Entrepreneurship.doc

Entrepreneurship Objective: Entrepreneurship is considered to be a separate factor of production now-a-days. In words of Schumpeter, entrepreneur is one who innovates, raises money, assembles inputs, chooses managers and sets the organization going with his ability to identify them and opportunities which others are not able to identify. According to him, innovation occurs through (i) introduction of new quality, (ii) introduction of a new product, (iii) discovery of a fresh demand, and (iv) by changing the organization. His views are relevant for advance countries. Because an entrepreneur in India is required not only to innovate but also to combine resources and put them to optimum uses. According to P.F. Drucker, “Entrepreneur is one who always searches for change, responds to it and exploits it as an opportunity”. According to him, innovation is a specific instrument of entrepreneurship. He says that a systematic innovation is vital for entrepreneurship. Systematic innovation means monitoring seven sources of innovative opportunities – out of which four are internal and three are external. Internal Elements: - (i) unexpected successes and unexpected failures, (ii) discrepancy between what is and what is to be, (iii) a concrete task-focused programme and a scientific process for innovation, (iv) impending change in industrial market structure. External Elements: - (i) Demographic Change (change in population level), (ii) Change in ideas and attitudes of the customer, and (iii) New knowledge e.g. computer or internet. Elements of the characteristics and dimensions of an Entrepreneurship: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Innovation (creative activity leading to changes in the existing products or services). Function of high-achievement (doing things in a new and better way and decision making under uncertainty). Organization-building function (multiplying oneself by effectively delegating responsibility to others). Group level pattern (Entrepreneurial activity is generated by the family background, experience and as a member of certain group and its reflection of values. Managerial skill and Leadership. Gap-filling functions (make up the deficiencies which always exist in the knowledge about production function). “The withdrawal of status respect” (creative personalities emerge when the members of some social groups experience the withdrawal of status respect). [Retreatist, ritualist; reformist and innovators]. Social, political and economic structure: the supply of entrepreneurship depends upon the structures found in a society or commodity (e.g. minorities have provided most of the entrepreneurial talent). A function of religious beliefs.

Intrepreneur (Inter-corporate entrepreneur): Gifford Pinchot-III used the term “Intrepreneur” to describe the persons who resigned from their well paid executive positions to launch their own ventures. These persons are driven not by monetary gain, but by a deep desire of personal achievement. Intrapreneurship : The entrepreneurial spirit can be an important competitive advantage, especially if harnessed in large organizations, which contain some of the best people and resources. But to accomplish this, large corporations must grant employees the kinds of freedoms entrepreneurs now enjoy. A relatively new concept called Intrapreneurs is the latest jargon used by the corporates. Who is an Intrapreneur? A person in a large Organisation empowered to create new products without been constrained by standard procedure. Innovation involves turning new ideas into business successes. Large corporations are good at creating ideas but poor at developing them commercially. Dissatisfied would-be intrapreneurs are then driven to venture capitalists to become entrepreneurs. To keep their creative people and implement new ideas, firms must first understand the complicated process by which innovation really works. Both top management and potential innovators must also recognize certain truths about intrapreneurs. They circumvent or ignore orders, follow intuition, go beyond formal job descriptions, share responsibility with a team, and pursue goals passionately but realistically. Intrapreneurs bridge the gap between inventors and managers; they take new ideas and turn them into profitable realities. Without them there is an innovation gap. They have vision and the courage to realize it. They can imagine what business and organizational realities will follow from the way customers respond to their innovations; they can plot the necessary steps from idea to actualization. To make things work, intrapreneurs cross organizational boundaries to do other people's jobs. They have a need to act, and they don't wait for permission to begin. Their dedication frequently shuts out other concerns, including family life. They pursue only goals that they set, that have personal meaning. Successful intrapreneurs learn to overcome mistakes

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and to manage risk. The typical intrapreneurial personality lies somewhere between that of the traditional manager and that of the traditional entrepreneur. Intrapreneurs are enough like entrepreneurs to make top management nervous, because of the unsettling myths about the entrepreneurial personality. Contrary to prevailing opinion, 1. 2.

Entrepreneurs are driven by a need to realize their vision, not a desire for wealth They work to minimize risk in order to realize their goals

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They follow both intuition and hard analysis

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They are honest with themselves and others and

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They do not have a need for power. They are, in short, worthy of freedom and responsibility.

Big companies can make the development of a new idea far easier for an intrapreneur than the same task would be for an entrepreneur. They offer marketing clout, a technology base, trusted co-workers, and information resources. They can provide financial support for projects that would not be attractive to venture capitalists. On the other hand, entrepreneurs escape the indecisiveness of the corporation, tap the experience of sophisticated venture capitalists, and enjoy the satisfactions of ownership. Successful intrapreneurs must choose the right idea from several they might be developing simultaneously in their minds. The idea must be good for the market, good for the company, and good for the intrapreneur. The idea will fit the market if there is a real customer need and the product can be delivered in a cost-effective manner at a price that gives adequate margins. It should also be appropriate for the company culture and lead to growth and profits. Most important, the idea should fit the intrapreneur's skills and experience. It should inspire belief, enjoyment, and dedication. Ideas can come from brainstorming, talking with co-workers in diverse departments, individual curiosity, market research, and current company projects and technology. Intrapreneuring can also involve improving a process within the corporation. Business planning converts intuitive vision into an action agenda. It documents destination, strategies, schedule, expected obstacles, and expected responses. The planning process includes training yourself to become more entrepreneurial, screening your ideas, attracting a venture team, building team consensus, raising money, and getting permission to proceed. Be careful to whom you show your business plan. Before it is formally presented, you should pre-sell the idea to the decision-makers. In writing the plan, begin with your goals and then follow a table of events. Sponsors break down three barriers to Intrapreneuring: lack of resources, "nervous money" (that is, vacillating investors), and political attacks. Sponsors are involved with technical problems, marketing options, presentation of ideas to management, and behind-the-scenes intervention. They help the intrapreneur think through and execute the "intraprise." Sponsors can be CEOs, former intrapreneurs, and owners. They must, however, be attracted naturally when the chemistry is right, not recruited. Above all, there must be trust between intrapreneur and sponsor. Intrapreneurial leaders face a basic paradox: the new venture team needs decisive centralized direction-setting but, at the same time, it requires participatory management to do its best work. Successful leaders breed a hybrid organization. They set the direction, give team members freedom and respect, and listen to colleagues-but they make the final decision. They build com-mitment by focusing on the goal of the intraprise and by sharing the visionary task. Building an intraprise includes four phases. The first is the solo phase in which the intrapreneur works alone. The second is the networks phase in which ideas are shared with a few close friends and trusted customers. This evolves into the bootleg phase where the emerging team works unofficially during spare hours. Finally, there is the formal team phase, which requires delicate management of people and the mainline corporate structure. The presence or absence of 10 freedom factors determines how effective intrapreneurs can be in their corporate culture. Potential innovators and managers seeking to promote innovation should audit their company's environment for the following: 1. 2.

Self-selection: Does the company encourage the self-appointed intrapreneur? No hand-offs: Does the company provide ways for intrapreneurs to stay with their intraprises?

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The doer decides: Can people do the job in their own way without always seeking permission?

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Corporate slack: Are there quick and informal ways to gain access to resources for new ideas?

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Ending the home-run philosophy: Can the company manage many small and experimental products and businesses?

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Tolerance of risk, failure, and mistakes: Is risk-taking encouraged? Are people allowed to learn from mistakes?

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Patient money: Can the company stick with the experiment through several false starts?

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Freedom from Turfiness: Are people more concerned with new ideas or defending their turf?

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Cross-functional teams: Is it easy to form autonomous teams?

10. Multiple options: Are people free to use the resources of other divisions and outside vendors? The reward systems for most firms are inadequate because they (1) don't match the risks of Intrapreneuring; (2) feature promotions, which are not suitable for most intrapreneurs; and (3) ignore the freedom to act on new projects, which is the basic motivation of the intrapreneur. Reward systems discourage risk-taking and encourage failure avoidance. They must be restructured to acknowledge the extraordinary contributions of the innovators. Firms should create a career path for intrapreneurs that allows the continual inception of new ventures without the financial penalties of lost promotions and with the increased freedom to act. The most fundamental measure of progress for an intrapreneur is the increasing freedom to use corporate resources to build new businesses for the corporation. This reward can be given (earned, actually) in the form of "intracapital." Intracapital is a permanent discretionary budget; like a bank account, it is there until used. It is a powerful motivator because it conveys a sense of ownership and guarantees freedom. It is advantageous to the company because it encourages frugality and allows the firm to bet on proven winners. Intrapreneurs earn intracapital when their new ventures succeed for the corporation. In a formal system, intrapreneurs also take some risks, such as foregone salary increases and extra, unpaid labor; there is an agreed-upon method of measuring success; profits are allocated to sponsors and team members, as well, in an agreed-upon manner; and earned rewards and autonomy can not be taken away. Contrary to many people initial fears, intrapreneurial corporations are better controlled than hierarchical organizations. The essence of efficient control is a good fit between the system and the task. Intrapreneurial firms are fit for the Innovation Age because they conserve the resource of brainpower. Such firms have found that trusting their people to preserve high quality works. In fact, with the increased use of computers, smaller staffs will be possible, thus lessening the chances of over control. In the Innovation Age, control systems will be based on selecting and empowering the right people, much as the venture capital system functions today. Conclusion: To survive, corporations of the future must change. They must balance necessary structures and freedom of action to increase productivity. The first step is an "interactive decentralization" that relies on voluntary customervendor relationships. Executives can create an internal marketplace that pushes intrapreneurs and employees toward the objectives of the corporation. Intracapital is the key ingredient in making decentralization work because it generates free intraprise. Intrapreneurship is a way of organizing business so that work again becomes joyful. The wealth of corporations-like that of nations-is dependent on the freedom of their people. Distinction between Entrepreneur and Intrepreneur: (i) an entrepreneur is an independent businessman who bears the full risks of his business, whereas an intrepreneur is semi-independent and does not fully bear the risk of the business he develops and operates, (ii) the entrepreneur himself raises the necessary capital from various sources and guarantees the return to people who give him finance; on the other hand, the intrepreneur neither raises the capital himself nor guarantees any return to the suppliers of capital, and (iii) an entrepreneur operates from outside an organisation whereas the intrepreneur is an “organisation man” operating from within the organisation. Both the entrepreneur and the intrepreneur are innovators and both perform the function of organization and management. But the context within which the two operates and the degree of risk they bear are different.

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Recently, a trend opposite to intrepreneurship has also been observed. The hassles of private entrepreneurship in the Indian context are so gigantic that unless the individual has a matching stamina, morally and physically, his chances of survival are weak. Seven principles for successful entrepreneuing: personal traits and characters. 1.

2. 3. 4. 5. 6.

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Research shows that successful entrepreneurs shares common

Develop a visionary, positive, serving perspective. Entrepreneurs visualize in their mind a better way of doing things. To them, problems are opportunities. To be successful, they must seek to help others; because in doing so the entrepreneur will be serving himself. The greater is the need of the people, the greater will be the personal regards for the entrepreneur. Be a goal setter. Successful ones always clearly define their object. By knowing exactly what they want to accomplish they multiply the chance of success. Educate yourself for success. Entrepreneurs seek to acquire the additional education, training and experiences necessary to achieve their insights. Take calculated risk, do not gamble. Most entrepreneurs are risk takers. But they do not rely on gambling or luck. Use time effectively. Entrepreneurs priorities their responsibilities, establish deadlines and ready themselves for each day’s work. They avoid wasted effort in frivolous (light hearted) matters. Be filled with drive, resourcefulness and perseverance. An entrepreneur is a dreamer and a doer; without energy, drive and propulsion he is likely to fail. Every entrepreneur face hurdles, unexpected problems and setbacks. These situations must be met head on with resourcefulness. Finally, the trait of perseverance is also essential and it is told that “entrepreneurs are anything but quitters”. Follow ethical standards. Ethical behaviour produces long run benefits. Enduring profitable business requires honest dealings with everyone.

Characteristics of a Successful Entrepreneur (Entrepreneur Traits): A summary of the fifty research studies reveals the following entrepreneurial traits: i. Total commitment, determination and perseverance. ii. Drive to achieve and grow. iii. Opportunities and goal orientation. iv. Taking initiative and personal responsibility. v. Persistent problem solving. vi. Realism and a sense of humor. vii. Seeking and using feedback. viii. Internal focus of control. ix. Calculated risk-taking and risk-seeking. x. Low need of status and power. xi. Integrity and reliability. The trait approach to entrepreneurship is useful. By developing a profile of a successful entrepreneur, it becomes possible to spot and develop entrepreneurs. However, this approach is not always satisfactory. Basically, an entrepreneur should be one who can bear risks, make innovations, and organize the business. Difference between an entrepreneur and a manager or an executive: Characteristic 1

Innovation

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Risk Taking

Entrepreneur He works to change in accordance with his personal visions and values. He takes calculated risks.

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Reward

He is motivated by profit.

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Skills

He needs intuition, creative thinking and innovative ability

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Status

He is self-employed and is his own boss.

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Manager He keeps on running a business on established lines. He is less tolerant of uncertainty. He is motivated by externally imposed goals and rewards. He depends more on human relations and conceptual abilities. He is a salaried person and is not independent oh his employer.

Response to Authority

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He was unable to submit to authority and accept the organisational roles. In that sense, he is “misfit” who had to enact their own environment.

He is well able to identify in a positive constructive way with authority.

Types or Classification of Entrepreneurs: in a study of American agriculture Danhof has classified entrepreneurs in the following categories: 1. 2. 3. 4.

Innovating Entrepreneurs: person of this type are generally aggressive in experimentation and cleverly put attractive possibilities in to practice. There is dearth of such entrepreneur in developing countries. Adoptive or imitative Entrepreneurs: instead of innovating the changes themselves, they just imitate the technology and techniques innovated by others. They are most suitable for underdeveloped countries. While innovative entrepreneurs are creative, imitative entrepreneurs are adoptive. Fablan Entrepreneurs: they are very cautious and skeptical while practicing any change. They are shy and sometimes lazy. Their dealings are determined by custom, religion, tradition, and past practice. Drone Entrepreneurs: they are characterized by a refusal to adopt and use opportunities to make change in production. They are laggards (shirker) and continue to operate in their traditional way and resist changes.

Another classification of entrepreneurs is: i. ii. iii. iv.

Individual and Institutional Entrepreneurs. Entrepreneurs by inheritance. Technologist entrepreneurs. Forced entrepreneurs.

Pitfalls and Barriers to Entrepreneurship: (i) lack of viable concepts, (ii) lack of market knowledge, (iii) lack of technical skills, (iv) lack of seed capital, (v) lack of business know how, (vi) complacency and lack of motivation, (vii) social stigmas, (viii) time pressure and distractions, (ix) legal constraints and regulations, (x) monopoly and protectionism, and (xi) inhibition due to patents. Factors that may help to reduce the effects of above barriers to Entrepreneurship: (i) market contacts, (ii) local incubator companies, (iii) capable local manpower, (iv) technical education and support, (v) suppliers assistance and credit, (vi) local venture capitalists, (vii) venture bankers, (viii) capable local advisers, (ix) proper entrepreneur education, and (x) successful “role models”. In the newly industrializing countries, small enterprises become the focus of various approaches to entrepreneurial development since they function as “seed bed of entrepreneurial and managerial talent”. The inadequacy of entrepreneurship is an inhibiting factor to accelerate the process of industrialization. Lack of motivation, shyness and inhibition on the part of the individual, ignorance of opportunities that he can avail himself of, lack of requisite management skill to start and manage enterprises, lack of finance for initial investment, lack of family & community support for enterprises, fear of cumbersome & time-consuming process in establishing the enterprise, and suspicion about his ability, all inhibit him, to become an entrepreneur. Entrepreneurial Environment: In advanced countries, their family system, religious belief, cultural factors, educational system etc are conductive for the creation of entrepreneurial skill. Besides these, the external factors like government support, industrial policies etc of the government go a long way in bringing out the best of entrepreneurship from everyone in the country. All these factors are called environmental factors affecting entrepreneurship. These factors decide the shape of the entrepreneur and his mental make-up. The interaction between the entrepreneur and the environment is a continuous process. Broadly speaking, the environmental factors affecting the entrepreneurship may be classified into (i) economic factors, (ii) social factors, (iii) political factors, (iv) emotional and psychological factors, and (v) legal factors. Organizing and Operating Small Business: An entrepreneur having a keen interest for starting up of a small scale unit should formulate a business plan and take a number of steps to give shape to his business plan. A careful adaptation of

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the following steps will avoid many pitfalls and help the entrepreneur to have a smooth sail in his advantageous entrepreneurship: 1. 2.

Selection of the right product. An economic viability of the product must be made. Selection of the form of ownership. (Sole proprietorship, Family ownership, Partnership and Private limited Company). 3. Selection of Sites. (Site from Free Trade Zone, Export Processing Zone, Declared Industrial Area). 4. Deciding the Capital structure. (Own capital, Long term loan from friends and relatives, Term loans from Banks & Financial Institutions). 5. Acquisition of manufacturing know how (National Laboratories, CSIR, RDC etc give information on the feasibility scale of operation). 6. Preparation of Project Report. (May get the report prepared by Technical Consultancy Organisations). The project report (consisting of technical feasibility; economic viability; financial implication; and managerial expertise) will provide information in a capsule to the financing agency. 7. Registration of the Industrial Undertaking. (A provisional registration, provided for one year, will entitle the new entrepreneur (a) apply for a shed in a industrial area, (b) apply to corporations / municipalities for other licenses, (c) apply for power connections, and (d) apply for financial assistance from banks etc). 8. Obtaining Statutory Licence (Municipal License; Registration with Central and Sales Tax departments; Registration as per the Factories Act with the Inspector of Factories - for 10 persons with power & 20 persons without power, Registration with Shop and Establishment Act, if applicable). 9. Power Connection (for connected load of 75 hp and below LT connection; from 75 hp to 130 hp he may opt for either LT or HT and for connected load exceeding 130 hp the unit is classified as HT consumer) 10. Arrangement of Finance (Small Industries Bank of India [SIDBI], SFC, National Small Industries Corporations Limited [NSIC]). NEDA Scheme: “New Entrepreneur Development Agency” Scheme by Indian Bank grants loan facilities under certain conditions e.g., educational qualifications, age (21-35 years), first generation entrepreneurs etc. Hire purchase/ Leasing scheme of National Small Industries Corporation Limited (NSIC) provides assistance to smallscale industries for acquiring machinery. Two stage procedure for registration of Small Scale Industrial Undertakins: a.

Provisional Registration (for bringing the unit in existence): The provisional / permanent registration is granted at the State / District level by the State Directorate of Industries. A provisional registration certificate (PRC) is valid for one year in the first instance and thereafter may be renewed for a period of two or more years in six monthly extensions on submission of satisfactory proof that the entrepreneur is working for the project. The PRC will automatically lapse at the end of three years if the entrepreneur does not make application for permanent registration. The provisional registration entitles the applicant to: i Apply for a shed in an industrial estate / developed site etc. ii Apply for financial assistance to nationalized bank or other financial institutions. iii Apply to NSIC or SSIC etc for procuring machines on hire purchase. iv Obtain Sales Tax, Excise Registration etc whenever required. v Take other steps to establish industrial unit and obtain import license for capital goods and raw materials. The essential certificate for import license could be issued if District Industries Centre (DIC) is satisfied that effective steps have been taken for establishment of the unit. Subsequent licenses will, however, be issued only after the permanent registration.

b.

Permanent Registration: When the entrepreneur has taken all steps to establish that: i the factory building is ready; ii all requisite machinery, testing equipment and pollution control facilities have been installed; and iii the power connection has been obtained, then the application for permanent registration can be made to the District Industries Centre (DIC) or other designated Officer. The officer will then inspect the unit for assessment of the installed capacity and other aspects. On being satisfied that the unit is capable of production, a separate registration certificate may be issued by the Directorate of Industries.

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All registered units should submit half-yearly report of the raw materials received / consumed, stock-on-hand, production and sales to the Directorate of Industries in triplicate. Failure to submit such returns may constitute ground to refuse to sponsor application for import / allocation of raw materials. Procedure for units, which wish to expand / diversify: No fresh registration or endorsement is required if it was already registered unless it involves the addition of plant and machinery. Registration of Existing Units: Such units should apply for registration (even without obtaining a provisional registration) to GM, DIC. All applicant units will be inspected as if they are new units and then registration approved. De-registration of Units: A small-scale registered unit may be de-registered on following grounds: 1. 2. 3. 4. 5.

If the unit remained closed continuously for more than one year. If the unit failed /refused to give full and truthful information as called upon by the registering authority., particularly the half-yearly report. If the unit misutilises raw materials allocated to it. If the unit is found to be a subsidiary of or owned or controlled by a medium or large-scale undertaking. If the fixed investment in plant & machinery of one or more units (clubbed together) set up by common proprietor for the manufacture of similar products exceeds the fixed investment ceiling prescribed in the definition of small scale / ancillary industrial undertaking (then all such units would be liable for de-registration).

Selection of the Type of Organisation for the Enterprise: The main forms of organization are: 1. Sole Proprietorship; 2. Partnership; 3. Company Form. A. Sole Proprietorship: It is a business owned and controlled by one person. He receives all the profits and bears all the risks in the success and failure of the enterprise. Salient features are single ownership, one-man control, nonseparate legal entity of the firm, unlimited liability and undivided risk. Sole Proprietorship is suitable for small capital oriented units e.g. sweet-shop, bakery etc; where quick decisions are important e.g. share brokers; where limited risks are involved e.g. automobile shops; where operation is simple and does not require skilled management. B. Partnership (Firm): The need to secure more capital, provide better skill and avail specialization led to the growth of partnership form of organisation. A partnership is an agreement among two or more persons to carry on jointly a lawful business and to share the profits arising there from. Characteristics of partnership are maximum ten number of partners for banking business and twenty for non-banking business; an agreement for partnership; lawful business; sharing of profit; mutual agency among partners (i.e. the act of one partner is binding on the firm or other partners); unlimited liability; restrictions on transfer of interest and utmost good faith. A written (it may be oral also) agreement among partners is known as “Partnership Deed”. Partnership firms are suitable for small & medium sized business that require limited capital, pooling of skills & judgments, demand moderate risks e.g. Wholesale & Retail trade, Transport agency, Real Estate brokers, Chartered Accountancy firms, Nursing Homes, and Attorney firms etc. Registration of Partnership Firms: It is not compulsory as per the Partnership Act, 1932, but is desirable. Application signed by all the partners along with the prescribed fee is to be deposited with the Registrar of Firm. On receipt of the prescribed forms duly filled-in fully, the Registrar of Firms will make an entry in the “Register of Firms” and issue a certificate of registration. Registration is conclusive proof of partnership and it helps to check tax evasion. After registration, a firm can file a suit to enforce its claim against third parties or partners can enforce their claims against each other. Registration for Income Tax: Registration of a Partnership Firm under the Partnership Act, 1932 is different from registration under the Income Tax Act, 1961. If a firm is registered under the Income Tax Act, 1961, its tax liability gets reduced. The profits of such a firm are divided among the partners and tax is charged on the incomes of the partners individually. For non-registration under the I.T. Act, the tax is charged on the profits of the firm as a whole. Dissolution of Firm: Dissolution of firm always involves dissolution of partnership, but the dissolution of partnership does not necessarily mean dissolution of the firm.

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Merits / Advantages of Partnership: 1. Ease of Formation (no cumbersome legal formalities are required). 2. Larger financial resources. 3. Specialization and Balanced Approach. 4. Flexibility of Operation. 5. Protection of Minority Interest. 6. Personal incentive and supervision. 7. Ability of survival (compared to sole proprietorship). 8. Better Human and Public Relation. 9. Business Secrecy. Demerits are unlimited liability, comparatively limited financial resources, risk of implied agency, lack of harmony, lack of continuity in case of death or retirement of a partner, non-transferability of interest, and public distrust because the firm is not subject to detailed rule and regulations. C. Joint Stock Company (Company Form): Major limitations of proprietorship and partnership business are unlimited liability, lack of continuity and limited financial resources. The company form of business organization was evolved to overcome these limitations. A joint stock company is an incorporated voluntary association of individuals with a distinctive name, perpetual succession, limited liability and common seal, and usually having a joint capital divided into transferable shares of a fixed value. It is an artificial legal person having an independent legal entity. Salient features of a company are as follows:i Separate Legal Entity. ii Artificial Legal Person. iii Personal Succession. iv Limited Liability. v Common Seal. vi Transferability of Shares. vii Separation of Ownership and Management. viii Incorporated (i.e. registered) Association of Persons. Private and Public Companies: a.

Private Company: It is a company which by its Article of Association: i Fixes the minimum number of members to two and maximum number to fifty, excluding members who are in the employment of the company. ii Prohibits any invitation to the public to subscription for any shares in or debentures of the company. iii Restrict the right of its members to transfer shares, if any. A private company enjoys special privileges and exemptions under the Companies Act. Private Company combines the advantages of both partnership and public company. It is a separate legal entity, has continuity, limited liability and business secrecy. Due to small number of members (usually of extended family and friends), there can be high degree of privacy and there is comparative freedom from legal requirements. Private companies are suitable for wholesale trading, chain business, hire purchase, underwriting firm etc.

b.

Public Company: i At least seven persons are required to form a public limited company and but does not limit the maximum number of shareholders. ii Lays down no restriction on the transfer of its shares. iii Can invite public for subscribing to its shares and debentures.

Merits / Advantages of Company Form of Organization: 1. Limited Liability. 2. Large Financial Resources. 3. Continuity. 4. Transferability of Shares. 5. Professional Management. 6. Scope of growth and expansion. 7. Public Confidence. 8. Diffused Risk. 9. Social Benefits.

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Demerits / Disadvantages of Company Form of Association: 1. Difficulty and Expense of Formation. 2. Excessive Government Control. 3. Lack of Motivation and Personal Touch. 4. Oligraphic (Rule by a few) Management. 5. Delay in Decisions. 6. Conflict of Interest. 7. Frauds in Promotion and Management. 8. Lack of Secrecy. 9. Social Evils (concentration of economic power). Factors to be considered for the choice of the form of ownership: i Nature of Business: Whether Trading. or Servicing or Manufacturing. ii Size and Area of Operations: whether Large, Medium or Small; or Local, National or International. iii Degree of Control intended by promoters.. iv Amount of Capital Required initially and for further expansion.. v Degree of Risk and Liability willing to be accepted by the promoters. vi Division of Surplus desired. vii Duration of Business desired. viii Government Regulation and Control. ix Managerial Requirement. (As there is separation of ownership and management in a Company form, the motivation is comparatively lower, but the professional managers can adapt the use of complex managerial techniques). x Flexibility of Operations.(less for a company form) xi Tax Burden. (A company is taxed at a constant rate irrespective of the volume of profit, where as in case of partnership and proprietorship business the rate of tax increases with the volume of business). Entrepreneurial Motivation: Money is not the only motivator for an entrepreneur. One research study indicates the following motivating factors for the entrepreneurs: A. Internal Factors. i Educational Background. ii Occupational Experience. iii Desire to work independently in manufacturing line. iv Desire to branch out to manufacturing. B. External Factors: i Assistance from government. ii Assistance from Financial Institutions. iii Availability of Technology. iv Other factors like the demand for a particular product. Or excess earned from agriculture or contracting business. The research has revealed that occupational experience is the most significant internal motivating factor. Because, business experience provides confidence to the entrepreneurs, which helps to reduce the element of uncertainty regarding demand of the product, technology, raw material etc. Another study classified the motivational factors behind entrepreneur’s growth into following three categories as: 1. Entrepreneurial Ambitions: to make money, to secure self-employment, to gain social prestige. 2. Compelling Reasons: unemployment, to make use of idle funds. 3. Facilitating Factors: success stories of individuals, previous employment, advise of family members. Executive Selection and Training in Small Business Three basic tools in the hands of entrepreneurs to select the executive and give them proper training & placement are: i Job Analysis.

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ii Job Description. iii Job Specification. Job Analysis is the process of collecting, analyzing and recording information about the jobs. The primary as well as secondary tasks that comprise the job should be listed and the skills, personality characteristics, educational background, the training and other requirements of a person to do the job should be determined. A job analysis reports the job as it exists for the post, and not as it exists in similar establishments. Job analysis is conducted by different methods e.g. observation, interview, position analysis questionnaire etc. The result of the Job Analysis is presented in the form of Job description and Job Specification. Job Description is a written statement of the duties and responsibilities of a job. In short, it tells people what is expected of them in the performance of their duties. To take an example, a Job Description for a marketing job might read thus: Marketing Manager: Duties include hiring, training, and supervising sale; Responsibilities for the overall performance of the department and reports to the Zonal Manager. Job Specification concentrates on the characteristics needed by an employee to perform the job. These qualifications might involve such factors as (a) educational qualification & training; (b) experience; and (c) physical & mental requirements. To take the example of Marketing Manager, a Job Specification might read: - “The position requires MBA; eight years of experience in Sales with minimum three years of supervisory experience; energetic individual with well-developed interpersonal skills”. Recruitment (attracting job applicant) involves seeking and attracting a group of people from which qualified candidates are to be selected. Sources of Recruitment: a. Internal Sources. It is not a healthy sign in long run as it prevents new blood from entering the organisation; capable persons may not be selected; but it can have significant positive effect on employee motivation and morale. b. External Sources. Walk-in-interview; advertisement; employment exchange; private employment agencies; labour union; educational institutions; professional associations; former employees; military services etc. Role of Outside Consultations in Recruiting: Many business organizations use executive search firms and management consultants who specialize in recruiting executive personnel. Selection (filtering of candidates): The purpose of the selection process is to choose from the available individuals who are most likely to perform successfully in a job. The job analysis, human resources planning, and recruitment are the essential pre-requisites to the selection process. Selection is a process of eliminating the unsuitable candidates and finally arriving at the most suitable candidates. Thus, while recruitment is considered as a positive process (or attracting job applicants), selection is a negative process (or rejecting or filtering the applicants). The cost of recruitment and training are considered as investment in personnel the return for which will be in the form of contribution made by them toward the output. A general selection process has the following steps: 1. 2. 3. 4. 5. 6. 7. 8.

Recruitment. The Screening Interview. Blank Application Form. Psychological Tests. To know about the mental alertness, achievements, aptitudes, physical dexterity (skill) etc. Evaluation Interview. Background Investigation: verification of the information obtained from the candidate’s blank application form. The Physical Examination. Placement including Training.

Training is the systematic instruction of staff at all levels to improve their skill and aptitudes. Small-scale industries in India suffer from various handicaps compared to large-scale industries. One of the most important among them is the nonavailability of technical and managerial personnel of the required caliber. For the benefit of small-scale industries, Small Industries Service Institutes have been conducting general application courses in Industrial Management as well as specialized Management Courses in specific areas like Marketing, Financial Management, Costing, Production Management etc. Training Courses in Business Management are also conducted at the Small Industries Service Institutes. Small Scale Industries

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Recent experience has concluded that development of Small Scale Industries is the only solution for most of the economic problems, to develop the country as a whole and to improve the standard of living of the people. The concept of small-scale industries has undergone periodic changes. The definition of small industries has undergone changes from time to time from 1954. As per the revised definition in 1974, Small-scale Industry means an undertaking having investments in fixed assets (i.e. in plant and machinery) not exceeding 10 Lakhs. Ancillary Industries producing components required by Large & Heavy Industries: Undertakings having investments in fixed assets in plant & machinery not exceeding Rs. 15 Lakhs and engaged mainly in the manufacture of intermediates or rendering of services for large plants, provided that no such undertaking shall be a subsidiary of or owned or controlled by any other undertaking. All industrial units covered by the revised definition will be eligible for the facilities and concessions open to smallscale industries such as credit on liberalized terms, allotment of factory sheds/plots in Industrial estates/ Industrial areas, supply of machinery on hire purchase terms through the NSIC and State Corporation, participation in Government Stores Purchase Programme, Training & Industrial extension Services. Tiny Sector (1977): All industries, with a capital investment of Rs. 2 Lakhs in plant & machinery and located in rural areas and small towns, are included in the tiny sector, so that financial institutions and other development agencies may give special attention to their rapid development. It was the objective of the Industrial Policy Resolution of 1977 to achieve a rapid increase in employment, productivity and income of industrial workers. In 1980, GOI raised the level of investment in tiny sector, small-scale industries, and ancillaries as under: 1. 2. 3.

The limit of investment in Tiny units was increased from Rs. 1.0 Lakhs to Rs. 2.0 Lakhs. Same in Small-scale units from Rs. 10.00 Lakhs to Rs. 20.0 Lakhs. Same in ancillaries from Rs 15.0 Lakhs to Rs. 25.0 Lakhs.

Enhancement of Investment Limits: Keeping in view the escalation in the cost of Plant & Machinery since 1980, the GOI has increased the investment limits for small-scale undertakings to Rs.35.00 Lakhs and for ancillary undertakings to Rs.45.00 Lakhs and they have been exempted from the licensing provisions of the Industries Development & Regulation Act, 1951. Classification of Small Scale Industries: The aim of small industry program in India is to mobilize the productive resources of the country, contain the monopoly of few large enterprise, and increase income, profits and employment. Business Occupation 1. Agriculture. 2. Industry. a.Small Scale i Cottage. ii Village. iii Ancillary. iv Modern Small Scale Industry & Tiny Sector. b. Medium Scale. c.Large Scale. 3. Commerce. a.Banking. b. Warehousing. c.Transport. d. Insurance. e.Trade. i Domestic Trade. A. Whole Trade. B. Retail Trade. ii Overseas Trade. A. Export. B. Import. f. Packing.

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4.

g. Advertising. Profession.

A proper organisation assists in the most effective use of the physical assets and the human resources so that the unit may be perpetuated and the profit objective may be achieved. The concept of organisation has five basic elements: 1. The assembly of men, materials, machines and money accordance to the plan. 2. The identification & grouping of the work i.e. work division and work allotments. 3. Definition of responsibilities for every functions. 4. Delegation of appropriate authority. 5. The establishment of structural relationships. Definition of Organisation: An organisation is the systematic bringing together of interdependent parts to form a united whole through which authority, coordination and control may be exercised to achieve a given purpose. The success of an organisation depends on the behavior of human beings. Importance / Advantages of Organisation: 1. It encourages specialization and ensures higher productivity. 2. It ensures smooth functioning of activities. 3. It helps in coordination of various activities in integrated manner. 4. It ensures proper direction, motivation, coordination and control. 5. It helps in the expansion and growth of an enterprise. 6. It provides for the optimum use of the technological improvements and manpower for growth. 7. An effective organisation promotes growth and diversification thorough decentralization and divisionalisation on geographical or on product basis. Formal and Informal Organisation: the structure, procedural, membership and work processes of a formal organisation are explicitly stated in clear terms. It is based on the delegation of authority with official leadership. Principles of Organisation: (Fifteen basic principles laid down by Urwick) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Objective. Specialization. Coordination. Clear unbroken line of authority. Responsibility. Efficiency. Delegation. The Span of Control. Balance. Communication. Personal Ability. Flexibility. Grouping. Definiteness. Continuity.

Steps in Organizing: a. Identify the activities in order to attain the objectives of the unit. b. Determining the activities, which are needed to execute plans and policies with a view of attaining objectives. c. Classifying and grouping the activities on the principles of function, products, jobs and departments. d. Defining responsibility and accountability so that every person knows what is expected of him. e. Delegating the requisite authority to enable each one to carry out his responsibility. f. Establishing clear structural relationships among individuals and groups. The organisational structure of a small-scale industry differs from that of other business organisation. Its outstanding feature is the personal character of the organisation and management. Usual Forms of Ownership Organization of a Small-scale Industry: 1. Sole Proprietorship: Nearly 61 % of the Small-scale industries are proprietary concerns. 2. Partnership: about 21 % of small-scale industries are partnership organisation..

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3.

4.

Co-operative Society is an association of persons, usually of limited means, who voluntarily join together to achieve a common economic purpose and through the formation of a democratically controlled business organization, making an equitable contribution to the capital required and accepting a fair share of the risks and benefits of the undertaking. Only 0.7 % of small-scale industries are co-operative societies. Joint Stock Company: only 3 % of the small-scale units are in the form of Joint Stock Companies.

There are three salient features of all forms of organisation. They are: a. Relationship: that is whether Line, Staff or Functional. b. Authority: that is whether Direct, Indirect or Representative. c. Responsibility: that is whether General, or Specialized or Advisory. Types of Organization: Three fundamental types are generally recognised: - 1. Line Organisation. 2. Functional Organization. 3. Line and Staff Organization. Line Organization: It is the oldest and simplest type. It is characterized by a direct flow of authority from the top boss though the various executives down to the workers. There is no staff or advisory position. President Plant Manager

Foreman Machine Shop

Foreman Assembly Shop

Foreman Shipping and Receiving

Workmen

Workmen

Workmen

Functional Organization: It was originated by Fredrick Taylor in an attempt to bring about a specialization of management. He contended that a foreman could not be specialist in everything he was expected to do. Therefore, instead of having one single superior, as in the line organization, Taylor arranged a group of specialist in everything he is expected to do. Therefore, instead of having one single superior, as in line organisation, Taylor arranged a group of specialist to boss the worker in the various aspect of business. The Line and Staff Organization: To utilize the advantages of both the line and functional organizations, the line and staff type of organization was developed. President Production Control

Engineering

Plant Manager

Personnel

Accounting

Foreman Machine Shop

Foreman Assembly Shop

Foreman Shipping and Receiving

Workmen

Workmen

Workmen

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Essentially, the line and staff organization consists of the addition of functional specialists to the simple line organization previously discussed. Thus the advantages of specialization are gained without the inherent disadvantages of the functional organisation. In essence, the line portion of a line and staff organization serves to maintain stability and discipline, whereas the staff or functional portion serves to bring expert knowledge to bear on the problem. Usually a small company starts with line organization. In this instance, the owner-manger hires, directs, and rewards his men. With a growth of business, however, a stage is reached where he is physically and mentally unable to cope with the many problems of business. At this point the manager turns to another person for assistance. Quite often this person is a staff man such as a record keeper, an accountant, or a personnel man. As the business continues to grow, other staff functions are added as the situation demands. An example of an organisation – Small-scale Industrialist functioning with the assistance of Technical Staffs. Owner Industrialist

Secretary

Chief Salesman

Salesman I

Salesman II

Salesman III

Wages- Sub staff

Accounts

Purchase Typist

Engineer

Foreman - I

Foreman - II

Electrician. Fitter. Carpenter. Painter. Boiler Attendant.

Assistant Foreman. Sectional Head. Workers.

Assistant Foreman. Workers.

Sales

Advantages of Small-Scale Industries 1. 2. 3. 4. 5. 6. 7. 8. 9.

Employment: Small-scale and Cottage Industries are labour-intensive, which require small amount of capital for every person employed. Capital Formation: They do not require much capital and have favorable effects on capital formation. Cost of Production: Sometimes the cost of production may be high in comparison to Large-scale units; but this may be offset by low cost of distribution of the small-scale units. Overall, in terms of social costs there are better placed than the large-scale units. Equitable Distribution of Income. Distributive aspects of small-scale industries give major benefits. Use of Latent Resources and Skills. Decentralization of economic activities. Consumer Goods. They are capable of producing the much-needed consumer goods within a short period of time. Foreign Exchange. They don not require foreign exchange; rather can contribute through export. Political and Social Benefits. The freedom to work, self-reliance, self-confidence, enthusiasm to achieve, and all such traits of a healthy nation can be built around the material activities performed in these industries. These noneconomic considerations are equally important.

Strategic Position in the Economy: a. These industries occupy a very important position in the employment profile of the country. b. From the angle of output too these industries ran quite high in the economy. c. These industries produce a large variety of goods.

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d. e. f.

These industries generally use local materials & manpower and do not involve foreign resources. These are widely dispersed industries and are found to scatter in every corner of the country - in rural & urban areas. They are also earner of the much needed foreign exchange.

Problems and Implements to the Progress of Small-scale and Cottage Industries: 1. Difficulties of Raw Materials. 2. Shortage of Finance. 3. Old and Inferior Techniques of Production. 4. Inadequate Marketing Facilities. 5. Competition from Large-scale Industries. 6. Unused Capacity. 7. Other Difficulties e.g. Transport, Local Taxes, Lack of Research and Shortage of efficient managers.. 8. Inadequate Dispersal. There has been concentration of units in a few areas like metropolitan/large cities, or industrial complexes. Long Term Solution for the Problem of Small-Scale Industries: The development of small-scale industries is an integral part of overall economic, social and industrial development of a country. These create employment opportunities, disperse manufacturing activities from urban to rural areas, promote capital formation and cause balanced regional development. A variety of measures have been taken by the GOI to promote growth of small units. Some noted measures are: Provision of adequate financial resources and credit facilities; advisory services in the preparation of project proposals and coping with the procedural formalities; adopting productive policies towards small units; establishment of regional information centers; provision of training in management skills to the entrepreneurs; provision of special incentive schemes to attract young entrepreneurs; provision of various measures for export assistance for the export of products and provision of raw materials and reservation of certain goods for exclusive production in the small units. Some of the factors responsible for the slow growth of the programs and measures for small-scale units are: a. Marketing Facilities. They are unable to spend adequate money for publicity and sales promotion measures b. Technological Obsolescence. They cannot afford to have their own R & D and hence productivity remains low and quality of the products remains poor. c. Inadequate Management Information System. Hence they are deprived of the up-to-date business intelligence required for an edge over the competitors. d. Isolated existences of small units minimize opportunities for sharing experiences, business trends and opportunities etc. e. Managerial Inability. f. Technological Advancement. Computer aided designs and robots are becoming common now a day. g. Competitiveness. They do not constantly innovate either in the product, process or marketing approach. h. Raw Materials. Adequate quantities and qualities are difficult to obtain in right time and right price. i. Finance. These units do not have much dealing with commercial banks and hence are often forced into borrowing at higher interest rate than larger firms. Suggestions for Sustenance (nourishment) of the Small-scale units: 1. Marketing Scanning. Small-scale units have to learn the way to scan the environment quickly and accurately. 2. Innovative Techniques. They should be technologically dynamic and focus on continuous product innovation. 3. Flexibility. Should be able to adapt and adjust to changing environmental pressure. 4. Joint-Operations. Collective Entrepreneurship instead individualistic approach and also institutional support. 5. Quality of Business Relationship. Large companies need to provide financial and technical supports to smaller unit e.g. productivity improvement, R & D of new components, upgrading of existing technology, joint ventures, employee up-skilling etc 6. Collective Entrepreneurship. The small units should form organized networks. The small-scale units network needs to exhibit a collective entrepreneurship in their venture for new products, new services and new markets. 7. Institutional Support. GOI could assist the small-scale unit’s network through agencies e.g. Productivity Councils, R & D Establishments and Educational Institutions.

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Small Scale Industries in the context of Economic Liberalization: The small-scale industry normally does not produce bulk items on mass scale. Its strength lies in its specialty products. Normally, it has flexibility of operations whereby, depending on the market requirements, products can be changed on a campaign basis. The objective is to exploit the market conditions at short notice. A vital aspect is the marketing of products of small industry. It is necessary that GOI sets up a National Marketing Services Corporation. It may undertake market promotional activities for the benefit of small manufacturers. Small Scale Industries and Exports: Emphasis should be for non-traditional items of export. Export Potential and Bottlenecks: Motivation for SSI Sector: Consumer Orientation: The small-scale units have to constantly observe and adjust to the changing need and tests of the consumers. Modern Marketing Consideration: Need for New Technology and Modernization: Quality Control is Essential: Suggestion for Improvements: Small Industries Development Bank of India (SIDBI) should set up a separate wing for export finance with regional spread of its branches. Special incentives like freight subsidy should be given by the GOI to promote export of new items. The SSI units should focus their attention to mass consumption products. This requires help by agencies like National Small Industries Corporation (NSIC).

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