangers

of excessive as well as inadequate working capital position are to be avoided.

Excessive working capital position indicates idle funds which is not desirable.

Inadequate working capital results in production interruptions and inefficiencies.

There should be optimum investment in working capital. It reflects on the need to

manage working capital well.

Working capital management is management of all aspects of current

assets i.e. cash, marketable securities, debtors, and inventories and current liabilities.

Investment in current assets constitutes a significant portion of the total investment

in current assets. It is important to manage current assets and current liabilities

carefully. A small enterprise may not have much investment in fixed assets, but it


Growth

133

NOTES

Business


has to invest in current assets. Also, the role of current liabilities in financing

current assets is far more significant.

There is a direct relationship between sales and needs of working capital.

With growth in sales, the entrepreneur has to invest more in inventories and book

debts. Continuous increase in sales may also require additional investment in fixed

assets. New enterprises require to make large investments in fixed assets.

Machinery and equipment will be depreciated over time.

For a growing enterprise, the entrepreneur has to apply some financial

skills to manage the business in a proper way. He/she has to be more skillful for

managing cash flows, the income statement and the balance sheet.

In a growing enterprise, there is a possibility of cash outflows exceeding

cash inflows. The entrepreneur need to make a systematic assessment of cash

position at a frequent interval of time. Preparing a monthly cash flow statement is

a useful approach for good financial control.

Cash is the most important current asset for the operations of any business.

An entrepreneur has to keep sufficient cash - neither more, nor less. He/she

needs cash to invest in inventories, receivables, and fixed assets, to make payments

for operating expenses in order to maintain growth in sales and earnings. Cash

shortage will interrupt the enterprise operations, while excessive cash will impair

profitability. The entrepreneur has to be particular about maintaining a sound cash

position. Cash management is concerned with managing of cash flows into and

out of the enterprise, cash flows within the enterprise and cash balances with the

entrepreneur at a particular point of time.

The entrepreneur is required to be particular about cash planning, managing

the cash flows, optimum cash level, and investing idle cash. Cash inflows and

outflows should be planned with the help of cash budgets. Cash budget is a summary

statement of the enterprise’s expected cash inflows and outflows over a projected

time period. On this basis, the entrepreneur determines the future cash needs of

the enterprise, plan for financing of these needs, and exercise control over the

cash and liquidity of the enterprise. Cash forecasts are needed to prepare cash

budgets. Cash planning may be done on daily, weekly or monthly basis.

The entrepreneur prepares cash budget, then establishes net cash flow

and then ensures that there is no significant deviation between projected cash

flows and actual cash flows. He/she has to improve cash management efficiency

through a proper control of cash collection and disbursement. He/she has to

accelerate cash collections and delay cash disbursements as much as possible.

It is crucial to see that the entrepreneur maintains a sound liquidity position

of the enterprise so that dues may be settled in time. The test of liquidity is availability

of cash to meet the enterprise’s obligations when they become due.

Trade credit creates book debt or receivable which the enterprise is

expected to collect in the near future. It constitutes a substantial part of current

assets of the enterprise. There is a need of careful analysis and proper management.

Credit management is aimed at maximization of value of the enterprise by achieving

a tradeoff between liquidity i.e. risk and profitability. The objective of credit

management is not to maximize sales, nor to maximize profitability. For maximization

of value, the entrepreneur is required to manage its trade credit so as to obtain

optimum, and not maximum sales; to control the cost of credit and keep it at

minimum; and maintain investment in debtors at optimum level.

Check Your

Progress

1. What is cash bud-

get?

2. An entrepreneur

has to keep sufficient

cash. Why?


appropriate words:

3. —- is a summary

statement of the

enterprise’s expected

cash inflows and out-

flows over a projected

time period



4. The test of liquidity

is availability of cash to

meet the enterprise’s

obligations when they

become due


Growth

134

NOTES

Business


The entrepreneur should adopt credit policy after careful consideration of

various issues such as credit period, cash discounts. The credit standards should

be adopted after analyzing its probable impact on sales and receivables. The extent

to which credit standards can be liberalized should depend upon the proper balance

between the profit arising due to increased sales and the costs to be incurred on

the increased sales.

Some customers are slow-payers and some are non-payers. The collection

policy should be devised in a manner to accelerate collections from slow-payers

and reduce bad-debt losses.

Effective credit management requires chalking out of clear guidelines and

procedures for granting credit to individual customers and collecting the individual

accounts. While extending credit, the credit policy should differ depending upon

the customers. Credit information is to be collected from financial statements,

bank references, trade references, credit bureau reports. There is a need to

undertake credit investigation and credit analysis.

Generally, enterprises sell products/services frequently on credit basis.

Accounts receivable are the unpaid bills against invoices submitted to the customers

for products/services delivered to them. On the other hand, entrepreneurs procure

needed resources from vendors/suppliers on credit basis. Creditors or accounts

payable are the outstanding to be paid by the entrepreneur to the vendor/supplier.

Inventory refers to the material or resources tied up by the entrepreneur in raw

materials, finished goods, semi-processed goods, etc. This stock is required to

ensure timely availability of materials, parts, components in right quantity so as to

maintain smooth production flow and enable timely delivery of products/services

in the market. Proper inventory management is based on cost benefit analysis. A

proper balance has to be struck between ordering cost and inventory carrying

cost. If there is excess investment in inventory, unnecessarily cash would be tied

up. Unless the inventory is used for the production, cash cannot enter the system.

If there is improper management of working capital that is if cash gets

locked up in debtors, inventory; there would be scarcity of cash. Cash may not be

available when needed. Management of operating cash cycle will make adequate

amount of cash available as and when needed throughout the operating cash cycle.

During the growth phase, it is difficult to manage inventory. To meet

customer demand, the entrepreneur makes high investment in inventory which

ties up cash in manufacturing, transportation, storage and warehousing expenses.

But in case of too little inventory, the entrepreneur may lose customers if their

demands are not met at right time.

8.3 Venture capital

Entrepreneurs need financial support for growth and development of their

ventures. Venture capital is a form of financing for an enterprise in which

entrepreneur has to give up a part of ownership and control of enterprise in

exchange for capital for a particular time period. It is a form of risk capital which

is invested as equity rather than as a loan and the investor gets a higher rate of

return to compensate them for their risks. It provides a long term committed share

capital for the enterprises to grow and succeed. It is available to entrepreneurs for

startup phase, expansion, and buy out a business, and also for turnarounds. There

is a substantial difference between acquiring venture capital and raising a debt or

Check Your

Progress

5. Inventory manage-

ment requires a proper

balance between —

and —


Growth

135

NOTES

Business


a loan from a lender. Irrespective of success or failure of the enterprise, lenders

have a legal right to interest on a loan and repayment of the capital. Venture

capital is invested in exchange for an equity stake in the business. As a shareholder,

the venture capitalist’s returns depend on growth and profitability of the business.

This return is generally earned when the venture capitalist exits by selling its

shareholding or when the business is sold to another venture.

The European Venture Capital Association describes venture capital as

risk finance for entrepreneurial growth oriented enterprises. It is an investment

for medium or long term return. It does not only deal with capital investment, but

it is a comprehensive package of development of the enterprise itself. It is a

partnership with the entrepreneur in which the investor adds value to the enterprise

based on his/her knowledge, experience, networking and contacts.

Neil Cross defines venture capital investment as the provision of risk bearing

capital, usually in the form of a participation in equity, to companies with high

growth potential. In addition, the venture company provides some value added

service in the form of management advice and contribution to overall strategy.

The relatively high risks for venture capitalists are compensated by the possibility

of high return, usually through substantial gains in the medium term.

According to I.M. Pandey, venture capital is an investment in the form of

equity, quasi-equity and sometimes debt-straight or conditional (that is interest and

principal payable when the venture starts generating sales), made in new or untried

technology or high risk venture, promoted by a technically or professionally qualified

entrepreneur where the venture capitalist expects the enterprise to have a very

high growth rate.

The venture capitalist provides assistance to entrepreneurs with

management and business skills for meeting the growth needs of the enterprise.

He/she expects medium to long term gains. However, he/she do not expect any

collateral capital provided.

J.C.Verma differentiates between venture capitalists and conventional

financers as follows:

Venture capitalists are risk takers like entrepreneurs. Conventional financers

avoid risk. Their main objective is protection of funds. Venture capitalists acquire

equity, a share of ownership and with it a share of risk. They do not eliminate risk

but manage it through in-depth monitoring, assisting and through portfolio

diversification. They consider themselves as a partner in entrepreneurial venture.

Conventional financer try to eliminate risk by loaning money against collateral and

ensuring ability of debt repayment capacity. Venture capitalists specialize in

management services including finance as one of the functional areas of

management. They deal with the entire range of operations including all resources

and functional divisions. Conventional financiers specialize in financial services.

They do not deal with management or marketing. Venture capitalists have extensive

operating experience. They provide full hands-in support to entrepreneurs.

Conventional financiers do not require such kind of experience. Venture capitalists

channel funds into the lowest tier of the market that is the emerging enterprise.

Conventional financiers avoid such situations of risk. Venture capitalists imbibe

vitality and innovation into the business whereas conventional financers do not

provide such support which may be required by new enterprises along with

investment. Venture capitalists assist the flow of new investment opportunities by

encouraging entrepreneurs, by developing entrepreneurial infrastructure, by

establishing different types of venture funds. Conventional financers assist only in

Check Your

Progress

6. What is meant by

venture capital?


Growth

136

NOTES

Business


investments. Venture capitalists provide promoters capital gap which conventional

financiers may not do always. Venture capitalists provide second stage financing

for full achievement of investee companies’ potential for realizing its business

opportunities which may not be the case for conventional financers. Venture

capitalists provide finance for turnaround of sick, potentially sick but viable

enterprises which may not be the case with conventional financiers. Venture

capitalists encourage entrepreneurial initiatives and innovations which accelerate

business development and the pace of national economic growth. Conventional

financers also help achieve business development and economic growth.

In structuring their investment, venture capitalist may use one or more of

the of share capitals such as ordinary shares, preferred ordinary shares, and

preference shares. Ordinary shares are typically held by the management and

family shareholders rather than the venture capital shares. Venture capital loans

typically are entitled to interests and are usually though not necessarily, re-payable.

Loans may be secured on the enterprise’s assets or may be unsecured. A loan

may be convertible into equity shares. Venture capital investments are often

accompanied by additional financing at the point of investment. Other forms of

finance provided in addition to venture capital equity include loan capitals, clearing

banks, merchant banks, finance houses, factoring companies, mezzanine firms.

Venture capitalist is a wealthy financier who wants to fund startup

companies. They are high risk investors. In accepting these risks, they expect a

higher return on their investment. A venture capitalist manages his/her risk reward

ratio by investing in businesses after careful investigation and selecting the business

which matches their investment criteria. Venture capital firms are generally private

partnerships or closely held corporations funded by private and public pension

funds, endowment funds, foundations, corporations, wealthy individuals, foreign

investors and venture capitalists themselves. Even individuals may be venture

capitalists. Venture capitalists finance new and rapidly growing enterprises,

purchase equity securities, assist in the development of new products/services.

They have a long term orientation. They add value to the enterprise through active

participation. They take higher risk with the expectation of higher rewards.

Assessment of Business Opportunities and Venture Capitalists

The entrepreneur seeks information about venture capitalist and proceeds

to identify the investors to match his/her funding requirements. He/she contacts

the venture capital firm. When the venture capitalist expresses interest in the

entrepreneurial venture as an investment opportunity, he/she views business plan.

The entrepreneur’s business plan should establish the feasibility of the investment

opportunity. The business plan covers the nature of the entrepreneur’s business

which he/she wishes to pursue, how he/she is going to achieve the goals within the

specified time with the help of information details such as estimation of market

potential, business strategies for exploitation of business opportunities, the

management team, financial projections and profitability.

The venture capitalists begin the investment process with an initial review

of the business proposal to assess whether it matches with the investment criteria or

not. Then in a meeting with the entrepreneur and his/her management team, there is

a preliminary screening in terms of the knowledge and ability of the team for

achievement of the strategy and objectives. Then there is an agreement between

the venture capitalist and the entrepreneur in terms of Memorandum of Understanding

(MoU). After the preliminary screening is over and the process of negotiation for

investment is completed then the next step of the investment process is negotiation


Growth

137

NOTES

Business


of the final terms and submission of investment proposal to the venture capital

firm. After approval of the investment proposal, legal documents are prepared.

A venture capitalist takes a decision about his/her share in the equity

capital of the enterprise on the basis of valuation of current investments made in

the enterprise. There are different valuation methods which venture capitalist use

before finalizing a decision to invest. Comparable Publicly Held Companies

approach includes assessing comparable publicly held companies and the prices

of those company’s securities. Present Value of Future Cash Flow is another

widely used valuation approach. This method adjusts the value of the cash flow of

the business for the time value of money and the business and economic risks.

Replacement Value Method is used when the buyer wants unique assets. The

valuation of the enterprise is based on the amount of money it would take to

replace the asset or another important asset or system of the venture. Book Value

approach uses the adjusted book value or net tangible asset value to determine the

enterprises’ worth. Earnings approach method provides the best estimate of the

probable return on investment to the potential investor. Factor approach uses three

factors to determine value: earnings, dividend paying capacity and book value.

Enterprises require funds at different stages in their life cycle – before

the beginning, at the time of actual launch, and at the time of expansion. Venture

funding happens in different stages such as seed stage, start up stage, early growth

stage, expansion stage, mature stage, the turnaround stage. Let us see what happens

in each of the stages regarding venture funding:

Seed stage is concerned with testing feasibility of a business idea. Very

few venture capitalists work with seed funding. In this stage, there is exceptionally

high risk and high expectations. If a venture capitalist invests in a seed stage

enterprise, the equity expectations would be very high. At the startup stage, the

business concept is validated. Now for prototype development, money is required.

This stage also involves very high risk, although slightly lesser than the seed stage.

In the early growth stage, funds are required for full scale operations. The

enterprise itself would be a few years old. This could also be the first round of

funding from a venture capitalist. The expansion stage of an enterprise indicates

its profit making status. Mostly the enterprise achieves success on the basis of

market acceptance. The enterprise now wish to increase revenue capital, increase

working capital, product development and penetration of markets. VCs fund this

through second and third round of funding. The mature stage is characterized by

fully profitable operations, positive cash flow and generation of ample income.

Now the entrepreneur needs money for new product development, new market

development, acquisitions, etc. Venture capitalists provide financing, funding for

liquidity either through IPO or sale of business. There is low risk of investment in

mature businesses, when products are losing their effectiveness and also loyal

customers, there is only marginal profit being earned. The reason may be market

fluctuation or wrong management decisions. Some venture capitalists specialize

in funding such businesses. They provide money for re-organization and

restructuring. The money is required to reduce the debt burden, settle liabilities

and to buy out existing venture investments. The risk for venture capitalists is

medium to high.

Venture capitalists are typically very small firms with about five to seven

people. The team decides the period for which they would function which is

generally for about ten year cycles. They expect to make investments during the

early stages and ensure that they get the expected returns.


Growth

138

NOTES

Business


There are two types of venture capitalists: General venture capitalists

who invest across industries and specialized venture capitalists who invest only in

certain types of industries. Sometimes venture capitalists focus only on certain

markets. Venture capitalists are required to possess high level of analytical skills

and human relations ability. They have to interact with a rather large audience.

They examine several business plans and communicate with the people. They

also provide non-monetary health to enterprises for achievement of required levels

of growth.

On the basis of types of promoters, venture funds in India can be classified.

Various types of organized/institutional venture capital funds are as follows: Venture

capital funds (VCF) promoted by the central government: control development,

financial institutions such as Risk Capital and Technology Finance Corporation

Ltd. (RCTFC) by the Industrial Finance Corporation of India (IFCI) and Risk

Capital Fund (RCF) by IDBI. VCF is promoted by state government. VCF is

promoted by public sector banks. Canfina by Canara bank and SBI-cap by State

Bank of India. VCF is promoted by foreign banks: private sector companies and

financial institutions like Indus Venture Fund, Credit Capital Venture Fund,

Grindlay’s India Development Fund.

8.4 Business Incubators

New ventures can use an incubator approach for getting started in some

places. The basic purpose of an incubator is to increase the chances of survival

for new ventures with a provision of support services such as financial, managerial,

technical, administrative and the like. The incubators provide such an environment

where small businesses are not alone. The anxiety and pressure associated with a

startup is reduced, it is shared with others.

The term business incubator refers to all such organizations which help

entrepreneurs develop their ideas from inception to launching of a new venture. It

includes technology centres, business and innovation centres. Many incubators

assist in project report preparation. They provide access to financial and technical

services and also sharing equipment and services such as offices communication

services, business services and various facilities and equipment services.

According to National Business Incubator Association (NBIA), an

incubator is “a business support process that accelerates the successful

development of startup and fledgling companies by providing entrepreneurs with

an array of targeted resources and services. These services are usually developed

or orchestrated by incubator management and offered both in the business incubator

and through its network of contacts”.

According to David A. Lewis, Elsie Harper-Anderson, and Lawrence A.

Molner, “Business incubation programmes are designed to accelerate the successful

development of entrepreneurial companies through an array of business support

resources and services, developed or orchestrated by incubator management and

offered both in the incubator and through its network of contacts. A business

incubation programme’s main goal is to produce successful firms that will leave

the programme financially viable and freestanding. Critical to the definition of an

incubator is the provision of management guidance, technical assistance, and

consulting tailored to young and growing companies.

Check Your

Progress

7. Enlist the valuation

methods used by ven-

ture capitalists before

finalizing a decision to

invest in an entrepre-

neurial venture.


Growth

139

NOTES

Business


European Commission defined a business incubator as: ‘a place whereby

newly created firms are concentrated in a limited space. Its aim is to improve the

chance of growth and rate of survival of these firms by providing them with a

modular building with common facilities (telefax, computing facilities etc) as well

as with managerial support and back-up services. The main emphasis is on local

development and job creation’.

The business incubator may be set up by government, business alliance,

or academic groups such as universities, research labs or specialized institutes

interested in basic research, with an aim to help small enterprises in the incubator

to ensure their survival through the startup phases. It is supposed to provide an

institutionalized environment to facilitate startup enterprises and their business

ideas to grow. It caters to the entrepreneurs’ needs regarding business planning,

marketing programmes. It includes entrepreneurial advice and mentoring. Through

incubators, entrepreneurs get an easy access to innovators, successful

entrepreneurs and professionals. Along with networking and business advice,

incubators offer a variety of resources and services such as marketing assistance,

technology assistance, business training programmes, help in financial management

and accounting, access to bank loans and the like. They also provide access to

angel investors, venture capital. The incubator always provides mentorship, hands-

on support, and also professional services. Business incubators improve the chances

of survival as well as growth prospects by providing a support in the form of

sharing facilities and providing services and enabling the entrepreneurs to reduce

overhead costs.

In incubator, an idea is developed and then an external team is engaged to

launch and manage it; and the incubator takes a significant equity share for its

services. Or an external team is engaged with its ideas and incubator provides

support, training and deals with mentoring; and incubator charges a monthly fee to

share and utilize the incubator’s resources over a period of time. Generally,

entrepreneurs pay a monthly fee to participate in the programme.

Incubators mainly support new ventures during the exploration phase aimed

at developing a business model. Through several trials and errors and feedback

from early adopters, it is attempted to develop a prototype of product/service and

test its acceptability by the target customers. Incubator is meant to support in

experimentation as well as assessment.

Some researchers divided incubators into four types: with walls, without

walls (also called virtual incubators), international incubators and accelerators. An

incubator with walls is a business incubation programme with a multitenant business

incubator facility and on-site management. This offers entrepreneurs space to

operate their businesses, but the focus of the programme is on the business

assistance services provided to the start-ups. Virtual incubators do not offer on-

site space for clients although they may have a central office to coordinate services,

for their staff and for meeting the clients. International incubators help foreign

entrepreneurs for their entry. They also provide some specialized services such as

translation services, language training, cultural training, immigration and visa

assistance, housing assistance and the like. Business accelerators may be defined

as a late-stage incubation programme which assists entrepreneurial ventures which

are mature and ready for external financing. Business incubators can also be

categorized by their industry focus as manufacturing incubators, mixed-use or

general purpose incubators, technology incubators, and service incubators. There

are various types of incubators. The objectives of each type vary. Some incubators

Check Your

Progress

8. Do you know the

concept of business

incubator?

State whether the

following is true or

false:

9. Incubators mainly

support new ventures

during the exploration

phase aimed at

developing a business

model

10. Business incubator

is supposed to provide

an institutionalized

environment to

facilitate startup

enterprises and their

business ideas to grow


Growth

140

NOTES

Business


are organized by government organizations or departments. Non-profit incubators

are organized and managed through chambers of commerce, associations etc.

8.5 Accelerators (or Seed Accelerator or Business

Accelerators)

Accelerators are the institutions which accelerate the growth of new

ventures by providing numerous services, resources; Business accelerators are

more likely to be financed by venture capitalists. They generally provide all the

services offered by a business incubator. Not necessarily all, but many seed

accelerators do provide physical space. Entrepreneurs gain access to future capital

and business networks through accelerators. One of the main objectives for startups

to participate in an accelerator programme is the connection to a network of

investors and mentors.

According to Miller and Bound, the general characteristics features of an

accelerator are:

• An application process that is open yet highly competitive

• Provision of pre-seed investment, usually in exchange for equity

• A focus on small teams, not on individuals

• Time-limited support comprising programmed events and intensive

mentoring

• Startups supported in cohort batches or ‘classes’

Unlike business incubators, the application process for seed accelerators

is open to anyone, but highly competitive. The accelerator can call selected

applicants for an interview in which a qualified and experienced panel of judges

assess the applicants and their potential. A seed investment in the startups is usually

made in exchange for equity. The focus is on small teams, not on individual founders.

Accelerators very rarely accept a single entrepreneur. Accelerators consider that

all the work associated with startup is difficult to be managed by a single individual.

They believe that instead of as a single individual, a team can give justice to the

task of initiating and managing a venture. The startups receive mentoring and

training from experienced founders and investors during a period of generally

three months. They are required to rehearse. On a ‘demo day’, the startups present

to investors and accelerators end their programmes. Now the startups manage on

their own. If the accelerator retains equity, then the accelerator is obviously

interested to help startup to raise money and be benefitted thereby.

Traditional business incubators are often government funded, generally

take no equity and focus on biotech, medical technology, product-centric companies;

accelerators can be either privately or public funded and focus on a wide range of

industries.

8.6 Angel Investors

Entrepreneurs may wish to help others after enjoying their own success.

They may like to invest in other entrepreneurial ventures. Employees of the enterprise

Check Your

Progress


about business accel-

erators?


lowing are true or

false:

12. Traditional busi-

ness incubators are

often government

funded, generally take

no equity and focus on

biotech, medical tech-

nology, product-cen-

tric companies

13. Accelerators can

be either privately or

public funded and fo-

cus on a wide range of

industries


Growth

141

NOTES

Business


may have idle money which they invest in business. They might have been bored

with the daily routine, and monotony associated with their job which no more is

interesting to them. They are in search of some opportunity of their interest in

which they can take pleasure.

An angel investor (also known as a business angel, angel funder, informal

investor, private investor, or seed investor or informal venture capital) is an investor

who provides financial backing for small entrepreneurs in exchange for convertible

debt or ownership equity and also advice. They are typically wealthy individuals.

They usually come with their own money in exchange for equity in that enterprise.

They may be the entrepreneur’s family members or friends. They may be former

entrepreneurs or professionals such as doctors, lawyers, accountants, dentists; or

business associates such as suppliers, vendors, customers, employees, executives,

competitors, brokers. They provide starting or growth capital to promising ventures.

In addition to the supply of money, angel investors play a key role in extending

strategic and operational expertise for new ventures. They also provide social

capital i.e. their personal networks. In the words of Nahapiet and Ghoshal, social

capital is a network of strong personal relationships that provide the basis of trust,

co-operation and collective action.

Mason and Harrison define angel network as “a high net worth individual,

acting alone or in a formal or informal syndicate, who invests his or her own

money directly in an unquoted business in which there is no family connection and

who, after making the investment, generally takes an active involvement in the

business, for example, as an advisor or member of the board of directors”.

In the words of Lerner and Kortum, angel investor is, “a wealthy individual

who invests in entrepreneurial firms. Although angels perform many of the same

functions as venture capitalists, they invest their own capital rather than that of

institutional or other individual investors”.

Unlike venture capitalists, angel investors usually work alone or in very

small groups. They are deemed to be angels in comparison with greedy investors

such as venture capitalists. Unlike venture capitalists, many angels are not motivated

solely by profit. They wish to earn money, at the same time they are motivated to

help entrepreneurs to succeed. They are inspired by a promising business venture

and take risk willingly to invest money in that venture. In return, they do not

expect control of the potentially profitable business in return. In comparatively

less time, entrepreneurs can take investment from angels in comparison with venture

capitalists. Angel investors are more liberal and provide more favourable terms

than other lenders. They are more concerned about helping the entrepreneur than

about the viability of the venture. They are more concerned with helping the

entrepreneur succeed rather than earning profit from their investment.

There is not adequate awareness about angel investment. Individual angel

investors keep information about his/her investment private. But now angel

investment sector is growing. It is becoming more formalized and organized with

creation of angel groups and networks.

Angels can be classified into two groups: affiliated and unaffiliated. An

affiliated angel is in contact with the entrepreneur and/or his/her enterprise; but

not necessarily related to or acquainted with the entrepreneur. A nonaffiliated

angel has no connection with the entrepreneur or his/her business.

Affiliated angels are in contact of the entrepreneurs during routine

functioning of the business. Some customers of products/services of the

entrepreneur may market the products/services to other markets or process the


Growth

142

NOTES

Business


products/services further to manufacture new products/services. Such customers

make excellent angels. Suppliers, vendors make money when the entrepreneur

achieves success. Such suppliers, vendors make excellent angels. They may not

directly invest money. They may help in the form of attractive payment terms,

cheaper prices. They may use their influences and help the entrepreneur to borrow

money/seek loan. Familiarity with the business/enterprise/enterprises, make the

affiliated angels successful.

Affiliated angels are contacted easily because of their previous contact

and association. For approaching nonaffiliated angels, advertisements can be placed

in newspapers etc.; business brokers can be approached. Intermediaries, also

called as boutique investment bankers, can help for finding angels. Telemarketing

as well as networking can also help in tapping the probability of searching for

wealthy individuals interested in investing.

8.7 Summary

A new as well a growing enterprise requires capital. For financing the

enterprise, there are number of alternatives available such as entrepreneur’s own

capital, arranging debt finance, seeking an equity partner such as in case of private

equity and venture capital. Private equity refers to any type of non-public ownership

equity securities that are not listed on a public exchange. Private equity includes

both early stage (venture capital) and later stage (buy out expansion) investing.

Venture capital is a means of equity financing for rapidly growing private companies.

In the startup phase, for development, expansion or purchase of a business, there

is a need of finance. Venture capital firms invest funds on a professional basis.

Venture capital is formal or professional equity. It is an important source of funding

for young, technology-based enterprises. It is appropriate for high-growth

enterprises which are usually technology or science based.

Venture capitalists basically deal with equity finance for new enterprises.

It may not be possible for the new entrepreneurs to go to capital market for raising

funds. However, such investment is not exclusively equity investment. The basic

objective of venture capital financing is to earn capital gains on equity, investments

at the time of exit and debt financing is only supplementary. It is a long term

investment in growth oriented small as well as medium enterprises. Venture

capitalists prefer to invest in small and medium scale enterprises preferably in the

early stage of their development.

The term business incubator refers to all such organizations which help

entrepreneurs develop their ideas from inception to launching of a new venture. It

includes technology centres, business and innovation centres. The basic purpose of an

incubator is to increase the chances of survival for new ventures with a provision of

support services such as financial, managerial, technical, administrative and the like.

The incubators provide such an environment where small businesses are not alone.

Accelerators are the institutions which accelerate the growth of new

ventures by providing numerous services, resources. Business accelerators are

more likely to be financed by venture capitalists. They generally provide all the

services offered by a business incubator.

An angel investor is an individual who invest his/her own money in an

entrepreneurial venture. He/she is often an experienced entrepreneur or experienced

person who constitutes an important source of equity capital at the seed and early

Check Your

Progress

14. Do you know the

meaning of angel in-

vestor?


Growth

143

NOTES

Business


stage of an entrepreneurial venture. Instead of investing in traditional investment

options, angel investing is preferred due to the possibility of seeking attractive

returns in comparison. Institutional venture capitalists invest other people’s money.

8.5 Key Terms

• Ordinary shares: These are equity shares that are entitled to all income

and capital after the rights of all other classes of capital and creditors

have been satisfied.

• Preference ordinary shares: These are equity shares with special

rights

• Preference shares: These are non-equity shares. Their income rights

are defined and they are usually entitled to a fixed dividend

• Operating cash cycle: The period during which an enterprise buys

raw materials, manufactures goods, scores up inventory, markets the

products, distributes the goods, prepares invoices and receives payment

from the customers


Questions

1. Explain the role and functioning of business incubators.

2. What do you know about angel investors?

3. Explain the significance of venture funds.

4. Give an account of the guidelines for management of financial resources

during the growth and development of small enterprises.

Exercise

Activity 8.1

Browse the internet and write the profiles of at least five venture capitalists,

accelerators and angel investors each


1. Venture capitalists generally do the following:

i. Finance new and rapidly growing enterprises

ii. Purchase equity security

iii. Assist in the development of new products/ services

iv. All the above

2. Which of the following holds true regarding venture capitalist?

i. Add value to the enterprise through active participation


Growth

144

NOTES

Business


ii. Take higher risk with the expectation of higher regards

iii. Have a long term orientation

iv. i, ii, iii

3. Pick up the main attribute of venture capital from the following

i. Equity participation

ii. Long term investment

iii. Participation in management

iv. i, ii, iii

4. Arrange the steps of the investment process in a sequential manner:

a. Negotiating investment

b. Preliminary screening

c. Approvals

d. Preparation of legal documents

i. b, a, c, d

ii. a, b, c, d

iii. d, c, b, a

iv. a, c, d, b

5. Which of the following is a valuation method used by venture capitalist

before taking a decision to invest?

i. Replacement value

ii. Present value of future cash flow

iii. Earnings approach

iv. All the above

6. Which of the following is true regarding business incubators?

i. In incubator, an idea is developed and then an external team is

engaged to launch and manage it; and the incubator takes a

significant equity share for its services

ii. An external team is engaged with its ideas and incubator provides

support, training and deals with mentoring; and incubator charges a

monthly fee to share and utilize the incubator’s resources over a

period of time

iii. i, and ii are true

iv. i, and ii are false

7. Which is one of the following is true for incubator?

i. Idea development


Growth

145

NOTES

Business


ii. Infrastructure

iii. Structure

iv. All the above

8. Which one of the following applies to accelerator?

i. Getting things done

ii. Startup growth

iii. Action

iv. All the above

9. Working capital management requires the growth entrepreneur to pay

attention to ————

i. Debtors/account receivables

ii. Creditors/account payables

iii. Inventory

iv. i, ii and iii

10. The objective of credit management is ———

i. To obtain optimum sales

ii. To maximize sales

iii. To maximize profitability


11. Improper management of working capital means ——————

i. Cash gets locked up in debtors

ii. Cash gets locked up in inventory

iii. Both i and ii



i. Excessive working capital position indicates idle funds which is not

desirable

ii. Inadequate working capital results in production interruptions and

inefficiencies

iii. Working capital management is management of all aspects of

current assets i.e. cash, marketable securities, debtors, and

inventories and current liabilities

iv. i, ii and iii are wrong


Growth

146

NOTES

Business


Answers

Check Your Progress

3. Cash budget

4. True

5. Ordering costs, Inventory carrying costs

9. True

10. True

12. True

13. True


1. iv

2. iv

3. iv

4. i

5. iv

6. iii

7. iv

8. iv

9. iv

10. i

11. iii

12. iv

8.7 Further Reading

Hisrich Robert D. Peters Michael P., Shepherd Dean A., Entrepreneurship,


http://www.cses.co.uk/upl/File/Benchmarking-Business-Incubators-main-

report-Part-1.pdf

https://www.entrepreneur.com/encyclopedia/angel-investor

https://www.inbia.org/docs/default-source/research/download-

report.pdf?sfvrsn=0

Reddy P. Narayana, Entrepreneurship Text and Cases, Cengage Learning,

Delhi, 2010

Exit Strategies

147

NOTES

Business


UNIT 9: EXIT STRATEGIES

Structure

9.0 Introduction

9.1 Unit Objectives

9.2 Exit Strategy

9.2.1Succession of Business- Transfer to Family/Non-Family members

9.2.2Harvesting Strategy – Direct sale, Employee Stock Option Plan,

Management Buyout

9.2.3Going public (IPO)

9.2.4Liquidation

9.3 Bankruptcy

9.4 Summary

9.5 Key Terms


9.7 Further Reading

9.0 Introduction

All entrepreneurial ventures do not necessarily succeed. Some enterprises

are closed down. The entrepreneurs may fail in their efforts. They may fail miserably

in management of money, human resource and adoption of new technology, or in

approaching right customers with right approach. There may be some problem in

production set up or with quality of product/service. Some unanticipated financial

problems may not be solved. Maybe something goes wrong in the economy, or

state or nation which is beyond the control of the entrepreneur. Sometimes

entrepreneurs get success in the initial period but later on it may not be possiblefor

them to maintain success. They may not be able to continue the business beyond

a particular life span. And at that time, the entrepreneur has to take a decision to

wind up the enterprise. It is an agonizing and undesirable decision.

Entrepreneurs have a limited time span.Therefore,there is a need of planning

for the future of the enterprise and management succession.There are various

options that an entrepreneur can adopt for harvesting or exiting. He/she may pass

on the business to family members or sell the business. There is a possibility of a

management buyout or a leveraged buyout. Sometimes the entrepreneur may have

to take a painful decision to wind up the enterprise. The decision is inevitable in

several cases. When the entrepreneur is unable to pay attention to manage the

business operations, it leads to liquidation or bankruptcy.

Exit Strategies

148

NOTES

Business


While planning an exit, the entrepreneur has to maintain transparency. He/she

has to communicate the concerned stakeholders about the possibility of exit. Employees,

partners, vendors, investors, customers, clients should know in advance about the probable

exit plan. The entrepreneur should be prepared to cope up with challenges arising through

the process of exit and after the process of exit is over. He/she should the plan the

process in such a manner as to protect the image of the enterprise.

9.1 Unit Objectives

After going through this unit you will be able to

• Learn the meaning of exit for an enterprise

• Realize the need for exit strategies

• Elucidate the exit strategies available to entrepreneurs

• Comprehend winding up of business

• Explain the pros and cons of Initial Public Offer (IPO)

• Evaluate the option of selling the business

• Know about business liquidation

• Understand the meaning of bankruptcy

9.2 Exit Strategy

Some enterprises tend to exit very early in their life span whereas some

enterprises exit over a longer period of time. Exit may be viewed by entrepreneurs

as an opportunity for wealth generation. Through exits, investors such as venture

capitalists, angels etc reap the return on their investment. They get an opportunity

to liquidate their investments. Serial entrepreneurs convert their dream into reality

and when they take up their dream venture up to a certain level, they typically

move on to the next challenge. Exit is an opportunity for them to create wealth,

they hand over the venture to professionals and continue the search for new

prospects. Some entrepreneurs are not comfortable with a growing organization

beyond a particular level because of different challenges involved with growth. So

they opt for exit. For some ventures the future does not seem to be attractive;and

the entrepreneur is in favour of harvesting the potential of the business.

Every entrepreneur has to give a thought to an exit strategy. This section

presents a number of exit strategies available to entrepreneurs such as an initial

public offering (IPO), private sale of stock, succession by a family member or a

non-family member, merger with another enterprise or liquidation of the enterprise.

Each of the exit strategies has its advantages and disadvantages. An entrepreneur

has to plan and decide an exit strategy at the time of startup stage.

9.2.1 Succession of Business

An entrepreneur may take the decision to hand over the business to family

members. If the business is family owned, it would be easier to find a family

member to entrust the responsibility. If no family member is interested in the

Check Your

Progress

1. What does “exit” in

an enterprise mean?

2. Write down the

important reasons for

entrepreneurs to think

of exits?

Exit Strategies

149

NOTES

Business


business, then the entrepreneur has to sell the business to outsiders or train some

eligible employee of the enterprise to take over.

Transfer to Family Members

An entrepreneur has to work on succession plan with consideration of

many issues like what he/she will do after handing over the business, what would

be his/her role, duties in the transition stage, whether he/she will work full time, or

part time? Is he/she likely to retire? He/she has to keep an eye on the current

business environment while planning this succession. He/she has to pay attention

to family dynamics in terms of the relationships between various family members,

compatibility of the family members with each other, their income etc. Tax

implications of the decision are also important.

The successor family member should be made familiar with the tasks and

responsibilities of the enterprise. It is always desirable to hand over the responsibility

of running the business with adequate training and ensuring sufficient exposure to

the business environment. It should be seen that the successor is being familiar

with the work culture and operational responsibilities also in a proper manner. To

get a grasp of the entire enterprise, the operations and the scope, the successor

should practice job rotation. The existing employees, especially the senior ones

should be made to interact with the successor and assist him/her. There is a

possibility of conflict to arise while working with the senior employees about

accepting the authority of comparatively junior member of the family as a leader.

They may feel offended. However, in such cases, the successor has to prove his/

her mettle. He/she has to exhibit the talent, ability, potential which resulted in the

choice of the successor. It would be always good to accompany the successor as

an advisor by the owner entrepreneur in the initial phases after assuming the

charge of the enterprise.

Transfer to Non-Family members

Sometimes, an entrepreneur may not find a suitable and eligible family

member to hand over the charge of the enterprise. No family member may be

interested in accepting the responsibility. In such a situation, the entrepreneur can

take the decision to sell the business. Or otherwise he/she can opt to choose a

deserving key employee and train him/her to run the enterprise successfully.

Being associated with the enterprise, the successor employee is well

familiar with the enterprise, the market and all the stakeholders. He/she is

experienced and well-trained. There may not be a major problem in accepting the

successor by the enterprise members. The owner entrepreneur can choose to be

a minority owner, stockholder or a consultant.

The entrepreneur has to decide about the issue of ownership i.e. how

much ownership and control he/she plans to retain with him/her. Managerial ability

and skills of the employee as well as the financial capacity are important

considerations for deciding the extent of transfer of ownership. It is seen that the

transfer or succession of an enterprise takes many years to fulfill all the requirements

of all those who are concerned with the decision. It is often advised to begin the

process of planning and decision making long before the need realizes for sell or

transfer of ownership of the enterprise.

In case of a family business,succession of business to a family member

may take place in the near future. Until then, the entrepreneur may hire a manger

to take care of the business. It may not be very easy to find such an eligible person

for the time being. There is no assurance about equity in the business. There is

Check Your

Progress

3. What do you under-

stand by transfer of

business to non-family

members?

Exit Strategies

150

NOTES

Business


also uncertainty about the time duration for which the person has to manage the

enterprise. It is difficult to find such a person.

In non-family business situations, there is no question of involvement of

family members.The successor has to be selected either from internal or external

sources. In a partnership firm, the process of finding the successor may be clearly

identified. It might involve a predetermined choice or an option to find the outside

successor for partnership. However, for facilitating the process it is always advised

to have well-defined job descriptions and specification of skills and talent required

for the particular position. There is a need of transparency in the process. Almost

all the employees should be involved in the process so that there would be

acceptance to the final decision. No one would object the decision and leave the

organization with such type of participation in the selection process. The strategy

for succession plan should be clearly communicated to everyone on the organization.

Senior members must be fully committed to the succession plan.

The last option left is harvesting. That is, selling the business to either an

employee or an outsider. Let us discuss the harvesting strategy.

9.2.2 Harvesting Strategy

A number of alternatives are available to the entrepreneur in harvesting

the venture such as direct sale, Employee Stock Option Plan (ESOP), management

buyout. Some of these issues are simple and some comprise complicated financial

matters etc. The entrepreneur has to study all the methods properly and then

decide which one to adopt for his/her enterprise in the light of his/her goals and

priorities. It is always advisable to seek guidance and consultancy of experts before

finalizing the decision.

Direct sale

The entrepreneur can sell the business and retire or may begin the search

of a new venture. When he/she is unable to meet the growing needs of the

enterprise, selling is the only option left;because the enterprise requires additional

resources for survival and growth. Sometimes entrepreneur sells his or her business

and accept an employment in the same business or be a consultant or adviser to

an enterprise. This may be an acquisition form of growth. Large entrepreneurs

wish to grow by acquisition and they are interested in successful small businesses.

When the enterprise is very small or it cannot confirm to the IPO norms

due to some reasons, the only alternative left for the entrepreneur is sale to a

strategic buyer. The valuation and price offers are more attractive than that of

financial investors. Mergers and acquisitions deal with strategic buy-outs as a

growth option. Strategic buyers pay a premium for synergy for a clear addition of

value. In absence of a perfect strategic fit, it is not easy to find buyers at high

valuation. Along with strategic sale out, the other exit routes are sale to financial

investors, sale back to promoters or co-investors.

Direct sale is the most common exit strategy. It requires systematic planning

and proper timing. The entrepreneur has to work on various details which might

be required while initiating and finalizing the sales transactions such as reasons of

selling the business, valuation of the enterprise, condition of machineries, equipment

and other assets, market standing of the enterprise, availability of human resources

in terms of quantity as well as quality.

There are three popular methods of valuation used for business: Market

approach, Income approach, Asset approach. Market approach deals with valuation

Check Your

Progress

4. What do you under-

stand by transfer of

business to non-family

members?

Exit Strategies

151

NOTES

Business


of business in comparison with other competitors. Private ventures are generally

valued at lower levels than public companies due to their lower equity. The income

approach analyses an enterprises’ income- both present income and future cash

flow. The approach defines future approach. This approach deals with net present

value by discounting future income at agreed rates. The asset approach is based

on assets and liabilities of the enterprise. Sometimes fair market value is used

instead of book value of the assets. Alternatively, this approach considers liquidation

value and the company value are calculated as if all assets are calculated and

debts are repaid. The asset approach is believed to be more accurate method for

valuation of business.

Some entrepreneurs may get the help of business brokers to actually sale

a business. They are busy in their activities. It may not be possible for them to

spare time for finalizing the sale transaction. Brokers help in the sale of business

on a commission basis. The entrepreneurs interested in buying are shown a

comprehensive business plan which exhibits the value of the business. A five-year

business plan provides the buyer entrepreneurs with a future perspective and

potential of the enterprise.

There may be direct sale of the business or otherwisethe entrepreneur

may sell it through a management buyout or a leveraged buyout. The existing

managers of the enterprise may take the opportunity of buying the venture. In

leveraged buyout, an investor obtains a majority of the enterprises’ equity. The

finance may be through borrowed money or debt.

Employee Stock Option Plan(ESOP)

Employee stock option plan (ESOP) is a two to three year plan to sell the

business to employees. The time period depends upon the entrepreneur. The ESOP

is often viewed as an alternative to a pension plan. Small enterprises may not be

able to offer and execute a pension plan. The decision of ESOP is in the interest of

the employees. In ESOP, the founder contributes stock or cash for buying the

owner’s interest in the venture.

ESOP serves as an incentive to employees. It motivates them to put their

best in the work performance since they belong to the organization. They dedicate

their time, energy, attention since they know that they are working for themselves

and they want to enjoy the fruits of their efforts. They take more and more interest

in the future, in the long-term success of the venture. They focus in innovation,

apply new methods and techniques.Loyal employees are rewarded for their

commitment and long-term association. Those who stayed with the enterprise

even in the bad times, now reap the benefits. Through a well-drafted agreement,

the business is transferred to the faithful employees.

ESOP is not a simple plan. It is a complicated one to launch. To calculate

the amount of ESOP package, complete valuation of the venture is required. Several

issues are to be taken into consideration such as taxes, payout ratios, amount of

equity to be transferred per year and the amount actually invested by the employees.

The agreement stipulates whether the employees can buy or send additional shares

of stock after completion of the plan.

After careful evaluation of all the alternative options for harvesting the

venture, the entrepreneur sells his/her business to a family member, or an employee.

Now the entrepreneur’s involvement with the sold business depends upon the sale

agreement or contract with the buyer entrepreneur(s) or new owner(s). As per

the requirement, sometimes the seller entrepreneur stays with the sold enterprise

for a short while until the routine operations are streamlined. In such situations,

Check Your

Progress

4. What are the op-

tions available to an

entrepreneur for har-

vesting his/her ven-

ture?

5. Enlist the methods

available for valuation

of business.

Exit Strategies

152

NOTES

Business


the seller entrepreneur should negotiate an employment contract that specifies

time, salary, and responsibility. The buyer entrepreneur may not need the seller

entrepreneur for running the business. The buyer entrepreneur may request the

seller entrepreneur to sign an agreement not to engage in the same business for a

specified number of years. These agreements are of different types. They are

prepared by lawyers with all minute details in a clear manner.

An entrepreneur may also plan to retain a business for only a specified

period of time with an intention to sell it to employees. This may involve all

employees through an employee stock option plan or through a management buyout

which allows only few managers of the business to buy.

Management Buyout

An entrepreneur wants to sell or transfer the enterprise to loyal and

deserving employees. The ESOP as discussed above seems to be complicated.

The entrepreneur finds a direct sale a better option. Management buyout often

involves a direct sale of the venture at a predetermined price. The price is calculated

on the basis of valuation of all the assets, past revenues and goodwill.

The sale of an enterprise to key employees takes place for cash or through

any other method of financing. If the value of the transaction is not significant,

then it would be a cash sale. Otherwise, if the value of the business is substantial,

then the sale can be financed through a bank, or the entrepreneur could also opt to

carry the note. This is a convenient arrangement. The income from the sale would

be spread out over a period of time as per the agreement. This system would

provide cash flows and reduce the tax burden. Another alternative of the enterprise

sale could be to use stock as the method of transfer. The buyer managers may sell

voting or non-voting stock to other investors. These funds would then be used as

a full or a partial payment for the venture. A bank or other investors take interest

in buying the stock since the venture has a long standing in the market. Further, it

is continuing with the same management team.

9.2.3 Going public (IPO)

Entrepreneur and other equity owners of the enterprise offer and sell

some part of the organization to the general public through a registration statement

filed with the Securities and Exchange Board of India (SEBI) which is known as

going to the public. Small entrepreneurs need capital for growth which they may

raise through an IPO i.e. Initial Public Offering. It is the first sale of shares to the

company by an enterprisein the capital market. This brings money into the enterprise

from a large number of stockholders. Mostly, newly issued shares are sold and

money is raised. Now the enterprise can have a greater access to capital markets

in the future. This is the most popular form of exit for entrepreneurs and venture

capitalists. It is the process though which part of ownership is offered to the public

by a sale of equity shares. After the IPO is over, the enterprise gets listed and

traded on a stock exchange.

IPO in India is done either by book building method, fixed price method or

a combination of both of these methods. The steps of the process include: preparing

draft, offer document for SEBI approval, offering the document to registrar of the

issue and stock exchanges, issuingprospectus, opening public issue for investors,

closing the issue, and finalizing the pattern of share allotment and transferring

shares to investors. It is imperative that the risk factors should be given explicitly

in the prospectus to ensure that the buyers of stock are not misled.

Check Your

Progress

6. What is meant by

employee stock option

plan?

Check Your

Progress

7. What is the mean-

ing of management

buyout?

Exit Strategies

153

NOTES

Business


There are several advantages as well as disadvantages of going public.

An entrepreneur has to carefully assess the benefits as well as limitations of going

public before initiating the process.

Going to the public is a sign of growth for the entrepreneur. It creates a

good image in the society. It provides for strength and transparency. Public

companies enjoy a good status in the society. They are better known and have a

good access to numerous sources of capital. When an entrepreneur on his/her

own is not in a position to mobilize funds needed for expansion, diversification,

acquisitions, R & D, working capital, or marketing of the business, then he/she

goes to public with limited dilution of the entrepreneur’s ownership stake. The

additional money borrowed increases the capacity of the entrepreneur to acquire

more resources. With IPO, there is no botheration of fixed repayment commitment

as in case of bank loans. Trading of shares on public exchanges provides them

market value and also liquidity to the enterprise. This liquidity leads to increased

wealth to the entrepreneurs. Entrepreneurs can offer stock options to their

employees so as to attract and retain them with the enterprise.

The procedure for going to the public is tedious, and complicated. It is

time consuming and expensive for small entrepreneurs. A number of formalities

are required before being allowed to go public. A number of regulations need to be

complied with. Entrepreneurs need to plan properly and interact with investment

bankers, underwriters, lawyers, advisors, accountants etc. For going to the public,

confidential information of the small enterprise need to be disclosed to the public.

Going public means inviting and adding more number of owners which may result

into loss of control of the entrepreneur and less authority over the enterprise.

There is a need of shareholders’ approval for major decisions. So there is less

freedom and flexibility in management. It is not very easy to convince the public to

invest into an IPO. Generally, people are ready to invest in reputed companies. To

create awareness and promote image, an extensive promotion programme is required

before the launch of IPO. To satisfy the public, the entrepreneur has to continue

with growth and maintain an increasing trend of growth which may give rise to

stress and heavy pressure for the entrepreneur. There is a possibility of the enterprise

being acquired through acquisition of shares.

9.2.4 Liquidation

When an entrepreneur starts realizing about the troubles and difficulties

the enterprise is going through, he/she taps various options to recover the situation.

All the way outs are tried to avoid bankruptcy/closure of the business. He/she

tries for reorganization and restructuring of the organization. He/she identifies the

profitability, growth rate, and future prospects of various divisions, branches,

sections, product lines, products and the like. Then he/she may take a decision to

eliminate unprofitable/loss making/weak products, divisions, branches. Further,

economy drive is adopted. Some low cost items are offered.

If the enterprise generates regular income, still the entrepreneur has a

chance to control the situation. He/she tries for getting extended time for making

payments. A plan for repayment is made with proper time schedules with mutually

agreeable terms and conditions. This enables the entrepreneur to continue to own

and operate the business.

Even if after getting extended time for payments, the entrepreneur is unable

to come out of the financial crisis, the only option left is liquidation. The entrepreneur

files a voluntary bankruptcy petition. The enterprise is considered as bankrupt. If

Check Your

Progress

8. IPO is ——

Exit Strategies

154

NOTES

Business


creditors file a petition about bankruptcy without the consent of the entrepreneur,

it is involuntary bankruptcy.

Liquidation is a process of winding up of a business by selling its assets

for the sake of paying off the liabilities. The secured creditors are given priority in

payment and then the shareholders are given the remaining amount in proportion

of their shareholdings.

Modes of Winding up

The winding up of a company may be either –

i. By the tribunal; or

ii. Voluntary

i. Winding up by the Tribunal.

Circumstances in which company may be wound up by Tribunal:

a. If the company is unable to pay its debts;

b. If the company has, by special resolution, resolved that the company be

wound up by the Tribunal;

c. If the company has acted against the interests of the sovereignty and

integrity of India, the security of the State, friendly relations with foreign

States, public order, decency or morality;

d. If on an application made by the Registrar or any other person authorized

by the Central Government by notification under this Act, the Tribunal is

of the opinion that the affairs of the company have been conducted in a

fraudulent manner or the company was formed for fraudulent and

unlawful purpose or the persons or the persons concerned in the formation

or management of its affairs have been guilty of fraud, misfeasance or

misconduct in connection therewith and that it is proper that the company

be wound up;

e. If the company has made a default in filling with the Registrar its financial

statements or annual returns for immediately preceding five consecutive

financial years; or

f. If the Tribunal is of the opinion that it is just and equitable that the company

should be wound up.

Company Liquidators and their appointments:

1. For the purposes of winding up of a company by the Tribunal, the Tribunal

at the time at the passing of the order of winding up, shall appoint an

Official Liquidator.

2. The terms and conditions of appointment of a Liquidator and the fee

payable to him/her shall be specified by the Tribunal on the basis of task

required to be performed, experience, qualification of such liquidator

and size of the company.

3. On appointment as a Liquidator, as the case may be, such liquidator shall

file a declaration within seven days from the date of appointment in the

prescribedform disclosing conflict of interest or lack of independence in

respect of his/her appointment, if any, with the Tribunal and such obligation

shall continue throughout the term of his/her appointment.

Exit Strategies

155

NOTES

Business


Removal and replacement of liquidator:

1. The Tribunal may, on a reasonable cause being shown and for reasons

to be recorded in writing, remove the provisional liquidator or the

Company Liquidator, as the case may be, as liquidator of the company

on any of the following grounds, namely:-

a. Misconduct;

b. Fraud or misfeasance;

c. Professional incompetence or failure to exercise due care and

diligence in performance of the powers and functions;

d. Inability to act as provisional liquidator or as the case may be,

Company Liquidator;

e. Conflict of interest or lack of independence during the term of his

appointment that would justify removal.

2. In the event of death, resignation or removal of the provisional liquidator

or as the case may be Company Liquidator, the Tribunal may transfer

the work assigned to him or it to another Company Liquidator for reasons

to be recorded in writing.

Effect of winding up order:

The order for the winding up of a company shall operate in favour of all

the creditors and all contributories of the company as if it had been made out on

the joint petition of creditors and contributors.

Submission of report by company Liquidator:

1. Where the Tribunal has made a winding up order or appointed a Company

Liquidator, such liquidator shall, within sixty days from the order, submit

to the Tribunal, a report containing the following particulars, namely:-

a. The nature and details of the assets of the company including their

location and value, stating separately the cash balance in hand and

in the bank, if any, and the negotiable securities, if any, held by the company:

Provided that the valuation of the assets shall be obtained from

registered values for this purpose;

b. Amount of capital issued, subscribed and paid-up;

c. The existing and contingent liabilities of the company including

names, addresses and occupations of its creditors, stating separately

the amount of secured and unsecured debts, and in the case of

secured debts, particulars of the securities given, whether by the

company or an officer thereof, their value and the dates on which

they were given;

d. The debts due to the company and the names, addresses and

occupations of the persons from whom they are due and the amount

likely to be realized on account thereof;

e. Guarantees, if any, extended by the company;

Exit Strategies

156

NOTES

Business


f. List of contributors and dues, if any, payable by them and details of

any unpaid call;

g. Details of trademarks and intellectual properties, if any, owned by

the company;

h. Details of subsisting contracts, joint ventures and collaborations, if any;

i. Details of holding and subsidiary companies, if any;

j. Details of legal cases filed by or against the company; and

k. Any other information which the Tribunal may direct or the Company

Liquidator may consider necessary to include.

2. The company Liquidator shall include in his/her report the manner in

which the company was promoted or formed and whether in his/her

opinion any fraud has been committed by any person in its promotion or

formation or by any officer of the company in relation to the company

since the formation thereof and any other matters which, in his/her

opinion, it is desirable to bring to the notice of the Tribunal.

3. The Company Liquidator shall also make a report on the viability of the

business of the company or the steps which, in his opinion, are necessary

for maximizing the value of the assets of the company.

4. The Company Liquidator may also, if he/she thinks fit, make any further

report or reports.

5. Any person describing himself in writing to be a creditor or a contributory

of the company shall be entitled by himself/herself or by his/her agent at

all reasonable times to inspect the report submitted in accordance with

this section and take copies thereof of extracts therefrom on payment of

the prescribed fees.

ii. Voluntary winding up

Circumstances in which company may be wound up voluntarily:

A company may be wound up voluntarily,-

a. If the company in general meeting passes a resolution requiring the

company to be wound up voluntarily as a result of the expiry of the

period for its duration, if any, fixed by its articles or on the occurrence of

any event in respect of which the articles provide that the company

should be dissolved; or

b. If the company passes a special resolution that the company be wound

up voluntarily.

If the entrepreneur wishes to go back to the business, he/she needs to set

up a new business.

Liquidation provides little opportunity for the recovery of funds for creditors.

To petition for a company’s liquidation, creditors have to bear costs.

9.3 Bankruptcy

Check Your

Progress

9. Can you explain the

meaning of liquida-

tion?

Exit Strategies

157

NOTES

Business


Entrepreneurs wish to have a continued existence of their ventures.

However, some ventures fail due to one reason or the other. It is essential to know

the options for ending and salvaging a venture. This section deals with the issues

and decisions involved in ending the venture.

Bankruptcy is not always the end of a business. It does offer an opportunity

to an entrepreneur to reorganize or merge with another enterprise. However, in

several situations, the entrepreneur has to face liquidation of his/her venture.

However, it leaves behind many biases for the entrepreneurs and others. An

entrepreneur who has declared himself/ herself insolvent or bankrupt is not

considered trust worthy and creditworthy by the community, financing agencies

and suppliers. The financing agencies will not entertain his application for financial

assistance for his new venture at least for a certain duration of time.

Hence, it is always advisable for the entrepreneur to address the crises

areas, try to rehabilitate the venture by trying all options before declaring bankruptcy.

Here below are a few ways to avoiding bankruptcy.

Reorganization: Entrepreneur has to work on several fronts simultaneously.

It is procurement, processing, market, recovery of proceeds, human resource,

statutory obligation so on and so forth. It is not always possible to be proficient on

every front, which leads to crises. Problem can arise on any front any time. If the

entrepreneur has to survive and sustain the enterprise he/she has to identify the

problem and reorganize the structure to make it sustainable. This can work only

when one or two fronts out of ten are having crises due to its problems.

If it is human resource then it can be solved by either impressing on staff

the need to work with trust and wholeheartedly. He/she needs to use motivational

skills, offer incentives, improve the working conditions etc. to get them to see the

light or fire them with compensation and get new staff recruited for better work

culture and enhanced productivity. If the workforce has stayed with the enterprise

for a long period, their salary wage is disproportionately high vis-a-vis their

productivity due to regular increments;in such cases it is a better option to retire

them with compensation and appoint a fresh staff with better qualities on less

salary or wage.

If it is a procurement problem such as quality of material, delayed supply

of materials, untrustworthy supplier, inordinately high cost of material or logistic

then the structure can be reorganized by sourcing other suppliers, logistic services

without discontinuing the present suppliers for certain duration of time. It may

happen that the existing suppliers feel the heat and fall in line.

If it is processing problem, the entrepreneur can think of alternate

technology, material, process or process flow. This is needed to be done with the

help of experts in the field. Entrepreneur can think of changing or adding the

product(s) which can be produced with the same installation. He/she can think of

changing the packaging or adding a few more features for value addition.

If it is a finance problem, the financing agencies are prepared to reorganize

the loans; creditors are ready to permit the entrepreneur for delayed payments.

This can happen only when other fronts such as production and marketing are

doing well and they envisage their loans and credits are safe. This re-organisation

of finance is considered if the entrepreneur sustains loss due to a situation which

is beyond his/ her control such as market fluctuation, government decisions etc.

Financing agencies also entertain one time settlement proposals under

which a few concessions are given. One time settlement amount also can be paid

Exit Strategies

158

NOTES

Business


in installments spread over a period of time with concessional rate of interest on

the outstanding loans.

Extended Time Payment Plans: If the entrepreneur defaults on repayment

of loans to the financing agencies or payment to creditors he/she can ask for re-

schedulement of the same with a concrete plan. Such a situation arises when the

sale proceeds are delayed and book debts go high beyond normal level. Enterprise

may offer cash discount for speedy recovery to ensure payment to financing

agencies and creditors.

Liquidation: Entrepreneur can think of salvaging or putting to more

remunerative use surplus assets such as land, building, machinery or material.

Land and building can be sold or given on rent, machinery can be rented out on

hour-rate basis and the surplus inventory can be salvaged to raise the required

funds for sustaining. This is partial liquidation of assets without hampering the

basic performance and helps a lot.

Business Turnarounds: It is seen that a truly motivated and committed

entrepreneur with whatever situation the enterprise is can get it out of crises with

sustained efforts and strategies. Taking a finance partner, technocrat partner, going

in for ESOP option, adding value added products to or removing loss making

products from the range of products, pumping in funds, reducing the debts by

partial liquidation of assets, strengthening marketing network, cutting costs on

production floor and in market are a few of many ways to avoid debt trap and

financial crises which leads to being bankrupt. It is a result of innovative ideas in

the areas of crises the entrepreneur implements can bear result and turnaround of

enterprise.

9.4 Summary

An entrepreneur has to plan and decide an exit strategy at the time of

startup stage. Some enterprises tend to exit very early in their life span whereas

some enterprise exit over a longer period of time. Exit may be viewed by

entrepreneurs as an opportunity for wealth generation. Through exits, investors

such as venture capitalists, angels etc reap the return on their investment. They

get an opportunity to liquidate their investments. Serial entrepreneurs convert their

dream into reality and when they take up their dream venture up to a certain level,

they typically move on to the next challenge. Exit is an opportunity for them to

create wealth, hand over the venture to professionals and continue the search for

new prospects. Some entrepreneurs are not comfortable with a growing organization

beyond a particular level because of different challenges involved with growth. So

they opt for exit. For some ventures the future do not seem to be attractive. And

the entrepreneur is in favour of harvesting the potential of the business.

Entrepreneurs have a limited time span. Therefore, there is a need of

planning for the future of the enterprise and management succession. An

entrepreneur can consider different strategies for harvesting or exiting such as:

passing the business to a family member, selling the business including a

management buyout or a leveraged buyout, going public i.e. initial public offering

(IPO), or dissolving the business. There are advantages as well as limitations

associated with different exit strategies. With involvement of a family member,

integrity and continuity of the business is maintained. Family may not be interested

in the business. Engaging a family member in the business may be harmful for

relationships. The option of sale of business is beneficial during recession or

Check Your

Progress


turnaround?

Exit Strategies

159

NOTES

Business


depression. However, value negotiation has to be properly managed. There is no

assurance about the brand or idea integrity. It may not protect the interests of the

employees. An entrepreneur may also plan to retain a business for only a specified

period of time with an intention to sell it to employees. This may involve all

employees through an employee stock option plan or through a management buyout

which allows only few managers of the business to buy.IPO is an attractive source

of financing which creates liquidity. It involves prestige. But it is an expensive

process. It results in dilution of ownership. It generates additional responsibility

towards shareholders. There is a pressure to meet earnings per share. There is a

need for regular scrutiny. Dissolving the business is the most undesirable and the

least financially attractive exit strategy. However, the entrepreneur can pursue

any new activity of his/her choice. Sometimes the entrepreneur may have to take

a painful decision to wind up the enterprise. The decision is inevitable in several

cases. When the entrepreneur is unable to pay attention to manage the business

operations, it leads to liquidation or bankruptcy. Bankruptcy is not always the end

of a business. It does offer an opportunity to an entrepreneur to reorganize or

merge with another enterprise. However, in several situations, the entrepreneur

has to face liquidation of his/her venture.

While planning an exit, the entrepreneur has to maintain transparency.

He/she has to communicate the concerned stakeholders about the possibility of

exit. Employees, partners, vendors, investors, customers, clients should know in

advance about the probable exit plan. The entrepreneur should be prepared to

cope up with challenges arising through the process of exit and after the process

of exit is over. He/she should the plan the process in such a manner as to protect

the image of the enterprise.

9.5 Key Terms

• Exit: A way out; Point at which an investor (usually a venture capitalist)

sells his or her stake in an enterprise to realize his /her gains (or losses).

Generally it is a move planned at the time of investment decision and

may also be included in the firm’s overall plan.

• Exit strategy: Plannedexit of an owner from his/her business which

maximize benefit and/or minimize damage; a way of ‘cashing out’ an

investment


Questions

1. What do you mean by ‘going public’? What are the advantages and

disadvantages of going public?

2. Why is going public a popular option for growth of a successful small

enterprise? What are the challenges involved in going for an IPO?

3. What advice would you give to an entrepreneur planning to handover

control to a family member?

4. What are the typical signs of a venture approaching bankruptcy?

Exit Strategies

160

NOTES

Business


5. Under what circumstances will you take a decision to sell your business

that you have started?

6. Under what conditions will you not go public?

7. What are the reasons that would lead an entrepreneur to consider exiting

the enterprise? What are the possible exit routes?

8. Write in detail about different exit strategies available to an entrepreneur.

Exercise

Activity 8.1

Contact at least three entrepreneurs about their plans for passing their

ventures on to the next generation.


1. Which one of the following is not an advantage of going public?

i. Enhanced ability to borrow

ii. Liquidity and Valuation

iii. Disclosure of information

iv. Prestige

2. Which one of the following is not a disadvantage of going public?

i. Loss of control

ii. Enhanced ability to raise equity

iii. Expensive

iv. Pressures to maintain growth

3. Entrepreneurs think of exits due to the following reason

i. Wealth creation

ii. Lack of future prospects

iii. Both i and ii


4. Exit communication is critical to all except –

i. Bank

ii. Employees

iii. Competitors

iv. Investors

5. While going for IPO, the following factor is to be considered

i. The time of exit

ii. The economic situation

Exit Strategies

161

NOTES

Business


iii. The sentiment on the trading markets

iv. All the above

6. An exit benefits all of the below mentioned group directly except

i. Entrepreneur

ii. Financial investors

iii. Employee ESOP

iv. Strategic vendors


i. Going to the public is a sign of growth for the entrepreneur

ii. The procedure for going to the public is tedious and complicated

iii. The procedure for going to the public is time consuming and

expensive

iv. A number of formalities are required before being allowed to go

public

Answers

Check Your Progress

8. Initial Public Offering

Multiple Choice Questions Exercise

1. iii

2. ii

3. iii

4. iii

5. iv

6. iii

7. i

9.7 Further Reading



http://finmin.nic.in/reports/DraftInsolvencyBankruptcyBil2015.pdf


Entrepreneurship, PHI Learning Private Limited, New Delhi, 2010

Shankar Raj. Entrepreneurship Theory and Practice, Vijay Nicole Imprints

Private Limited Chennai, 2012

Exit Strategies

162

NOTES

Business


UNIT 10: NETWORKING

Structure

10.0 Introduction

10.1 Unit Objectives

10.2 Meaning of Networking

10.3 Benefits of Networking

10.4 Entrepreneurs’ Networks

10.5 Summary

10.6 Key Terms



Appendix I

Appendix II

10.0 Introduction

“Coming together is a beginning, staying together is progress, and

working together is success” – Henry Ford

This unit presents the role and importance of personal and social human

network in entrepreneurial success. Successful entrepreneurs possess the ability

to network. They know how to network effectively. It is more than meeting people.

It is a plan to be in contact with the people who may do business with you and

develop relationships with them.

Networking must be focused and strategic. Entrepreneurs are required to

be proactive. They make a networking plan, commit to it, imbibe networking skills

and then execute the plan. Networking plan takes care of several issues in a

systematic manner such as the objectives of networking, the target individuals and

organizations to be contacted for business purposes, image building.



• Know the meaning of networking

• Realize the benefits of networking

• Be aware about various networking forums for entrepreneurs

Networking

163

NOTES

Business


• Appreciate good networking practices

10.2 Networking

Networking is simply interacting with people and entering into numerous

transactions for mutual benefit. It is the process of developing relationships with

the stakeholders i.e. with people and organizations with an eye on getting the

things done.

Networks can be personal or social. Personal network comprises of family

members, friends, relatives. Social network is one level ahead of the personal

network which outspreads beyond the personal contacts to comprise of business

associates, partners, suppliers, customers, vendors, investors, debtors, creditors,

consultants, advisors, experts, professionals etc.

According to Raj Shankar, Networking is defined as the process of

identifying, aligning, engaging, adding value thereby creating and sustaining

relationships.

According to Hubert Osterle, Elgar Fleisch, Rainer Alt, networking is a

socioeconomic business activity by which businesspeople and entrepreneurs meet

to form business relationships and to recognize, create, or act upon business

opportunities, share information, and seek potential partners for ventures.

In Business Dictionary, networking is defined as creating a group of

acquaintances and associates and keeping it active through regular communication

for mutual benefit. Networking is based on the question “How can I help?” and

not with “What can I get?”

As per Wikipedia, in business, entrepreneurial networks are social

organizations offering different types of resources to start or improve entrepreneurial

projects. Having adequate human resources is a key factor for entrepreneurial

achievements.

According to Merriam-Webster.com, networking is the exchange of

information or services among individuals, groups, or institutions; specifically: the

cultivation of productive relationships for employment or business.

In the words of Susan Ward, “business networking is the process of

establishing a mutually beneficial relationship with other people and potential clients

and/or customers. The primary purpose of business networking is to tell others

about your business and hopefully turn them into customers”.

Networking is a business activity by which entrepreneurs, businessmen

meet to form mutually beneficial business relationships. A business network is a

system to reach markets. It is an effective method to reach target customers. It is

possible to approach opinion leaders, decision makers through business networking

whichotherwise is very difficult through any other means or through conventional

advertising and promotion.

Networking can also be considered as a marketing technique. It becomes

more effective with personal contacts, referrals, and recommendations. Very

conveniently business opportunities can be developed though business networking.

Business networking can be considered as a low-cost marketing technique for

developing contacts, relationships and sales opportunities. There is sharing of

information. Also these networks recognize, create and act upon business

Check Your

Progress

1. What is meant by

networking?

2. Can you define net-

working in your own

words?

Networking

164

NOTES

Business


opportunities. Possibilities of strategic alliances, partnerships, joint ventures and

the like are facilitated by such type of business networks.

The members in such type of networks meet regularly. Either they conduct

face-to-face meetings, gatherings or may contact through phones, e-mails etc.

Networking is commonly done at business or community events. It is usually

organized by business networking groups or organizations. These events may be

arranged on a local or national level. Networking is also done virtually with the

help of online networking sites. This option is low cost and has the added advantage

of local as well as worldwide contact. The networking eventsare usually planned

around different activities. The members are given opportunities to meet and

interact with the other networkers either before the activity or after the activity is

over. Such interactions prove fruitful for building long lasting business relationships

with free sharing of ideas, thoughts and knowledge details.

Nowadays, there is a popularity of online social and business networking

websites such as WhatsApp, Facebook, LinkedIn, Twitter, My Space, You Tube,

Flickr, blogs, wikis etc. Various online social networking sites have become popular.

These sites are useful for entrepreneurs to create networks and increase new

personal contacts. There are various online newsletters of businesses, industry

associations from which entrepreneurs can get latest information and updates

about conferences, events, and opportunities.

Person-to person interaction is just indispensable. Wherever possible face-

to-face network be should be adopted. However, we should not overlook the

effectiveness and convenience of social media platforms for the sake of

communicating with business contacts.

The networks support entrepreneurs by facilitating business operations

by extending favours and using influences. It is not about the use of social medium,

web or internet only. But it is about the use of personal human network of an

entrepreneur that plays a vital role in his/her life.

Business networking can be conducted at a local level, or at a regional

level, national level or international level. There are several places or forums wherein

networking activities can be initiated. An entrepreneur can begin the networking

efforts with his/her own schools, colleges, universities, institutions in which he/she

has past association of some kind. It is easy to begin development of professional

relationships with people and places of previous acquaintance for developing

confidence. One or more family members/friends may be good at networking.

People contact them for dissemination of some important information. They look

upon the networkers as a channel for passing on information or for seeking

assistance of any kind. Such types of networkers maintain relationship not for

immediate personal gain. They work for something beyond their personal interests

and benefits.

Customers are a good starting point for networking. When you are beginning

to build relationships with known members, it is always easier to extend those

relationships in future also. Along with customers, potential customers also would

develop favourable impressions about the entrepreneurs and thereby become a

part of network.

Peer community i.e. the industry in which the entrepreneurs operate

presents another important networking opportunity for entrepreneurs. The other

players in the industry become aware about the entrepreneurs’ existence and

presence. And entrepreneurs know what the others are doing. This enables

availability of interesting and meaningful information about the competitors. Of

Networking

165

NOTES

Business


course there is a risk of disclosure of new business ideas and business practices to

the competitors. However, interactions with other industry players i.e. co-partners,

co-founders, key personnel, core team members and the like may prove fruitful

from strategic perspective. Entrepreneurs may pick up promising employees,

strategic partners and associates through such networks.

Entrepreneurs can find networking opportunities on the basis of their age,

hobbies, interests, lifestyles and the like. Such type of lifestyle groups meet

frequently. They share their experiences, interests, problems as well as

achievements. Then there are numerous opportunities for developing networks on

the basis of common interests based on some subjects, activities, philosophies etc.

Also several networks are developed out of the need to serve the society, to fulfill

certain needs etc. Such kind of common purpose groups also are not uncommon.

There are several different ways, places and means to build networks. It

is always advisable to be in touch with as many relevant networks as possible on

the basis of pre-decided networking objectives and avail the advantages for taking

the business to the higher levels.

10.3 Benefits of Networking

By learning more and more about networking systematically, an

entrepreneur consciously builds networks and seeks success out of that. It is a

skill and it can be learnt and practiced. It requires many traits such as patience,

genuineness, honesty, empathy, social responsibility and the like. It can be acquired

if there is a will. No one is born as a natural networker. But everyone definitely

can become one.

Networking increases visibility of the entrepreneurs. They get noticed for

their work and their contribution to the society through regular contact by means

of the networking opportunities. They can build their image in the manner in which

they wish by ensuring regular attendance to business and social events.Regular

interaction with optimistic and dynamic entrepreneurs improves the motivation

level and raises morale of the networkers. Sharing of experience as well as

knowledge is one more advantage which networkers seek.

Networking helps entrepreneurs for setting up a new venture or grows an

existing business. Through networking, networkers can become aware about new

opportunities. It is an inexpensive way to promote and increase business. This is

basically the prime reason for participation in networking activities and therefore

entrepreneurs choose to seek membership of different networking groups.

All the networkers are motivated to help others. Obviously tremendous

opportunities are thrown open through a huge business network. It is also helpful

for finding customers, suppliers, business partners, investors. Also, it is advantageous

to seek client leads, to tap the probabilities of partnerships as well as joint ventures,

to find the chances of sales of assets or the business venture. The services of

accountants, lawyers and other professionals can be hired with recommendations

of other networkers. It is very much convenient to fulfill the needs of equity financing

by finding venture capitalists, accelerators, angel investors through networking

channels.

Entrepreneurs tell others about their ventures and gain new clients.

Networking is a way to build a sustainable business. Due to familiarity with the

Check Your

Progress

2. Where should you

network?

Check whether the fol-


3. Networking is

based on the question

“How can I help?”

and not with “What

can I get?”

Networking

166

NOTES

Business


networkers, there is an assurance that the opportunities match with the

entrepreneurs’ vision and goals.

Business networking is a cost-effective way of increasing awareness about a

particular business and enhancing the scope of market as well as number of customers.

Entrepreneurs get many referrals through networking. The important thing is these

referrals can be turned into clients with proper follow-up. Since they are suggested by

acquaintances, these referrals are of high quality. It also contributes to increase in

sales, and income. This method requires comparatively low-cost in comparison with

advertising, public relations etc.being based on personal contacts and relationships.

Networks are very much helpful for sharing information of various types.

They are also useful for exchanging business leads.Through networking,

entrepreneurs may come across numerous attractive business opportunities. They

can find investors, business partners, new suppliers, new customers through

networks. Effective business networking connects individuals and organizations

together. With continued relationships, trust builds up among the members.

Networking makes referrals to other members and increases business significantly.

It provides exposure to numerous business professionals. All the members help

each other. They serve as walking advertisements for each other. Some

entrepreneurs are recognized as a strong resource and they often are approached

for queries regarding ideas, suggestions, names etc.

Majority of the people prefer to enter into transactions with the people they

know or who are known to those they know. For becoming known and developing

some kind of trust is not an easy time. It requires hard work, time, energy, relentless

efforts and what not. Networking is a device with which you can interact with known

people and your chances of being known to many increases manifold. It is the most

proficient, fruitful and enduring way to build relationships and enhance effectiveness.

Human being by nature is a social being. Everyone is a networker in his/

her own way. Everyone strives for friendship, association, community. We are

talking about business networking. While developing professional associations,

personal friendships also get developed.Since all those who have common interest,

such types of like-minded persons meet regularly. The networkers can get advice

also even for personal matters from the other networkers.

Entrepreneurs get to know about several success stories of entrepreneurial

ventures through networking. They get an opportunity to learn from the success

of others.

Networking enables entrepreneurs to come across numerous influential

people who otherwise may not be accessible to them. Several times, entrepreneurs

experience that, ‘it’s not what you know, but who you know’. This holds valid for

their businesses. Ultimately, what matters is not ‘who you know but who knows

you’. Networking offers several such sources of contacts and links to be in touch

with big shots. Along with the networkers, entrepreneurs add networkers’

networkers also in their own network. And with that, the extent of advice and

expertise to be availed by the entrepreneur networkers increases manifold.

Networking is an effective technique for solving various types of business

problems and critical issues. At the same time, those who provide the solutions get

the pleasure of helping others. Networking enables entrepreneurs to help others

and also seek help from others. Those who seek help and those who offer help

both increase their confidence.

Check Your

Progress

4. Write down few ad-

vantages of network-

ing.

5. Do you find any dis-

advantages of net-

working?

Check whether the fol-


6. No one is born as a

natural networker. But

everyone can defi-

nitely become one.

7. Networking is a skill

and it can be learnt and

practiced

Networking

167

NOTES

Business


10.4 Entrepreneurs’ Networks

There are some associations which are specifically formed for the purpose

of stimulating the spirit of entrepreneurship; and supporting the budding as well as

successful, well-settled and established entrepreneurs. These associations provide

a platform where entrepreneurs come in contact with each other and freely seek

guidance, advice as well as provide support to each other. A representative, and

not exhaustive, list of entrepreneurs’ networks is given below:

1. Entrepreneurs’ Organization (EO):

https://www.eonetwork.org/

The Entrepreneurs’ organization (EO), the peer-to-peer network

exclusively for entrepreneurs, is founded in 1987. It enables entrepreneurs

to learn and grow from each other leading to greater business success

and an enriched personal life. It is a global business network of 11,000+

leading entrepreneurs in 157 chapters and 48 countries. It educates,

transforms, inspires, and offers valuable resources in the form of global

events, leadership development programmes, an online entrepreneur

forum and executive education opportunities and the like.

2. The Indus Entrepreneurs (TiE):

www.tie.org

The Indus Entrepreneurs (TiE), was founded in 1992 in Silicon Valley by

a group of successful entrepreneurs, corporate executives and senior

professionals with roots in the Indus region. There are 13,000 members,

including over 2,500 charter members in 61 chapters across 18 countries.

TiE’s mission is to foster entrepreneurship globally through mentoring

networking, education incubating and funding. TiE influenced liberalization

of key economic sectors in India and Pakistan. It has significant

involvement in social entrepreneurship.

3. LinkedIn:

www.linkedin.com

LinkedIn, a business-oriented social networking service, launched in 2003.

A useful website for those who want to network with like-minded

individuals or those who search for jobs, or wish to set up an enterprise.

This professional network allows entrepreneurs to be introduced and

collaborate with other professionals. This website offers many resources

for entrepreneurs. They can discover and catch right business

opportunities; search for service providers, partners. With proper branding,

entrepreneurs come across appropriate business opportunities

4. Trepup:

www.trepup.com

Founded by John Verbic, who, along with Rahul Dhingra, developed the

first concept beta for TrepUp in 2012.trepup claims to be a trusted

community of 551,239 businesses. Entrepreneurs can browse global

business directory, search for products, updates, reviews; discover

businesses that for their usual and unusual needs.

5. National Entrepreneurship Network (NEN):

Networking

168

NOTES

Business


www.nenglobal.org

National Entrepreneurship Network (NEN), founded in 2003 by

Wadhwani Foundation with a mission to inspire, educate and support

high-growth entrepreneurs and SMEs as a catalyst for creating millions

of high-value jobs through programmes like learning, mentor and investor

networks, workshops, experiential programmes, reward and recognition

platforms, e-marketplace, financing growth, incubators, accelerators,

domestic and international expansions.

Skill Development Network (SDN):

Skill Development Network (SDN) is established in 2011, aims to leverage

technology and provide vocational education and training to millions of

youth in high-demand job roles leading to entry-level mid-skills jobs

Opportunity Network for Disabled (OND):

Opportunity Network for Disabled (OND) aims to mainstream the

educated disabled in sustainable high-quality corporate jobs through a

business value proposition with the help of NGO partnerships, employers

and content and educational institutes.

Research and Innovation Network (RIN):

Research and Innovation Network (RIN) offers role model programmes

in partnership with existing research institutions government and industry.

6. SNEHA (Society for Networking, Empowerment & Holistic Action)

Foundation:

www.snehafoundation.in

Sneha is a registered non-governmental and non-political organization which

runs all types of social welfare projects with focus on educational programmes

i.e. professional and vocational training course under Entrepreneurship

Development Programme, Rural Development Programme

7. Business Networking and Referrals (BNI):

www.bni.com

Business Networking and Referrals (BNI), founded by Dr. Ivan Misner,

is a business and professional networking, referrals and word of mouth

marketing organization built upon the idea of ‘Givers Gain’ with a mission

‘to help members increase their business through a structured, positive,

and professional ‘word-of-mouth’ programmes that enable them to

develop long-term, meaningful relationships with quality business

professionals

8. Indian entrepreneur:

www.indianentrepreneur.com

Indian entrepreneur is an online publication and community that is focused

on showcasing some of the best startups and entrepreneurs from India.

It is founded by Manish Singh.

9. Headstart Network Foundation

Networking

169

NOTES

Business


www.headstart.in

Headstart Network Foundation

10. Google Small Business

https://plus.google.com/+GoogleBusiness

Google for Business is an official page for businesses using Google to

connect with people. This page is created to help business people to

make the most of the web, as a place to bring useful information and

access to industry events.

Google Small Business Community connect entrepreneurs with peers and

experts both inside and outside of Google ready to share advice and support.

11. Entrepreneur India

https://www.entrepreneur.com

12. Entrepreneur Network

http://www.entrepreneurnetwork.com/

Entrepreneur Network is a premium video network providing

entertainment, education and inspiration from passionate thought leaders

to the millions of entrepreneurs seeking actionable, entertaining content.

Entrepreneur Network publishes to Entrepreneur.com and to millions of

fans on YouTube and Facebook.

13. Cofounder

www.cofounder.co

Cofounder.co is a new innovative partnership to help startups and

entrepreneurs reach their full potential in the Bay Area. It is a group of

experienced partners with founder/CEO and investor experience (Raj

Kapoor is the first founding partner – others are added later) that works

very closely with a few tech startups mostly in the internet and mobile

for consumer/small business/enterprise sector that either reside the Bay

area or want to relocate here. A partner joins the company as a cofounder

at the earliest stages (either at founding or sometime before funding)

and spends the equivalent of one day a week (so they only partner with

4-5 startups at any time) helping in all areas of the company including

financing recruiting, strategy, product development, and mentoring the

CEOs. It’s a much deeper and focused involvement than most angels,

advisors and accelerators and for a longer period of time (several years).

Cofounder.co is a community for entrepreneurs, programmers, designers,

investors, and other individuals involved with starting new ventures.

Comprises of idea makers, entrepreneurs, programmers, web designers,

investors, freelancers and executives. It is a strictly private network.

Without registration for an account, no one can have an access to the

profiles of members. Membership requires a valid university or work

email address. You have to sign up, then specify your abilities and the

people you want to network with and then post your ideas on the bulletin

board or in the forum

14. E.Factor

Networking

170

NOTES

Business


www.efactor.com

E-factor is an online community and virtual marketplace of more than

1.9 million designed for entrepreneurs, by entrepreneurs. It enables

entrepreneurs to connect with fellow entrepreneurs to around the world

and give them the proven tools to help grow their business. It offers

resources and tools such as accounting, advertising, banking, business

consultancy, catering, coaching, coffee services, corporate responsibility,

education, event management, factoring, funding, graphic design, ICT,

ICT supplies, insurance, legal, meeting space, notary, office space, security,

social media, team building and web design.

15. Ecademy

http://www.ecademy.com

https://www.linkedin.com/company/ecademy

Ecademy is a membership organization for entrepreneurs and business

owners who belong to a community that connects, supports and transacts

with one another. It provides a platform for businesses to learn, network

and develop and a peer to peer knowledge exchange through blogging

and boardroom events. It is apremier online business network for creating

contacts and sharing knowledge and to keep up to date with networking

and social media skills.

https://www.linkedin.com/groups/1158547/profile

Ecademy is a business social network of employees partners, suppliers

and customers which is concerned with trusted business introductions,

referrals and trading; advertising for business across the globe; contacts,

knowledge, support and transactions.

16. Networking for Professionals

https://www.networkingforprofessionals.com

Networking for Professionals is a business network that combines online

business networking and real-life events. It is founded in New York city

in 2002 with branches in many cities now.

17. Heart Link Women’s Network for women entrepreneurs

www.theheartlinknetwork.com

The Hear Link Network is founded by Dawn Billings. It is dedicated to

encouraging and empowering women small business professionals which

provides safe intimate, non-threatening, women-only business networking

opportunities for professional women. It is dedicated to showcasing

advertising, enriching and empowering professional women in business.

18. PerfectBusiness

www.perfectbusiness.com

Perfect Business is a network of entrepreneurs, investors, and business

experts that encourage entrepreneurship and mutual success. It

introduces entrepreneurs to new business contacts and answer their

questions. It also provides professional business planning software, startup

resources and inspiring interviews with leading entrepreneurs. Services

Networking

171

NOTES

Business


include exclusive offers from VirginMoney, LegalZoom, Entrepreneur

magazine and other strategic partners. It provides everything needed to

launch and grow a business, including educational videos, articles, events,

business plan software, and access to experts and investors.

19. Plaxo

https://www.plaxo.com

Plaxo is an enhanced online address book tool for networking and staying

in contact which stores over 50 million address books with 3.7 billion

contacts. The users can export their data using popular standards such

as Outlook (CSV) and vCard (VCF).

20. Ryze

https://www.ryze.com

Ryze is a business networking community, founded by Adrian Scott, which

allows users to make connections and build their networks, make quality

business contacts. It enables the users to get practical advice, tips and

resources from the field professionals, and make deals though Ryze

members. There are more than 5, 00,000 Ryze members in more than

200 countries. The basic membership is free and there are paid

subscriptions for advanced features like contacting distantly-connected

members for a few dollars a month.

21. StartupNation

https://startupnation.com

StartupNation, founded in 2002 by Jeff and Rich Sloan, is a community

focused on the exchange of ideas between entrepreneurs and aspiring

business owners. It has inspired, educated and attracted entrepreneurs

and small business owners from Main Street America.

22. Upspring

www.upspring.com

Upspring is a social networking site for promotion and social

networking that enable businesses to attract, grow, and monetize their

audience, prospects and customers.

23. Xing

https://www.xing.com

Xing is a European business network in German-speaking countries

with more than 10 million members worldwide.

24. Viadeo

www.viadeo.com

www.corporate.viadeo.com

Viadeo is a professional social network in France. It has 200

employees spread across four cities: Casablanca, Moscow, Paris, and

San Francisco.

Networking

172

NOTES

Business


25. Cmypitch.com

www.cmypitch.com

cmypitch.com is a business website for UK entrepreneurs to get quotes,

advice etc.

26. Yammer

https://www.yammer.com

A private social network that helps employees collaborate across

departments, locations and business apps. Yammer provides a simple

way to collaborate, share knowledge, and engage everyone across the

company

27. Anoox

https://www.anoox.com

Anoox is a not-for-profit social networking based search engine and

news.

28. The Entrepreneurs Network (ten)

www.tenentrepreneurs.org

The Entrepreneurs Network (ten) is a think tank for ambitious owners

of Britain’s fastest growing businesses and aspirational entrepreneurs;

housed in Adam Smith Institute with the support of Octopus Investments

29. Jumpstart Entrepreneurial Network

www.jumpstartnetwork.org

Jumpstart Entrepreneurial Network is a connected group of

entrepreneurial support organizations which offer the resources suchas

capital, space advice and connections to tech-based entrepreneurs. Works

for accelerators, incubators, startups, angel funds and other organizations

dedicated to fostering entrepreneurship across the 21 countries of

Northeast Ohio. By working together, these organizations provide a

comprehensive continuum of resources and support for startups and

their diverse entrepreneurs.

It is supported in part by Ohio Third Frontier Network partners collaborate

to help entrepreneurs grow early stage companies in Northeast Ohio.

30. Global Entrepreneurship Network (GEN)

www.wearegen.co

Global Entrepreneurship Network (GEN) is aimed at creating one global

entrepreneurial ecosystem, GEN helps people in 160 countries to unleash

their ideas and turn them into promising new ventures with the following

programmes:

Global Entrepreneurship Week – www.wearegen.co/gew

Global Business Angels Network – gban.co

Startup Experience – www.startupexperince.com

Networking

173

NOTES

Business


Global Enterprise Registration – ger.co

Global Entrepreneurship Library - www.unleashingideas.org

Startup Open – www.wearegen.co/startupopen

GEN Starters Club – www.wearegen.co/gen-starters-club

Startup Compete – www.startupcompete.co

Global Entrepreneurship Research Network – www.gern.co

Startup Nations – www.startupnation.co

Useful because of the focus on content which is neglected by most

social networks such as articles, forums, blogs on-demand seminars,

and podcasts

Global Entrepreneurship Index – www.thegedi.org

Compass Report

Global Entrepreneurship Congress - www.gec.co

31. Perfect Business

www.perfectbusiness.com

PerfectBusiness is a network of thousands of entrepreneurs, experts

and investors from a variety of industries wherein entrepreneurs can

find potential business partners, potential clients and advisers. It provides

professional business planning software startup resources and inspiring

interviews with leading entrepreneurs. Services include exclusive offers

from VirginMoney, LegalZoom Entrepreneur magazine and other

strategic partners.

32. The Funded

www.thefundedcom

This is an online community, founded in 2007 by Adeo Ressi, comprising

of over 20,000 CEOs, Founders and entrepreneurs to discuss fundraising,

rate and review angel investors and venture capitalists, and discuss

strategies to grow a startup business. The entrepreneurs who research,

rate and review funding sources worldwide.This is a review website in

which users can post anonymous ratings and reviews of venture capital

investment firms. They can discuss the functioning of enterprises and

their operations. The member entrepreneurs can view facts, reviews

and commentary on funding resources. They can access detailed fund

profiles with specialty, reference investments, and investment criteria.

33. Founder Dating

www.founderdating.com

Founder Dating is a network of talented entrepreneurs which provides

access to world-class advisors regarding entrepreneurial problems.

34. New Jersey Entrepreneurial Network (njen)

www.jjen.org

Networking

174

NOTES

Business


The New Jersey Entrepreneurial Network (njen) is a non-profit

organization providing educational and informational services to

entrepreneurs, investors, persons in related fields and the public in general.

The meetings are attended by a select group of entrepreneurs, company

executives, venture capitalists, and professional service providers.

35. Dartmouth Entrepreneurial Network (DEN)

www.den.dartmouth.edu

DEN fosters and promotes entrepreneurship among students, faculty,

clinicians, researchers, staff, alumni, and community members from all

schools at Dartmouth the Dartmouth-Hitchcock Medical Center, the

Dartmouth Regional Technology Centre. It includes 45,000 people and

14 chapter cities, courses, workshops, speaker series, startup

competitions, and networking activities. The network offers a wide range

of services to the Dartmouth community from strategic advice, to one-

on-one mentoring, to educational programmes, to networking

opportunities, to infrastructure, and office and lab space. Since Jan. 2001,

the office has provided support for over 400 projects and companies.

36. Young Entrepreneur Council (YEC)

https://yec.co

YEC, founded by Scott Gerber, is an invite-only nonprofit organization

comprised of the most promising young entrepreneurs. It promotes

entrepreneurship as a solution to youth unemployment and

underemployment and provides its members with access to tools,

mentorship, and resources that support each stage of development and

growth of business. The members avail the benefits: thousands of travel

discounts, 24/7 peer support forums, members-only web and mobile

dashboards, media exposure and content syndication, trusted, vetted peer

community, high-touch support, access to affordable healthcare options,

access to thousands of workspaces, free personal website and custom

reputation plan, virtual speaker series and webinars, volume discounts

and expense optimization, private events at conferences and tradeshows.

37. Barrie Entrepreneur’s Connect

www.barrie.entrepreneursconnect.ca

Barrie Entrepreneur’s Connect is a portal for aspiring and accomplished

entrepreneurs to access required resources and information as well as

network with other entrepreneurs

38. Quora

https://www.quora.com

Quora connects people who have knowledge to the people who need it. It

brings people with different perspectives together so that they can understand

each other better; and empowers everyone to share their knowledge for

the betterment of all. You can ask questions at Quora and get answers.

39. About.Me

https://about.me

Networking

175

NOTES

Business


About.me is a social directory.It is founded by Ryan Freitas, Tony Conrad

and Tim Young. It is an online platform enabling users to create and

maintain a curated page for self-expression

www.aboutme.com

40. Twitter

https://twitter.com

Twitter is an online social networking, created by Jack Dorsey, Evan

Willioams, Biz Stone and Noah Glass in 2006, in which registered users

send and read short 140-character ‘tweets’ while unregistered users

can only read them.

41. Facebook

http://www.facebook.com

Facebook is an online social networking service, launched by Mark

Zuckerberg, that enables its users to connect with friends and family as

well as make new connection. The users can create a profile, update

information, add images, send friend requests, and accept requests from

other users, exchange messages, post status updates and photos, share

videos, use various apps, and receive notifications when others update

their profiles. Users can join common-interest groups

42. Under30CEO

www.under30ceo

Informative business articles and fantastic interviews with high level

entrepreneurs

Blogging and commenting on bogs is just as much of a social network.

Active members, who frequently comment on blogs become well-known.

Meaningful relationship get developed among the bloggers and peers in

various groups.

43. WeMedia.com

www.wemedia,com

This is an organization which deals with online networking, physical

conferences and start-up cash for entrepreneurs. They provide tips for

entrepreneurs on their website and their staff provide advice on building the

business. They are very keen on providing resources, guidance and capital.

85Broads

This community connects and empowers women from more than 90

countries around the world.

44. Yo! Success

www.yosuccess.com

Yo! Success is an initiative to build a community of entrepreneurs, startups

and industry stalwarts to celebrate success and to learn from shortfalls.

The mottos is ‘Contribute, Inspire and Embellish Entrepreneurship’. It is

Networking

176

NOTES

Business


a community of entrepreneurs who implement a pioneering idea, build

new technology, develop a unique business model and the like.

45. Yunus Social Business

http://www.yunussb.com/

Yunus Social Business – Global Initiatives (YSB) grows entrepreneurs

in emerging economies to solve problems of poverty in a business way.

It is active in several countries where local country teams source, coach

and mentor entrepreneurs through tailored accelerator programmes. YSB

subsequently finances the most promising social businesses and also

provides long-term support to maximize impact

46. Ashoka India

www.India.ashoka.org

Ashoka, founded by Bill Drayton in 1980, is an international networks of

social entrepreneurs worldwide, with over 3,000 Ashoka Fellows in 70

countries. In India, Ashoka has over 350 fellows. Ashoka’s mission is to

enable an “Everyone a Changemaker” world.Ashoka in India focuses

on core areas: Changemaker schools- a global networked to identify,

connect and support innovative schools around the world; Full economic

citizenship – Housing for All initiative in which businesses and social

organizations collaborate; Health and nutrition initiative – to enable schools

to improve the nutrition of communities; Lum Stic – a product suite to

enable positive societal change in a methodical way through a ‘data

ecosystem’; and Youth venture – an ecosystem to support youth to

connect the key stakeholders in the society.

47. Swedish Entrepreneurship Forum

www.entreprenorskapforum.se

Swedish Entrepreneurship Forum is a leading Swedish network

organization which generates and transfers policy relevant research in

entrepreneurship and small enterprise development. It initiates and

disseminates research relevant to policy in the fields of entrepreneurship,

innovation and SME. It offers entrepreneurship researchers a form for

idea sharing, to build national and international networks in the field and

to bridge the gap between research and practical application.

10.5 Summary

Entrepreneurs network effectively. Successful entrepreneurs possess the

ability to network. It is more than meeting people. It is a plan to be in contact with

the people who may do business with you and develop relationships with them.

Networks can be personal or social. Personal network comprises of family

members, friends, relatives. Social network is one level ahead of the personal

network which outspreads beyond the personal contacts to comprise of business

associates, partners, suppliers, customers, vendors, investors, debtors, creditors,

consultants, advisors, experts, professionals etc.

Networking

177

NOTES

Business


Business networking can be conducted at a local level, or at a regional

level, national level or international level. There are several different ways, places

and means to build networks. It is always advisable to be in touch with as many

relevant networks as possible on the basis of pre-decided networking objectives

and avail the advantages for taking the business to the higher levels.

Networking increases visibility of the entrepreneurs. They get noticed for

their work and their contribution to the society through regular contact by means

of the networking opportunities. Through networking, networkers can become

aware about new opportunities. It is an inexpensive way to promote and increase

business. Networking is a way to build a sustainable business. Due to familiarity

with the networkers, there is an assurance that the opportunities match with the

entrepreneurs’ vision and goals. Entrepreneurs get to know about several success

stories of entrepreneurial ventures through networking. They get an opportunity

to learn from the success of others. Networking enables entrepreneurs to come

across numerous influential people who otherwise may not be accessible to them.

Networking enables entrepreneurs to help others and also seek help from others.

At the end of the unit, several popular and useful networking forums along

with their website addresses and few relevant details are given.

10.6 Key Terms

• Networking: A socio-economic activity by which entrepreneurs interact

with each other and develop business relationships and recognize, create

and exploit business opportunities


Questions

1. What is meant by networking? explain the benefits of networking

2. Are you aware about some entrepreneurs’ networks? Discuss.

Exercise

Activity 11.1

Meet a few entrepreneurs and ask them about the places of networking

and the benefits received by them through networking. Also seek the information

about their approaches to networking.


1. Business networking is a valuable way ———

i. To expand your knowledge

ii. To attain new clients

iii. To learn from the success of other entrepreneurs

iv. i, ii and iii

Networking

178

NOTES

Business


Answers

Check Your Progress

3. True

6. True

7. True


1. iv


Shankar Raj, Entrepreneurship Theory and Practice, Vijay Nicole Imprints

Private Limited, Chennai 2012

www.bni.com

http://www.businessdictionary.com/definition/networking.html

http://mashable.com/2009/03/12/entrepreneur-networks/#pIYMeJt_1aql

https://www.sitepoint.com/social-networking-sites-for-business/

h t tp : / /www.inc .com/drew-hendr icks /50-bes t -websi tes- for -

entrepreneurs.html

Networking

179

NOTES

Business


Annexure I

List of Industry Associations working for Entrepreneurship

Development

1. Federation of Indian Micro and Small and Medium Enterprises (FISME)

2. Confederation of Indian Industry (CII)

3. Federation of Indian Chambers of Commerce Industry (FICCI)

4. Associated Chamber of Commerce and Industry (ASSOCHAM)

5. World Association for Small and Medium Enterprises (WASME)

6. Federation of Associations of Small Industries of India (FAASI)

7. Self Employed Women’s Association (SEWA)

8. Federation of Indian Women Entrepreneurs (FIWE)

9. Laghu Udyog Bharati (LUB)

10. All India Association of Industries (AIAI)

11. Confederation of Indian Industry (CII)

Annexure II

List of Industry Associations, Federations and Chambers of Commerce

in Maharashtra

Networking

180

NOTES

Business


Networking

181

NOTES

Business

Entrepreneurship - VSource: Directorate of Industries

Networking

182

NOTES

Business


UNIT 11: PROJECT MANAGEMENT - I

Structure

11.0 Introduction


11.2 Project Management

11.3 Need for Project Management

11.4 Challenges of Project Management

11.5 Project Life Cycle

11.6 Summary

11.7 Key Terms



11.0 Introduction

It is difficult to sustain in the face of pressures posed by the dynamic

environment for organizations with traditional management structure and hierarchy.

Project based organizations are seen to grow well in a vibrant environment since

they have the flexibility in putting their efforts. They are known for better utilization

of resources, better control and enhanced performance.

Traditionally work in construction business and defense procurement was

viewed as project but now it is seen that many proactive organizations are adopting

management-by-project approach; they are structuring their work as a project

and using project management techniques for the sake of ensuring successful

completion. Project management techniques are now increasingly being adopted

by almost all industries. Entrepreneurs as well as managers are seen interested to

gain professional project management knowledge. Particularly they wish to learn

project management planning and control techniques. Many big corporates now

adopt management-by-project approach for the sake of making their work

manageable and innovative.



• Explain the meaning and significance of project management

• Appreciate the need for project management

Project Management - I

183

NOTES

Business


• Realize the challenges of project management

• Learn about the various phases of project life cycle

11.2 Project Management

Let us begin the discussion on project management with meaning of the

word ‘project’. What is a project? A project can be defined as a set of multiple

interdependent activities that require people and resources. It is characterized by

a definite start and end and a specific set of criteria that define successful

completion. The dictionary meaning of project is that it is a scheme, a design, a

proposal or something intended or devised to be achieved.

In the words of James Lewis, “a project is a one-time job that has defined

starting and ending dates, a clearly specified objective, or scope of work to be

performed, a pre-defined budget, and usually a temporary organization that is

dismantled once the project is complete”.

To quote Newman and his associates, “a project has typically a distinct

mission that it is designed to achieve and clear termination point, the achievement

of the mission”.

Gillinger defines project “ as a whole complex of activities involved in

using resources to gain benefits”.

The Project Management Body of Knowledge (PMBOK) published by

the Project Management Institute (PMI) defines a project as “Any undertaking

with a definite starting point and defined objectives by which completion is defined”.

According to Paul C. Dinsmore, “a project is a unique undertaking, is

composed of activities, involves multiple resources, is not synonymous with the

‘product of the project’, and has a managerial emphasis on timely accomplishment

of the project”.

The Project Management Institute USA, defines a project as a one-shot,

time-limited, goal-directed, major undertaking requiring the commitment of varied

skills and resources. It also describes a project as “a combination of human and

non-human resources pooled together in a temporary organization to achieve a

specific purpose”.

A project is initiated to achieve a mission. It is not simply the end result. It

is triggered with a technically feasible, economically viable, politically suitable and

socially acceptable idea and approval of the investment proposal for the same.

Then with the help of human and non-human resources, activities and tasks are

performed for accomplishment of the mission. After fulfilling the mission, the project

is concluded.

A project has some typical characteristics. It has objectives to fulfill. After

fulfillment of the objectives, the project comes to an end. The end is spelt out in

the objectives. However, it cannot continue endlessly. It has a life cycle revealed

by growth, maturity and decline. It is one entity. It is the responsibility of the

project-in-charge who works with his/her team which is composed of members

from different disciplines, organizations, states and even countries. The project is

typically characterized by unity in diversity in terms of people, skills, backgrounds,

technology, machinery, equipment, materials, work culture etc. Majority of the

work in a project is done through contractors. More the complexity of the project,


184

NOTES

Business


more is the extent of contracting. A project is designed and developed strictly as

per the requirements, terms and conditions of the customer. Each project is unique

in its own way. No two projects are exactly similar. They differ in terms of location,

infrastructure, people, the agencies etc. A project is subject to change always.

Some changes may have a drastic impact on the nature and character of a project.

There is always risk as well as uncertainty associated with every project.

A project is defined by the goal and its scope. The goal indicates the end

result to be gained and the project scope indicates the set of standards and criteria

that the customer defines as successful completion. After knowing about the project,

it is required to develop a clarity about the objectives in terms of a combination of

tasks that concern specific functional groups or structural areas. The objectives

are specified in terms of financial needs, marketing plan, operations plan, as well

as various other plans for providing human resources, facilities, materials and the

like. Further, each of the objectives are expressed in tasks to be performed i.e. the

project manager has to see that each task contributes to completion of one or

more objectives. A task is a combination of activities that lead to the achievement

of a definable result. Each task must be broken down into a series of activities. An

activity is a time-consuming piece of work with a definite beginning and a definite

end. When the task is broken down into activities, it becomes much more

manageable. One person can easily accomplish one task or tasks. Each activity

need not be assigned to a different individual. For proper performance of a project,

planning needs to be in terms of specific duration. Duration is the elapsed time

from the beginning to the end of an activity, task or objective. It is the time from

the beginning of an activity till it is delivered.

While planning and scheduling a project, it is converted into objectives,

tasks, and activities. For perfect scheduling of the project, it is essential to predict

the duration of each task and activity in an accurate manner.

Project management is an organized endeavor for managing projects.

Previously it was considered to be the prerogative of construction business and

defense industries. Nowadays, many businesses are taking up various new ventures

as projects and manage them as projects. Project management is assuming more

and more importance. It has attained the status of an independent branch of

management. Since traditional management is not adequate to manage projects

effectively. Effective project management require special skills, techniques,

resources to accomplish the project in the allotted budget and stipulated time period.

The Association of Project Manger’s (APM) body of knowledge (BOK)

defines project management as ‘the most efficient way of introducing change —

achieved by:

• Defining what has to be accomplished generally in terms of time, cost,

and various technical and quality performance parameters;

• Developing a plan to achieve these and then working this plan, ensuring

that progress is maintained in line with these objectives;

• Using appropriate project management techniques and tools to plan,

monitor and maintain progress;

• Employing persons skilled in project management – including normally a

project manager – who are given (single) responsibility for introducing

the change and are accountable for its successful accomplishment’.

Check Your

Progress

Explain each of the

following terms in your

own words:

1. Project:

2. Goal:

3. Objective:

4. Task:

5. Activity:

6. Duration:


185

NOTES

Business


Project management is defined by the Project Management Institute’s

(PMI) Project Management Body of Knowledge (PMBOK) as: “… the application

of knowledge, skills, tools and techniques to project activities in order to meet

stakeholder’s needs and expectations from a project”.

As per the definition, a project manager has to fulfill stakeholder’s needs

and expectations. Project manager is the single point of responsibility. He/she has

to take care of the demands of the project, requirements of the organization,

interests of the stakeholders and also the needs of the individuals working on the

project. He/she must do whatever is required to make the project happen.

The discipline of project management has been described in terms of its

component processes; as defined by the PMBOK as nine knowledge areas:

integration, scope, time, cost, quality, human resource management, communication,

risk and procurement. The four core elements of the body of knowledge – scope,

time, cost and quality – determine the deliverable objectives of the project. The

other knowledge areas – integration, human resources, communication, risk,

procurement and contract – provide the means of achieving the deliverable objectives.

Project management is an integration of planning, execution and control

with inputs from several knowledge areas. It is planning, organizing, and managing

resources to bring about the successful completion of goals and objectives of the

project. It is a planned and organized effort to attain a project. It includes development

of a project plan which consists of defining projects goals and objectives, specifying

tasks/activities for achieving goals and objectives, deciding about resource

acquisition, developing budgets and time schedules for successful completion. While

implementing the project plan, controls are set on the project path so as to ensure

project implementation exactly in line with the plan. On the whole, project

management comprises of several activities such as planning to achieve objectives,

defining products of the project, assigning tasks, directing activities, communicating

with the stakeholders, estimating resources, allocating resources, acquiring human

and non-human resources, assessing and controlling risk, controlling project

execution, reviewing and reporting progress, analyzing the results, quality

management, defect prevention, problem solving, identifying, introducing and

managing change, project closure, forecasting future trends in the project

Project scope management comprises all the processes required to

complete the project successfully. It consists of authorization, scope planning, scope

definition, scope change management and scope verification. Project time

management includes activity definition, activity sequencing, duration estimating,

establishing the calendar, schedule development and time control. Project cost

management deals with the process required to ensure that the project is completed

within the approved budget. It includes resource planning, cost estimating cash

budgeting, cash flow and cost control. Project quality management is concerned

with quality planning, quality assurance and quality control. Project human resource

management consists of organization planning, staff acquisition and team

development. The process ensures the most effective use of human resources of

the organization. Project communication management performs the process needed

to ensure collection, and dissemination of project information in a right and

appropriate manner with the help of communication planning, information

dissemination, project meetings, and progress reporting. Project risk management

comprises of risk identification, risk evaluation, response development and risk

control. It includes the process concerned with identifying, analyzing, and responding

to project risk. Project procurement management includes the process required to

acquire goods and services from outsiders which consists of procurement planning,

solicitation planning, solicitation, and source selection.

Check Your

Progress

7. What is a project?


186

NOTES

Business


Management – by - Projects Approach

Projects used to be managed typically through a classical functional

hierarchical organization structure. With the growing importance of multi-disciplines,

multi-departments, and multi-national projects; people are increasingly moving

towards management – by - projects. They are adopting project teams and matrix

organization structures.

There is a difference between project management and management – by

- projects. Project management executes a project by using a specific set of skills

aimed at, controlling quality, costs schedules, and risk etc. it is a management system

which guarantees delivery of results and no chance of failure when it is effectively

applied. It is the result of a management – by - projects approach. Projects are

completed on the basis of project management principles. They operationalize the

strategic objectives of the organization. Project management is planning, control,

decision making of a project. Management - by - projects deals with multiple projects.

It is an integration, prioritization, communication and continuous control of multiple

projects. Project management is a discipline whereas management - by - projects is

an operating environment. Project management applies to a project; and management

– by - project applies to the entire organization. Project management is a tactical

issue and management - by -projects is a strategic issue.

Management - by - project approach is characterized by organizational

flexibility, decentralized management responsibility. It views at various issues and

problems with a holistic and integrated approach. Management - by - projects is a

management philosophy which uses cross functional approach with the practice of

trained and specialized project teams to deliver strategic objectives. It allocates a

restricted number of clearly defined responsibilities to trained managers. They are

given necessary resources and commensurate authority to achieve those assigned

duties and responsibilities. They are given complete control over the method by which

the results are delivered to the project management team. In contrast to this, in the

general traditional management approach, managers have a comparatively larger

number of tasks to perform. There is some degree of uncertainty regarding resourcing.

Management – by - projects approach involves the entire organization. It

affects all aspects of the organization right from the development of corporate

strategy, planning process and the like. The systems of management - by - project

encompass multiple levels and departments. All the functional activities are viewed

as projects and such potential projects are evaluated against corporate strategy.

Operational plans for all functional activities are prepared with a project orientation.

At the end of the planning process, it is ensured that the set of projects/programmes

are properly aligned with the corporate strategy.

With management - by - projects approach, there is effective

communication between the project and the functional departments. While allocating

and managing resources across the multiple project organizations, it is seen that

the strategic projects get the valuable and scarce resources at a priority.

11.3 Need for Project Management

Swift growth of global markets, rapid penetration of global players,

increasing importance of quality and the drive towards continuous improvement

necessitate more and more need for enhancement of performance and

organizational effectiveness. The skills of project management are needed for

sustaining in this highly competitive world for meeting the challenges arising out of

the external environment. There is a need not only to accept but initiate change(s)

Check Your

Progress

8. What do you know

about management –

by - project approach?

9. Is there a difference

between project man-

agement and manage-

ment - by - projects?


187

NOTES

Business


in response to the external changes. Introduction of change has to take place in an

effective and successful manner. The organizations need to introduce new products,

processes. They have to find out new procedures, new practices, new techniques

so as to react effectively to competitive pressures, technological breakthroughs

and maintain their competitiveness. They are required to be learning organizations.

Project is a unique activity outside the normal, routine operations. It is not

usually a routine common task but it may include several routine tasks. It is very

unlikely that a project would be repeated again in the same manner by the same

teams to deliver the same results. It has a unique objective which is explicitly defined

so as to convey a common meaning to all the concerned people. It is focused on

customer and customer expectations. It is comprised of a collection of activities

which are linked together since they are performed to bring the desired outcome. It

has a clearly defined and agreed upon deadline by which the task is to be

accomplished. Along with the time constraints, it has cost constraints also. The

people working on the project need to be fully aware about the time as well as cost

limitations and ensure the viability of the project from time to time. Completion of a

project require diverse skills and often a large number of versatile people. Project is

usually complex since the work involves people from different departments. It may

be performed on different sites. It involves many unknowns within the task, regarding

the human talent, skills of the people doing the work, and the external influences on

the project. It provides a distinctive opportunity to learn and imbibe new skills. It

challenges the established, set and fixed stereotyped thinking. It is not without risks

at every step of the process. Project is required to be flexible as it has to be modified

as the work proceeds. In due course of time, it has to accommodate change(s).

Change is a common feature of a project since it creates something for the first time

which never existed before. Such type of activities are carried out along with the

regular routine functioning of the organization.

For being effective and dynamic, entrepreneurs use project management

as a tool. It is a popular business discipline. At some point in life, one has to play

the role of a project manager. However, one may not be a project manager forever.

Project vary significantly in type, size, nature, objectives, complexity and

also time duration. However, every project has a starting point and an end point with

specific objectives. Basically it is a course of action with explicit objectives and

definite time perspectives. It should be completed without any delay. It should involve

as less investment as possible. It should use the least amount of human and non-

human resources. All these requirements are fulfilled by project management.

Typically project work is characterized by inter-dependence and inter-

relationships. No work, task, activity is independent, or isolated. No decision can

prove to be meaningful if it is taken in isolation, without paying attention to inter-

relationships. The effectiveness of performance depends upon realizing the

importance of task in relation to other tasks and to the whole.

The work and interrelationships change with time but the ultimate objectives

do not change. In the light of future uncertainty, there is a need of adaptation to

the changing needs. In a dynamic environment, plan is required to be dynamic,

flexible so as to offer a quick and prompt response whenever needed.

Project management is a flexible and generalist approach and not a rigid

and specialist one. In functional management, functional specialization receives

priority at the cost of the totality of work. A task is done in an effective manner if

it is done as a whole. In project management, communication is faster, and decision

making is quick. It works on the principle of management by exception. There is

no hierarchical protocol.

Check Your

Progress


appropriate blanks:

10. Project manage-

ment is a —and —

approach and not a —

and — one. (flexible,

rigid, generalist, spe-

cialist)


188

NOTES

Business


11.4 Challenges of Project Management

The success of project management depends upon completion of task

against the set specifications and time, cost and performance targets. Necessarily,

a project must be completed within the stipulated time, allocated budget and must

perform to customer satisfaction.

Project management offers a structured approach to managing projects.

Projects involve all kinds of people, both within the enterprise and outside. The in-

house team members are from research and development department, marketing

department, cross functional teams and accounting. Out-of-house team members

may include architects, vendors, technicians, customers. Project team members

may belong to different occupations. Some project teams may contain

representatives of customers so as to ensure clarity regarding the clients’ priorities.

The project manager has to tackle all these team members who represent different

backgrounds, priorities, agendas, loyalties; also diverse and sometimes opposing

needs and expectations from the project.

For successful completion, the project has to be firmly integrated into the

organization culture. The organization culture need to be project oriented.

Each and every project, by its basic nature, faces certain constraints in

terms of cost, time, quality, scope. Typically several constraints are in the form of

resources.

Cost constraints may be in the form of limited budget, profit margin.

Sometimes project managers are given a fixed budget and they need to manage

within that budget. Sometimes, a general budget is given and project manager has

to work out the required one with all minute details.

Cost is calculated from the time variable. Cost of an internal project can

be calculated as cost of the team members multiplied by time. When an independent

consultant is hired for a project, cost will be determined by the consultant or the

organization’s hourly rate multiplied by an estimated time to complete.

Every project comes with a deadline. Project managers are given start

dates and completion dates. The deadlines may be set by the client. It may be

production start-up date. It not given, then he/she has to establish an appropriate

deadline. After fixing the deadline, it is to be translated into a schedule for the

convenience of the team members.

While receiving a project, the project manager is given quality specifications

for the end product. It may be a detailed document conveying all the needed

requirements.

Quality of the project depends upon the extent of time put into individual

tasks. With adequate time, some tasks may be performed in a good manner. And

when more time is spent on such tasks, the tasks are performed in an excellent

manner. Quality of any project depends upon time and cost. Time and cost

requirements of a project depends upon quality needs.

Scope of a project is an explanation of the end result of the project. It

describes what the end result should be. All the requirements for the end result

are specified in the scope.


189

NOTES

Business


Always some types of risks are associated with projects. Risk indicates

the probability of failure. It is the likely point of failure. With adequate time and

sufficient resources, most risks or potential failures can be avoided.

A project is viewed as a complex set of activities from diverse areas such

as adoption of relevant technology, acquisition of appropriate machinery and

equipment, procuring adequate financial resources, hiring right human resources,

execution of the project with proper scheduling of necessary activities and the

like. Some of the activities are entrusted to sub-contractors specialized in a particular

kind of activity. Then the coordination becomes a vital task.

In this manner, project management is unique in its approach and task

which make it imperative to fulfill the pre-determined objectives in the light of

time, cost and performance standards.

In contrast with the functional management, individuals in project teams

work in a temporary role. After completion of the project, they return to other

operational duties or join another project with different teams. Working in project

management is often very different than working with general functional

management with a fixed hierarchical team. Project team members typical come

from different departments in the organization, maybe from different sites. Team

members need to report to project manager for project related work and to the

functional manager for other work. This may create problems due to dual command.

Project manager evaluates the performance of his/her team members. For persons

working on different projects simultaneously with different project managers and

still holding some functional responsibilities, problems or issues may arise regarding

their performance appraisal. Team members may not know each other. It requires

time until they know each other, develop a good team work, set team norms and

share information, ideas, opinions as well as problems. The project manager need

to be well conversant with the techniques and dynamics of conflict management

and conflict resolution strategies. Team membership is less likely to be stable. In

the light of time constraints, it is difficult for the team manager to take out time to

guide, counsel, advise and provide coaching to his/her team members.

Role of a Project Manager

A project manager is one who is entrusted with the task of managing a

specific project. Project management is his/her responsibility. He/she is responsible

for developing a definition of project. He/she is supposed to be the project’s single

point responsibility and the organization’s representative to the client and other

stakeholders. He/she manages relationships with all the concerned stakeholders.

He/she is responsible for the complete project. He/she ensures that the project is

delivered on time, within the set budget and to the agreed specifications and expected

quality norms. He/she strives to accomplish the project objectives, reduce the risk

of failure and directs the project team towards progress.

There are some technical aspects associated with the role of a project

manager such as development of project definition, managing project’s work flows,

and performance. For the sake of having control over the project, some baseline

metrics and parameters need to be established for the implementation phase. The

project manager is required to be ready with a toolkit of various techniques for

applying in planning, scheduling controlling, decision making phases for successful

completion of the project.

In the GOAL/QPC Project Management Memory Jogger, the project

manager’s job is defined as supplying “project teams with a process that helps

them coordinate their efforts so they may create the right product (or service,

Check Your

Progress


lowing are true or

false:

11. The success of

project management

depends upon comple-

tion of task against the

set specifications and

time, cost and perfor-

mance targets.

12. Necessarily, a

project must be com-

pleted within the stipu-

lated time, allocated

budget and must per-

form to customer sat-

isfaction.


190

NOTES

Business


process of plan), at the right time, for the right customer within the resource limits

established by the organization”.

Project manager is a change agent. He/she is required to work under

pressure, uncertainty, complexity in the dynamic environment. He/she must be

well conversant with application of knowledge, skills, tools and techniques so as to

plan, organize, and control various phases of the project for success and progress.

Planning is a crucial task of a project manager. He/she has to plan what

needs to be done, who is going to do it, when it needs to be done and how it is

required to be done. Planning is an iterative process that has to take place throughput

the life of the project. He/she has to plan and define the scope of the project

meticulously. Another important task is of activity planning, sequencing and scheduling.

Another essential task is setting up the project team’s structure. It is about

the decision regarding functional, matrix, or project organization structure. Then

identification of roles and positions, assigning of responsibility, delegation of authority

are the other tasks to be performed.

Project manager has to act as a project leader. The role of a project

manager as a leader involves various challenging aspects of work including

motivating the team members, assigning work, maintaining communication, and

setting team direction. For seeking the best performance from the project team,

good communication skills need to be applied.

Controlling is needed to keep the project on track. It is done through the

steps of setting the standards, measuring the project progress, comparing the

performance with the standards, determining the causes of deviations, if any, from

the standards, and taking corrective actions to address deviations.

The project manager deals with initiation, planning, design, execution,

monitoring, controlling and closure of a project. He/she makes all the decisions

required for successful completion of the project. He/she has to assess and measure

the risks associated with project. It is needed to control risk and minimize uncertainty

associated with the project.

He/she integrates and coordinates all the efforts and activities and guides

the team members to complete the project successfully. He/she should be well

conversant with project management methods and techniques. He/she should

possess the ability to visualize and solve problems in their totality with good decision

making skills. There is a need to possess the ability to handle project management

software tools and packages. There is a need to integrate the project stakeholders.

He/she should be able to appreciate the environment in which work in an

environment of constant change.

The project manager should know how to build and lead teams. He/she

should be able to select and develop an operational team. He/she need to be

proficient in management of human resources. There has to be a considerate

approach towards views and opinions of team members. He/she should possess

conflict resolving capacity. The project manager must be an excellent communicator,

good leader and efficient manager. He/she should be well conversant with planning

and organization skills. The ability to plan, expedite and get the things done would

fetch success as a project manager. He/she maintains a co-operative, motivated

and successful team. There is a need of achievement orientation, high energy

levels, initiative, risk taking ability as well as entrepreneurial skills. There is a need

of patience, tolerance for difference of opinion, ambiguity, uncertainty and delay.

He/she should possess negotiation skills and resource allocation skills. He/she


191

NOTES

Business


should possess change orientation. When needed, he/she should offer alternative

decisions and take appropriate actions quickly. Further, effective time management

is another desirable requirement for a project manager. He/she should be able to

maintain good rapport with the client. There is a need of maintaining cordial

relationship not only with the client but also with all the stakeholders.

Duties and responsibilities of a project manager vary from industry to

industry, organization to organization and even from project to project several

times. However there are some basic duties and key tasks which are expected

from the project managers for ensuring successful completion of their projects

such as planning and defining scope, risk analysis, resource planning, developing a

budget, developing schedules, estimating cost, estimating time, assuring quality of

deliverables by converting it into specifications, documentation, monitoring project

progress and performance, recruiting project staff, managing and leading project

team, coordinating various agencies and working groups in project work, identifying

user’s needs correctly, managing project training and user training on the basis of

needs within the approved budget and the like.

11.5 Project Life Cycle Approach

Peter Morris describes project management as: ‘… the process of

integrating everything that needs to be done (typically using a number of special

project management techniques) as the project evolves through its life cycle (from

concept to handover) in order to meet the project’s objectives’.

Organizations performing projects generally subdivide their projects into

several phases or stages for ensuring effective and successful performance.

Collectively these phases are called as project life-cycle. The project life cycle

divides the scope of work into sequential project phases.

A project passes through several distinct phases over a period of time as

it matures. The project life cycle is linked with a clear starting point and an end

point with a time scale. It comprises of all phases from the point of initiation to the

final termination of the project. The interfaces between the phases of the life

cycle are rarely clearly separated.

The PMBOK states;’…. because projects are unique and involve a certain

degree of risk, companies performing projects will generally subdivide their projects

into several project phases to provide better management control. Collectively

these project phases are called the project life-cycle’. Projects do pass through a

number of clearly identifiable stages from initiation to completion. All these stages

are interrelated and dependent on each other. Every project goes through a series

of stages during its life irrespective of scope or complexity of the project.

Project life cycle refers to a logical sequence of activities directed at

achievement of project’s goals or objectives. The four phases of project life cycle

are: conceptualization and initiation phase, design and development phase,

implementation or construction phase and commissioning and handover phase.

The project phases derive their names from the deliverables of the phases such as

initiate, design, construct, and handover.

Conceptualization and Initiation phase: The first phase of the project is

conceptualization and initiation phase. This is a stage of commencement. It starts

with identification of need for a project. There may be an opportunity for a new

product/service or facility. On the basis of goals, available alternatives are explored.

Check Your

Progress

13. What are the con-

straints with which

projects must be man-

aged?

14. What are the at-

tributes of a good

project manager?

15. Outline the role of

a project manager.


192

NOTES

Business


The feasibility study is carried out and then the feasible proposal moves to the next

phase. In this birth or concept stage, outputs and critical success factors are defined.

Design and Development phase: This is a stage of planning and organizing

in which the project is divided into smaller parts or tasks. It is based on the guidelines

set up by the feasibility study. The product is designed. Detailed schedules of

project activities are developed. For implementation of the project, necessary

resources are allocated. Budgeting of capital expenditure is done. This stage deals

with studying cash flows, ranking of investment proposals, sensitivity analysis, risk

analysis, site preparation and investigations, government clearances, project

infrastructure and enabling services, and rationing of capital. In all, in this stage

detailed schedules and plans are made for making or implementing the project.

Some organizations prepare documents such as Project Execution Plan in this

stage. This phase is often considered as a part of implementation phase. Many

activities including field work are carried out during this phase.

Implementation or Construction phase: This is a stage of implementation

in which the project plan is executed. After preparation of specifications for

equipment and machinery, orders are placed with the manufacturers. Contractors

are lined up, and construction drawings are issued followed by civil construction,

construction of equipment foundations, equipment and machinery erection, plant

electricals, piping, instrumentation, testing, checking, trial run and subsequently

commissioning of the plant takes place. The plan prepared in the previous stage is

implemented in this stage. Major project work is done in this phase. All techniques

of project management are applied. Every attempt is made to fast track i.e. overlap

the various sub-phases such as engineering, procurement, construction and

commissioning to the maximum extent. There is a need of coordination and control.

Commissioning and Handover phase: This is a stage of termination. In

this stage, resources are released and handed over to the clients or parent

organization. Drawings, documents, files, operation and maintenance manuals are

catalogued and handed over to the customer. Test runs are conducted to ensure

customer satisfaction. All the contractual obligations regarding the performance

are fulfilled. Project accounts are closed, outstanding payments made and dues

collected during this phase. There is a confirmation of project implementation as

Source: https://www.google.co.in/

search?noj=1&tbm=isch&q=construction+project+life+cycle&sa=X&ved=0ahUKEwiUzcv-

xcrNAhXEQ48KHX3CBJcQhyYIIg&dpr=1&biw=1366&bih=643#imgrc=uhSwMOkYQ5ihpM%3A


193

NOTES

Business


per the design and this terminates the project. The closure or exit phase marks the

completion of the project.

Figure 11.1: Project Life Cycle

Conceptually, all the phases of project life cycle should follow each other

in sequence. However, this happens very rarely in actual practice. Sometimes

succeeding phases overlap with the preceding phases. There may be a complete

overlap of all the phases.

The sequence of project phases deals with some form of technology

transfer or handover from one phase to the other such as project brief to design

and development, detailed design to manufacture, construction to commissioning

and commissioning to operation. As the project moves from one phase to another;

the goals, objectives also change consequently. This gets reflected in the process

of project management. In the end of each phase, a review of deliverables and

performance is taken; and on the basis of the review, a decision is taken about

continuation of the project in the next phase. Each phase can be planned and

controlled as a mini project. Each phase may be performed by different departments

and contractors.

Project activities must be grouped in phases. With proper grouping of

activities, the project manager efficiently plans and organizes resources as per the

demand of each of the phases. Then he/she measures the performance and takes

a decision to continue further, correct or terminate.

As we have seen above, with project life cycle approach, there are four

different project phases of stages. These phases can be further subdivided into an

input, process and output format. Let us discuss the project management process

in terms of input, output, tools and techniques.

The concept stage begins with identification of a problem or opportunity

and then proceeds forward with feasibility study. The concept stage ends with

feasibility study, project proposal and execution strategy. If the project is found to

be not feasible, then it is abandoned. Otherwise, for a feasible project, the process

continues with the next design phase. Input for the design phase is in the form of

approval to go ahead to design and develop the product. With the help of processes

like design product, develop detailed schedule, work breakdown structure (WBS),

critical path method (CPM) and budgets; and modelling as a key activity; the

design stage offers the output of baseline plan with design and schedule. After

getting the approval to implement the project, the next step of implementation

starts. The implementation stage deals with various processes as award contracts

and issue instructions, procure equipment and service, make the product, solve

problems. The output of the implementation process is in the form of certificate of

completion. After the approval, the project is ready to commission. The commission

stage triggers after receiving the input in the form of commissioning plan and

notification of completion. Then it proceeds forward with startup and testing of

the product. After seeking approval of the project acceptance by the client, the

output is in the form of closeout report.

11.6 Summary

This unit basically deals with the concept of project and fundamentals of

project management. A project is initiated to achieve a mission. It has objectives

to fulfill. It is accomplished by performing a set of activities. Each project is unique.

No two projects are similar. Activities of a project are unique and non-routine. A

Check Your

Progress

16. What are the four

stages in a project life

cycle?


194

NOTES

Business


project cannot continue forever. It has a definite time limit. The project is typically

characterized by unity in diversity in terms of people, skills, backgrounds, technology,

machinery, equipment, materials, work culture etc. Majority of the work in a project

is done through contractors. More the complexity of the project, more is the extent

of contracting. A project is designed and developed strictly as per the requirements,

terms and conditions of the customer. Each project is unique in its own way. No

two projects are exactly similar. They differ in terms of location, infrastructure,

people, the agencies etc. A project is subject to change always. Some changes

may have a drastic impact on the nature and character of a project. There is

always risk as well as uncertainty associated with every project.

Project management is an organized endeavor for managing projects.

Traditional management is not adequate to manage projects effectively. Effective

project management require special skills, techniques, resources to accomplish

the project in the allotted budget and stipulated time period.

A project manager has to fulfill stakeholder’s needs and expectations.

Project manager is the single point of responsibility. He/she has to take care of the

demands of the project, requirements of the organization, interests of the

stakeholders and also the needs of the individuals working on the project. He/she

must do whatever is required to make the project happen.

Project management is an integration of planning, execution and control

with inputs from several knowledge areas. It is planning, organizing, and managing

resources to bring about successful completion of goals and objectives of the

project. It is a planned and organized effort to attain a project.

Management – by - projects approach involves the entire organization. It

affects all aspects of the organization right from the development of corporate strategy,

planning process and the like. The systems of management - by - project encompass

multiple levels and departments. Management - by - project approach is characterized

by organizational flexibility, decentralized management responsibility. It looks upon

various issues and problems with a holistic and integrated approach.

A project has a life cycle. The project life cycle consists of four phases:

Conceptualization and Initiation phase, Design and Development phase,

Implementation or Construction phase, Commissioning and Handover phase. In

conception stage, project ideas are conceived. In design phase, detailed designs of

different project ideas are worked out. Then the project is implemented as per the

design. The project is commissioned after implementation. Commissioning of a

project indicates the end of its life cycle.

11.7 Key Terms

• Life cycle: The series of changes that something (as an individual,

organizations, process, product) goes through from the beginning of its

life until death; the length of time that something lasts or can be used


Questions

1. What is a project? Explain the important characteristics of a project.


195

NOTES

Business


2. Discuss the challenges faced by project managers

3. Explain the concept of project life cycle.

4. What do you know about project management? Describe its significance.

5. Explain the meaning of management – by – project?

Exercise

Activity 11.1

1. Collect information about any one live local project.


1. The success of project management depends upon target in terms of

————

i. Time

ii. Cost

iii. Performance

iv. All the above


i. Project is a unique activity outside the normal, routine operations.

ii. It is very unlikely that a project would be repeated again in the

same manner by the same teams to deliver the same results.

iii. Project has a clearly defined and agreed upon deadline by which

the task is to be accomplished

iv. All the above

3. —— is the characteristic of a project.

i. Definite time limit

ii. Uniqueness

iii. Sub-contracting

iv. All the above

4. Which one of the following statements is wrong?

i. Project management as a technique is assuming greater importance

since it aims at optimum utilization of resources

ii. Project management has grown into a separate branch of

management since traditional management techniques are found

inadequate to handle projects effectively


iv. i and ii are right

5. ——— a key task of a project manager


196

NOTES

Business


i. Resource planning

ii. Risk analysis

iii. Leading project teams

iv. All the above

6. Tick the basic attribute of a project

i. A course of action

ii. Specific objectives

iii. Definite time perspectives

iv. i ii, and iii


i. Project is a unique activity outside the normal, routine operations.

ii. Project is usually a routine common task

iii. It is very unlikely that a project would be repeated again in the

same manner by the same teams to deliver the same results.

iv. Project vary significantly in type, size, nature, objectives, complexity

and also time duration.

Answers

Check Your Progress

10. Flexible, generalist, rigid, specialist

11. True

12. True


1. iv

2. iv

3. iv

4. iii

5. iv

6. ii

7. ii


Burke Rory, Project Management Planning and Control Techniques, John

Wiley & Sons, Noida, 2003

Choudhury S., Project Management, Tata McGraw Hill Publishing

Company Limited, New Delhi, 2002


197

NOTES

Business


Desai Vasant, Project Management, Himalaya Publishing House, New

Delhi, 2011

Ghattas R. G., Mckee Sandra L. Practical Project Management, Pearson

Education Asia, Delhi 2001

Goel B. B., Project Management Principles and Techniques, Deep and

Deep Publications Pvt. Ltd., New Delhi 2004

Gupta C. B., Srinivasan N. P., Entrepreneurship Development in India,

Sultan Chand & Sons, New Delhi, 2005

Nagarajan K., Project Management, New Age International Publishers,

New Delhi 2010


198

NOTES

Business


UNIT 12: PROJECT MANAGEMENT – II

Structure

12.0 Introduction


12.2 Project Classification

12.3 Tools and Techniques of Project Management

12.4 Network Analysis

12.4.1 PERT

12.4.2 CPM

12.5 Summary

12.6 Key Terms



12.0 Introduction

Project management is an organized venture for managing projects. It is

essential for ensuring timely and successful implementation of projects. It improves

performance and help management achieve desired level of efficiency. Project

management approach is different from traditional management. It comprises of

‘systems approach’ to planning, scheduling and controlling.

Every enterprise needs project management techniques in one form or

the other. These techniques are applied in planning, financing, implementing and

controlling project activities or tasks to achieve predefined objectives within

constraints of time, cost, quality and quantity.



• Know about different classifications of projects

• Appreciate the significance of tools and techniques in project

management

• Comprehend the concept of network analysis

• Learn about PERT and CPM

Project Management – II

199

NOTES

Business


• Explain similarities and differences between PERT and CPM

12.2 Project Classification

On the basis of project classification, we can understand and highlight the

characteristic features of projects. There are several different ways to classify

projects. Let us discuss some of the important classifications of projects.

Projects had been classified, according to Indian Planning Commission,

on the basis of various sectors such as agriculture and allied sector, irrigation and

power sector, industry and mining sector, transport and communication sector,

social services sector, information technology sector, miscellaneous sector.

The projects in which quantitative assessment of benefits is possible are

termed as quantifiable projects like projects concerned with industrial development,

power generation, mineral development etc. In non-quantifiable project, such type

of quantitative assessment of benefits is not possible. Projects concerned with

health, education, defense, irrigation etc are non-quantifiable projects.

The projects based on techno-economic characteristic are techno-

economic projects. These can be classified in several different ways. Factor

intensity-oriented classification speaks about two categories of projects: capital

intensive projects and labour intensive projects. The degree of labour intensity is

typically measured in proportion to the amount of capital required to produce goods/

services. Higher the proportion of labour costs required the more labour intensive

the business. Labour intensive project requires a large amount of labour to produce

goods or services. In labout intensive projects a larger portion of total costs is due

to labour as compared with the portion of costs incurred in purchase, maintenance

and depreciation of capital equipment. Capital intensive projects rely mainly on

capital; capital costs are higher than labour costs. Capital projects are often identified

by their large scale and large cost relative to other investments requiring less

planning and resources.

On the basis of causation, projects can be classified as demand based and

raw material based projects. Raw material based projects are founded on availability

of certain raw materials, skills or other inputs. The existence of demand for certain

products or services make the project demand-based.

The service oriented projects are classified as: welfare projects, service

projects, research and development projects and educational projects.

Based on the type of activity, there are two categories of projects such as

industrial projects and non-industrial projects. Industrial projects are set up for

manufacturing of goods. Non-industrial projects such as health care projects,

educational projects, irrigation projects, soil conservation project, pollution control

projects and the like benefit the entire society. Such types of non-industrial projects

are financed by government.

Based on the geographical location of the project, projects can be classified

as national projects and international projects. National projects are set up within

the national boundaries of a country. International projects are set up outside the

boundaries of a country. They may be either set up by government or by a private

player. They may be in the form of fully owned subsidiaries established abroad,

joint ventures established abroad, or establishment of projects abroad through

mergers and acquisitions. International projects involve higher risk and more efforts


200

NOTES

Business


in comparison with national projects. Further, it requires numerous procedural

formalities. Expertise is needed to handle international projects.

Based on the project completion time, and need of execution, there are

two types of projects - normal projects and brash projects. Normal projects have

no constraint on time. Brash projects are to be completed within the stipulated

time. Due to the fixed deadline for completion of the projects, the project may end

up with high project costs. For disaster projects, anything is allowed to gain time.

Defensive project is the project initiated to stabilize and sustain the current

business situation. Aggressive project is the project initiated to enter into new

business in a commercial manner which depends upon the future prospective rather

than the current scenario.

On the basis of ownership, projects can be classified as private sector

projects, public sector projects and joint sector projects. As the name implies,

ownership rests with project promoters and investors for private sector projects.

Profit maximization is the focus of private sector projects. Investors make an

investment in private sector enterprises only with an objective to earn good returns

on the investment. Public sector projects are owned by state for developmental

reasons. An enterprise is considered as public enterprise when state or any other

national, regional, or local authority holds at least 51% of its capital and holds

control over the project. In our country, public sector undertakings can be owned

either by central government of by state governments. It is vital for the government

to invest in growth sectors; no private player may volunteer since huge investment

is required and there are unattractive returns to this investment. The government

has to invest and nurture industries in such planned sectors of the economy. The

other examples of public sector projects are strategic sectors such as defense,

space research, atomic research, public utility services, natural resources – mining,

dam construction, and hydro power plants etc. Private sector is not allowed to

invest in strategic sectors of the nation. Public utility services cannot be fully

entrusted to the private sector players. Private sector is oriented towards profit

maximization and not towards welfare maximization. The natural resources of a

country are controlled by the government. Public sector deals with natural resources

since huge investment is required and ownership of the resources rests with the

government. In joint sector projects, government and private entrepreneurs share

ownership. Government shares the investment required for the project and in return,

avails the managerial talents, marketing expertise and entrepreneurial skills of

private entrepreneurs.

Size of the project is another parameter for classifying projects into three

types – small projects, medium projects and large projects. The size is generally

stated in terms of the amount of investment required. The investment limits for

different categories of projects are announced by the government from time to

time. For small projects, investment in plant and machinery is up to Rs. 5 crores.

For medium projects, investment in plant and machinery is up to Rs. 10 crores.

For large projects, investment in plant and machinery is up to Rs. 100 crores.

Projects with investment in plant and machinery beyond Rs. 100 crores are

categorized as mega projects.

Financial institutions classify projects on the basis of their age, experience,

and the purpose for which the project is being taken up. They are: new projects,

expansion projects, modernization projects, diversification projects.

New projects deal with a new product/idea. Entrepreneurs find out a gap

in the present market offerings regarding fulfillment of needs and wants of

Check Your

Progress

1. What is a brash

project?

2. What is meant by a

small project?


appropriate words:

3. For medium

projects investment in

plant and machinery is

up to Rs. — crores.

4. In — sector

projects, government

and private entrepre-

neurs share owner-

ship.

5. Profit maximization

is the focus of — sec-

tor projects.

6. —— projects in-

volve higher risk and

more efforts in com-

parison with ——

projects.(national, In-

ternational)


201

NOTES

Business


customers. And accordingly new products/services are made to fulfill the gap

through a new project. Finding out a gap and then identifying and formulating a

new project is not an easy task. It requires expertise and proficiency.

Expansion project is aimed at increasing plant capacity for the current

product range by establishing additional plant capacity or by acquisition of another

organization in the same line of activity. Expansion project is undertaken for products

with good demand potential and promising future prospects.

Modernization project is undertaken when plant and machinery or

production process become obsolete with growing technological innovation. In

absence of modernization, inferior quality products would be produced, the cost of

production would be higher.

On the basis of need for project, projects can be classified as balancing

projects, replacement projects, backward integration and forward integration

projects.

Balancing project is undertaken to improve upon the manufacturing

capacity of one or more production units that will result in improvement in the

overall production capacity of the project as a whole.

Replacement project is meant for maintaining the same or better operational

efficiency. It involves replacing some of the old machinery with new machinery.

Over a period of time, there is wear and tear of machinery and maintenance costs

rise up along with the subsequent problems of breakdown of machinery, poor

quality of products, reduction in capacity of output etc. And the need for

replacement project is observed.

Diversification project aims for product diversification. Product

diversification is offering more than one product to the customers. Diversification

project is meant to offer more than one product to the market. Diversification may

be related or unrelated. Related diversification is closely related to the product line

of the organization. When the organization offers products different from the existing

ones, it is said to be unrelated diversification. Diversification aims for improved

profitability. There is a drive to tap the unexplored potential of the market behind

diversification project.

Backward integration project involves adding manufacturing or processing

facilities at beginning stages of a product line. A manufacturing organization starts

production of raw material instead of acquiring it from the suppliers and the

organization is said to be on backward integration.

Forward integration project involves adding additional manufacturing or

processing facilities at completion stages of a product line. After including additional

manufacturing/processing facilities at the end of the production line, the currently

produced products go through further processing resulting in further value addition.

In forward as well as backward integration, capacity of the added

production facilities must match with the existing production facilities.

Depending upon the speed needed for execution of a project, there can be

three categories of projects as normal projects, brash projects, and disaster projects.

Normal projects are implemented with adequate time. All the phases in a normal

project are allowed to take normal time as per the needs. Such type of normal

projects possess quality. They require minimum capital cost. Brash projects need

additional capital cost for speedy implementation of the projects. Additional

expenditure is required for procuring materials from vendors in a speedy manner.


202

NOTES

Business


For saving time, construction contractors demand extra charges. The requirement

of time saving may lead to overlapping of various phases of the project. There is

a possibility of quality compromises for time saving. Disaster projects compromise

at various levels to gain time. The requirement is to reduce time drastically. Vendors

who can supply speedily are preferred even if they charge extra price. Quality

compromises are accepted; the only criteria is to reject failure level. There is no

question of competitive bidding. The work is in progress 24x7. Obviously for saving

project time, capital cost goes up in an exorbitant manner.

12.3 Tools and Techniques of Project Management

Project management involves the three phases of project planning, project

scheduling and project controlling. The role of project planning and scheduling is

seen before actual start of the project. The project controlling phase begins during

execution of the project. It is meant for removing the bottlenecks and completing

the project in time. During all these phases of project management, the network

techniques of PERT and CPM are useful.

A project is comprised of several interrelated activities which must be

performed in a sequence for its completion. The process of dividing the project into

these activities is called work breakdown structure (WBS). Project planning begins

with setting objectives of the project on the basis of certain assumptions. Then work

breakdown structure is developed depending upon the objectives in the form of

clearly definable activities. Project planning deals with identification of jobs, tasks

and activities to be performed and estimation of the required resources of various

types such as human resources, equipment, machineries, financial resources, material

resources, operational resources, time, space etc. Proper planning and estimation of

all resources including time is helpful for estimation of time and cost of various

activities of the entire project. Project planning involves analysis of various alternative

courses of action for achievement of objectives. Further, it is important to develop a

sequence of performing the activities in a systematic manner.

Project scheduling is preparation of time schedules of execution of activities

and computation of resources required at various stages of operation. It is the process

of laying out all the actual activities of the project in the time order in which they are

to be performed, in the light of logical sequence of the activities. The logical sequence

of activities of a project would be enterprise registration, appointment of consultant,

mobilization of resources, land acquisition, site development, preparation of civil work

designs, plans and estimates, entrusting the work to civil contractors, preparation of

design specifications and placing order for plant and machinery, receiving plant and

machinery on project site, erection of machinery, commissioning the plant, taking

trial runs, and commencement of regular production.

Scheduling also identifies the tasks that are critical and the resources that

are limited so as to ensure execution of the project in an orderly and systematic

manner. The process lays out the project activities in a time sequence in the order

of their performance, assign starting time and finishing deadlines and then allocates

resources to them. In all, the project scheduling phase sets start and finish times of

each activity, identifies critical activities that require special attention, allocate

resources to each activity, determines slacks and floats for non-critical activities

and then focuses on various constraints due to limitation of resources.

Project controlling phase takes follow up of the planning and scheduling

phases during the actual execution of the project. To begin with, standards and

Check Your

Progress

7. Distinguish be-

tween modernization

project and diversifi-

cation project.

8. How forward inte-

gration project is dif-

ferent from backward

integration project?

9. Give an example

each for forward inte-

gration project and

backward integration

project.

10. What are the cir-

cumstances that ne-

cessitate backward in-

tegration projects?


203

NOTES

Business


targets are set in terms of time and cost of the project. The performance is measured

by comparing it with the set standards and targets. The project is monitored; the

progress is reviewed on the basis of work scheduled at various stages of operation

in the light of time. It is attempted to find deviations in actual progress from the

scheduled plan and evaluate the effect of deviations on the project plan. The

project schedule is updated. To rectify the deviations from the plan, corrective

measures are suggested.

If the project is large and complex involving numerous interrelated

activities, requiring several resources in the form of men, money, machines,

materials etc.; it is very difficult for the management to make and execute an

optimum schedule on the basis of past experience, availability of expertise, skills

and intuition. Therefore, they are in search for some methods, techniques which

may help them in planning, and successfully implementing such type of projects.

The focus of project management is on proper planning, scheduling and controlling

of the project. It aims to develop a sequence of activities for completion of the

project in fixed time, within the set budget and available resources. For systematic

planning, the management has evolved various techniques applying network

strategy. Project management requires various tools and techniques such as bar

charts, milestone charts, velocity diagrams and network techniques.

Bar charts are the two-dimensional pictorial representation showing various

activities of a project. In a bar chart, activities of a project are shown on one axis

and their durations are represented on the other axis. In the axis that represents

activities, the different activities involved in a project are drawn in the form of

bars. Time taken for completion of each activity is represented by length of the

bar. It helps to review the project progress, and allows for rescheduling of the

project. It highlights critical activities and other bottlenecks in the completion of

the project in a proper manner.

A bar chart is normally suited to small projects. It cannot be effectively

used for medium sized and large projects. It cannot represent the interrelationships

between various activities of the project. It cannot take into account the

uncertainties in activity duration. They are difficult to update when there are many

changes. When there are many changes between the plan and actual performance,

bar charts become obsolete. They do not equate time with cost. Time-cost

relationship cannot be derived from bar charts.

Milestone charts are the modified and improved versions of bar charts. Bar

charts represent activities and milestone charts represent the events which mark

either the beginning or the end of an activity. They are more detailed and offer better

control than bar charts. They show most of the drawbacks like bar charts.

Velocity diagrams are useful for representing the activities which require

a series of crews working in a given sequence.

Big and large sized projects are comprised of a large number of activities and

conventional scheduling methods like bar charts may not be effective for such large

and complex projects. If scheduling is not properly done, there may be an overestimation

or underestimation of project implementation period; both are not desirable.

Programme Evaluation Review Technique (PERT) and Critical Path

Method (CPM) are the widely used techniques for planning, scheduling and

controlling of large and complex projects. PERT was developed in the year 1957

by Morgan R. Walker of DU Pont and James E. Kelly of Remington Rand. PERT

was developed in the year 1958 by the US Navy.

Check Your

Progress

12. What is a bar

chart?


204

NOTES

Business


With slight modifications, PERT and CPM have given rise to several other

network techniques such as Programme Evaluation Procedure (PEP), Resource

Allocation for Multi-Project Scheduling (RAMPS), Least Cost Estimating and

Scheduling (LESS), and Scheduling and Control by Automated Network System

(SCANS) etc.

C. Choudhury groups several techniques which contribute significantly

towards effective project management under the following heads:

1. Project selection techniques

a. Cost benefit analysis

b. Risk and sensitivity analysis

2. Project execution planning techniques

a. Work breakdown structure (WBS)

b. Project execution plan (PEP)

c. Project responsibility matrix

d. Project management manual

3. Project scheduling and coordinating techniques

a. Bar charts

b. Life cycle curves

c. Line of balance (LOB) and

d. Networking techniques (PERT/CPM)

4. Project monitoring and progressing techniques

a. Progress measurement technique (PROMPT)

b. Performance monitoring technique (PERMIT)

c. Updating, reviewing and reporting technique (URT)

5. Project cost and productivity control techniques

a. Productivity budgeting technique

b. Value engineering (VE)

c. COST/WBS

6. Project communication and clean-up techniques

a. Control room

b. Computerized information systems

12.4 Network Analysis

A project consists of a number of organized activities and tasks. The

compilation of all the activities of the project in a sequence is known as project

Check Your

Progress

13. Name some tools

and techniques of

project management


205

NOTES

Business


logic. When it is represented in the form of a graphical depiction, it is called as

network. A network (also called as network diagram or network technique) is a

graphical representation of inter related activities of the project. It indicates the

specific activities required to complete a project. It depicts flow as well as sequence

of well-defined interdependent activities and events concerned with a project. It

clearly indicates start and finish time of each activity of a project. It enables the

project manager to assign duties and responsibilities for each specific activity.

Resources are allocated for each specific activity. The project manager may deploy

resources from non-critical activities to critical activities for the sake of project

duration needs.

A network path comprises of a set of activities which are well connected

from network beginning event to the network terminal event. It generally comprises

a set of symbols connected with each other in a sequential relationship with each

step making the completion of an event. It is a symbolic representation of the

essential characteristics of a project. On the basis of network diagram and

scheduling computations, it is possible to identify the longest series of activities

through the project implementation phase and decide about the project duration.

The longest path through the network is called as critical path. Length of the

critical path determines the minimum duration in which the project can be completed.

Network enables project managers to view the entire project in terms of

a sequence of activities and events. It indicates all the activities which follow one

after another leading to an event. It becomes clear that which tasks will be

performed simultaneously and which ones sequentially. The entire project can be

seen on one network. Since projects are broken down into simple activities and

these activities are arranged in a logical sequence. Time, costs and other resources

are allocated to different activities.

The working methodology of Critical Path Analysis (CPA), which includes

both CPM and PERT, according to P.C. Tulsian and Vishal Pandey, consists of the

following steps:

• Analyze and breakdown the project in terms of specific activities and/or

events

• Determine the interdependence and sequence of specific activities and

prepare a network

• Assign estimate of time, cost or both to all the activities of the network

• Identify the longest or critical path through the network

• Monitor, evaluate and control the progress of the project by replanning,

rescheduling and reassignment of resources

There are various network techniques available such as:

• Critical Path Method (CPM): The CPM is a logical mathematical model

of the project based upon the optimal duration required for each activity

and optimal use of available limited resources. It is a deterministic model.

• Programme Evaluation and Review Technique (PERT): The PERT is

basically a scheduling technique. It shows a project as a set of processes

or operations called ‘activities’ which must take place in a certain

sequence. To accomplish the project, all activities have to be completed.

It is a probabilistic model. It introduces uncertainties in the project

network.


206

NOTES

Business


• Graphical Evaluation and Review Technique (GERT): The GERT is a

recently used network. This is superior to CPM and PERT. It allows for

probabilistic events while all events in CPM and PERT are deterministic.

In the networks representing research and development project the

process is repeated till the desired outcome is achieved. CPM and PERT

cannot be used in such situations. Only in GERT network simulation can

be used.

• Line of Balance (LOB): Line of balance uses graphic techniques to

show the progress of the project with reference to key events.

• PERT/Cost: It is an extension of the basic PERT system to cover cost

of the project. It helps to plan the completion of a project not only within

a certain time but also within a certain cost.

• Workshop Analysis Scheduling Programme (WASP): This techniques

was developed by the British Automatic Energy Authority.

Prem Kumar Gupta and D.S. Hira note the objectives of network analysis

as:

• To complete the project within the stipulated period

• Optimum utilization of available resources

• Minimization of cost and time required for the completion of the project

• Minimization of idle resources and investments in inventory

• To identify the bottlenecks, if any, and to focus attention on critical

activities

• To reduce the set-up and changeover costs

Network techniques are very much useful for planning, scheduling and

control of operations in large and complex projects. With the application of network

techniques, project managers benefit immensely with optimum utilization of

resources, effective decision making, improved communication saving of time,

cost saving. They exercise management control in a far better manner. With the

help of these tools, it is possible to evaluate the performance by comparing actual

performance against the planned targets. These techniques help project managers

to predict the probable project duration and accompanying cost. Project managers

apply network techniques to achieve the objectives with least cost and in minimum

time. They are in a better position to anticipate the probable problems and difficulties

in actual execution of the project and thereby they can take correction action well

in time. They are able to minimize delays and hold-ups during execution.

Construction of networks for complex projects is time consuming and

complicated since it deals with time-cost trade off procedure. It adopts trial and

error approach. It is difficult to make an accurate, realistic and reliable estimation

about duration of various activities. For new and non-repetitive projects, the time

estimates are based on guesses. It is not easy to perform and analyze in the face

of resource constraints. Individuals trained in the network methodology are needed

to plan and implement networks. Either trained professionals are to be recruited

or existing employees need to get trained in networking techniques. There are

several difficulties in determination of the level of network detail. Planners take

decisions on the basis of judgement and experience.

Check Your

Progress


network analysis?

15. State the impor-

tance of network

analysis.



16. PERT and CPM

are the most com-

monly applied tech-

niques for project plan-

ning and control.


207

NOTES

Business


12.4.1 Programme Evaluation and Review Technique (PERT)

Programme Evaluation and Review Technique (PERT) is a popular method

used in project planning and control. It is a scheduling technique. It shows a

sequence of activities to be completed for concluding a project. It is primarily

concerned within project time. It enables project manager to schedule and coordinate

various activities so that the project can be completed on scheduled time. It is

generally used for those projects which are not of repetitive nature and where

time required completing various activities are not known in advance.

The steps of the process of PERT can be listed as:

• Identification of activities of the project

• Estimation of activity time

• Defining inter-dependent relationships between the activities

• Identification of critical activities for efficient allocation of resources

• Closer control on critical and other activities

PERT expedites planning. PERT facilitates management to use the

resources in the best possible manner for achievement of an objective within the

overall time and cost limitations. It enables optimum allocation of limited resources.

It determines critical activities in the project. It determines the expected duration

of activities and consequently of the project duration. It determines the most

economic schedule for fixed duration project. It incorporates risk analysis in project

network. In all, it supports management to take right action, at the right point, and

at right time to achieve a given goal.

The time estimates to perform activities constitute a major limitation of

PERT. Activities are of non-repetitive type. If the estimates are not satisfactory,

then the network will be highly unrealistic. The probability distribution of total time

is assumed to be normal in PERT which in real life situations may not be true.

Simple PERT technique does not consider resources required at various stages of

the project. If a certain resource must be used to perform more than one activity

and at the same time if it can be used for only one activity at a time then the

network diagram will become infeasible. For controlling a project with PERT,

there is need of frequent updating and revision of PERT calculations and this

exercise increases expenditure.

12.4.2 Critical Path Method (CPM)

CPM uses activity oriented network which consists of a number of well

recognized jobs, tasks, activities. CPM is generally used for simple, repetitive type

of projects for which activity times and costs are known precisely with a high

degree of certainty. It is deterministic rather than probabilistic model. CPM has

two time-cost estimates for each activity – one time-cost estimate for the normal

situation and the other estimate for the crash situation. It does not incorporate any

statistical analysis in determining such time estimates. It operates on the assumption

that there is a precise known time that each activity on the project will take.

CPM determines the critical or bottleneck activities and the critical path

on which the project duration depends. It gives the most economical schedule for

a fixed duration. It determines the pattern of allocation of available limited resources.

CPM helps in ascertaining the time schedule. With CPM, management

can have a control easily. It identifies the most critical elements and thus more

Check Your

Progress

17. Write a short note

on PERT


208

NOTES

Business


attention can be paid to these activities. It contributes to detail planning. Through

CPM, it is convenient to communicate project plans, schedules time and cost

performance.

CPM allows for a comprehensive view of the entire project. Because of

the sequential and concurrent relationships, time scheduling becomes more effective.

Identification of critical activities keeps the project manager alert and attentive.

He/she becomes prepared with alternative plans ready, if needed. The project is

broken down into small components. This permits better and more effective control

over the activities. It is beneficial to use selective management principle. In network

analysis, critical activities become A items, sub-critical items B items and all others

C items. Through the plan schedule derived from CPM, delegation can be more

effective.

CPM is deterministic model based on certainty assumptions as regards

time which may not be true in practice. CPM does not use statistical analysis in

making time estimates. It operates on the assumption that there is a precise known

time that each activity in the project will take. But this may not be true in actual

life. CPM cannot be used as a controlling device because any changes will alter

the entire structure of network. One has to repeat the entire evaluation ow the

project each time when changes are introduced in the network. CPM was initially

developed as a static planning model and not as a dynamic controlling device.

Comparison between PERT and CPM

PERT and CPM both are used in planning and controlling projects. Both

the techniques use near about the same networking principles. They are similar in

terms of their basic structure, rationale, and mode of analysis. Yet there are

differences between them.

• The origin of PERT is military (naval) and the origin of CPM is industrial.

• PERT is an event oriented approach whereas CPM is an activity oriented

approach. In PERT, the emphasis is on completion of task rather than

the activities required to be performed to reach a specific event or task.

CPM is built on the basis of activities.

• PERT is a probabilistic model with uncertainty in activity duration. CPM

is a deterministic model with well-known activity (single) time based

upon the past experience.

• PERT uses three estimates of time and CPM uses single estimate of

time for activities. PERT takes into account uncertainties involved in the

estimation of time of a job or an activity. It uses three estimates of the

activity time namely, optimistic, pessimistic and most likely, with a view

to take into account uncertainty in time. Expected duration of each

activity is probabilistic. Expected duration indicates that there is 50%

chance of completing activity within that time. CPM does not take into

account the uncertainties involved in the estimation of time for execution

of an activity. On the basis of past experience, each activity is assigned

a single time. In CPM, the emphasis is on cost.

• PERT is time based and CPM is cost based. PERT lacks the cost-time

function of CPM which is an important factor for project control. PERT

is predominantly concerned with time only. It helps to schedule and

coordinate various activities so that project can be completed in scheduled

time. CPM is concerned with project time as well as cost and finds

Check Your

Progress

18. Write a short note

on CPM


209

NOTES

Business


trade-off between project time and project cost. To reduce project

duration at optimum cost, it employs additional resources and manipulates

project duration within certain limits.

• PERT lays emphasis on reduction of the execution time of the project

without too much cost implications. CPM lays emphasis on the greatest

reduction in completion time with the least increase in project cost.

• PERT averages time while CPM does not average time.

• PERT does not demarcate between critical and non-critical activities

while CPM does mark the critical activities.

• PERT allows uncertainty whereas CPM does not allow uncertainty.

• PERT is suitable when high precision is required in time estimates. CPM

is suitable when reasonable precision is required.

• PERT is generally used for projects where time required for completing

the activities is not known in advance. It is generally used for those

projects which are non-repetitive in nature. PERT is used for large, one-

time research and development type of projects. CPM is mainly used

for projects which are repetitive in nature and comparatively small in

size. And where one has previous experience in handling similar projects.

• In PERT, the concept of crashing is not applied. In CPM, the concept of

crashing is applied.

• CPM relies on past experience whereas PERT do not take past

experience into consideration.

• Over a period of time, these differences between PERT and CPM have

become less significant. Now cost considerations have been included in

PERT analysis. These distinctions are of academic interest only. For the

purpose of analysis, both PERT and CPM are treated as synonymous.

12.6 Summary

There are several different ways to classify projects. The projects in which

quantitative assessment of benefits is possible are termed as quantitative projects

and the projects in which quantitative assessment of benefits is not possible are

non-quantitative projects. In labour intensive projects a larger portion of total costs

is due to labour as compared with the portion of costs incurred in purchase,

maintenance and depreciation of capital equipment. Capital intensive projects rely

mainly on capital; capital costs are higher than labour costs. The service oriented

projects are classified as: welfare projects, service projects, research and

development projects and educational projects. Industrial projects are set up for

manufacturing of goods. Non-industrial projects are done for the upliftment of the

society and done with social welfare objectives. National or domestic projects are

within one’s own country. International projects are built in other foreign country.

In normal projects time limits are set and adequate. In brash projects additional

costs are involved to gain time. Disaster projects allow any deviation to meet the

time deadline. Public sector projects are of the state, centre or both forms of

government. Private sector projects are mostly done with an objective to earn

profit. They are the projects with a complete ownership of promoters and investors.

Owner may be an individual, partnership firm or a company. In joint sector projects,

Check Your

Progress

19. What are the simi-

larities between PERT

and CPM?


210

NOTES

Business


there is a partnership between an entrepreneur and government – may be state

government or central government. On the basis of expertise, these types of

partnerships occur. Balancing project augments or strengthens the capacity of a

specific area within a sequence of entire production plant for the sake of scaling

to the capacity in order to have optimum utilization. Replacement project involves

replacing old machinery with new machinery to maintain the same or better

operational efficiency. Diversification project is meant to offer more than one

product to the market. Diversification may be related or unrelated. Backward

integration project involves adding manufacturing or processing facilities at beginning

stages of a product line. Forward integration project involves adding additional

manufacturing or processing facilities at completion stages of a product line.

Modernization project is concerned with adopting and upgrading the technology to

increase the productivity. Expansion project is undertaken to increase the production

capacity of goods and services. Rehabilitation project is undertaken to revive a

loss making enterprise.

Project management requires various tools and techniques such as bar charts,

milestone charts, velocity diagrams and network techniques. Programme Evaluation

Review Technique (PERT) and Critical Path Method (CPM) are the widely used

techniques for planning, scheduling and controlling of large and complex projects.

CPM uses activity oriented network which consists of a number of well

recognized jobs, tasks, activities. CPM is generally used for simple, repetitive type

of projects for which activity times and costs are known precisely with a high

degree of certainty. It is deterministic rather than probabilistic model.

Programme Evaluation and Review Technique (PERT) is a popular method

used in project planning and control. It is a scheduling technique. It shows a

sequence of activities to be completed for concluding a project. It is primarily

concerned within project time. It enables project manager to schedule and coordinate

various activities so that the project can be completed on scheduled time.

PERT and CPM have developed independently. They have a common

basis i.e. optimization of resources for implementation of the project as per the

pre-determined time, cost and performance. They assist in long-term planning.

They clearly indicate the inter-dependencies as well as problem areas. These

techniques allows mangers to focus on vital activities by proper allocation of time

and money. These techniques facilitate systematic allocation and utilization of

scarce and limited resources and contribute in achievement of goals within the

constraints of time and cost. They provide a powerful means to obtain trade-off

between cost and time.

12.7 Key Terms

• Event: A specific accomplishment that occurs at a recognizable point

of time and does not call for either the need of time or resources

• Activity: The work required to complete a specific event


Questions


211

NOTES

Business


1. Discuss various phases of project life cycle.

2. How will you classify projects? Which criterion seems to be more rational

and acceptable for classification of projects?

3. Discuss the similarities and differences of CPM and PERT.

4. Discuss the applications of PERT and CPM in project planning and

explain the difference between them.

5. What is PERT/CPM? What does each involve? How are they similar?

Different? What particular advantages does PERT have over CPM?

6. Explain the classification of projects.

7. What is meant by CPM? What are it salient features?

8. Explain the advantages and limitations of PERT.

9. What do you mean by network analysis? Explain clearly the nature of

network techniques and network planning.

Exercise

Activity 12.1

Meet two local entrepreneurs and ask the about the use of tools and

techniques of project management.



i. For small projects, investment in plant and machinery is more than

to Rs. 5 crores.

ii. For medium projects, investment in plant and machinery is up to

Rs. 10 crores.

iii. For large projects, investment in plant and machinery is up to Rs.

100 crores.

iv. Projects with investment on plant and machinery beyond Rs. 100

crores are categorized as mega projects.

2. Pick out the wrong alternative

i. Capital intensive projects invest heavily in plant and machinery.

ii. Labour intensive projects involve a large number of human

resources.

iii. Industrial projects are financed by government.

iv. Industrial projects are set up for manufacturing of goods.

3. Which one of the following is non-industrial project?

i. Irrigation project

ii. Pollution control project

iii. Educational project


212

NOTES

Business


iv. All the above


i. Profit maximization is the focus of public sector projects.

ii. Normal projects have no constraint on time.

iii. Crash projects are to be completed within the stipulated time.

iv. International projects involve higher risk and more efforts in

comparison with national projects.

5. Which one of the following applies for private sector projects?

i. Ownership rests with project promoters and investors

ii. Profit maximization is the focus

iii. Investors make an investment with an objective to earn good returns

on the investment

iv. All the above


i. All the phases in a normal project are allowed to take normal time

as per the needs

ii. Crash projects need additional capital cost for speedy implementation

of the projects

iii. Disaster projects compromise at various levels to gain time

iv. All the above

7. Which one of the following does not apply to PERT?

i. Cost based

ii. Time based

iii. Use of three estimates of time

iv. A probabilistic model

8. Which one of the following does not apply to PERT?

i. Cost based

ii. Time based

iii. Use of single estimate of time

iv. A deterministic model


i. PERT is an event oriented approach

ii. PERT does not take into account uncertainties involved in the

estimation of time of a job or an activity

iii. PERT lays emphasis on reduction of the execution time of the project

without too much cost implications


213

NOTES

Business


iv. PERT is suitable when high precision is required in time estimates


i. CPM takes into account the uncertainties involved in the estimation

of time for execution of an activity

ii. CPM lays emphasis on the greatest reduction in completion time

with the least increase in project cost

iii. CPM is concerned with project time as well as cost and finds trade-

off between project time and project cost

iv. CPM is suitable when reasonable precision is required

Answers

Check Your Progress

3. 10

4. Joint

5. Private

6. International, national

16. True


1. i

2. iii

3. iv

4. i

5. iv

6. iv

7. i

8. ii

9. ii

10. i


Burke Rory, Project Management Planning and Control Techniques, John

Wiley & Sons, Noida, 2003

Choudhury S., Project Management, Tata McGraw Hill Publishing

Company Limited, New Delhi 2002


214

NOTES

Business


Desai Vasant, Project Management, Himalaya Publishing House, New

Delhi 2011

Ghattas R. G., Mckee Sandra L. Practical Project Management, Pearson

Education Asia, Delhi 2001

Goel B. B., Project Management Principles and Techniques, Deep and

Deep Publications Pvt. Ltd., New Delhi 2004

Gupta C. B., Srinivasan N. P., Entrepreneurship Development in India,

Sultan Chand & Sons, New Delhi, 2005

Gupta Prem Kumar, Hira D.S., Operations Research, S. Chand &

Company Ltd., New Delhi, 2009

Jhamb L.C., Quantitative Techniques for Managerial Decisions, Everest

Publishing House, Pune, 2001

Nagarajan K., Project Management, New Age International Publishers,

New Delhi 2010

Tulsian P.C. Pandey Vishal, Quantitative Techniques Theory and Problems,

Pearson Education Asia, Delhi, 2002


215

NOTES

Business


BUSINESS ENTREPRENEURSHIP - Vycmou.digitaluniversity.ac/WebFiles/BEG 301_mcom_iii_Sem_book.pdf ·...

Documents

Transcript of BUSINESS ENTREPRENEURSHIP - Vycmou.digitaluniversity.ac/WebFiles/BEG 301_mcom_iii_Sem_book.pdf ·...