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1. Disturbed Childhood
A child may be continuously rejected by parents, friends & others. All dominate
him. So he needs a relief. He may destroy himself by depression or became very
creative & enterprising. He want to dominate and achieve something. Organization
becomes a sours to achieve this. So he starts his own enterprise.

2. Rejected Group
Entrepreneurs emerge as a group, when
The group is not recognized in the society
- Contract with important social networks are denied.

3. Religion & Culture

Some religion & cultural values encourage money making, status & risk taking
while others may discourage these.

Following religion & cultural groups are enterprising

- Marwarrs parsees, Jain, Chettiars in India
- Protestants in UK & US
- Samurai in Japan
- Yoruba in Nigeria
- Kikuyu in Kenya

4. Age of Entry
- 2/3 of entrepreneurs start enterprise before 25th age. But it differs among
- Kamma community start earlier
- Kapu & Brahmin start the enterprise in young age.
- Vysya start in old age with experience.

5. Family background
- If family members have political influence, or in high status jobs, one can
become entrepreneur

- Youngsters in joint family may get moral & financial support.
- In-laws may make one as a partner or help him to start one’s own business.

6. Education
- Technically educated persons may start manufacturing units with some
managerial training.
- Arts/Commerce/uneducated people can start service sector/trading center/
low-technology units.

7. Experience
- 25% entrepreneurs are inexperienced. They start after technical &
managerial training.
- 32% prefer the same line of business.
- 40% prefer different line of business.

8. Type of ownership
- 55% prefer sole proprefership concern
- 25% prefer partnership concern
- 20% prefer private limited
- 5% prefer public limited concern

9. Location
- 60% prefer backward areas for subsides & concessions. Govt provide built
in industrial estate with shed and infrastructure facilities.
- 40% prefer developed areas for convenience.

10. Environment
Environmental factors like Govt policy, political stability, peace within & between
the countries, cost of import, competition, infrastructure, financial support by banks &
financial institutions, etc, influence the emergence of entrepreneurs.


1. Basic infrastructure
Good road, seaway, communication facility, water, power encourages entreps.
These provided by the Govt. This speeds up production & trade. This reduces cost of
production. In rural & backward areas such facilities are not provided.

2. Capital
- Rigid norms of banks & financial institutions. (Risk free projects & existing
units are preferred due to the following problems).
- High rate of interest
- Low capital market (share / debenture / bond) awareness.
- High import cost of technology
- Rigid foreign exchange regulations
- Slow apply of raw materials & price fluctuations increases working capital
- Govt. should provide financial assistance or act as guarantor in raising loans.

3. Raw material
- Right quantity, quality of raw materials at reasonable price are not available
near the industry.
- Govt should supply scarce materials in time or it may provide suppliers
- Raw material import should be liberalized
- Govt. should encourage R&D and wide network of distribution centers.

4. Labour
- Graduates are not willing to join in the avialable jobs due to status, salary or
they prefer only selected jobs. (ie. unemployability)
- Shortage of skilled labours. Now Govt. initiates technical, electrical,
management education. But knowledge works are available more than manual

- Manual works are immobile due to language, culture & sentiment. Less
contact between employer and manual job seekers. Because they don’t watch
advertisement. Govt & private employment services are increasing the contact.

- Quality of workers have to be improved. Some companies have training &
development cells.
5. Competition
- High quality, low priced products of large manufacturers destroys small
manufactures. So modernisation is a must.
- Substitute products destroys existing products. Eg. Pager to cell; Radop tp
- Product can be protected by patent rights.

- Inventions/ideas can be protected by intellectual property rights.

6. Technology
- New technology destroys existing product. Xerox machine destroyed carbon
papers; plastic replaces wood & steel.
- React to the environmental changes through technological change.

Eg. : Rising petrol price forced automobile manufactures towards fuel economy
technology. Aerodynamically designed body, fiber body, Ceramic components for
engine, redesigned tyres for road grip.

- R & D investments are increased US Du’pont patented its invention in 1990.

- Process innovations are important like product innovations. Process like,
production process, distribution, man power, quality of product are improved.
- TOM is implemented for error free work. Customer’s needs are not on time
& 100% of time.
- Business process Re engineering is adopted to eliminate unwanted process.
- Flexible manufacturing system produces different component in different
quantities. It enables small-scale production at the cost of a large scale production.
- Importing technology takes long duration (1 year to get import license).
Developed countries may not give their technology to India.
- Public oppose technology. It affects health. Atomic reactors, cement
industry, chemical factories, etc.

7. Political environment
- Due to high election expenses politicians exploit companies by granting or
denying policy measures.
- Tax is improperly spent
- Govt control only core sector. It encourages private investments in all other
sectors, provides subsidy, incentive, export promotions, saves small scale units by
reserving certain industries for SSI.

- SSI License is granted in 6 months. Large unit license is granted, after long
delay & corruption.
- Control measures of Govt. are given below
 Formations Stage of Unit : Companies act, IDR act, FERA
 Personnel regulations : Factories act (wage, burns, P.F., E.S.I., etc.)
 Construction Stage : Allotment of land, cement, power, loan
 Machine procurement & installation stage : Import license, customs
 Preproduction & production Stage: Working capital provision,
Registration of ST, CST.
 Marketing regulations : Adulteration act, consumer protection act, patent
right, Consumer Protection act, etc.

8. Economic Environment
- Industrial growth 7% per annum
- Export promotion measures are done. EPZ (Export promotion zones), port
modernization (sedhu samudram projects) are some examples.
- Foreign investments are encouraged. Govt. has liberalized investment limits
in telecom, civil aviation, insurance sectors for foreigners.
- Capacity utilization of industries is only 70%.
- Economic growth is determined by market forces
- Interest rates are deregulated
- Capital market reforms.
- Tax reforms – Corporated tax may be reduced ; National VAT around 12%
may be introduced.
- Legal measures are simplified & speeded up.

(i) Proprietorship
Small trading and service enterprises like retail stores, workshops, bakeries,
restaurants, hair-dressing and beauty saloons, laundries, tailoring and draper shops,
dry-cleaners and dyers and other enterprises requiring small capital, catering to local
markets, involving limited risks and the use of personal knowledge and skills.

ii. Partnerships and Private Companies

Medium sized service and trading concerns, like wholesalers, hotels,
transporters, hire-purchase firms, confectioners, and professionals like attorney,
lawyers, chartered accountants, architects, consultants, etc. Also, small manufacturing
firms requiring simple techniques and processes.

iii. Public Companies

Large scale manufacturing and commercial undertakings, like chain stores,
departmental stores, etc., requiring heavy investment, specialised talents and complex
processes of production and distribution.

Comparative evaluation of different forms of business ownership

Basis of Sole Private Pubic Limited
Comparison Proprietorship Company Company
1. Formation Easiest, no Easy, only an Difficult, some Very difficult
legal forma agreement legal formalities several legal
required formalities
2. Registration Not necessary Optional Compulsory Compulsory
3. Membership One man show Minimum : 2 Minimum : 2 Minimum : 7
Single Maximum : 10 Maximum : 50 Maximum : No
membership in banking and limit
20 in others
4. Legal status No separate No separate Separate legal Separate legal
legal existence legal existence entity entity
5. Liability of Unlimited, full Unlimited, joint Limited Limited
Members risk and several,
risk shared
6. Financial Limited Capital Pooling of Large capital, Very large
capacity & suitable for capital, suitable suitable for capital suitable
small business for medium medium scale for large scale
suitability size business operations
7. Sharing of All to the owner As per On the basis of On the basis of
profits agreement shares held shares held
8. Management Quick decision, Unanimous Board Board decision,
no decision, decisions, specialisation

and control specialisation, limited greater divorce
management & specialisation, specialisation, between
ownership lie in management ownership and ownership and
the same lies where control go management
hands ownership is. together

Basis of Sole Private Pubic Limited

Comparison Proprietorship Company Company

9. Business Perfect Secrets limited Secrets shared Secrets shared

Secrecy Secrecy No to partners, no by members, with public,
audit or reports audit or reports audit and audit and
reports reports
compulsory compulsory

10. State Practically Very little, Considerable Excessive, no

regulation none, full sufficient limited flexibility
and flexibility of flexibility flexibility,
flexibility operations privileges, &

11.Transferability At will With mutual Restricted as Freely

of interest consent Articles of transferable

12. Tax Burden Low at small Low at small Low at medium Low at high
level of income, level of level of level of
progressive income, income, flat income, falt
rate progressive rate, double rate, double
rate taxation taxation

13. Stability or Unstable, life Less table, Perpetual Perpetual

continuity fully dependent may be existence existence
on the owner disolved by
insolvency, etc
of a partner.

14. Winding up At will At will Under the Act Under the Act

15. Governing General law The The Under the Act

Act Partnership Companies The
Act, 1932 Act, 1956 Companies
Act, 1956


As explained earlier, a business enterprise can be organised into several forms.

Every form of organisation has its own merits and demerits. A businessman has to
keep in view these merits and demerits while selecting an appropriate form of
organisation. The choice has to be made both at the time of setting up a new enterprise
and at the time of expansion and growth of an existing concern.
At the time of launching a new business enterprise, the choice of the form of
ownership is dictated by several factors as given below :
1. Nature of business – Service, trade, manufacturing.
2. Scale of operations – Volume of business (large, medium, small) and size of
the market area (local, national, international) served.
3. Degree of direct control desired by owners.
4. Amount of capital required initially and for expansion.
5. Degree of risk and liability and the willingness of owners to assume personal
liability for debts of business.
6. Division of profits among the owners.
7. Length of life desired by the business.
8. Relative freedom from government regulations (flexibility of operations).
9. Scope and plan of internal organisation.
10. Comparative tax liability

It must be noted that these factors are interrelated and interdependent. For
instance, the amount of capital required and the degree of risk involved depend upon
the nature and volume of business operations. The degree of control and the division of
profits are both related to risk and liability. Therefore, an entrepreneur division of profits
are both related to risk and liability. Therefore, an entrepreneur should not consider
these factors in isolation. The interrelationship between these factors should be duly
considered. The impact of each one of these factors on the choice of a suitable form of
ownership is described as follows.

1. Nature of Business

The nature of business has an important bearing on the choice of the form of
ownership. Business providing direct services, e.g., small retailers, hair-dressing
saloons, tailors, restaurants, etc., and professional services, e.g., doctors, lawyers, etc.,
depend for their success upon personal attention to customers and the personal
knowledge or skill of the owner and are, therefore, generally organised as proprietary
concerns. Business activities requiring pooling of skills and funds, e.g., wholesale trade,
accounting firms, tax consultants, stock brokers, etc., are better organised as
partnerships. Manufacturing organisations of large size are more commonly set up as
private and public companies.

2. Size and area of operations

Large scale enterprises catering to national and international market can be
organised more successfully as private or public companies. The reason is that large –
sized enterprises require large financial and managerial resources which are beyond the
capacity of a single person or a few partners. On the other hand, small and medium
scale firms are generally set up a partnership and proprietorship. Small scale
enterprises like generally hair-dressers, bakeries, laundries, workshops, etc. cater to a
limited market and require small capital. The risk and liability are not heavy and the
management problems can easily be handled by the owner himself. Therefore, the
owner likes to be his own master by organising as a sole proprietor. He can maintain
fact-to-face relationship with his customers which is important in small service
enterprises like painters, decorators, repair shops, beauty parlours, etc. Medium-sized
enterprises and professional firms, e.g., health clinics, chartered accountants, etc. are
predominantly partnerships. They pool their capital and expertise to operate on a larger
scale and to avail of the benefits of specialisation. Large scale enterprises and
enterprises involving heavy risks, e.g., engineering firms, departmental stores, five star
hotels, chain stores, etc., are normally organised as companies. These enterprises
require huge capital, heavy risks and expert managers. Proprietary and partnership
forms are unable to provide these resources. The company form is, therefore, best
suited to large scale enterprises. Similarly, where the area of operations is widespread
(national or international), company ownership is appropriate. But if the area of
operations is confined to a particular locality, sole proprietorship or partnership will be a
more suitable choice.

3. Degree of Control Desired

A person who desires direct control of business prefers proprietorship rather
than the company because there is a separation of ownership and management in the

latter case. In case the owner is not interested in direct personal control but in large
scale operation, it would be desirable to adopt the company form of ownership.

4. Amount of Capital Required

The funds required for the establishment and operation of a business have an
important impact on the choice. Enterprises requiring heavy investment, i.e., iron and
steel plants, etc., should be organised as joint stock companies. A partnership has to
be converted into a company when it grows beyond the capacity and resources of a few
persons. Requirements of growth and expansion should also be considered in making
the choice. There is maximum scope for expansion in case of a public company.
Where the funds required initially are small and scope for expansion in case of public
company. Where the funds required initially are small and scope for expansion is not
desired, proprietorship or partnership is a better choice.

5. Degree of risk and liability

The volume of risk and the willingness of owners to bear it, is an important
consideration. A single individual may have large financial resources sufficient for a
medium scale enterprise but due to unlimited personal liability he may not like to
organise as a proprietor or a partnership. Due to limited liability an and a large number
of shareholders, there is maximum diffusion of risk in a public company. But an
enterprising individual not afraid of unlimited liability may go in for sole proprietorship.

6. Division of Surplus
A sole trader receives all the profits of his business but be also bears all the
risks. If a person is ready to bear unlimited personal liability and desires maximum
share of profits, proprietorship and partnership are preferable to company form of

7. Duration of Business
Temporary and a hoe ventures can be organised as proprietorships and
partnerships as they are easy to form and dissolve. But they lack continuity and
stability. Enterprises of a permanent nature can be better organised as joint stock
companies and co-operative because they enjoy perpetual succession. A business
requiring a long period for establishment and constitution should be organised as a
corporate body.

8. Government regulation and control

Proprietorships and partnerships are subject to little regulation and control by the
Government. Companies and co-operatives are, on the other hand, subject to several
restrictions and have to undergo several legal formalities. But this face is not very
important and it can be helpful in making the choice only when all other factors are
unable to indicate a clear-cut choice.

9. Managerial Requirement
Organisational and administrative requirements depend upon the size and
nature of business. Small businesses using simple processes of production and
distribution can be managed effectively as proprietorships and partnerships. On the
other hand, giant enterprises involving the use of complex, techniques and procedures
require professional management. Such enterprises can be managed efficiently only as
joint stock companies. Due to identity of ownership and management, motivations is
very high in proprietorships and partnerships. Such motivation is lacking in a company
due to separation of ownership from management.

10. Flexibility of Operations

Business which require a high degree of administrative flexibility should better be
organised as proprietorships or partnerships. Flexibility of operations is linked with the
internal organisation of a business. The internal organisation of sole proprietorship and
partnership is much more simple and less elaborate than the internal organisation of a
joint stock company. Moreover, the objectives and powers of a company cannot be
changed easily or without legal formalities.

11. Tax burden

Various forms of ownership are taxed differently under the Income-tax Act in
India. If the expected volume of profit is very high it may be profitable to start a
company. A company is taxed at a uniform rate, i.e., the rate of tax remains the same
irrespective of the volume of taxable income.


An entrep. can get idea of new product from the following sources.

1. Unsatisfied Demand
The Success of “Maggi” noodles is an example of unsatisfied demand for fast
foods. “Surf” catered to the upper segment of the market. Later “Nirma” entered to
satisfy the lower strata of the market. The acceptance of “SINTEX” water tanks is
another example.

2. End / by Product
End products and by products can throw light on new project ideas. For
example mini steel plants have been started, using steel scrap which was endproduct
large steel plants. Liquor industries are started, using molasses which was a by –
product in sugar industry.

3. Imports and Exports

The Government of India is now encouraging exports. There is now great scope
for import substitution and export of various items. AVT group of companies are
successfully exporting tissue culture plants.

4. Emerging Technologies
Commercial exploitation of indigenous or imported technologies is another
source of project idea. One best example is Xerox. Till Xerox Corporation adopted the
idea in 1960, it remained as an unexploited invention.

5. Social and Economic Trends

Social and economic status of people always change and offer vast
opportunities. For example, there is now a shift towards ready-made garments;
possessing consumer durables on hire-purchase basis, etc.

6. Revival of Sick Units
A dynamic entrepreneur, can revitalize and turn a sick unit into a profitable one.

7. Chance Factors
An entrepreneur may come across a chance factor which may trun out to be a
good project idea. eg : Imported mixies were not suitable to the ingredients used in
India. Satya Prakash Mathur’s wife complained to him about the non-suitability of
imported mixies. So Mathur manufactured “Sumeet” mixie to suit Indian conditions.
Thus he become a great entrep.

8. Trade Fairs
Trade fairs are organized by Industries Department of the Central and State
Governments and Trade Organizations. Machinery and tools for the small scale units,
and ancilliary products required by the major industries are displayed at the national.
State and district level fairs. Dynamic entrepreneur can get lots of ideas by visiting
these fairs.

9. Trade and Professional Journals

Trade and professional journals / magazines are also sources of ideas. These
journals/magazines give information relating to products manufactured and spares,
component required by various industrial units belonging to a particular trade.


Before choosing or product / project its feasibility be studied on the following


1. Availability Resources
The project should be suitable with the financial and human resources available
with the entrep. Projects which are beyond the capacity of the entrepreneur are bound
to fail.

2. Suitability with Government Regulations

The project should not violate government regulations entrep must consider
Government’s policy regarding investments and reservation of certain categories of
items for the small scale units.

3. Availability of Raw Materials

The availability and the cost of obtaining raw materials are also important
factors. If raw materials are imported, the cost of materials change due to exchange
rate of currency. For example, the price of Maruti Vehicles increased due to increase in
the value of Japanese yen.

4. Potential Market
Existing and potential demand in the domestic and export markets, consumption
trends, nature of competition, competitors market shares, availability of substitutes,
barriers and the possibility of entry of substitutes and technological developments in the
product etc. should be before choosing a product.

5. Cost of the Project

Revenew should be more than the cost of the project to earn reasonable profit.
A study of the cost structure under raw materials, cost, labour cost, direct expenses,
factory overheads, administrative expenses, selling.

6. Machines

(a) Major manufacturers, here and abroad, (b) Price structure of different brands.
(c) Comparative features, manufacturer’s standing, reputation. (d) Repair and
maintenance facilities, (e) After sale service, availability of spares. (f) Performance
guarantees by supplies. (g) Training of technical staff requirements. (h) Machinery
delivery schedules etc. should be favourable.

7. Marketing and Distribution

(a) Marketing strategy, distribution channels. (b) Advertising, and positioning, (c)
Outstanding features of product/service (Advantage over competitions, superior design,
import substitute, quality up gradation, longer guaranty warranty, innovativeness) (d)
Market features and practices – credit facility, minimum order, incentives, (e) Business
terms, commission, stocks, warehouse facilities etc. should be favourable.

8. Consumer Behaviour
Existing brand loyalty (b) Consumption pattern, (c) Motivation to buy new
product, (d) Purchasing power (e) Preference for durability, service, economy,
(f) Consumer characteristics of different regions, etc. should be favourable.


When a new product is introduced it passes through various stages. In each

stage, the management must decide whether to move on to the next stage or not. The
following are the six stages involved in the product development.

1. Idea Search
New products are born from ideas. Ideas may originate from sources outside
the company or from within the company New ideas may also come from unexpected
sources. The consumer can also suggest new ideas. But the particular source is not so
important as the company’s system for stimulating new ideas and their acknowledgment
and reviving them promptly.

2. Screening of Ideas
All new ideas cannot be converted into products as it requires heavy capital
investments. They should be screened and all unworkable ideas should be deleted.
Only most feasible and promising one should be selected for further processing. Some
companies use “the Concept of Testing Method” for screening. In this method,
consumer response to a description or picture is measured even before the product is
actually produced. The purpose is to get an idea of the eventual reaction of the product.

3. Business Analysis
In this stage, an attempt is made to predict the economic consequences of the
product for the company as a whole. Only during this stage, the new product idea is
expanded into a concrete business proposal. During this stage, the management
should perform the following :
1. Identify product features
2. Estimate market demand and product profitability
3. Establish a programme to develop the product.
4. Assign responsibility for further study of the product

4. Product Development
Until this stage, the existence of the product is entirely the critical. Only in this
stage, the idea in paper is converted into a physical product. Pilot models of the product
are produced in small quantities with certain specifications. Laboratory tests and other
technical evaluations necessary to determine the production feasibility of the product
are made.

5. Market Testing
During this stage, market tests, in-use-tests and other commercial experiments
in limited geographic areas are conducted to ascertain the feasibility of a full scale
marketing programme. In this stage, design and production factors may have to be
readjusted as a result of test findings. At this point, the management must take a final
decision regarding whether to market a particular product or not. Test marketing is
generally done for consumer goods rather than for industrial goods.

6. Commercialisation
Full scale production and marketing programmes are planned and then the
product is launched. Upto this point, the management has complete control over the
product. Once the product is born and enters into its life cycle, the management has
little control over it. Only external environmental factors began to control the product.
In these stages of evolution, the first three stages are the critical ones.
However, they are least expensive. The subsequent three stages are also very
important because they swallow a sizable revenue of the company.

Reasons for Failure of a Product

Introduction of a new product is the most risky job of a marketing firm. It is
estimated that more than 95 percent of the new products have failed. Failure is a
relative term. Any product which does not live upto the expectations of the consumers
are bound to fall.
According to William Stanton, the factors responsible for the product failures can
be grouped under seven heads. They are as follows

1. Inadequate Market Analysis

Over-estimating potential sales of the new product, inability to determine the
buying motives and habits and misjudgements as to what products the market wanted/

2. Product Deficiencies
Poor quality and performance, products that are too complicated, and especially
products that did not offer any significant advantage over competing items already in the
market etc., come under this category.

3. Lack of Effective Marketing Effort

Failure to provide sufficient follow up measures, failure to train marketing firm. It
is estimated that more than 95 percent of the new products have failed. Failure is a
relative term. Any product which does not live upto the expectations of the consumers
are bound to fail.
According to William Stanton, the factors responsible for the product failures can
be grouped under seven heads. They are as follows

1. Inadequate Market Analysis

Over-estimation potential sales of the new product, inability to determine the
buying motives and habits and misjudgements as to what products the market wanted.

2. Product Deficiencies
Poor quality and performance, products that are too complicated, and especially
products that did not offer any significant advantage over competing items already in the
market etc., come under this category.

3. Lack of Effective Marketing Effort

Failure to provide sufficient follow up measures, failure to train marketing
personnel for new products and new markets etc.

4. Higher Costs than Anticipated

This led to higher prices which in turn led to lower sales volume than anticipated.

5. Competitive Strength or Action

The competitors may copy a genuine innovation with speed and ease and the
market shall also become overcrowded.

6. Improper Timing of Introduction

The product should be introduced in appropriate time. Too late entry or
premature market entry shall always lead to failure of the product.

Technical or Production Problems

In the initial stages, the company is not in a position to produce sufficient
quantities to meet the market demand. The competitors, in which case shall gain an
unanticipated share of the market. This will in turn lead to poor sales which in turn will
result in product failure.

Test marketing is generally adopted by the producers of consumer products
only. In case of Industrial goods, manufacturers try out their mew products with
selected customers. Test marketing involves introduction of a new product into one or
more test market areas which are carefully chosen. Test market areas should be fairly
representative as far as possible. In practice, test marketing is used to find out the
feasibility of launching the product on a full-scale on the national market. To make it
successful, test marketing should be carefully planned and efficiently executed. It is
undertaken to find out in advance whether the product could be launched successfully
on the national scale. Before conducting test marketing, the decisions regarding the
following are to be taken by the company-length of time the test has to be conducted,
the type of information to be collected, the product to be tested, whether price and
sitribution strategies should also be tested and how the data collected are to be
interpreted. Interpretation and arriving at correct and valid conclusions are most vital in
test marketing.

Objectives of Test Marketing

The objectives of test marketing can be summarised as follows :
(i) To forecast sales volume,
(ii) To determine media mix, sales channels, etc.

(iii) To evaluate complete marketing plan including advertising, distribution,
sales, pricing, etc.
(iv) To locate and correct the product fault.
(v) To select a new product from among a number of possibilities.

Difficulties of Test Marketing

The following difficulties are generally pointed out in the case of test marketing.
I. There is a time gap between the time when it is tested and it is launched. In the
mean time, competitors may enter the market with their products by imitating the
product so tested.
II. In case of certain products subject to frequent fashion changes, time available
for test market is of generally small.
III. Choosing the most representative area is also very difficult. In a vast country
like ours, many towns are to be selected for the purpose of test marketing which
may consume of lot of time and investment.
IV. The expenses of test marketing is fairly large and involves huge investments to
conduct the market test for a single product. Such a huge investment can be
justified, if test marketing results guarantee success for the launching of the
product of the national market. However, such guarantee can’t be offered.
Hence, most of the businessmen consider test marketing as of uncertain value.
Though most of the above mentioned difficulties are experienced by the
producers, even now many producers of consumer goods undertake test marketing
since it provides them some valuable clues as to market behaviour

Merits of Test Marketing

Test marketing helps the marketing manager in –
1. Evaluating the market plan completely.
2. Determining distribution channel, mix, etc.
3. Forecasting sales volume.
4. Improving the product based on the results of test marketing before
launching the product in the market.

Demerits of Test Marketing

1. It Involves huge money and effort.
2. It Determining distribution channel, mix, etc.
3. Forecasting sales volume.

4. Improving the product based on the results of test marketing before
launching the product in the market.

Procedure of Test Marketing

1. Determining the Number of Markets
This is the first step in test marketing. While determining the number of markets,
they marketer should assure that whether it is the representative of all kinds of
customers and whether the cost of test will be within the controllable limits.

2. Selecting the Cities

It involves the selection of cities where test marketing is to be applied. It should
be selected carefully after considering the fact that whether the cities so selected
represents the entire nation.

3. Duration
It means the period for which test marketing shall be carried out. Duration of the
test should be determined after having considered the faction like product’s average
repurchase period, nature of the competition and cost of conducting the test marketing

4. Collecting Necessary Information

Once the duration is fixed. the next step is collecting the necessary information
with regard to the consumer behaviour, nature of goods, nature of consumers,
distribution channels etc.

5. Launching the Product

After having carried out the test marketing as described above, conclusions are
to be drawn. If the sales are very excellent, we can launch the product in the market.
But if the sales are not very excellent, necessary modifications should be made in the
product to improve the same and then product should be introduced into the market

Methods of Test Marketing

There are many methods of test marketing. They are as under :
1. Consumer Panel method
2. Store – audit method
3. Before and after study method, and
4. Playback audit method

1. Consumer Panel Method
In this method, small panel of selected customers are prepared from among the
representative members of different groups of consumers. The consumers from all
class of citizens are selected to form a panel. The products are given to them and are
requested to use them. The members of the panels are then requested to give their
frank opinion about the product as to its various aspects such as price, quality, utility,
durability, ease of handling and so on. The opinions of consumer panels are collected,
tabulated and conclusions are drawn. This is a common method of test marketing but
the main difficulty is about the real and correct opinion of the consumer panels.
However, from experience it is found that consumer panel method offers valuable clues
to the manufactures about the marketability of their products.

2. Store – audit Method

The field salesmen select a few representative retail stores and visit them in the
morning and the evening to find out the rate of sales from the inventories of the
products. The store-audit method can provide what is called “continuous audit” of the
rate of turnover of goods by visiting the retail stores everyday. This will furnish the
company a reliable indication about the product acceptability in the market since its
salesmen will furnish dependable data. It will thus be possible to estimate the product
effectiveness and whether the product should be launched nationally. The store-audit
method will also provide the company, the information regarding the competition it has
to face from the competitors’ products and how effectively it can counter it. This method
is useful in test marketing.

3. Before and-After Study Method

This study method involves two phases of testing and collecting the relevant
statistical data. The ‘before’ phase tries to find out the attitude of the consumers
towards the products. It may also try to find out whether the consumers are aware of
the product. The ‘after’ phase of data collection will normally be closely similar to the
earlier measurements in terms of questions asked to the consumers and the information
sought. The test is complete when any difference between the two phases of the
survey are analysed in terms of statistical significance.

4. Playback Audit Method

This method is used to find out the effectiveness of sales training. It is a means
to measure the impact of such training effect. In its most simple form, this method

involves actually visiting retail shops to make take purchases to test the salesman’s
selling efforts.

Launching the Product on the Market

After conducting the test marketing, if the result is positive and encouraging, the
time comes for the company to decide whether or not to go ahead with actual launching
of the product commercially. The commercialisation of the product involves huge capital
investment both in the factory and in the marketing of the product. The investment runs
into millions of rupees. Besides production, huge capital is required for advertising and
promotional purposes. In launching a new product, advertising and sale spromotion
them selves will consume lakhs of rupees. As the the investment required is an
enormous amount of capital, only large corporations which can afford such investment
can undertake the nation wide launching of the new product. If the launching in the
initial market becomes successful as expected, then the company enters into other
more promising and contiguous areas, thus gradually encompassing the whole national
market. This strategy is called the “roll-out” policy. The rate of expension will depend
upon a number of factors like initial sales, competition and the availability of funds.
Thus the company will enter the entire national market in phases. Such a policy is
followed by the company in order to minimise losses by failure in a particular market.


Distribution – act of carrying goods or services from the producer to consumer.

Channels of Distribution : A path through which product moves from a producer

to the ultimate consumers or industrial users”.

Channels of Consumer Goods

1. Producer – Consumer
2. Producer – retailer – Consumer
3. Product – Wholesaler – Retailer – Cons.
4. Product – Agent – Retailer – Cons
5. Producer – Agent – W.S – Retailer – Cons.

Channels of Industrial Goods

1. Producer – Industrial User
2. Producer – Industrial distributor – User
3. Producer – Agent – User
4. Producer – Agent – ID – User

Channels of Agricultural Commodities
1. Producer – Consumer
2. Producer – Village shop keeper – W.S – Retailer – Cons.
3. Producer – It inerrant merchant – W.S – Cons.
4. Prod – Primary W S – S W S – Retailer – Cons.
5. Prod – Primary W.S – Miller – Retailer – Cons.
6. Prod – Primary W.S – Government procurement agency – Roller flour
mills – Fair price shop – Cons.


1. Distribution Policy
a. Intensive Distribution – If product / service is frequently bought by many
b. Selective Distribution – Occasionally bought by the consumers.
c. Exclusive Distribution – Occasionally bought by few consumers.

2. Product Characteristics
Perishable goods or fashion goods short channel.
Frequently purchased goods (FMCG) all distribution channels.
New products approach retailers directly to induce sales.
Bulkey, large sized, technically complicated products short channel.

3. Supply Characteristics
Few producers with huge resource, Rigid entry for new producers – short
Many produces with limited resources, free entry for new producers – Long

4. Customer Characteristics
Customers are Geographically dispersed, frequent buy longer otherwise short.

5. Company Characteristic
Financially sound companies appoint their own salesman – Direct channel
When company wants to more control short channel.

6. Environmental Characteristics
When economic conditions are depressed, when multi tax on sales is imposed,
short channel is preferred.


Types of Accounts
 Personal
 Real
 Nominal

1. Books of Original Entry

 Cash Book
 Purchases Book
 Sales Book
 Returns Book
 Journal

 Division of Work
 Efficiency
 Time saving
 Facility in Checking

2. Ledger
 Used for posting the transactions
 Permanent Record of all transactions
 Dedit & Credit Balance

3. Trial Balance
 Statement showing the debit & credit balances separately
 Two sides must be equal
 Date of preparation is a must

 Arithmetical Accuracy
 Locating Errors
 Helps in Preparation of Final A/C

4. Final Accounts
 Trading Account
 Profit & Loss Account
 Balance Sheet




Trial Balance

Balance Sheet


HRM is the systematic approach to the problem of selecting, training, motivating

and retaining personnel in a organisation.

1. Man Power Planning (MPP)

MPP answers the following questions :
- What kind of man power needed?
- How many of what kind?
- What should be their background, education and experience?
- What should be their compensation package and career opening?

2. Recruitment
It is the process of searching for prospective employees and stimulating them to
apply for the job in the orgn.

Methods of Recruitment
- Direct method
- Indirect method
- Third party

Generally recuitment is of two types

- Internal Recruitment
- External Recruitment

3. Selection

Koontz – “Process of choosing from among the candidates from with in the
organization or from the outside, the most suitable for the current as well as for the
future position.”

Selection Steps
1. Application Blank
2. Screening
3. Reference
4. Test
5. Interview
6. Medical check up
7. Appointment / Placement
4. Orientation / Induction
Orientation or Induction refers to the activities involved in introducing the new
employees to the orgn. a its policies procedure, rules and regulations. In general it is
known as welcoming the new employee to the organization.

5. Training
Need for Training
 New Environment
 Lack of trained personnel
 Advancements in technology
 Faulty methods
 Prevention of accidents
 Career Development

Training Methods

On the Job Off the Job

Position Rotation Special Course & Lectures
Special Projects Conferences
Selective Reading Case studies
Apprentice ship Brain storming
Experience, coculy, understudy Simulation
Multiple mgmt/. Role playing Games

5. Motivation (Compensation)
Types of Rewards
- Intrinsic & Extrinsic Rewards
- Financial & Non financial
- Performance based & membership based
- Positive motivation – promotion
- Negative motivation – Demotion

Apart from the above, grievance handling, career planning, transfers,

performance appraisal, etc. are some of the function which comes under the human
Resource Management.


1. Factors influencing Location

Raw Material
Man Power
Ecology and Environment
Local Laws and Regulation

2. Plant Layout
It refers to the arrangements of physical facilities such as machinery, equipment,
furniture, etc. within the factory building.
Proper layout is essential for efficient Manufacturing at low cost. A good layout
will offer following benefits.
- Optimum utilisation of flour space
- Increase in Productivity
- Effective super vision and control
- Economy in material handling
- Optimum investment in plant & building

Types of Layout
a) Product Layout
Raw material enters the production process at one end and come out as finished

- Suitable for mass production
b) Process Layout
Machines of similar type are arranged together at one place
- Flexible and adaptable to change.
- Goods are produced according to customer specification.
Eg. Tailoring

3. Production Design : (Production Planning & Control)

It involves
 Estimating : Raw material and other outputs needed are estimated on the
basic of production volume.
 Routing : The path along which raw materials during the process of
production. It is to minimise time and cost.
 Loading : The total volume of work is allocated among various men &
machines on the basis of work capacities.
 Scheduling : Determining the time required to perform each operation of
different jobs.
 Follow up : Continous monitoring is required to perform each operation of
different jobs.

4. Quality Control
To maintain quality, regular control over raw material, production process
finished product are essential.
Methods of Quality Control
- Inspection
- Statistical Quality Control
- Quality Control Charts
- Acceptance Sampling

5. Inventory
Inventory means the Goods held by a firm for eventual sale

a) Raw materials
These are goods which have not yet been committed to production at all.

b) Work in Progress

These are goods which have been committed to production has not yet been
completed thereon.
c) Finished Goods
- Completed Product awaiting for sale.

Need for Inventory

It is necessary to hold some inventory so that production and sales can continue
(i) To Avoid loss of Sales
Goods are not available when demanded by customer.
(ii) To Reduce ordering cost
Cost of placing orders can be reduced, if a firm places a few large orders
instead of several small orders.
(iii) To Achieve efficient production
Holding adequate inventory protects against shortage of raw materials.


Inventory Control is a system which ensure supply of required quantity and

quality of inventory at the required time without unnecessary investment in inventory.

1. Economic order Quantity (EOQ)

Decision in inventory MGMT is how much quantity should be ordered and how
many times in a year. This decision depends on
- Ordering Cost – Cost of placing order. It decreases if the quantity purchased
per order increases.
- Carrying Cost – Cost of keeping items in stock.
EOQ minimises both costs.

2. ABC analysis
It is the technique of exercising selective control over inventory. It is classified
into 3 categories.
Catagory A – Costless items of Inventory
Catagory B – Less costly items
Catagory C – Least costly items


Strategy means a deliberate and well planned course of action designed to

achieve specific objectives.

Growth Strategy
It defined as a strategic plan formulated & implemented to expand the operations
of a business firm. The main strategy for growth are as follows.
Diversification → Internal Growth
Subcontracting → External Growth
Joint Venture

Expansion and diversification are in the form of internal growth. Internal growth
implies to increase in scale of operations without joining hands with other firms.

Mkt Penetration
It increases the sales of existing product in the existing markets for eg. LML
launched a scheme of exchanging old scooter for new to increase its sales, Titan
Company now recently announced a scheme as exchange offer.

Mkt Development
It involves exploring new markets for existing products. Eg.: Reliance

Product Development
It implies developing new or modified products for sale in the existing markets for
eg LG recently launched a 5 categories as toothpaste, soap, shampoo, daspers etc.

Advantages of Expansion
 It provides economics of large scale operation.
 It face better competition in the market.
 Expansion can be done by his own funds.
Limitation of Expansion
 Sometimes Growth will take show.
 It is not always possible to grow in the present product market.
Problem in Expansion
 Technology often necessary to upgrade technology.
 Marketing Expansion is possible & profitable only when increasing the
 Risk : It involves additional risk.
The firm introduce or add a new products or markets to its existing business line.
This approach is called as diversification. It is a process of entry into a field of business
which is new to an enterprise several companies business houses both in private &
public sectors have adopted it. For eg ITC Ltd, originally agaretle company but it has
diversified in to hotel, finance, agri – business , paper & deep sea fishing.
It has four types
 Horizontal Integration
 Vertical Integration
 Concentric Integration
 Conglomerate Integration

Horizontal Integration
In this type of diversification a company adds up same type of products at the
same level of production or marketing process. for eg. Air cell & Hutch. Spark
Ceramics India Ltd took over Neyveli Ceramics & Refractories Ltd. Both the companies
are sanitary would tiles. Two or more competing firms are brought together under single

Vertical Integration

In this type of growth strategy new product or services are added which are
complementary to the existing product or service line. It involves backward or forward
integration from the product.

Concentric Diversification
When a firm enter unto some business which is related with its present business
in terms of technology, marketing or both it is called as concentric diversification. For
eg. In Technology side Nestle has added Tomato Ketchup Maggi Noodles to it range of
baty food.

Conglomerate Diversification
When a firm enter into business which is unrelated to its existing business in
both technology as well as in marketing. Several Indian Companies have adopted this
stratogy eg :- ITC, Godrej, Allwyn, HMT.


 To create employment
 For a balanced industrial growth (SSI, Cottage.
 First EDP in 1970 by Gujarat Ind. & Invest Corp.
 In 1985 Central Govt.s EDII to assist state level EDP agencies.
 Banks, FIs (IDBI, IFCI, SFC etc) & SSI development institutes are doing
Target Groups
 Unemployed technical graduates
 Unemployed commerce/arts graduates
 Employed & experienced graduates
 Ex-service man
 SC / ST
 Women

 Rural Area – Social workers, bankers, teaches recommend the candidates.
 Urban Area – Ads / Campus / Mail

 Selection board – Industrialist, psychologist, academics.
 Selection Criteria – Age, Education, Experience, family, caste, assets,
achievement motive, influencing skill, self confidence, decision making in new
situation, stress tolerance, G.K. etc.
 Application screening, written test, interview, GD

 Full time – Min. 1½ mths.
 Part time – Min. 6 mths.

 Rs. 3000 to 4000 per head.
 Sponsored by Bank / FI / EDIs

Number of Participations
 30 Candidates per programme
 If less uneconomical
 If more uncomfortable
Training Methodology
 Motivation – Achievement, by Games, Roles playing
 Technical – Prod, Fin, Mrkt, HR, Legal – Few Lecture More excercise.
 Factory visit
 Inplant training
 Starting the industry
 Follow-up

 Govt. policy on SSI – Investment limit, reserved ind., backward areas, subsidy,
 Incl. opportunities in that area.
 Forms of org-sole prop/partner/pvt Ltd/public ltd.
 Licensing / Registration procedures
 Product selection.

 Managerial aspects – a/c books & records keeping, production planning,
inventory control, labour law, case law.

Project Preparation
 Technical feasibility – Machines, raw materials location, infrastructure, man
 Commercial / economic viability – Demand, competition, capital, working capital,
cost of production, sales revenue, profit cash flow, play back period, Break even
 Financing the project – Promotor’s share, other sources subsidy.
 Project implementation schedule.

Follow – up
 Follow up upto 1½ years of starting the unit .
 Letters
 Supply informations periodically.
 Visit the unit counsell, help.
 Refer history of entrep (candidate) – His test score, change after the program,
performance in pray, etc. his academic & experience etc.
 Follow up register with problems & solutions.



1) Financial Institution
 IDBI, IFCI, ICICI, conduct EDP and provide for assistance.
 Promote many TCO[Technical Consultancy Organisation],
NSTEDB[National Science and Technology Enterpreneur Development Bank],
EDII[Entrep Development Institute of India], STEP[Science and Technical
Entrep Park].
 IDBI provides Promoter seed capital
IFCI provide risk capital through RCF[Risk Capital Foundation].

2. Commercial Bank

 100% Finance to technically qualified or trained Entrep.
 Interest free loan up to 25% of project cost which is the minimum promoter
 Punjab National Bank
 Conducts Technical, Economic and Market study.
 Offer Term loans, Foreign Currency Loans.
 Helps to get government Approval.
 Functions as a Merchant Bank.
 Bank of Baroda
 Started Entrep Banking Cell.
 Arranges Inplant Training.
 Has Multiservice Agency at Mumbai to provide project reports and information
on rawmaterials and market.

Indian Bank, Bank of India, Canara Bank, Grinlays Bank Etc. Provide this type of

3. EDII (Enterp Development Institute of India]

 Sponsored by all India Financial Institution and Gujarat Government in 1983/
 Conducts Research, Project Preparations, Training, Institutional Building,
Followup Services. It Also Trains The EDP trainner and assist the state level
EDP Agency.

4. NIESBUD [National Institute of Enterp and Small Business Development]

 Set up in 1983 by ministry of industry to affliat and coordinate enterp institutes
in India.
 It is secretary for National Enterp Development Board [NEDB], which is a policy
 Organises National/International Entrep Forums to generate Ideas for policy
 Provides Training for new activities or activities not supported by any other
 Developed EDP training Methodlogy to assist EDP Training Institutes.
5. NSIC [National Small Industry Corporation]
 Started in 1955 by ministry of industry

 Construct Industrial Estate
 Creates Prototype Production-cum-training Center
 It promotes SSI as ancillary units of large units.
 It provides Government Purchase Order.
 Offers Machine On Hire Purchase.
 Offers Rawmaterials through its Depots.

6. NPC [National Productivity Council]

 It Provides Data bank on investment opportunity, consumption pattern, Loans,
Raw Material, Machinery, Modernisation, Product Development, etc.
 If offers Post Investment Service Like Productivity Improvement Through
Trainning Employees, Marketing Services, Consultation/

7. NAYE [National Alliance of Young Entrep]

 Mostly banks help NAYE to promote young entrep. Union bank in tamilnadu,
Dena bank in Chennai helps.
 Lends upto 2 Lakhs for single entrep and 3 lakhs for joint entrep.
 Repayment Holiday during gestation period.
 100% Finance for deserving Candidate.

8. IIC [Indian Investment Center]

 Promotes joint ventures between India and foreign entrep.
 It Guides on investment opportunity in India and suitable Indian partners to
 Informs Government about the expectation of foreign Entrep to promote Foreign

9. SSIB [Small Scale Industry Board]

 Created in 1954 by the Government to coordinate various central and state level
EDIs and SSIs Government Department.
 Advises the Government on development of SSIs.
 Promote liberal terms of Credit at resonable Intrest Village, Cottage, Tiny

10. SIDO [Small Industry Development Organisation]

 It is a Subordinate of Department of SSI

 Controls all SSIs except those controlled by special board like coir board, Khadi
 Frame National Policy on SSI.
 Coordinate State Government SSI policy and Programmes.
 Develop Industrial Estate.
 Reserve Industry for SSI.
 Encourages Local Production of Imported Goods.
 Develop Ancillary Units.
 Provide Government Purchase order to Small Units.
 Provides Technical Service-Production Planning, Machine Selection, Layout
Planning etc.
 Marketing Assistance.
 Provides General Information and Training

11. SISI [Small Industry Service Institute]

 Provides Technical Consultancy.
 Trains Rural Worker and Managers.
 Offers Trade and Market Informations Through Survey.
 Modernisation Study Report
 Project Profiles
 Testing Facilities at concessional Rate
 Spare Capacity of SSIs are informed to Large Industry.

12. SIDCO [Small Industry Development Corporation]

 Provide Plots/Sheds in Industry Estate on Hire-Purchase / Rent.
 Helps and Procure Scarce Rawmaterials.
 Subsidies, Interest Free Loan, Finance to Rehabilations Sick Units.
 Marketing Assistance
13. SIPCOT [Small Industries Promotion Corporation of Tamilnadu
 SIPCOT & TIIC jointly provides loan under IDBI refinance scheme, TIIC provides
upto 30 lakhs for limited company, upto 15 lakhs for Propertary/Patients SIPCOT
provides the balance of loan if it excee for limited.
 SIPCOT has newly made and provides project profiles for many products. It
enables Entrep to choose a product.

 Implementation Procedure of Selected Projects in Particular areas are available
with SIPCOT.
 SIPCOT volantarily approaches Potential and existing Entrep for regular
guidance without being invited.

14. TIIC [Tamilnadu Industrial Investment Corporation]

 Eligibility For Finance Assistance
 Limited Company with Capital of 1 Lakhs to 1 Crores.
 Project Cost upto 3 Crores.

 Quantum of Assistance
 Loan up to 30 Lakhs.
 Deferred Payment Guarantee upto 30 Lakhs.
 Underwritting upto 25 Lakhs or 25% of Issued Capital, Whichever is Less.
 Total Assitance of above Three should not exist 65 Lakhs Per Industry.

 Condition for Loan

 Rate of Interest varies from 10% to 14%. The Rate depends on type of
Industry, Loan Amount and Entrep.
 Loan should be Repaid in 8 to 10 Half yearly Installments.
 Repayment Holiday of 1 to 2 years is considered.
 Deferred Payment guarantee Commission. 2% per Annum.
 Underwriting Commission 2.5% for Backward Areas 1.25%
 Minimum Promoters Contributions. For Technical Entrep 15%, backward areas
17.5%, Non Backward Areas 20% of the project cost.
 25% Security Margin on Fixed Asset Loan For Small Units;25 to 50% for
Medium Units.
 25% on Deffered Payment Guarantee amount by Cash Deposit is Insisted.
 Personal Guarantee of All or any of the Promoters or Directors.

15. DIC [District Industries Center]

 It is a District Level Institution. The Plans of National level and State Level
Institutions [NSIDCO, SIDCO, SIPCOT etc] are Implemented Through DIC in
Each District.
 Identifies Potential Entrep.

 Guides in Project Selection.
 Issues Provisional SSI Registration Certificate with Validity for one Year. This
Certificate is Essential to Approach Financial Agency.
 Provides Loan To Acquire Land And Buildings or Recommands to other
Financial Institutions For such Loans.
 Sanctions Margin Money Payable to Other Finance Agency to buy Plant and
Machinary [upto 25000],and recommands to the financial Agency.
 To Get the Speedy Power Connection request TNEB in the District Advisory
Committee Meeting Held by the Collector.
 After the Commencement of Productions, Final SSI Registration Certificate is
issued by DIC. It is Essential to get the financial Assistance and scarce Raw
 Recommand to Supplier of Raw Materials. Issue Quota Cards to Get Scarce
Raw Materials From the materials.
 Issues Certificate to joint chief controller of imports and exports for theimport of
machinery and raw materials.
 DIC recommends SSIs to NSIC to sell the products through govt. purchase
 DIC recommends SSIs to SIDCO for general mardeting assistance.
 Interest free sales tax loan upto 8% of the units fixed assets provided in rural
 Power tariff concession upto 30% in 1st year, 20% in 2nd year, 10% in 3rd year are
provided for rural units.
 Provides interest subsidy for engineers.
 Subsidy of 1/3 of project cost subject to a maximum of 3000 is provided to rural
artisand and handicrafts by DRDA (District rural development authority) with
DICs recommendation.
 DRDA trains rural entreps under IRDP training scheme (Industrial rural
development programme)
 Self employment for unemployed educated youth(minimum SSLC), aged
between 18 to 35 years can avail a loan upto 25000 from banks to start a

16. TCO (Technical consultancy organisation

 Industrial potential survey
 Preparation / evaluation of project profiles
 Conducts EDP
 Technical and administrative assistance
 Assist in technical upgradation and modernisation
Revives sick units


1. Investment Limits – (one) cr for SSI; 25 lacs for tiny sector.
2. Priority in allocation of scarce raw materials

3. Technology development cell & Export development cell in SIDO.
4. Marketing assistance through NSK, Co-ops, agencies.
5. 837 sectors are reserved fro SSIs.
6. 409 items should be bought only from SSIs.
7. Service sectors are treated as tiny sectors.
8. Support from National Equity Fund for projects upto 10 lacs.
9. Single window loan for projects upto 20 lacs.
10. Factoring service through SIDBI to overcome the delayed payment
1. Backward area incentives
a) 247 districts are declared as backward dist. These are divided into A, B
& C categories.
b) Investment Subsidy
For A category dist. – 25% of investment, upto 25 lacs.
For B category dist. – 15% of investment, upto 15 lacs.
For C category dist. – 10% of investment, upto 10 lacs.
c) Liberal loan
SFC grants loan to buy fixed assets upto 30 lacs for ltd. Co. & upto 15
lacs for others at low margin, low interest & long repayment period.
2. Subsidy for indegenous technology
When the technology invented in Govt. labs, universities, are used to produce
essential products, interest due to IFCI during the first 5 yrs. upto 5 lacs per year is
3. Transport subsidy

50% of transport cost of raw materials & finished goods are subsidised for
industries located in Jammu & Kashmir, Himachal Pradesh, Hill districts of U.P. & North
Eastern Regions.
4. Seed Capital Loan
Interest free seed capital loan upto 15 lacs repayable in 5 yrs., is given 15 new
generation entrepreneurs.

5. Rehabilitation allowance through tax

Units affected by flood, cyclones, fire etc. can deduct 60% of allowable
deduction from the tax due.

1. Subsidy for selected industries

Drug units, automobile ancillary units, Export oriented gold jewellery makers,
diamond processing units are eligible for a subsidy of 10% on fixed assets or Rs.20,000
for every regularly employed worker, whichever is lower, upto a ceiling of 10 lacs.

2. Interest free sales tax loan

Units outside 8 Km. of Madurai, Madras, Trichy, Coimbatore, Salem can avail
this loan upto 20% of fixed assets or 20 lacs whichever is less.

3. Concessional power tariff

a) High Tension power tariff is subsidised 66% in the first three years. 80% in
the 4th year, 90% in the 5th year.
b) Low Tension power tariff is subsidised 40% in Iyr, 30% in II yr, 20% in II yrs.

4. Concession in water royalty

New units in backward areas can draw water from public sources for the first 6
yrs, for Rs. 300 per yr. as water royally.

5. Project report subsidy

SIPCOT provides project reports at 10% of the project preparation cost. 40% of
the cost will be converted into loan.

6. Market study subsidy

75% of the cost of market study conducted by ITCOT, not exceeding Rs.15,000
is subsidised for new projects exceeding Rs. 3 cr.

7. Pioneer industry subsidy

Pioneer industry in each area is eligible for a capital subsidy of Rs. 25 lacs.

8. DIC’s single window clearance service

Spot clearance of building plan approval, pollution control regulations, & power
sanctions, etc are done in DIC itself.

9. Sales tax waiver & deferral

Sales tax is waived upto 7 yrs, and deferred upto 14 yrs. based on the units
investment value.

10. Power generation subsidy

15% of the generator cost, upto 5 lacs is subsidised.


A project report can be defined as a well evolved course of action devised to
achieve the specified objective within a specified period of time.
The following are broad heads under which complete information on Relevant
Aspects should be included in the project report.

1. General Information
- Bio-data of promoters
- Industry profile
- Constitution and organisation
- Product details
2. Project Description
- Site (Plants Location)
- Physical infrastructre-Raw material, skilled labour
- Utilities
 Power
 Fuel
 Water
- Pollution Control
- Communication System
- Transport Facilities
- Manufacturing Process
- List of Machinery and Equipment
- Capacity of the Plant
- Technology Selected
- Balancing of Plant
- Quality Control / Testing and Inspection
- Research and Development

3. Marketing Factors
- Market Potential
 Demand and supply position
 Price expected to be Realized

- Marketing strategy
- After sales service
- Seasonality Factor

- Transportation

4. Capital Costs and Sources of Finance

- Land and Building
- Plant and Machinery
- Installation costs
- Other miscellaneous assets like furniture/fixtures, vehicles, tool etc.
- Preliminary and preoperative expenses.
- Contingency cushion against price rise/unforeseen expenses
- Margin for working capital

5. Assessment of Working Capital Requirements

The estimated working capital requirement should be shown along the total cost
of the project.

6. Other Financial Aspects (Estimated) :

- Profit & Loss Account
- Balance sheet
- Cash flow statement
- Break-even Analysis

7. Economic and Social Variables

- Employment Generation
- Import substitution
- Ancillarisation
- Exports
- Local Resource utilization
- Development of the Area

8. Plant Layout
A copy of plant layout can also be furnished in the project report.

Plant Capacity

Capacity depends on product specification, product mix and raw materials. In a
textile mill, capacity varies with the composition of yarn of different counts. Sugar mill’s
capacity depends on the sugar content of the cane so the plant capacity should be

An integrated textile mill with cotton as a starting material is more profitable than
an unintegrated mill producing fabric from grey cloth. So integrated projects are

By Product Recovery
In a caustic soda plant recovery of chlorine and hydrogen improve profitability
than a plant without recovering this. So projects with by-product recovery are prefered.

Flexible Production
Stand – by equipments help maintain uninterrupted production. Quantity &
quality of the output should be easily modified.

Plant Layout & Design

If should ensure ease of operation, maintenance and capacity of expansion.
Availability, quality and price of the inputs should be stable. Instability of there
factors in power, water & agri produce will affect the output.

Ideal location is close to buyers and suppliers with good infrastructure. The
plant should not pollute the location by smoke, effluent, noise and machine vibration.


Employment Effect
Direct and indirect employments of skilled & unskilled employees created by the
project is assessed. Direct employment refers the employment within the project.
Indirect employment means the employment on input side (suppliers & service provides)
and output side (sales, distribution, transport jobs) of the project.
Foreign Exchange Effect
Exporting units increases the inflow of foreign currency Import substitution units
reduces the outflow of foreign currency. Such projects are preferred.

Social Benefit
Some projects develops the infrastructure in its area. [Road, water, transport,
power, housing, hospital, school etc.] This improves long term income of the society.
But some projects by polluting the environment affects public health and reduces the
fertility of land. This affects long term income of the society.


Simple rate of return
 It is the ratio of expected net profit to the initial investment.
 i.e. Net Profit / Investment
 The rate should be more than the cost of capital.

Pay Back Period

 It measures the number of years required to recover the investment.
 Investment – Annual cash flow.
 Projects with short pay back period is preferred.

Internal Rate of Return (IRR)

 It is the rate of return on discounted future cash in flows.
 The project break evens if the cost of capital = IRR
 The project is profitable if the cost of capital < IRR

Eg. : Investment = 18,00,000

Annual cash in flow for 5 years = 5,70,000 p.a.
5,70 ,000 5,70 ,000 5,70 ,000
18,00,000 = + 2 +.... +
(I +r ) 1 ( I +r ) ( I +r ) 5

Net Present Value (NPV)

 A project is accepted if the discounted future cash inflow exceeds the
 Cost of capital if interest rate may be the discount rate
Eg. Investment = 18,00,000 at 12% interest

Annual cash for 5 years = 5,70,000

5,70 ,000 5,70 ,000
Present value of cash inflow = 5 + .... + = 20,54,700
(1 +.12 ) (1 +12 ) 5

The present value exceeds the investment. So the project is acceptable.

Current Ratio
 Indicates projects ability to meet short – term obligations.
 Current ratio = Current assets / Current liabilities
 Current assets should be 1 ½ times of current liability (ration 1 :5 :1).,

Debt. Equity Ratio

 Indicates projects ability to meet long term obligation
Longtermde bt / equity
 Debt. equity ratio = shareholde requity

 Debt. could be upto four time the equity (4:1)

Debt. Coverage Ratio

 Indicates the ability to repay principle & unit regularly Ratio = operating profit
(Principle + Interest)
 It is good if the operating profit is twice the principle + interest.

Break even pint (BEP)

 Indicates how much should be sold to avoid a loss.
 70% BEP means 70% of the products should be sold to avoid loss.
 Project with low BEP is good.
 Market Potential
 Unfilled potential
 Number and strength of the present and potential competitors.
 Existing and future substitutes.
 Seasonal fluctuations in sales.
 Govt. support through reserving for SSI’s govt. purchase scheme, compulsory
purchase schemes.
 Trends in earning, spending, price, life style.
 Distribution – Distribution cost, distributers cooperation, mode of transport, ware
house etc.
If these are favourable the project may be selected.

Capital decision involves
 Total amount (capitalisation)
 Composition (Fixed + working – capital structuring)
 Sources
 Procedure of rising capital


Factors influencing fixed capital need

 Nature of business – Manufacturing Assembling ↔Trading
 Size of business – Large ↑; small
 Technology – Modern / Imported
 Sub – Contracting provision
 Economy – Growing - ↑ for future expansion.

 Over Capitalisation – investing more than the need Reduce profitability.
 Under capitalisation – investing less. loose the sales

Equity Shares
 Repayment on liquidation only
 Dividend is optional
 Capital gain for share holders.

Preference Shares
 Dividend is fixed, compulsory & on priority basis.
 Priority in repayment of capital while liquisdation
 Redeemable / convertible options

 Assured repayment & fixed interest Less risky than equity shares.
 Interest is treated as expense benefit for the co.
 Repayment is burden for the co.
 Secured / unsecured / convertible options

 Like unsecured debentures

Term Loans
 Repayable within 25 years with interest in installment
 Minimum interest 10.75% p.a.
 Owners margin money/security is insisted.
 Repayment not compelled during
 Total loan can be returned at any time.
 Cost of raising capital is low

Repayment not compelled during gestation period

 Total loan can be returned at any time.
 Cost of raising capital is low.

Reserves & Surplus

 Retained profit after divident, share premium are used por modernisation &

Deferred Credit (or purchase)

 Fixed assets are brought on credit basis.
 Cost with interest is paid in installments.
 Supplier demands margin money & bank guarantee.

Subsiding & Concessional loans by govt. in backward area

- Short term assets required for daily operations
- Components of working capital (current asserts)
 Inventories (Raw / Finished / work in progress)
 Cash, Bank bl.
 A/c receivable.
 Advances paid
- Permanent w.c. should be maintained at any time.
- Variable w.c. is procurd whenever needed.

Factors influencing working capital need
- Purchase Policy - Cr.  WC
- Sales Policy - Cr.  WC
- Inventing Policy - More  WC

Sources of WC
- Private Loans - From Share holders / buyers / suppliers / Traders

- Bank Credit
 Unsecured loans – Cash credit, over profit
 Secured loans – Bills, stock, securities)

Public Deposits
 Borrow upto 10% of share capital + reserves for Deposits > 3 mths.
 Borrow upto 25% of share capital + reserves for Deposit for 6 months to 5 yrs.

- Commercial Paper
 Promote maturing in 3 to 270 days.
 Brought by individuals / banks / FI / Insurance
 Company must have high credit rating

- Inter – corporate deposit

 Deposit made by one co. with another co.
 Call deposits – lender can withdraw with 3 day notice
 3 mths / 6 mths deposits.

- Customer’s advance
- Credit purchase
- Pledging – Giving a/c receivable as collateral security for loan.
- Factoring – Selling a/c a/c .. Fin. inst. accept collection risk.

- Fixed assets are acquired through lease finance.

- Lesser buys asset as metioned by the lessee and leaves it with him for use/
- Lessee pays rents (instead of principal + interest)
- Rent is treated as expense. So lessee enjoys tax benefit.
- Lesser as a asset owner enjoys depriciation & its tax benefit.
- In ‘financial lease’ the lease agreement is permanent.
- In operating lease the agreement can be cancelled by either party lessor with
maintains service the asset.
- In ‘sale & lease book’ type a firm sells its asset to the lessor and lease it back.

- Hire uses the asset for rent (principal + int.)
- Hirer can return the goods at any time & cancell the agreement.
- Hirer becomes the asset owner after paying the last installment.

- It is a supporting finance provided between the sanction of loan & its
- The approval of public issue & collection of full amount.
- In case of public issue upto 75% of the under written amount is given initially.
- Capital provided for high risk & high rewarding projects.
- IFCI’s Technology Development & Infrastructure corp. Can-Bank Fin. services
are venture capitalists.


- Cap. structure means the composition of different sources of funds like
debenture, loans, lease, equity capital, etc.
- Debt – equity ratio from 2:1 to 5:1 is preferred
- More equity is preferred
 by risky business
 when more control over the co. is not needed
 During the capital market boom
 Low Equity Increases EPS
 Favourable dest-reserve ration brings flexibility


- Scale of assistance
- Interest rate
- Duration of repayment
- Margin
- Forms with terms of loan are available at headquarters and district officers of
- Banks branch managers supply forms & discuss
- Filling the application
 Post balance sheets
 Projected Financial statement
 List of required
 List of mortgageble assets margin money are enclosed.

- Follow up
 The case is referred to small service Institute or director of industries
for techno economic report.
 Deficiency in the report is to be rectified lending agencies queries are
to be answered
- Disposal
 Full / reduced loan is sanctioned or rejected.
 If rejected additional information / documents are produduced.
- Documentation & disbursment Borrower signs the document and receives
the loan.
A) Cost of the Project
COST OF THE PROJECT (Rs. in lakhs)
1. Land
2. Machinery
3. Plant & Machinery
4. Technical fee/ royalty
5. Other assets
6. Preliminary expenses
7. Pre-operative expenses
8. Provision for contingencies

9. Margin for working capital

1. Land
Land cost should include the purchase price of land, legal changes for
conveyancing, cost of levelling and laying roads and cost of putting up ferce and gates.

2. Building
Adequate prov should be made for factory building, godowns wall, Canteen,
guest house, quarters for staff, sewerage etc. Cost should also include architects fee.

3. Plant & machinery

Cost of all items till the machinery is installed in the factory. In case of imported
machinery, amount of import cluty payable should be properly estimated and provided

4. Technical fee/ Royalty

Fees paid to consultant, and foreign collaborators, expenses on training of
regular staff in initial stages. Reputation of consultants demand fees from 5 to 10% of
cost of project.

5. Other fixed assets

Furniture and equipment, Cars, trucks, electrical installation etc.,

6. Preliminary expenses
Legal expenses, brokerage commission etc. required for raising if a capital of the

7. Pre-operative expenses
Factory advance, E & Phone, sales for advance and registration, R or d
expenses, promotion expenses, working expenses, expenses for traising personell,
interest on borrowing, guarantee charges etc up to stage of reaching commercial

8. Provision for contingencies

Adequate cushion is provided to absorb unforeseen expenses and also increase
in prices due to inflation and levying of additional taxes. Provision of 10% to 20% is

9. Margin for working capital

Normally, 25% of total current assets of the unit is expected to be financed out of
long term sources and hence this amount is included here.

B) Means of Financing
After determining the cot of the project, the next step is to arrange for finance to
meet the cost. A list of different sources of finance is given in the following table.

Means of Financing (Rs. in lakhs)

1. Share Capital

2. Reserves and Surplus

3. Public deposits

4. Borrowings from financial institutions

5. Borrowings from Banks

6. Loans/deposits from Directors

7. Deferred payments

8. Subsidy


1. Share Capital
The ration of equity to preference shares should not be less that 3:1. i.e.
Preference shares should not exceed 25% of total shares capital.
2. Reserves and Surplus
They represent internal accrual in case of an existing concern. Their composition
should be examined to ascertain whether they will be readil
y awaitable is the form of cash when required to meet expenses.

3. Public deposits
The amount of public deposit a company can accumulate would depend upon its
reputation in the market.

4. Borrowings from Financial Institutions

This is the single source of long term finance for industries. Finance may be
provided by a single institution or jointly by many institutions.

5. Loans/deposits from Directors

The terms on which funds are received should be examined to see that they are
not likely to cause urchins strain to the concern financially.

6. Deferred Payments
Plant and machinery may be purchased or imported on defense I payment
terms. They case the financing problem of the unit. Short-daked referred payments are
not considered suitable because the capacity to repay immediately is very less in such

7. Subsidy
This scheme of central Govt. is in operation in districts identified as backward by
central Government.

C) Cost of Production and Profitability

Repayment of term loans is out of earning of unit. Period covered by the
statement will include initial construction period and continue till full repayment of term
loan available.

a) Capacity utilization is realistic. It will be low in initial years and gradually increase in
next few years and reach optimum level at a later stage.

b) Increase in cost due to inflation is not taken into account. Where the increase is
definitely known it is accounted for.

c) Items like power and Fuel will depend upon capacity of machinery installed.

d) Depreciation provided for should confirm to the provisions of Income tax Act.

e) Interest should include interest both on working capital advances and on term loan.



Capacity Utilizations

Sales i) volume

ii) Value

Cost of production

Raw materials

Direct Wages

Power and Final

Consumable Stores

Regards and maintenance

Rent, taxes etc.

Other expenses



less taxation


Debt service Coverage Ratio =

Net Pr ofit After taxes +Depreciati on +Interest on term loans

Instalment of term loans +Interest on term Loans

The average of the ratio over than years is calculated. It is expected that the
ratio should be around 2:1. It means that for repayment of every one rupee towards
interest and instalment of term loan. The company is generating funds to the extent of

two rupees. Gianting reduction in profit, due to inforces circumstances, Company should
be is a comfortable position to repay the loan.


Sources of Funds
Net profit before taxes with interest added back
but before depreciation and investment allowance
Increase in share capital
Increase in long term borrowings
Increases in short term borrowings
Depreciation provision
Invetment allowance reserve
Application of funds
Fixed assets and capital expenditure
Increase in current assets Repayment of term loan
Repayment of short term borrowing.
Increase in other asset
Interest on borrowings
Other expenses
Opening balance of cash
Surplus/deficit between sources and applications of fund
Closing balance of cash




Definition of Sickness
- Basically a sick unit is one which is not healthy.
- Different views on sickness (Workers, Investors, Financial Institutions)

“According to Reserve Bank of India, a Sick Unit is one which,”

- incurs cash for one year and it likely to continue to incur cash losses for current
year as well as the following year.
- Imbalance in financial structure,
- Cumulative losses each capital and reserves.

“According to the Dept. Commissioner SSI,”

- Capital utilization is below 50% in compasion with highest capital utilized.
- Closure of the unit for a period of more than six months.


Industrial Units Functional areas

Generating Profits

Initial abberation in
Tending towards functional areas

Functional areas
incures continues
Industrial Units cash

Functional areas
Tending towards becomes in
sickness efficient

Signals of SS
(i) Decline is capacity utilisation
(ii) Shortage or Liquid funds
(iii) Inventories in excessive Quantity
(iv) Frequent Breakdowns & equipments
(v) Frequent turnover of Personal

Synttonis of I.W
(i) Persisting shortage of cash.
(ii) Continues tumble in prices of shares
(iii) Delay & Default in the payment of statutory dues.
(iv) Degradation of employees
(v) Despination among the team.

Magnitude of I-S
- Unfortunately nine out or ten sick small locate units are non-viable
- A sick unit is viable when
 It would be in a position after giving a package of concessions.
 Duration of seven years will be given for the repayment obligations.
- Incidence or sickness is higher in the Industrially backward states.

Causes of Industrial Sickness

It can be classified into eastern causes and Internal Courses.

External Causes
(i) Cases in Indi policies of Govt. from time to time.
(ii) Lack of adequate Demand for the product
(iii) Natural calamities like drought, floods, etc.
(iv) Inadequate availability of essential inputs.
(v) Shortage of finance.

Internal Causes
(i) Lack of Good mgmt (in Funel Areas)
(ii) Poor implementation (Improper planning)
(iii) Labour trouble
(iv) Technical / operational problems [choices of technly]
(v) Marketing problems

Eg. : Saraswathi wollen mills pvt. Ltd.

Consequences of Industrial Sickness

Is lead to several healthful effects.

Financial Loss
Banks & Financial institutions

Loss of Employment
Widospread unemployment in country

Industrial unrest
Strikes, and other forms of unrest.

Harm to Investment
I-S create Great Lots to Invstrs & entrepreneurs Er’s are discouraged &

Loss of Public Revenue

- Govt. gets a sixeable proportion of its revenue by way of taxes levied on
Industrial units.
- The shortage of tax revenue due to Industrial Units ultimately affects various
programmes of social and economic depart or the country.


1. Identification and detection of sickness in earlier stage.

2. BIFR should open a separate division to deal with sickness in small scale
3. Improper Rehabilitation programmes have to be changed and improved. The
programme should also taks care or mgl efficiency, marketability, power and raw
4. Having taken a decision to rehabilitee sick unit the programme should be
finalised quickly and implemented speedily.
5. The Banks and financial institutions should periodically review the account of
6. EDP programmes have to be conducted periodically.

Third Semester

Time: Three hours Maximum : 100 marks

Answer ALL questions

PART A – (10 x 2 = 20 marks)

1. Mention the different features of an entrepreneurship.

2. List out any four problems faced by small-scale industries in India.

3. Give the importance of project monitoring and control.

4. State the factors that motivate people to go into business.

5. List the various factors determining the working capital requirements.

6. What are the major aspects generally to be considered in the process of project


7. How do you select a suitable channel of distribution?

8. What are the common errors made by the entrepreneurs in project formulation?

9. Mention the methods of training imparted to entrepreneurs in India.

10. List out the methods of project appraisal used to appraise a proposed proposal.

PART B – (5 X 16 = 80 marks)

11. (i) Explain the essential qualities needed for a successful entrepreneurs. (8)

(ii) What are the objectives of Entrepreneurs Development Programs? (8)

12. (a) (i) List out and explain the different classification of entrepreneurs. (8)

(ii) List out and explain the tools and techniques of marketing control. (8)


(b) What are the various factors affecting the entrepreneurial growth? Explain. (16)

13. (a) How will you carryout project planning? Explain in detail. (16)


(b) What are the salient features of new small-scale enterprise policy in India?

Explain?. (16)

14. (a) How are project classified? Describe the stages involved in the identification

and selection of projects. (16)

(b) List out and explain the guidelines formulated by our planning commission for

formulating a project report. (16)

15. (a) What are the causes of sickness in small scale industries and explain the

measures for avoiding sickness? (16)

(b) (i) Name the different organizations assisting small scale industries.

Explain. (4)

(ii) Assuming that you are an entrepreneur planning to set up an

establishment catering to every day provisions need of a large housing

complex. How would you solve your working capital requirements?

Explain. (12)



Entrepreneurship concept – Entrepreneurship as a Career – Entrepreneur –
Personality Characteristics of Successful. Entrepreneur – Knowledge and Skills
Required for an Entrepreneur.


Business Environment - Role of Family and Society - Entrepreneurship
Development Training and Other Support Organisational Services - Central and
State Government Industrial Policies and Regulations - International Business.
Sources of Product for Business - Prefeasibility Study - Criteria for Selection of
Product - Ownership - Capital - Budgeting Project Profile Preparation - Matching
Entrepreneur with the Project - Feasibility Report Preparation and Evaluation


Finance and Human Resource Mobilization Operations Planning - Market and
Channel Selection - Growth Strategies - Product Launching.


Monitoring and Evaluation of Business - Preventing Sickness and

Rehabilitation of Business Units.Effective Management of small Business.

Total 45 periods
1. Hisrich, ‘Entrepreneurship’, Tata McGraw Hill, New Delhi, 2001.
2. P. Saravanavel, ‘Entrepreneurial Development’, Ess Pee kay Publishing
House, Chennai -1997.
3. S.S.Khanka, ‘Entrepreneurial Development’, S.Chand and Company
Limited, New Delhi, 2001.
1. Prasama Chandra, Projects – ‘Planning, Analysis, Selection, Implementation
and Reviews’, Tata McGraw-Hill Publishing Company Limited 1996.
2. P.C.Jain (ed.), ‘Handbook for New Entrepreneurs’, EDII, Oxford University
Press, New Delhi, 1999.
3. Staff College for Technical Education, Manila and Centre for Research and
Industrial Staff Performance, Bhopal, ‘Entrepreneurship Development’, Tata
McGraw-Hill Publishing Company Ltd., New Delhi, 1998.