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BEG. 301
BUSINESSENTREPRENEURSHIP - V
M. Com. Part II
Semester III
YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITYDnyangangotri, Near Gangapur Dam, Nashik 422 222, Maharashtra
Copyright © Yashwantrao Chavan Maharashtra
Open University, Nashik.
All rights reserved. No part of this publication which is materialprotected by this copyright notice may be reproduced or transmittedor utilized or stored in any form or by any means now known orhereinafter invented, electronic, digital or mechanical, includingphotocopying, scanning, recording or by any information storageor retrieval system, without prior written permission from thePublisher.
The information contained in this book has been obtained byauthors from sources believed to be reliable and are correct to thebest of their knowledge. However, the publisher and its authorsshall in no event be liable for any errors, omissions or damagearising out of use of this information and specially disclaim anyimplied warranties or merchantability or fitness for anyparticular use.
YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY
Vice-Chancellor : Dr. M. M. Salunkhe
Director (I/C), School of Commerce & Management : Dr. Prakash Deshmukh
State Level Advisory Committee
Dr. Pandit Palande Dr. Suhas Mahajan Dr. V. V. Morajkar
Hon. Vice Chancellor Ex-Professor Ex-Professor
Dr. B. R. Ambedkar University Ness Wadia College of Commerce B.Y.K. College, Nashik
Muaaffarpur, Bihar Pune
Dr. Mahesh Kulkarni Dr. J. F. Patil Dr. Ashutosh Raravikar
Ex-Professor Economist Kolhapur Director, EDMU,
B.Y.K. College, Nashik Ministry of Finance
New Delhi
Dr. A. G. Gosavi Dr. Madhuri Sunil Deshpande Dr. Prakash Deshmukh
Professor Professor Director (I/C)
Modern College, Swami Ramanand Teerth Marathwada School of Commerce & Management
Shivaji Nagar, Pune University, Nanded Y.C.M.O.U., Nashik
Dr. Parag Saraf Dr. S. V. Kuvalekar Dr. Surendra Patole
Director, Associate Professor and Assistant Professor
Institute of Management Science, Associate Dean (Training)(Finance ) School of Commerce & Management
Pimpri, Pune National Institute of Bank Management, Y.C.M.O.U., Nashik
Pune
Dr. Latika Ajitkumar Ajbani
Assistant Professor
School of Commerce & Management
Y.C.M.O.U., Nashik
Authors Editor
Dr. Madhuri Sunil Deshpande Dr. Parag Saraf
Professor, School of Commerce & Management Sciences Director, Institute of Management Science
Swami Ramanand Teerth Marathwada University, Nanded Pimpri, Pune
Dr. Latika Ajitkumar Ajbani
Assistant Professor,
School of Commerce & Management, Y.C.M.O.U., Nashik
Instructional Technology Editing & Programme Co-ordinator
Dr. Latika Ajitkumar Ajbani
Assistant Professor, School of Commerce & Management, Y.C.M.O.U., Nashik
Production
Shri. Anand Yadav
Manager, Print Production Centre, Y.C.M. Open University, Nashik - 422 222.
Copyright © Yashwantrao Chavan Maharashtra Open University, Nashik.
(First edition developed under DEB development grant)
q First Publication : January 2016
q Type Setting : M/s. Master Graphics, Nanded.
q Cover Print :
q Printed by :
q Publisher : Dr. Prakash Atkare, Registrar, Y.C.M.Open University, Nashik - 422 222.
CONTENTSM. Com. Part II (Business Entrepreneurship - V)
Semester III
Contents Pages
Unit 1 : Entrepreneurship And Strategy 9
Unit 2 : Entry Strategies 29
Unit 3 : Strategies For Growth And Development –I 45
Unit 4: Strategies For Growth And Development –II 64
Unit 5 : Strategies For Growth And Development –III 81
Unit 6 : Strategies For Growth And Development –IV 97
Unit 7: Managing Business Growth 115
Unit 8: Financing For Business Growth 131
Unit 9: Exit Strategies 147
Unit 10: Networking 162
Unit 11: Project Management - I 182
Unit 12: Project Management – II 198
INTRODUCTION
Business Entrepreneurship –V comprises of some contemporary issues in
entrepreneurship management with reference to developmental dynamics for
MSMEs comprising entry strategies, growth strategies as well as exit strategies.
This book acclimatizes the students with the practices to sustain and grow an
entrepreneurial venture. It talks about aspects like managing growth, financing
growth, networking, collaboration, franchising, and also project management.
It is intended to encourage thoughts on various possible scenarios and
challenges that arise during the entrepreneurial growth journey.
This book is designed to be friendlier to the users by means of special care to
make the text easier to read and understand. I hope it would enthuse the
students about entrepreneurship as a career option.
With Best Wishes!
Dr. Madhuri Sunil Deshpande
Professor
School of Commerce & Management Sciences
Swami Ramanand Teerth Marathwada
University, Nanded
6
NOTES
Business
Entrepreneurship - V
Unit 1 : Entrepreneurship And Strategy
Understanding Strategy and Strategic Management- Approaches to Strategy,
Strategy Hierarchy
Strategy and Small Business
Unit 2 : Entry Strategies
Enterprise Survival and Growth
Entry Strategies
Buying an Existing Business
Unit 3 : Strategies For Growth And Development –I
Business Growth
Growth Strategies – Ansoff’s Growth Strategies,
Kotler’s Growth Strategies,
Glueck’s Growth Strategies
Unit 4 : Strategies For Growth And Development –II
Corporate Level Strategies
Business Level Strategies
Functional Level Strategies
Unit 5: Strategies For Growth And Development –III
Franchising
Ancillarization
Collaboration
BUSINESS ENTREPRENEURSHIP - VM. Com. Part II
SYLLABUS
7
NOTES
Business
Entrepreneurship - V
BUSINESS ENTREPRENEURSHIP - VM. Com. Part II
SYLLABUS
Unit 6 : Strategies For Growth And Development –IV
Acquisitions
Mergers
Joint Ventures
Strategic Alliances
Unit 7 : Managing Business Growth
Management of Growth
Designing the Organization – Organization Culture
Leadership – Succession Planning
Management of Change
Unit 8 : Financing For Business Growth
Management of Financial Resources
Venture Capital
Incubators
Accelerators
Angel Investors
Unit 9 : Exit Strategies
Exit Strategy – Succession of Business,
Harvesting Strategy,
Going Public (IPO),
Liquidation
Bankruptcy
Unit10 : Networking
Meaning of Networking
Entrepreneurs’ Networks
8
NOTES
Business
Entrepreneurship - V
BUSINESS ENTREPRENEURSHIP - VM. Com. Part II
SYLLABUS
Unit11 : Project Management - I
Project Management
Need for Project Management
Challenges of Project Management
Project Classification
Unit12 : Project Management – II
Project Life Cycle Approach
Network Analysis
PERT
CPM
9
NOTES
Business
Entrepreneurship - V
Entrepreneurship And
StrategyUNIT 1 : ENTREPRENEURSHIP AND
STRATEGY
Structure
1.0 Introduction
1.1 Unit Objectives
1.2 Understanding Strategy and Strategic Management
1.2.1 Approaches to Strategy
1.2.2 Strategy Hierarchy
1.3 Strategy and Small Business
1.4 Summary
1.5 Key Term
1.6 Questions and Exercises
1.7 Further Reading
1.0 Introduction
“The best way to predict your future is to create it”. – Peter Drucker
Until now you have become familiar with the conceptual framework of
entrepreneurship. Also you have studied the dynamics of initiating and managing
small enterprises. You also went through the procedural formalities of setting up
micro, small and medium enterprises (MSMEs). Then you leant the problems and
prospects of small enterprises in the light of government policy and legislative
framework. Over a period of time, through trials and errors, entrepreneurs setup
their businesses so as to ensure smooth functioning and streamlined routine
operations. At this stage, the crucial issue is how to sustain and scale up the
business. This requires strategic orientation and thinking. Let us begin with the
theoretical background of some essentials of strategic management.
1.1 Unit Objectives
After going through this unit, you will be able to
• Comprehend the relationship between entrepreneurship and strategic
management
• State the meaning of strategy and strategy hierarchy
• Know about various approaches to strategy
• Explain the association of strategy with small business
10
NOTES
Business
Entrepreneurship - V
1.2 Understanding Strategy and Strategic
Management
“Trying to predict the future is like trying to drive down a country at
night with no lights while looking at the back window”. – Peter Drucker
For knowing the significance of strategic management in entrepreneurship,
we have to discuss and comprehend some concepts and terms from the discipline
of strategic management.
Strategy can be considered as a resource for accomplishment of goals. It
is one of the most significant concepts in management and in entrepreneurship. It
is a crucial issue for fetching success for an enterprise. It ensures survival, progress
as well as success.
Henry Mintzberg identified 5 different types of strategies:
• Strategy as a plan - Strategy is defined as being a guide for a specific
course of action. This view is pioneered by George Steiner.
• Strategy as a pattern - On the basis of analysis of patterns of past decisions
and actions, strategy has to be designed and developed.
• Strategy as position - This view is propounded by Michael Porter.
Strategies defined as reflection of a decision to offer particular products/
services in particular markets. Formulations of strategies are affected
by the developments in the competitive environments.
• Strategy as perspective - Peter Drucker views strategy as a system of
values and beliefs of the strategists who are instrumental in shaping a
future of the organization
• Strategy as a ploy - Strategy is seen as behavioral rather than perceptual.
William F. Glueck defines strategy as a “unified, comprehensive and
integrated plan relating the strategic advantages of the firm to the challenges of
the environment. It is designed to ensure that the basic objectives of the enterprise
are achieved”. In this manner, strategy is a unified plan. It binds all the divisions,
departments, sections together. It is comprehensive. It comprises of all the aspects
of the enterprise in a holistic manner.
‘Tackling competition’ is the fundamental nature of strategy. As Kenichi
Ohmae observes, “Without competitors, there would be no need for strategy, for
the sole purpose of strategic planning is to enable the company to gain, as efficiently
as possible, a sustainable edge over its competitors”. Strategy is formulated in
anticipation of the possible moves and counter moves of the competitors. It is a
well thought out plan of action which visualizes the probable actions and reactions
of competitors and embarks upon them. It takes into consideration the strengths
and weaknesses of the competitors, their possible reactions and moves and then
the future course of action is designed in a systematic manner. Along with
‘competitive spirit’, another perspective of strategy can be denoted as ‘future
orientation’.
One has to be very much particular about the relevance and applicability
of strategy. In the words of D. Hambrick, strategy is defined as “the patterns of
the decisions that shape the venture’s internal resource configuration and deployment
and guide alignment with the environment” On similar lines, strategic management
Entrepreneurship And
Strategy
11
NOTES
Business
Entrepreneurship - V
Entrepreneurship And
Strategycan be considered as dealing with decisions which determine a business venture’s
internal resource structure and implementation; these decisions influence the
interaction of the business venture with the external environment.
Fred R. David defines strategic management as “the art and science of
formulating, implementing and evaluating cross-functional decisions that enable
an organization to achieve its objectives”.
Strategic management deals with future. Peter Drucker says,
“Management has no choice but to anticipate the future, to attempt to mold it, and
to balance short-range and long-range goals. The future shall not just happen if
one wishes hard enough. It requires decision – now. It imposes risk – now. It
requires action - now. It demands allocation of resources – now. It requires work
- now”.
Strategy formulation deals with planning as well as analysis. Strategic
management comprises of strategy formulation, strategy implementation, evaluation
and control. Strategy formulation deals with planning as well as analysis. It
comprises of determination of mission, and objectives; analysis of strengths and
weaknesses of the enterprise along with environmental opportunities and threats.
The entrepreneur has to begin with defining the mission of the enterprise which
indicates the very purpose of existence of the enterprise. It relates the enterprise
to the needs of the society. Then the entrepreneur establishes objectives of the
organization. Objectives define the enterprise to the society. These are the end
results end results towards which enterprise’s activities are directed. The enterprise
pursues its mission through the objectives.
Figure 1.1: The Process of Strategic Management
In the words of Ansoff, the term strategy indicates the relation between
the enterprise and its environment. The entrepreneur has to pay attention to appraisal
of the organization i. e. internal environment as well as the external environment.
The external environment is composed of various constituents such as economy,
demographics, technology, politics, government, society and culture, ecology and
the like. SWOT analysis plays a crucial role in strategic management. On the
basis of SWOT analysis, the enterprise makes a decision regarding the portfolio
strategy and other strategies to be followed.
The mission and objectives are now clear. The entrepreneur has analyzed
the strengths and weaknesses of his/her enterprise, and also the environmental
opportunities and threats. Now he/she proceeds to generate alternative strategies
in the light of the objectives established. Different strategic alternatives are evaluated
on the basis of predetermined criteria like suitability, feasibility, acceptability etc.
12
NOTES
Business
Entrepreneurship - V
The strategy has to be in line with the corporate philosophy, mission and objectives.
It should capitalize on the enterprise’s strengths and relevant environmental
opportunities. It should overcome enterprise’s weaknesses and avoid environmental
threats. Further, the strategy should be realistic and practical. The required
resources, inputs, technology should be accessible. The strategy needs to be
evaluated on the basis of profitability as well as its impact on the enterprise with
reference to employees, stockholders, customers etc.
Fred David says, “Strategy formulation is largely an intellectual process
whereas strategy implementation is more operational in character. Strategy
formulation requires good conceptual, integrative and analytical skills but strategy
implementation requires special skills in motivating and managing others. Strategy
formulation requires primarily at the corporate level of an organization while strategy
implementation permeates all hierarchical levels. Strategy formulation requires
coordination among a few individuals, but strategy implementation requires
coordination among many”. Strategy implementation is concerned with execution
and evaluation of the activities and operations that make up the strategy. This is
the action phase of the process of strategy implementation. It comprises of
mobilization and allocation of resources.
1.2.1 Approaches to Strategy
Strategists, academicians, researchers are always in search for an effective
approach to strategy. Let us see some important approaches to strategy.
Peter Drucker on Strategy
“…the continuous process of making present entrepreneurial (risk-
taking) decisions systematically and with the greatest knowledge of their
futurity; organizing systematically the efforts needed to carry out these
decisions; and measuring the results of these decisions against the
expectations through organized, systematic feedback”. – Peter Drucker
According to Peter Drucker, it is not desirable to emphasize only the profit
objective. Because if managers emphasize only on profit objective, they will make
decisions and actions for maximization of profits at present; which he thought,
may be against future of the organization. He suggested eight key areas in which
managers should set objectives:
1. Market standing- Management should set objectives in a way so as to
indicate where it would like to be in relation to its competitors
2. Innovation- Management should set objectives with innovation as the
essence.
3. Productivity- Management should set objectives outlining the target levels
of production
4. Physical and financial resources- management should set objectives
regarding acquisition, application and maintenance of various resources.
5. Profitability- Management should set objective so as to specify the profit
target of the company in a specific manner.
6. Managerial performance and development- Management should set
objectives with a clear focus on productivity by motivating the employees
and improving their morale.
Check Your
Progress
1. Define strategy in
your own way.
2.State the meaning
of strategic
management.
Entrepreneurship And
Strategy
13
NOTES
Business
Entrepreneurship - V
7. Worker performance and attitude- Management should set objectives in
the light of increase in workers’ motivation levels and morale.
8. Public responsibility- Management should set objective which indicate
the enterprise’s responsibility towards the various stakeholders including
its customers and society.
Peter Drucker calls the strategic management process as ‘self-
assessment’. This is considered as the most effective and workable approach to
strategic planning. He advocated that the initial step is to ensure that customers
have input into the process. Customer interviews reveal what they value and why
they buy. Such in-depth interviews provide innovative ideas. Innovation objectives
are usually set around problems which affect growth and profitability. Innovative
opportunities may lie in the Eight Essential Areas of Objectives as mentioned
above. All these objectives need to be clearly communicated and understood by
all the relevant stakeholders.
According to Peter Drucker, every business must answer the five questions:
• What is our mission?
• Who is our customer?
• What does our customer value?
• What are our results?
• What is our plan?
He says, “The five questions appear simple, but they are not. Give them
time to sink in; wrestle with them”.
Peter Drucker says,” Strategic planning is not a box of tricks, a bundle of
techniques”. It is not forecasting. Actually, it is necessary precisely because we
cannot forecast. “Forecasting does not serve the purposes of planners who seek
to direct their organizations to the future”. He opines that strategic planning does
not deal with future decisions. It deals with futurity of present decisions. The
crucial issue is “What do we have to do today to be ready for an uncertain
tomorrow?” It is not about what will happen in the future. It is not the organization
should do tomorrow. It’s about NOW and not about the future. It is not an attempt
to eliminate or minimize risk. Necessarily right risks are to be taken in a rational
manner through the systematic process of planning.
In his essay “Entrepreneurial Strategies”, Peter Drucker talked about the
following strategies. He believes that entrepreneurial strategies are as important
for any business as entrepreneurial management. According to him, entrepreneurial
management means practices and policies within the enterprise and entrepreneurial
strategies mean practices and policies outside the enterprise i.e. the marketplace
in which the enterprise operates. He proposes the following entrepreneurial
strategies:
• Being fustest with the mostest: This is being the unchallenged leader in
the industry by creating an innovative and unique product/service.
• Hitting them where they ain’t i.e. creative imitation: This is sensing
potential opportunities in the innovation of others. This strategy aiming
at market leadership is less risky than the first one.
Entrepreneurship And
Strategy
14
NOTES
Business
Entrepreneurship - V
• Finding and occupying a specialized ‘ecological niche’: This is developing
a monopoly in a small area in which others may not be interested. There
are three possible ways of applying this strategy – the toll-gate strategy,
the specialty skill strategy, the specialty market strategy.
• The entrepreneurial judo aims at entering a market where the established
leaders do not defend it or do not care about it.
• Changing the economic characteristics of a product, a market, or an
industry: This is adapting an existing, well-known product as per the
customer requirements. This strategy can be applied in various ways
such as creating customer utility, pricing, the customer’s reality, delivering
value to the customer.
He states that a strategy may actually be a combination of some of those
listed above; and that different strategies require different behaviours by
entrepreneurs and a different type of innovation.
Michael Porter’s Competitive Analysis
“The essence of strategy is choosing what not to do”- Michael Porter
The five forces model was developed by Michael Porter to help enterprises
assess the nature of an industry’s competitiveness and develop corporate strategies
accordingly. The framework enables an enterprise to identify and analyze the
forces that determine the profitability of an industry. It is aimed to provide a new
way to use effective strategy to identify, analyze, and manage external factors in
an organization’s environment. It is used to evaluate an enterprise’s position in its
industry and to assess its level of competitiveness.
Figure 1.2: Porter’s Five Forces Model
The five forces identified by Porter are categorized into: horizontal forces
– threat of substitutes, threat of new entrants, competitive rivalry; vertical forces
– bargaining power of buyers and bargaining power of customers.
Competitive rivalry is the degree of rivalry between the enterprises in the
market. Competitive rivalry may be higher when similar sized companies operate
in one market. These companies have similar strategies and products have similar
features and offer same benefits. Growth in the industry is slow. There are high
barriers to exit or low barriers to entry. The intensity to rivalry is influenced by the
number of firms, slow market growth, high fixed costs, high storage costs, low
level of product differentiation etc.
If an industry is profitable, it will attract new enterprises. With low barriers,
there is a greater risk of depletion of market share. Barriers to entry comprise
Check Your
Progress
3. Enlist the five
questions of Peter
Drucker.
4. State the eight key
areas in which
managers should set
objectives.
Entrepreneurship And
Strategy
15
NOTES
Business
Entrepreneurship - V
access to inputs, economies of scale, access to infrastructure and/or innovative
technology, patents, high initial investment etc.
With more substitutes for a product, the potential for profit is lesser with
more competitive environment. If the substitutes are lower priced and/or effective
in fulfilling customer needs, it will affect in an adverse manner for the existing
products of the enterprise.
Power of suppliers with reference to their position to dictate terms, setting
of prices etc is an important factor. If the suppliers are few, they would exercise
more power due to high dependency upon them. The bargaining power of suppliers
depends upon brand reputation, geographical coverage, quality, relationship with
customers etc.
Power of customers to affect prices and quality is a crucial issue. If the
buyers either buy in bulk or can easily switch to competitors, their bargaining
power is high. With little or no product differentiation, the customers would dictate
terms. If customers purchase in small quantity, their bargaining power is low. With
high product differentiation, buying power is low.
The situation of concern is: the threat of new entry is quite high, competitive
rivalry is extremely high, buyer power is strong and there is a threat of substitution.
For survival, entrepreneur has to change the situation. He/she need to specialize
in a sector that is protected or find a related business which is strong.
After a systematic analysis, an entrepreneur has to choose and execute a
strategy for the sake of competitive advantage. Porter has propounded three
‘generic strategies’ to be deployed in any industry or any enterprise:
Cost leadership: In this strategy, profit is increased with reduction in costs
by charging competitive prices or market share is increased with reduction in
sales price by retaining profits.
Differentiation: In this strategy, entrepreneur makes the products/services
significantly different from the competition. This strategy fetches success with
good research and development and effective marketing efforts.
Focus: In this strategy, entrepreneurs select niche markets for offering
their products/services. This strategy brings desired results with an in-depth study
of market, customers, competitors and the like. This strategy at times applies a
cost leadership or differentiation option.
Porter suggested execution of strategy at corporate, business unit and
departmental levels. He considered the business unit most significant.
Porter’s competitive ‘diamond’ model is used for assessing relative
competitive strength of nations; and by implication their industries:
• Factor conditions: production factors required for the industry
• Demand conditions: extent and nature of demand within the nation for
product/service
• Related industries: existence, extent and international competitive strength
of other industries in the nation concerned that support or assist the
industry
Check Your
Progress
5.Porter’s five forces
model consisting of
five competitive forces
determine the ——.
6. State the three
generic strategies
propounded by Porter.
7. Enlist the five forces
of Michael Porter.
Entrepreneurship And
Strategy
16
NOTES
Business
Entrepreneurship - V
• Corporate strategy, structure and rivalry: conditions in the home market
that affect the creation, growth and management of corporations.
Core Competence
“What’s the use of running if you are not on the right road” – German
proverb
Competencies are special qualities of an enterprise which facilitates them
to withstand in the face of competition in the market. An enterprise develops its
competencies over a period of time and develops an expertise in using the
competencies. Such competencies are termed as core competencies. Such kind
of specific ability developed by an enterprise is also called as distinctive competence.
A. Sharplin defines distinctive competence as ‘any advantage a company has
over its competitors because it can do something which they cannot or it can do
something better than they can’.
Many organizations achieve strategic success by building distinctive
competencies around the critical success factors (CSFs). CSFs are those factors
which are crucial for enterprises’ success. They are also referred as strategic
factors or key factors for success. Strategies consciously look for CSFs while
exercising strategic management. With CSFs, they are likely to be more successful.
The term core competence has been popularized by Prahalad and Hamel
as an idea around which strategies could be formulated by an organization.
According to Prahalad and Hamel, the competitive/strategic advantage can be
attributed to the core competencies of an enterprise. They discussed analogy of
the tree while discussing core competence. ‘The diversified corporation is a large
tree. The trunk and major links are core products, the smaller branches are business
units; the leaves, flowers, fruits are end products. The root system that provides
nourishment, sustenance and stability is the core competence.’ To identify the
core competence, Prahalad and Hamel prescribed three tests:
• It should be able to provide potential access to a wide variety of markets;
• It should make significant contribution to perceived customer benefit of
the end products and ;
• It should be difficult for the competitors to imitate.
BCG Growth-share Matrix
‘’ A company should have a portfolio of products with different growth
rates and different market shares. The portfolio composition is a function of
the balance between cash flows…Margins and cash generated are a function
of market share.’’-Bruce Henderson
In the early 1970s, the Boston Consulting Group (BCG) developed a model
for managing a portfolio of different business units of major product lines. The
BCG Matrix aims to identify high growth prospects. It categorizes the company’s
products according to growth rate and market share. The BCG matrix is a portfolio
planning model developed by Henderson. A company’s business units are classified
into four categories based on combinations of market growth and market share
relative of the largest competitor. The growth share matrix maps the business unit
position within these two determinants of profitability. BCG matrix has four cells.
The horizontal market represents relative market shares and the vertical access
represents growth rate. Resources are allocated to the business units according to
the situation on the grid. The four cells of this matrix are called as stars, cash
Check Your
Progress
8. What is meant by
core competence?
9. To identify the core
competence, Prahalad
and Hamel prescribed
three tests. Which
ones?
10. CSF means ——
11. The term core
competence has been
popularized by ———
Entrepreneurship And
Strategy
17
NOTES
Business
Entrepreneurship - V
cows, question marks and dogs. Each of these cells represents a particular type
of business.
1. Stars (High share and high growth) - Stars generate large amounts of
cash because of their strong market share. They consume large amounts
of cash because of their high growth rate. If successful, a star will
become a cash cow when its industry matures. The portfolio of a
diversified company should have stars that will become the next cash
cows and ensure future cash generation. Entrepreneurs are advised to
invest in stars. Stars represent business units having large market shares
in a fast growing industry. They may generate cash but because of fast
growing market, stars require huge investments to maintain their lead.
2. Cash cows (High share and low growth) - Cash cows require little
investment. They generate cash that can be utilized for investment in
other business units. They generate more cash than they consume.
Entrepreneurs are advised to invest in cash cows to maintain the current
level of productivity. Such business units usually follow stability strategies.
With further deterioration, retrenchment strategy may be followed.
3. Dogs (Low share and low growth) - Dogs neither generate nor consume
a large amount of cash. They are generally considered cash traps.
Businesses have money invested in dogs. They are likely to make loss
or a very low profit. It is advised to avoid dogs and minimize them in an
enterprise.
4. Question mark (Low share and high growth) - Question mark (or problem
child) grows rapidly and consumes large amounts of cash. Due to low
market share, they do not generate much cash. A question mark has a
potential to gain market share and become a star and eventually a cash
cow when the market growth slows. If huge investment is made, question
marks may become stars. If ignored, the question marks may become
dogs. Question mark is a business unit with a small market share in a
high growth market. Such units require resources, grow market share
but whether they will succeed and become stars is unknown.
BCG matrix is a useful framework which guides for allocation of resources
among different business units. It also enables comparison of various business
units at a glance. It can also be used for resource allocation among products with
a single business unit
Figure 1.3: BCG Growth –Share Matrix
Check Your
Progress
12. What is BCG
matrix?
13. The four cells of
this matrix are called
as ———
Entrepreneurship And
Strategy
18
NOTES
Business
Entrepreneurship - V
Blue Ocean Strategy
Blue ocean strategy is a new way of thinking; it is a new strategic mind-
set. It is a shift in focus from competing to creating new market space, thereby
making the competition irrelevant. The goal is not to hit the competition, but to
make the competition extraneous.
Chan Kim and Renee Mauborgne developed ‘blue ocean strategy’ on the
basis of a study of 150 strategic moves over a period of more than 100 years and
30 industries. They observed that businesses compete with each other for market
share. Typically they work in ‘red ocean’ conditions. According to blue ocean
strategy, businesses work in market place which is free of competitions. Blue
oceans can be created by introducing completely new industries; it can also be
created from within a red ocean while expanding the operations beyond the
boundaries of an existing business. The proponents of blue ocean strategy
propounded that too much emphasis on competition and competitive advantage is
not desirable. Instead, there is a need to find and develop blue oceans; and also to
exploit and protect blue oceans.
According to Kim and Mauborgne, It is not proper for businesses to
succeed by beating competitors. Instead they should systematically create ‘Blue
oceans of uncontested market space’. The strategy is based on high product
differentiation and low cost. It is a systematic approach which makes the competition
irrelevant. Blue ocean strategy creates uncontested market space whereas red
ocean strategy competes in existing market space. Red ocean strategy aligns the
whole system of a firm’s activities with its strategic choice of differentiation or
low cost. Blue ocean strategy aligns the whole strategy of a firm’s activities in
pursuit of differentiation and low cost. Blue ocean strategy makes the competition
irrelevant while red ocean strategy beats the competition.
Blue ocean strategy creates and captures new demands and red ocean
strategy exploits existing demand. In Blue Ocean, demand is created rather than
fought over. It is believed that there is ample opportunity for growth that is both
profitable and rapid. Red ocean strategy makes the value-cost trade-off. Blue
ocean strategy breaks the value-cost trade-off.
The essence of blue ocean strategy can be expressed as follows:
• Make the competition irrelevant
• Don’t compete, create
• Create uncontested market space
Kim and Mauborgne suggested ‘Four Actions Framework’ for businesses
and entrepreneurs instead of Porters ‘five forces’ model. To break the tradeoff
between differentiation and low cost, and to create a new value curve, the
framework possesses four key questions:
• Eliminate: which factors that the company has long competed should
be eliminated?
• Reduce: which factor should be reduced well below the industry’s
standard?
• Raise: what factor should be raised well above the industry’s
standard?
Check Your
Progress
14. ———— devel-
oped blue ocean strat-
egy
15. What is meant by
blue ocean strategy?
16. What is meant by
red ocean strategy?
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• Create: which factor should be created that the industry has never
offered?
The Four Actions framework is expressed as Eliminate-Reduce-Raise-
Create (ERRC) Grid.
1.2.2 Strategy Hierarchy
In the initial phases, entrepreneurs deal with a single or few products,
local market, few customers and simple technology. But, of course, in due course
of time after getting success and stabilizing operations; many of them may think of
including new products/services, new customers, new markets, new technology.
They may plan to increase the scale and scope of operations of their enterprises.
For such enterprises who deal with different business lines holding a variety of
products/services, markets or technology; a single strategy may not be adequate
and appropriate. For such multi business enterprises, there is a need of multiple
strategies at different levels. Such companies organize their activities on the basis
of different divisions. These divisions may be termed as profits centers or strategic
business units (SBUs).
Arthur Sharplin defines an SBU as “any part of a business organization
which is treated separately for strategic management purpose”. Generally SBUs
are involved in a single line business. Ansoff uses the term SBA i.e. strategic
business area so as to refer to external environment of an enterprise. He defines
it as ‘a distinctive segment of the environment’. Multi business enterprises have a
number of SBUs for different SBAs. Each of the SBUs has its own functional
departments. Or they may have a few major functional departments while common
functions are grouped under the corporate level. The different levels of strategy
could be at the corporate level, the SBU level and the functional level. This strategy
hierarchy is also sometimes referred as strategy pyramid.
Figure 1.4 Strategy Hierarchy
The strategy hierarchy is concerned with two types of levels – levels of
management and levels of strategy. The organizational levels are the levels of
strategy of corporate, SBU and functional levels. The strategic levels are the
corporate level, business level and functional level strategies.
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According to Sharplin, corporate level strategic management is the
management of activities which define the overall character and mission of the
organization, the product/service segments it will enter and leave, and the allocation
of resources and management of synergy among its SBUs. Corporate strategy is
formulated by the top level corporate management. It is related with the basic
purpose of the enterprise. It deals with decisions regarding the business/businesses
it would engage in; and also about entry into and expansion of such business/
businesses.
Corporate level strategies are directed at achievement of the overall
corporate objectives. These strategies are long term strategies which comprise
the whole organization. These strategies deal with decisions for allocation of
resources among different businesses of an enterprise. They also make decisions
regarding transferring resources from one set of businesses to others. In all,
corporate strategies are meant for managing and nurturing a portfolio of businesses.
The corporate level strategy covers various functions that are performed
by different SBUs. It focuses on the corporate objectives, resource allocation,
and coordination of the SBUs for optimal performance.
Corporate strategy deals with business portfolio i.e. type of business and
makes decisions about strategy/strategies to deploy in the business/businesses.
According to Ansoff, SBU level strategic management is the management
of an SBU’s effort to compete effectively in a particular line of business and to
contribute to overall organizational purposes. SBU level strategies are formulated
by the business heads i.e. senior executives in the light of corporate philosophy
and strategy.
Business level strategy is based on the objectives of SBUs, allocation of
resources among functional areas and coordination of various SBUs for the sake
of contribution to the corporate level objectives.
In the words of Ansofff, “functional-level strategic management is the
management of relatively narrow areas of activity, which are of vital, pervasive,
or continuing importance to the total organization”. Functional-level strategies are
strategies formulated for different functional areas such as marketing, finance,
production/operations, human resources etc. They are formulated by the heads of
functional areas.
Functional strategy is focused on the objectives for specific function,
allocation of resources among different operations within that functional area and
coordination between them so as to contribute to the achievement of SBU and
corporate level objectives.
In a common manner, strategic plans are made at three levels of strategy
i.e. at corporate level, business level and functional level as discussed above.
However, at some other levels also strategic plans are developed. Enterprise level
strategy is concerned with the relationship between the enterprise and the society.
Sometimes strategies are set at a level higher than the corporate level which are
termed as the societal strategies which are also called as enterprise strategies. In
the words of Sharplin, “Enterprise strategy is the organization’s plan for establishing
desired relationship with other social institutions and stockholder group and
maintaining the overall character of the organization”. Societal strategy is based
on a mission statement. It presents a view of how the enterprise relates itself to
the society in terms of a particular need or a set of needs. Corporate level strategies
are based on the societal strategies.
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Some strategies may be set at still lower levels. After the functional level,
operational level strategy may be set. Each functional area may need a set of
operational level strategies. Such operational strategies deal with a highly specific
and narrowly defined area. Thompson Strickland says, “Operating strategies
concern how to manage key organizational units and within a business (plants,
sales districts, distribution centres) and how to perform strategically significant
operating tasks (materials purchasing, inventory control, maintenance, shipping,
advertising campaigns)”. These operating strategies are at the bottom of the
strategy pyramid. They are formulated by operating or front-line mangers after
seeking approval from the top bosses through proper channels.
Activities in each of the operational areas contribute to the functional
objectives. Different functional strategies are interlinked with each other. All these
functional strategies operate under the SBU level. Different SBU level strategies
operate under corporate level strategy, which, in turn, operate under societal level
strategy of the corporation. All these strategies at all levels need to coordinate and
synchronize with each other.
1.3 Strategy and Small Business
“It is more important to do what is strategically right than what is immediately
profitable” – Philip Kotler
Small entrepreneurs commonly are not found to practice strategy. They
may talk about strategy, but commonly they do not apply strategic orientation for
their enterprise. They do not deal with strategic planning and strategic decision
making. What might be the reasons behind this lack of interest among small
entrepreneurs in strategy and consequently in strategic management? They may
not be aware about the meaning and significance of strategy for the purpose of
ensuring success for their enterprise. They may perceive strategy as a complex
tool which is needed for large enterprises only which possess multiple businesses
in its portfolio.
Small entrepreneurs are under the impression that strategy is required for
big corporates which are engaged in complex operations mostly at international
level; and that strategic management has no role to perform in small business.
Even if some of them wish to adopt strategic approach, they find it difficult to
visualize and formulate strategy. And implementation of strategy is found to be a
gigantic task for them. There are difficulties associated with manpower, budget,
long time span, scarcity of resources etc.
However, it is highly desirable that all the perspectives and dimensions of
strategy should be understood by the entrepreneurs, so that they would be in a
better position to adopt the framework for their own enterprise.
There are many approaches to strategy formulation some of which are
narrated above in the section 1.2. The essence of strategy lies in creation of a
unique, and exclusive position for the enterprise. It consists of a set of distinctive,
inimitable activities that the enterprises is engaged in, which qualifies the enterprise
to gain a competitive advantage; an edge over its competitors. Competitive
advantage is not easily sought. It not easy to be adapted by any of the competitors
– present as well as future. This feature of competitive advantage results in a
specific and definite position for the enterprise.
The strategy is to be clearly communicated to all the employees of the
enterprise. Everyone has to be encouraged to reflect on strategy. A strategy
Check Your
Progress
17. What is meant by
strategy hierarchy?
18. What do you know
about the term
‘SBU’?
19. Small
e n t r e p r e n e u r s
commonly are ———
——— to practice
strategy (not found,
found)
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document has to be circulated among all levels of the employees from all the
areas of the enterprise. It needs to be unmistakably understood by everyone.
Strategy formulation is not enough. The strategy has to be converted into activities,
operations, actions and goals with a clear focus on key result areas.
Strategy formulation takes place through the process of strategic planning.
This is not a one-time activity. The continuous cycle of strategy formulation,
execution, measurement, review and repositioning has to go on in a consistent
manner.
1.4 Summary
Strategy is a resource for accomplishment of goals. It is a plan of action
to achieve a goal or a set of goals. It comprises of a set of unique activities which
enable an enterprise to gain a competitive advantage.
Strategic management deals with future. Strategy formulation deals with
planning as well as analysis. Strategic management comprises of strategy
formulation, strategy implementation, evaluation and control. Strategy formulation
deals with planning as well as analysis. It comprises of determination of mission,
and objectives; analysis of strengths and weaknesses of the enterprise along with
environmental opportunities and threats. Different strategic alternatives are
evaluated on the basis of predetermined criteria like suitability, feasibility,
acceptability etc. The strategy has to be in line with the corporate philosophy,
mission and objectives. It should capitalize on the enterprise’s strengths and relevant
environmental opportunities. It should overcome enterprise’s weaknesses and avoid
environmental threats. Strategy implementation is concerned with execution and
evaluation of the activities and operations that make up the strategy. This is the
action phase of the process of strategy implementation. It comprises of mobilization
and allocation of resources.
An entrepreneur needs to understand the concept of strategy at different
levels. Enterprise level strategy is the apex level of the strategy. It relates enterprise
with the society at large. Corporate strategy deals with various issues related with
diversification and the management of a portfolio of businesses. Corporate level
strategy manages diversification within the enterprise. Business level strategy
focuses on competitors within the industry. It is concerned with acquisition,
organization and employment of resources. It deals with industry conditions.
Functional strategies manage marketing, finance, accounting and human resource
policies.
According to Peter Drucker, managers should set objectives in eight areas
–market standing, innovation, productivity, physical and financial resources,
profitability, managerial performance and development, worker performance and
attitude, public responsibility. Every business must answer the five questions: what
is our mission, who is our customer, what does our customer value, what are our
results, and what is our plan? He proposed various entrepreneurial strategies such
as being fustest with the moistest, hitting them where they ain’t, finding and
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occupying a specialised ‘ecological niche’, and changing the economic
characteristics of a product, a market, or an industry.
Michael Porter developed the five forces model consisting of threat of
substitutes, threat of new entrants, competitive rivalry, bargaining power of buyers,
and bargaining power of customers. He propounded three generic strategies of
cost leadership, differentiation and focus.
The term core competence has been popularized by Prahalad and Hamel
as an idea around which strategies could be formulated by an organization.
According to Prahalad and Hamel, the competitive/ strategic advantage can be
attributed to the core competencies of an enterprise.
The BCG Matrix aims to identify high growth prospects. It categorizes
the company’s products according to growth rate and market share. The four
cells of this matrix are called as stars (High share and high growth), cash cows
(High share and low growth), question marks (Low share and high growth) and
dogs (Low share and low growth).
According to blue ocean strategy, businesses work in market place which
is free of competitions. Blue oceans can be created by introducing completely
new industries; it can also be created from within a red ocean while expanding the
operations beyond the boundaries of an existing business. The proponents of blue
ocean strategy propounded that too much emphasis on competition and competitive
advantage is not desirable. Instead, there is a need to find and develop blue oceans;
and also to exploit and protect blue oceans.
Majority of the small businesses do not practice strategy. Regardless of
the size of the enterprise, strategic planning benefits immensely for advancement
of the enterprise. It brings focus to the enterprise.
1.5 Key Term
• Substitute products: Those products that exist in another industry but
may be used to fulfill the same need.
1.6 Questions and Exercises
Questions
1. Why is strategy not a popular tool amongst small business owners and
entrepreneurs?
2. Describe some popular approaches to strategy.
3. Write in detail about blue ocean strategy.
4. Write an essay on Peter Drucker’s views on strategy and strategic
management.
5. Comment on the significance of strategy for small entrepreneurs.
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6. What do you know about BCG matrix? Explain in detail.
7. Analyze the terms ‘core competence’ and ‘competitive advantage’ in
the context of strategic management.
8. While formulating strategy, which questions a business must answer,
according to Peter Drucker?
Exercise
Activity 1.1
Meet at least three small entrepreneurs and ask them about application of
strategy and strategic management for their enterprises.
Multiple Choice Questions
1. Peter Drucker says, “The future will not just happen if one wishes hard
enough. It requires ————
i. Decision –now
ii. Allocation of resources – now
iii. Action – now
iv. All the above
2. Pick the odd one out
i. Strategy is a unified plan
ii. Strategy is not relevant in entrepreneurship
iii. Strategy binds all the divisions, departments, sections together
iv. Strategy comprises of all the aspects of the enterprise in a holistic
manner
3. The sole purpose of strategic planning is to enable the company to gain,
as efficiently as possible, a sustainable edge over its —————
i. Competitors
ii. Suppliers
iii. Customers
iv. None of the above
4. Which one of the following is not among the five forces identified by
Porter?
i. Threat of substitutes
ii. Threat of new entrants
iii. Government
iv. Bargaining power of buyers
5. ————— in this strategy, entrepreneurs select niche markets for
offering their products/services
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i. Focus
ii. Cost leadership
iii. Differentiation
iv. None of the above
6. —————— in this strategy, entrepreneur makes the products/services
significantly different from the competition
i. Focus
ii. Cost leadership
iii. Differentiation
iv. None of the above
7. —————— in this strategy, profit is increased with reduction in costs
by charging competitive prices
i. Focus
ii. Cost leadership
iii. Differentiation
iv. None of the above
8. “Without competitors, there would be no need for strategy, for the sole
purpose of strategic planning is to enable the company to gain, as
efficiently as possible, a sustainable edge over its competitors”. Who
said this?
i. Kenichi Ohmae
ii. Peter Drucker
iii. Arthur Sharplin
iv. None of the above
9. Pick up the right alternative
i. Stars – High shares and high growth
ii. Cash cows – Low share and High growth
iii. Dogs – High share
iv. Question mark – Low growth
10. Pick up the right alternative
i. Cash cows require little investment
ii. If successful, a star will become a cash cow when its industry
matures
iii. Dogs neither generate nor consume a large amount of cash
iv. All the above
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11. Which one of the following is not associated with strategy?
i. Competitive spirit
ii. Future orientation
iii. Both i and ii
iv. None of the above
12. Which one of the following alternatives is right?
i. George Steiner viewed strategy as a plan
ii. Michael Porter defined strategies as reflection of a decision to offer
particular products/services in particular markets
iii. Peter Drucker views strategy as a system of values and beliefs of
the strategists
iv. All the above alternatives are right
13. Strategy is defined as being a guide for a specific course of action. This
view is pioneered by ———
i. George Steiner
ii. Michael Porter
iii. Peter Drucker
iv. None of the above
14. ——————views strategy as a system of values and beliefs of the
strategists who are instrumental in shaping a future of the organization A
strategy is the means to achieve objectives.
i. Peter Drucker
ii. William Glueck
iii. Kenichi Ohmae
iv. None of the above
15. Strategic management comprises of ———————
i. strategy formulation
ii. strategy implementation
iii. strategy evaluation
iv. all the above
16. Which one of the following is not suggested by Peter Drucker among
the eight key areas in which mangers should set objectives?
i. Market standing
ii. Innovation
iii. Personality
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iv. Profitability
17. Which of the following is not associated with a good strategy?
i. Short-term focus
ii. Risk based
iii. Clarity
iv. Flexibility
18. Which of the following is true?
i. Strategy should be known only to the strategists
ii. Strategy should be known to everyone in the organization
iii. Strategy should be known only to mangers
iv. Strategy should be known to strategists and managers
19. Which of the following approach focuses on competition
i. Michael Porter’s five forces model
ii. Blue ocean strategy
iii. Both i and ii
iv. None of the above
Answers
5. intensity of industry competition and profitability
10. critical success factors
11. Prahalad and Hamel
13. stars, cash cows, question marks and dogs
14. Chan Kim and Renee Mauborgne
Multiple Choice Questions
1. iv
2. ii
3. i
4. iii
5. i
6. iii
7. ii
8. i
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9. i
10. iv
11. iv
12. iv
13. i
14. i
15. iv
16. iii
17. i
18. ii
19. i
1.7 Further Reading
Cherunilam Francis, Business Policy and Strategic Management Text and
Cases, Himalaya Publishing House, Mumbai, 2010
Drucker Peter, Management: Tasks, responsibilities, Practices, Harper &
Row, New York, 1974
http://www.genesismc.co.uk/GenesisGenie/peter-drucker-strategy-
entrepreneurs/
https://www.blueoceanstrategy.com
Kazmi Azhar, Business Policy and Strategic Management, Tata McGraw
Hill Publishing Company Limited, New Delhi, 2005
Taneja Satish, Entrepreneur Development, Himalaya Publishing House,
Mumbai, 2010
www.businessnewsdaily.com/5647-blue-ocean-srategy.html
www.chris-kimble.com/Courses/World-Med_MBA/Strategy-and-
Tactic.html
www.grainnet.com/pdf/additionalmaterials.pdf
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UNIT 2 : ENTRY STRATEGIES
Structure
2.0 Introduction
2.1 Unit Objectives
2.2 Enterprise Survival and Growth
2.3 Entry Strategies
2.4 Buying an Existing Business
2.5 Summary
2.6 Key Terms
2.7 Questions and Exercises
2.8 Further Reading
2.0 Introduction
The organizational life cycle (OLC) comprises of five stages: start-up,
expansion/growth, maturity, revival and decline. It is observed that almost all or-
ganizations pass through the same phases of OLC. However, some enterprises
enter decline phase immediately after the start-up phase; they cannot pick up
growth due to lack of sustainability.
New entrepreneurs must learn the dynamics of enterprise survival and growth
while planning the launch of their ventures. And this needs strategic approach right
from the beginning. Rather, there is a need of learning strategic framework and
adoption of strategic tools not only from the beginning but ‘before the beginning’.
This is the essence of strategy. This unit deals with how to make a strategic beginning
with the acceptance and application of entrepreneurial entry strategies.
2.1 Unit Objectives
After going through this unit, you will be able to
• Understand the concept of growth and development of an enterprise
• Be aware about initial entrepreneurial strategies
• Know about the dynamics of buying an existing business
• Know the advantages and disadvantages of buying an existing
business
• Explain the process of evaluation of an existing business
• Discuss the steps involved in buying a business
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2.2 Enterprise Survival and Growth
“By three methods we may learn wisdom; first, by reflection, which is
noblest; second, by imitation, which is easiest; and third, by experience, which
is the bitterest”. – Confucius
In this age of cut-throat competition, enterprises must create and sustain
competitive advantages for their survival and growth. In absence of core
competence/distinctive competence, entrepreneurs cannot hope survival of their
enterprises. This is possible with strategic decision making, well planned and skillfully
chosen strategic moves and countermoves and application of general management
principles. Enterprise survival can never be ensured in absence of strategic
orientation. Those who think big and dare to dream about creation of high growth
enterprises, plan the launch of their enterprises by adoption of entry strategies.
Majority of the small enterprises cannot taste the fruits of success. May
be they are too casual in their approach. May be without giving a deliberate and
systematic thought, they had ventured into the unknown and paid the price for that
in the form of failure. Some small enterprises achieve success, but their achievement
is limited. May be because of sheer luck, or owing to the situational factors they
could see growth of their ventures. And then there are entrepreneurs who are
planners, dreamers, visionaries, strategists; who try to touch the sky and see
phenomenal growth of their ventures and they experience waves of success in
the chain of their ventures in series.
2.3 Entry strategies
Let us discuss new entry of an entrepreneur. Entry of an entrepreneur may
be in the form of introduction of a new product/service to a new market or an
existing market. It may be in the form of offering an established product to an
established/a new market or creation of a new organization. When an entrepreneur
deals with a new product/a new market/a new organization, there are good chances
of market acceptance of such innovations due to their uniqueness. The innovative
features of the product/service/organization differentiate it from the offers of various
competitors. At the same time, there is a possibility of non-acceptance of such
innovations by the market. At one side, there are high chances of success if newness
is accepted by the customers; and at the other side, there are several threats in
case of non-acceptance by the customers. In order to reduce the risk and
uncertainty associated with new entry of an entrepreneur, there is a need of strategic
approach in entrepreneurship i.e. adoption of entrepreneurial strategies.
In the words of Robert D. Hisrich, Michael P. Peters and Dean A.
Shepherd, “Entrepreneurial strategies represents a set of decisions, actions and
reactions that first generate, and then exploit overtime, a new entry in a way that
maximizes the benefits of newness and minimizes its costs”. An entrepreneurial
strategy comprises of generation of a new entry opportunity, and also exploitation
of a new entry opportunity. An entrepreneur is able to generate a new entry
opportunity on the basis of knowledge, technology and other resources. If the
entrepreneur perceives new entry opportunity as valuable, unique and not very
easy for others to copy/imitate, he/she proceeds forward with suck kind of new
entry opportunities. Whether such kind of new entry opportunity will fetch success
or not depends on various factors like the capability and competence of the
entrepreneur, his/her organizing skills, human resource capability etc. When an
entrepreneur succeeds with a new entry opportunity, it doesn’t imply that he/she
would be successful with another new entry opportunity. If the enterprise is unable
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to find another new entry opportunity then, life cycle of that enterprise enters
maturity stage and then declines. The long term success of an entrepreneur and
his/her enterprise depends upon the ability to generate and exploit a variety of
numerous new entry opportunities.
Generation of a New Entry Opportunity
When an entrepreneur selects a new entry opportunity, he/she expects
that this opportunity would serve as a competitive advantage. He/she is always in
search of sources of such opportunities for building a strong base of competitive
advantage. Resources can be considered as a source of sustainable competitive
advantage. They provide the foundation for efficient functioning and excellent
performance of the enterprise. Various resources such as money, materials, methods,
man power, market etc can be combined in a variety of ways. Such bundles of
resources enable an enterprise to exhibit good performance. A single resource
may not bring the desired results, but a bundle of resources can certainly exceed
the expectations and give rise to superior performance. According to J. B. Barney,
‘In order for a bundle of resources to be the basis of a firm’s superior performance
over competitors for an extended period of time, the resources must be valuable,
rare and inevitable (including non-substitutable)’. By being ‘valuable’, it indicates
that the resources develop valuable products and services for the customers. The
term ‘rare’ resources implies that there is a rare possibility of competitors to be
present and a rare possibility of a similar offer by any of the competitors in the
market. By being ‘inimitable’ implies that this combination of resources would be
very difficult for competitors to copy/imitate and/or would involve enormous
expenditure of money and efforts.
In the words of Robert D. Hisrich, Michael P. Peters and Dean A.
Shepherd, ‘The ability to obtain and then recombine resources into a bundle that is
valuable, rare and inimitable represents an important entrepreneurial resource.’
The basis of this entrepreneurial resource is knowledge. To quote J.B. Say, “An
entrepreneur may or may not supply capital but he must have judgement,
perseverance and the knowledge of the world of business”. This knowledge is
sought by the entrepreneurs through their day to day experiences accumulated
over a number of years. Such kind of experiences are unique to each and every
entrepreneur. It may not be possible to share this knowledge with others. On the
basis of this knowledge, innovations take place.
For generation of new entry opportunities, entrepreneurs need to be
equipped with market knowledge. They need to be familiar with target customers,
their profile, their needs/wants/preferences, buying habits, buying motives etc.
Technological breakthroughs also are found in several cases having given
rise to new entry opportunities. Technological innovations and inventions create
new products/services, new organizations, new markets.
Exploitation of a New Entry Opportunity
An entrepreneur may find the competitive advantage in being ‘the first’
that is being the ‘first-mover’. He/she may be the first to choose to be ‘the first’
in introducing a new product/service and/or the first to create a new market.
Being the first, there may be only a few customers in the market in the beginning
after the initial launch of the new product/service. But with the right decisions at
proper time and with the help of an appropriate opportunity, market grows speedily
and consequently, the number of customers increase rapidly. And with growth in
market size, competitors are attracted towards the industry. With entry of
competition, market share may be reduced.
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Check Your
Progress
1. Do you know the
meaning of
e n t r e p r e n e u r i a l
strategy?
2. An entrepreneurial
strategy comprises
of———————
—, and also ———
————
3. What is a new
entry strategy?
4. Resources can be
considered as a source
of sustainable
c o m p e t i t i v e
advantage.
First-movers select and target the most attractive, profitable market
segments and position their offer in an innovative manner. Being the pioneer, they
position their product as industry standard. First-movers nurture and develop strong
relationships with all the stakeholders including suppliers, distribution intermediaries
etc. They build up their own network.
Along with availing the benefits of being the first-movers, there are several
disadvantages for being the first. Being the first to market, first-movers literally
enjoy monopoly for some time. But the moment at which competition enters, the
dynamics changes. However, the first mover entrepreneur can stop or delay
potential competitors in the industry with the help of entry barriers. He/she strives
to build customers loyalty. The quality, uniqueness of the product/service may
serve as a competitive advantage. The first-movers make efforts to maintain product
uniqueness. It may be in the form of protecting intellectual property such as patents,
copy rights, trademarks and trade secrets. Entrepreneur may choose some entry
barriers so as to discourage competition at least for some time. First-movers may
build switching costs. Customer’s switching costs are the costs that must be borne
by customers if they stop purchasing from current suppliers and begin purchasing
from others. First-movers develop exclusive relationships with the stakeholders
such as suppliers, trade channels, etc. Such kind of entry barriers may prevent or
reduce the extent and degree of competition faced by first-movers.
With increase in competition, typically prices are reduced, marketing and
promotion costs are increased and profits are curtailed. Of course, healthy
competition enhances the performance of enterprises in the industry. With
competitive spirit, each and every enterprise improves its performance and
contributes to increasing trend of industry growth. Each market player strives to
offer more value in their products/services for customers. They want to create a
special position in the mind of the customer by being more innovative and more
efficient.
While developing their products/services, entrepreneurs have to pay
attention to the environmental happenings. They have to analyze key success
factors of the industry in which they are planning to enter. With correct judgment
and application of the key success factors, there is a high probability of success.
However, the speed with which the environment changes, the key success factors
also change accordingly. The entrepreneur has to develop the ability to sense,
understand and adapt to the changes in the environment and organize the resources
in view of that. The success of an entrepreneur depends upon his/her skills in
anticipating the change and then adapting to the change in an intelligent manner.
The environment poses uncertainty in terms of demand, trends, fashions, technology
and the like. The first challenge is to detect the change and another is an intelligent
adaptation to the change.
It is difficult to estimate the demand in the market. Further, the growth
rate of demand in the market has to be assessed. Being the first, there is no past
information available for estimation of potential size of the market. If demand is
overestimated, the entrepreneur may be in trouble. He/she may find that size of
the market is inadequate for sustenance of the entrepreneurial venture. On the
other hand, over estimation of demand may lead to the danger of overcapacity
and the costs associated with it. With an underestimation of market demand, the
entrepreneur may suffer from costs of under capacity. He/she may not be able to
fulfill the demands of the customers and consequently the customers may switch
over to the competitors.
Entry Strategies
33
NOTES
Business
Entrepreneurship - V
Customers’ needs, preferences, urges and drives may change over a period
of time. Entrepreneur has to pay attention to such kind of changes and make an
adaptation accordingly. If demand is unstable and unpredictable, the first-mover
may have to face several inconveniences. It is advised to the entrepreneur about
delaying the entry in such a situation.
Technological environment presents various threats to the first-movers. Sometimes,
technology may not perform as expected. The entrepreneur may incur problems
of meeting the customer’s promises, maintaining his/her reputation, additional
expenditure on R and D and on production. In this techno savvy world, there is
always a possibility of a new superior technology replacing the previous one.
There is a risk of loss as well as of failure due to various kinds of
uncertainties associated with market demand, technological development,
competitors etc. In a systematic, planned and strategic manner, entrepreneurs
attempt to reduce the uncertainties and risks of various kinds while launching their
new entry strategies.
Imitation strategy
Karl Vesper’s Entry Wedges
It is interesting to learn about Vesper’s entry wedges. Karl Vesper
discussed the concept of ‘entry wedges’ in his book ‘New Venture Strategies’.
These entry wedges are the ways, courses of actions adopted by entrepreneurs
while launching their start-up ventures. These methods deserve attention since
they may affect the manner in which the enterprise would move in a particular
direction and shape its future. The entry wedge can be a part of the enterprise’s
sustainable competitive advantage.
According to Karl Vesper, all new ventures employ one or more of the
three major entry edges: new product or service, parallel competition, and
franchising. Let us discuss these entry wedges one by one.
New product/service: It may not be easy for a new entrepreneur to
make a decision about a new product/service to deal with in the beginning. He/she
typically goes through the process of decision making through an analysis of a
number of variables such as his/her interests, hobbies, skills, expertise, and demand
potential and so on.
The new product/service wedge is denoted by Peter Drucker as “being
first, with the most” strategy. This is high-risk, high-reward entry wedge. It is not
easy to design, develop and launch truly new product/service. New technology
has a fundamental role to play in development of new product/service. ‘Being
first’ speaks about newness. Innovation is instrumental in the launch of new product/
service. With new product/service wedge, entrepreneurs can generate a new
industry or can become market leader of the existing industry. Copying/imitating
of an innovative product/service is not possible for any of the competitors. However,
if the product/service is not an entirely new concept or idea, competitors can
focus on that aspect and snatch the market share to their side. “With the most’’
speaks about comprehensiveness of the product/service. If the strategy do not
cover all the comprehensive aspects such as product features/attributes, guarantee,
warrantee, service, delivery etc, then there is risk of competitor’s entry. Competitors
pick up the missing component and capitalize on that weakness for grabbing the
market share.
Check Your
Progress
5. What is meant by
‘first-mover’?
6. What are the
benefits of being first-
mover?
7. Enlist the
disadvantages of being
the first-mover.
Entry Strategies
34
NOTES
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Parallel Competition: Parallel competition is called by Peter Drucker
as ‘creative imitation’. It is a “me too” strategy which introduces competitive
duplications into the market. These competitive duplications are not identical to
existing products/services. Rather, they are parallel. They may involve an innovative
feature. There may be some variation from the existing products/services. If there
is some gap in the existing market offerings, an entrepreneur recognizes such
small/minor shortcomings in the market and attempts to fill the niche i.e. a small
segment of the market. There is no need of distinctive competence. With a minor
variation in any of the aspects of product/service, entrepreneurs make customers
happy and delighted with parallel wedge strategy.
Franchising: The third major wedge is franchising. The entrepreneur
may be either the franchisor or franchisee. The franchisor is the seller of franchises.
He/she expands the business on the basis of his/her long standing in the market,
experience, good image, reputation and expertise. The franchisee invests money,
time and energy to sell product/service developed by the franchisor. The franchisee
pays franchise fee and royalties (usually based on sales). He/she gets support of
the franchisor in terms of training, marketing, operations etc.
Karl Vesper enlists minor entry wedges as follows:
1. Exploiting partial momentum
i. Geographic transfer
ii. Supply shortage
iii. Tapping underutilized resources
iv. Creating or modifying existing distribution channels
2. Customer sponsorship
v. Customer contract
vi. Second sourcing
3. Parent company sponsorship
vii. Joint venture
viii. Licensing
ix. Market relinquishment
x. Spin-off
4. Government sponsorship
xi. Favoured purchasing
xii. Rule change
xiii. Direct assistance
The entrepreneur is familiar with the market. He/she is aware about
product(s) with good potential and exploits this information either by geographical
transfer, or by filing a supply shortage, or by putting underutilized resources to
work, or by creating or modifying existing distribution channels. Geographical
transfer means establishing a successful business in another area. Franchising is a
meaningful entry strategy. Entrepreneurs may start new business by fulfilling market
Check Your
Progress
8. Do you know the
meaning of
franchising?
9. Name the entry
wedges devised by
Karl Vesper.
10. Parallel
competition is called
by Peter Drucker as
——
11. The new product/
service wedge is
denoted by Peter
Drucker as ———
strategy
Entry Strategies
35
NOTES
Business
Entrepreneurship - V
gaps such as supply shortages. It could also be considered as geographical transfer
when product/service is transferred from one area to another where it is in short
supply. Any of the underutilized resources, may be human, physical, financial,
technological or organizational and the like, may be put to productive use by
launching a new venture. Underutilized physical resources may be by-product,
waste or worn-out product.
Customers may encourage entrepreneurs for launching new ventures either
by customer contract or by second sourcing. With customer contract, the new
entrepreneurs can get guarantee of sales and initial financing. Entrepreneurs can
choose to become a second source with the support of customers. The customers
may provide financial, technical, managerial assistance for getting supply as per
their needs and requirements.
A parent company can help establish a new venture by joint venturing,
licensing, market relinquishment, or spin-off. Under a licensing agreement, the
entrepreneur contracts with the parent company to produce a product/service or
employ a system or technology. The entrepreneur gets the benefit of experience
and expertise of the parent.
2.4 Buying an Existing Business
Entrepreneurs may launch their own businesses, or purchase a franchise or
buy an existing business. Some of them find it easy and convenient to evaluate
and purchase existing business and develop it to suit and fulfill their requirements.
They do not wish to take the pains of detailing a comprehensive business plan,
working out on all the particulars, entering into various procedural formalities,
seeking approvals, sanctions etc and then see the enterprise functioning with full
momentum. They do not wish to experiment with trial production runs, test
marketing, human resource challenges and then wait for getting market acceptance
and develop their own standing in the market. Instead they buy an existing, mostly
a profit making business. By purchasing existing business, entrepreneurs save
time, money and energy required to launch a new business. In an existing business,
almost all the trials and errors for establishing an efficient product operation have
been proved successful. The product/service is well received by the target
customers. The enterprise is well settled with streamlined operations and efficient
functioning and well placed in a good location. A successful business may continue
to be successful in future also. On the basis of these assumptions, buyer
entrepreneur decides to buy existing running businesses. And now after such
purchase, the buyer entrepreneur needs to make few changes and modifications
in the business, for improvement. History of the business, various previous records
and documents would be a good beginning to gain command over the newly bought
business. The past employees of the business and especially the previous owner
entrepreneurs can provide useful information. It’s always easier to raise money
for existing business than for a new business.
Along with advantages, various disadvantages also can be attributed with
reference to buying an existing business. There is a high probability that business
may not be as attractive and as profitable as it seems. It is quite probable that the
business may have been incurring loss. There is possibility of an attempt to cover
up the facts and manipulation of accounting figures so as to project rosy picture of
the business. There is always a risk. The business may have been poorly managed.
The previous employees of the business may not be able to accept change and
Check Your
Progress
12. What are the
benefits of buying an
existing business?
13. Are there some
disadvantages in
buying an existing
business?
Entry Strategies
36
NOTES
Business
Entrepreneurship - V
cope up with the new leadership, management style and corporate culture.
Customers may not accept the change in ownership and consequent changes
regarding product/service etc. If proper attention is not paid at the time of purchase,
there is a probability that the equipment, machinery and facilities may be outdated
and inefficient. That might contribute to high operating costs, reduced profit margins,
may be losses. The business location may not be appropriate and suitable for the
buyer entrepreneur.
The Steps in Buying a Business
In the light of some of the probable disadvantages of buying an existing
business as discussed above; an entrepreneur has to be very much careful in
selection of a suitable business for buying in. He/she has to decide the criterion
while planning to buy out an existing business. He/she has to follow a systematic,
logical and methodological approach in acquiring the existing business as described
below:
• Self-appraisal to determine suitability to the type of business
The entrepreneur has to begin with a self-appraisal to determine the type
of business which suits him/her: self-appraisal in terms of strengths, abilities,
hobbies, interests, skills etc. He/ she has to deliberate on various relevant issues
such as which business activities he/she might be interested in, the type of businesses
to be preferred and to be avoided, area of his/her expertise and experience, the
type and degree of agreeable risks, size of the business, preference towards
geographical locations etc. The entrepreneur has to consider the product/service
which suits him/her. The product/service should be suitable to his/her skills,
knowledge, expertise etc.
• Selection criterion for buy out
Entrepreneurs need to bring out their personal preferences for certain
geographical locations. There may be some personal reasons, family reasons, and
business reasons for setting up businesses in particular places. Business prospects
also dictate the location in several cases. Some may restrict their selection to the
places of their liking where they would like to settle down. Sometimes family
needs also mean an essential consideration. Financial capacity is also a vital
parameter for choosing a suitable business. The entrepreneur has to clearly assess
the amount of money he/she is able to raise from various available sources in the
light of their paying capacity. He/she has to think about availability and size of his/
her own contribution, debt arrangement from banks and other financial institutions.
The entrepreneur has to analyze carefully his/her expectations and comfort
level about the size and type of business, the scope of its operations in terms of
sales, turnover, profitability etc. Consequently he/she needs to make an assessment
about the time, effort and energy he/she would have to put in the business they
may buy in.
• Sources of search for buy ins
Now the entrepreneur has decided the criteria, he/she has to search for
the potential businesses most likely to be bought in. There are various sources for
search of suitable businesses which meet the buyer’s criteria. Typical sources
include business brokers, and consultants. They have a list of prospective sellers
which they share with their clients by charging a fee. They get brokerage also
after finalizing the deal. Consultants help their clients by providing them market
information alternative financing method and the like. They negotiate with the
Entry Strategies
37
NOTES
Business
Entrepreneurship - V
sellers on behalf of their client. Now a day, the internet and the World Wide Web
has become a popular source for entrepreneurs to identify the businesses available
for buying. Business brokers have developed their own websites Bankers,
accountants, investment bankers, venture capitalists, chartered accountants,
financial institutions, trade associations etc also constitute important sources of
business information. Entrepreneurs may use professional advisers also for selling
and buying their business. Industry contacts such as suppliers, distributors,
customers, insurance brokers etc are other sources of search for buy ins along
with newspapers and trade journals which maintain listing of businesses for sale.
Sometimes, some important clues are given through networking that is through
social and business contacts with friends and relatives. And if entrepreneurs are
interested in a particular business, the option of knocking on doors of the business
is always open for the entrepreneurs even if such businesses are not advertised as
being ‘for sale’.
• Identification and evaluation of candidate businesses
There are various advantages of buying an existing business. There is
every probability that the successful existing business may continue to be successful
in future also. The successful business already has loyal and satisfied customers.
It may mean a well-developed linkage with suppliers, vendors, bankers, creditors,
financiers and other intermediaries. The employees and the managers are well-
acquainted with the organizational culture on the basis of their associations and
experience with the business. After buying the existing business, immediately the
revenue from the business begins. There is no waiting time for earning money as
in case of a new venture.
On the basis of past performance, existing business needs to be evaluated.
The prospective buyer should evaluate the business’s assets to determine their
value. He/she should also check the condition of equipment, building with the help
of professionals. He/she should also assess inventories and other assets, accounts
receivables, accounts payable. Past data of profits, sales as well as turnover over
a number of years is to be analyzed for consistency and to get an idea about the
future growth prospects. Financial condition of the business has to be assessed
with the help of financial statements, income tax returns, sales records, legal
documents, and cash flow.
It is needed to have some idea about the motives of the seller entrepreneurs
before finalizing the decision. There is a possibility that the product/service has
become outdated. So as to avoid the probable future losses, the entrepreneur may
have taken the decision about selling the venture. There is also a probability that
the seller entrepreneur may not have been able to cope up with the speed with
which technological changes are taking place. For some products/ processes,
technology changes very rapidly. The seller entrepreneur may not have been able
to arrange resources for acquisition or development of new technology and the
infrastructure needed to manufacture and market the product/service. An
apprehension of technological obsolescence may direct an entrepreneur to sell the
enterprise. Entrepreneurs may get frustrated due to increasing competition.
Sometimes it is observed that, when a successful enterprise is offered good price
for his/her venture, it works out an irresistible temptation to make money. Personal
reasons or family needs may have prompted the seller entrepreneur to wind up
the venture. Some entrepreneurs may be interested in changing their careers.
They may sell out their ventures for starting a new venture or enjoy the comforts
of life out of the wealth generated by the sale. Entrepreneurs launch their small
ventures; the business flourishes speedily and the entrepreneurs may not be able
Entry Strategies
38
NOTES
Business
Entrepreneurship - V
Check Your
Progress
14. What are the
motives of selling an
existing business?
15. Name some
sources of search for
buy-ins.
16. State the steps in
acquiring a business in
the right way.
to manage the business growth independently on their own. For managing such
high growth businesses, the business needs to be corporatized. However, if the
entrepreneurs do not like to share their ventures with others, the only option left is
to sell the business. Entrepreneurs may face succession problem. After getting
old, he/she may not find a suitable, eligible family member to continue with his/her
business. In such case, he/she is left with no option but to dispose of the business.
Several times seller entrepreneurs do not reveal their motivations for sale of their
business. However, the buyer entrepreneur has to investigate and probe further
before finalizing his/her buying decision.
Thomas W. Zimmerer and Norman M. Scarborough suggest the potential
buyer to explore the business opportunity by examining five critical areas:
1. Why does the owner want to sell?
2. What is the physical condition of the business?
3. What is the potential for the company’s products or services?
4. What legal aspects should be considered?
5. Is the business financially sound?
Evaluating these five areas of a business is known as performing due
diligence i.e. the process of investigating the details of a company that is for sale
to determine the strengths weaknesses, opportunities and threats facing it.
Determining the Value of a Business
The decision to buy an existing business depends upon proper valuation of
the business. For proper valuation of the business, information about assets of the
business needs to be collected. On the basis of the information, future performance
and prospects of the business can be appraised. Business assets are tangible as
well as intangible. Tangible assets include land and buildings, plant and machinery,
inventory, accounts receivable, trademarks, patents, vehicles; etc. Intangible assets
are in the form of goodwill, reputation, human resources and the like. It is somewhat
easy to assess the tangible assets whereas being subjective, intangible assets are
somewhat difficult to evaluate. For evaluating goodwill, the important aspects to
be considered are reputation, image, credit rating, clientele, etc. The valuation of
intangible assets should be fair to both the buyer entrepreneur and the seller
entrepreneur.
Buyer entrepreneur is keenly interested in assessing performance of the
enterprise which is under consideration for buying. He/she wants to know about
the profitability of the enterprise on the basis of operational performance. Health
of the enterprise can be assessed by reviewing the functional areas of marketing,
finance, production and human resources. Marketing performance has to be
appraised on the basis of sales, growth in sales, market share, changes in market
share, credit policy and the like. Distribution policy, sales force management,
customer service etc also matter a lot with reference to marketing effectiveness.
Efficiency of production and operations system of the enterprise also
contributes to profitability in a major way. The issues to be investigated relating to
the operations system comprise of plant and machinery, production planning and
control, inventory management, quality assurance, production efficiency, plant and
equipment maintenance, etc. Issues related with safety, waste disposal, pollution
control policy etc also deserve attention.
Entry Strategies
39
NOTES
Business
Entrepreneurship - V
Operational performance of several financial parameters also has to be
looked into such as profitability and the like and financial deficiencies also through
an analysis of various financial statements such as account books, balance sheets,
profit and loss account etc.
For evaluation and appraisal of functional areas, services of professionals
and experts such as consultants, chartered engineers, surveyors, lawyers, chartered
accountants should be hired.
The buyer entrepreneur needs to conduct market research and study the
customers, competitors, marketing strategies of competitors also. He/she can make
an assessment of the existing market, its growth rate, changes in customers’
motivations, preferences etc and make future projections.
For valuation of the business to be bought, there are two approaches – the
assets approach and the earning approach.
The assets approach is based on the assets of the enterprise and does
not have any relation to their earning potential. The assets valuation of an enterprise
may be based on the following methods:
Book value of the assets: It is also called as ‘balance sheet method’ and
‘net worth approach’. In this method, the values of various assets given in the
latest balance sheets of the enterprise are taken as worth of the assets. From the
total book value of the assets, the amount of external liabilities is deducted to find
out the net worth of the enterprise. Net worth = total assets – total liabilities. This
is the value of the business without considering goodwill.
The adjusted book value method: in this method, the book value of assets
and liabilities are adjusted so as to reflect their real (realizable) value. The value
an intangible asset such as good will is added to the value of total assets. This
method is also called as adjusted balance sheet technique.
Selected assets method: in this method, the buyer selects only selected
assets of the seller for evaluation. Equipments and inventories remain with the
seller if not needed by the buyer entrepreneur.
The earnings approach is based on the earning capacity of the target
enterprise. The assumption is regarding positive correlation between funds invested
in the enterprise with the profits. The earnings approach focuses on the future
income potential of the business based on the proposition that an enterprise’s value
depends on its ability to generate consistent earnings over time.
The market approach (or price/earnings approach) uses price/earnings
ratios of similar businesses listed on a stock exchange to establish the value of a
company. A company’s price/earnings ratio is the price of one share of common
stock in the market divided by its earnings per share (after deducting preferred
stock dividends). To get a representative price/earnings ratio, a buyer should average
the price/earnings of as many similar businesses as possible. To compute the
company’s value, the buyer multiplies the average price/earnings ratio by the
company’s estimated earnings.
Buyer entrepreneur faces a dilemma regarding use of the abovementioned
methods for determining value of a business, No single method can be said to be
the best. Each of these methods may yield a range of values. Buyer should look
for values that might cluster together and then determine a reasonable offering
price on the basis of their judgement.
Check Your
Progress
16. Name a few
tangible assets.
17. Do you know some
intangible assets?
18. Which techniques
can be used for
determining the value
of a business?
Entry Strategies
40
NOTES
Business
Entrepreneurship - V
2.5 Summary
Entry of an entrepreneur may be in the form of introduction of a new product/
service to a new market or an existing market. It may be in the form of offering
an established product to an established market or a new market or creation of a
new organization. In order to reduce the risk and uncertainty associated with new
entry of an entrepreneur, there is a need of strategic approach in entrepreneurship
i.e. adoption of entrepreneurial strategies.
An entrepreneur may find the competitive advantage in being ‘the first’
that is being the ‘first-mover’. He/she may be the first to choose to be ‘the first’
in introducing a new product/service and/or the first to create a new market.
An entrepreneurial strategy comprises of generation of a new entry
opportunity, and also exploitation of a new entry opportunity. An entrepreneur is
able to generate a new entry opportunity on the basis of knowledge, technology
and other resources. If the entrepreneur perceives new entry opportunity as
valuable, unique and not very easy for others to copy/imitate, he/she proceeds
forward with suck kind of new entry opportunities. Whether such kind of new
entry opportunity will fetch success or not depends on various factors like the
capability and competence of the entrepreneur, his/her organizing skills, human
resource capability etc.
An entrepreneur may find the competitive advantage in being ‘the first’
that is being the ‘first-mover’. First-movers nurture and develop strong relationships
with all the stakeholders including suppliers, distribution intermediaries etc. They
build up their own network. Being the first to market, first-movers literally enjoy
monopoly for some time. The quality, uniqueness of the product/service may serve
as a competitive advantage. The first-movers make efforts to maintain product
uniqueness. It may be in the form of protecting intellectual property such as patents,
copy rights, trademarks and trade secrets. Entrepreneur may choose some entry
barriers so as to discourage competition at least for some time.
According to Karl Vesper, all new ventures employ one or more of the
three major entry edges: new product or service, parallel competition, and
franchising. The new product/service wedge is denoted by Peter Drucker as “being
first, with the most” strategy. This is high-risk, high-reward entry wedge. Innovation
is instrumental in the launch of new product/service. Parallel competition is called
by Peter Drucker as ‘creative imitation’. It is a “me too” strategy which introduces
competitive duplications into the market. The third major wedge is franchising.
The entrepreneur may be either the franchisor or franchisee. The franchisor is
the seller of franchises. The franchisee invests money, time and energy to sell
product/service developed by the franchisor.
Entrepreneurs may launch their own businesses, or purchase a franchise
or buy an existing business. By purchasing existing business, entrepreneurs save
time, money and energy required to launch a new business. Along with advantages,
various disadvantages also can be attributed with reference to buying an existing
business. The steps in buying an existing business are: self-appraisal to determine
the suitability to the type of business, selection criterion for buyout, sources of
search for buy ins, identification and evaluation of candidate businesses.
The decision to buy an existing business depends upon proper valuation of
the business. For valuation of the business to be bought, there are two approaches
– the assets approach and the earning approach. The assets approach is based on
the assets of the enterprise and does not have any relation to their earning potential.
Entry Strategies
41
NOTES
Business
Entrepreneurship - V
The assets valuation of an enterprise may be based on methods such as book
value of assets, the adjusted book value method, selected assets method. The
earnings approach is based on the earning capacity of the target enterprise. The
assumption is regarding positive correlation between funds invested in the enterprise
with the profits. The market approach (or price/earnings approach) uses price/
earnings ratios of similar businesses listed on a stock exchange to establish the
value of a company.
2.6 Key Terms
• Risk: The probability, and magnitude of downside loss which could result
in bankruptcy
• First-mover: Also called as market pioneer, the first company to enter
a market
• Core competence: A concept introduced by C. K. Prahalad and Gary
Hamel. It is defined as a harmonized combination of multiple resources
and skills that distinguish a firm in the marketplace
2.7 Questions and Exercises
Questions
1. What are the advantages of buying an existing business? Write down
the disadvantages of buying an existing business?
2. How to evaluate a target business for buying in?
3. What are the advantages to an entrepreneur in buying an existing business
over starting a new one?
4. Explain in detail the issue of evaluating an existing business.
5. Outline the steps involved in buying a business.
6. Why do many entrepreneurs run into trouble when they buy an existing
business? What areas of an enterprise should an entrepreneur consider
when he/she plans to purchase it?
Exercise
Activity 2.1
Meet at least three entrepreneurs who have purchased existing businesses
and seek information about the dynamics of entrepreneurial buy-ins.
Multiple Choice Questions
1. Pick up the wrong alternative
i. A single resource may not bring the desired results, but a bundle of
resources can certainly exceed the expectations and give rise to
superior performance
Entry Strategies
42
NOTES
Business
Entrepreneurship - V
ii. Resources can be considered as a source of sustainable competitive
advantage
iii. Both i and ii are wrong
iv. Both i and ii are right
2. Pick up the wrong alternative
i. Entry of an entrepreneur may be in the form of introduction of a
new product/service to a new market or an existing market.
ii. Entry of an entrepreneur may be in the form of offering an established
product to a new market or creation of a new organization
iii. Both i and ii are wrong
iv. Both i and ii are right
3. Which of the following is a disadvantage to first-mover?
i. Environmental instability
ii. Customer uncertainty
iii. Short lead time
iv. All the above
4. Which of the following is a first-mover advantage?
i. Cost advantages
ii. Less competition
iii. Both i and ii
iv. None of the above
5. Which of the following is the entry wedge devised by Karl Vesper?
i. New product/service
ii. Parallel competition
iii. Franchising
iv. All the above
6. Which of the following is not related with the ‘new product/service’
strategy?
i. Competitive duplication
ii. High-risk, high-reward entry wedge
iii. Innovation
iv. Comprehensiveness
7. Which of the following alternative is not related with ‘parallel competition’
strategy?
i. Creative imitation
Entry Strategies
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NOTES
Business
Entrepreneurship - V
ii. Being first, with the most
iii. Competitive duplications
iv. All the above
8. Which of the following is associated with ‘parallel competition’ strategy?
i. Competitive duplications
ii. A minor variation from the existing product/service
iii. Franchising
iv. Creative imitation
9. ———— is a seller motive
i. Outdated product/service
ii. Technological changes
iii. Both i and ii
iv. None of the above
10. Pick the odd one out:
i. There is a high probability that business may not be as attractive
and as profitable as it seems.
ii. It is quite probable that the business may have been incurring loss.
iii. The business may have been poorly managed
iv. By purchasing existing business, entrepreneurs save time, money
and energy required to launch a new business
11. Pick the odd one out:
i. It’s always easier to raise money for existing business than for a
new business
ii. By purchasing existing business, entrepreneurs save time, money
and energy required to launch a new business.
iii. In an existing business, almost all the trials and errors for establishing
an efficient product operation have been proved successful.
iv. There is a high probability that business may not be as attractive
and as profitable as it seems
Answers
Check Your Progress
2. generation of a new entry opportunity, exploitation of a new entry
opportunity
4. True
10. Creative imitation
11. Being first, with the most
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NOTES
Business
Entrepreneurship - V
Multiple Choice Questions
1. iii
2. iii
3. iv
4. ii
5. iv
6. i
7. ii
8. iii
9. iii
10. iv
11. iv
2.8 Further Reading
Dollinger Marc J., Entrepreneurship Strategies and Resources, Pearson
Education, Delhi, 2003
Hisrich Robert D., Peters Michael P., Shepherd Dean A, Entrepreneurship,
Tata McGraw Hill Education, New Delhi, 2010
Raichaudhuri Anjan, Managing New Ventures Concepts and Cases on
Entrepreneurship, PHI Learning Pvt. Ltd., New Delhi, 2010
Shankar Raj, Entrepreneurship Theory and Practice, Vijay Nicole Imprints,
Chennai, 2012
Taneja Satish, Entrepreneur Development, Himalaya Publishing House,
Mumbai, 2010
Zimmerer Thomas W., Scarborough Norman M., Essentials of
Entrepreneurship and Small Business Management, PHI Learning, New Delhi,
2011
Entry Strategies
45
NOTES
Business
Entrepreneurship - V
UNIT 3 : STRATEGIES FOR GROWTH
AND DEVELOPMENT –I
Structure
3.0 Introduction
3.1 Unit Objectives
3.2 Business Growth
3.3 Growth Strategies
3.3.1 Ansoff’s Growth Strategies
3.3.2 Kotler’s Growth Strategies
3.3.3 Glueck’s Grand Strategies
3.4 Summary
3.5 Key Terms
3.6 Questions and Exercises
3.7 Further Reading
3.0 Introduction
Many big corporates were started as small enterprises. Typically, small
enterprises are expected to grow to medium scale and then become large
enterprises. However, in actual practice, this is not commonly found as a natural
recourse. Some enterprises remain in the startup phase for a long period of time.
Some entrepreneurs may not be interested in growth. They create their enterprises
out of their hobbies, interests, expertise, skills and the like. Individual capability is
the major factor for initiation of such enterprises. Obviously, such entrepreneurs
do not aspire for growth and expansion of their enterprises. They take pleasure in
managing their enterprises on their own. They apprehend that they may not be
able to manage the increase in scale of their operations beyond a particular limit.
Because increased scale of operations would mean delegation of authority, reduced
control over the operations, sharing of authority and responsibility which such type
of entrepreneurs do not like. Growth of enterprises beyond a particular limit
presupposes a strong business model independent of the owner entrepreneur.
An entrepreneur has to visualize clearly about the motive to grow and
analyze the reasons behind the growth urge. The issue is whether the business
model is supportive of business growth and capable of adequate profitability.
There are enterprises that have grown to be medium and then large
enterprises. Some enterprises pick up growth and then fall down. Some enterprises
become sick and then are closed down. Some enterprises continue their existence
for years together with a rich history of profits and goodwill.
Strategies For Growth And
Development –I
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There is a wide diversity in the evolution and growth of small enterprises.
The life cycle stages of startup, expansion/growth, maturity/saturation, revival
and decline vary for each and every enterprise. The duration of time for each
phase of the life cycle varies. Some enterprises stay at a particular stage for a
longer duration and for some stages quickly they may move from one stage to
another. There are some enterprises which take fifty to sixty years to grow to
medium/large size whereas some businesses grow rapidly to a large size in a short
span of time.
There are ups and downs over the life history of enterprises. While moving
from one phase to another, there are innumerable risks and challenges. The journey
from the initiation to the stage of being small, medium or large enterprise is also
not without facing countless threats and hazards. Let us be cognizant about all
these matters which impact an enterprise’s growth and also with the ways and
strategies through which growth is achieved.
Entrepreneurship development and enterprise creation deals with two major
aspects. The first is initiation and startup of a new venture. And the second part is
‘how to sustain and expand the business?’ This unit speaks about various issues
relating to making the entrepreneurial ventures bigger.
3.1 Unit Objectives
After going through this unit, you will be able to
• Be aware about possible growth opportunities
• Know how to look for and create business growth opportunities
• Learn the factors and issues which impact an enterprise’s growth
• Explain the framework of growth strategies propounded by Ansoff,
Kotler and Glueck
• Describe the various types of expansion strategies
3.2 Business Growth
A natural urge for growth is commonly found among entrepreneurs. If
such kind of growth drive is supported by environmental opportunities, then the
entrepreneurs certainly grab such openings and achieve growth. An entrepreneur
may like to grow for increasing its market share. Even to protect the market share
in a growing market, growth is essential. When the competitors are growing,
there is no option left but to grow for any enterprise. Otherwise it may lag behind
the competition. Growth may be a competitive strategy. Sometimes entrepreneurs
follow their competitors in terms of their growth options. Sometimes they attempt
to surpass competition with excellence, improvement over competitors’ offers and
grow.
A certain level of growth is needed even for survival. An enterprise has to
maintain operations at a particular level; otherwise, if the scale of operations falls
below the optimal level, then the enterprise may not be able to break-even. The
overheads and fixed cost may not be recovered and it may result in losses.
Sometimes growth is targeted for the sake of full utilization of human as
well as non-human resources. In absence of this approach, the potential of the
Check Your
Progress
1. Name few busi-
nesses which took a
long time to grow.
2. Can you name
some businesses
which have grown to
a large size in a short
span of time?
Strategies For Growth And
Development –I
47
NOTES
Business
Entrepreneurship - V
enterprises may remain untapped and unexploited. Good people stay in the
organization only if it is a growing concern. Talented human resources are motivated
only with challenges, opportunities and growth. Sometimes exploitation of growth
can be a motivation for growth.
Some entrepreneurs aspire for growth with an eye on seeking market
leadership. They may diversify their businesses to reduce risks. To increase profits
is often an objective of growth.
By looking at some indicators, we can see growth in an enterprise such as
increase in net worth, increase in total assets, increase in turnover, increase in
profits, increase in market size, increase in market share, increase in the scale of
operations, increase in the number of employees. All of these indicators may not
be shown at the same time.
Business growth is a positive sign. It is welcome by almost all enterprises.
However, sometimes growth is not found to be without risks and dangers. By
inviting growth, the business may be putting itself in trouble. It may invite some
hazards also.
New activities, in the initial phases, require more care, more energy, more
time and continued focus. They may consume prime resources, prime time and
energy of the entrepreneurs. Entrepreneurs may pay more attention to new business
and existing business may remain unattended which is not desirable. If the new
business is in loss, consequently the old/existing business also get adversely affected
by such failure. With growth, it may become difficult for entrepreneurs to manage
the expanded scale of operations. They may become ineffective in their approach
in management. Further, sometimes expanded business would suffer if the demand
decreases. It may be unfortunate if growth is not supported by favourable
environment. With growth, entrepreneurs may have to forgo several gains, subsidies,
reimbursements, paybacks, and concessions which are meant for small enterprises
only. They may not avail benefits of several government schemes. And on the
other side, their increasing growth curve may attract the attention of competitors,
government and public.
3.3 Growth Strategies
In the previous unit 2, we have studied new entry strategy. An
entrepreneurial entry strategy consists of generation of a new entry opportunity
and also exploitation of a new entry opportunity. With a successful new entry, the
entrepreneur grabs an opportunity to grow his/her business. He/she introduces a
new product/service into the existing market and seeks an opportunity to increase
his/her market share. He/she makes an entry into new market and gets an
opportunity to deal with new customers segments. In a structured manner with a
step by step approach, it is difficult to talk about generation of attractive growth
opportunities. However, we can explore the probabilities of suggesting some models
which would guide entrepreneurs while searching for growth opportunities on the
basis of a sustainable competitive advantage. Let us begin with Ansoff’s growth
strategies, then we will describe Philip Kotler’s growth strategies followed by
expansion strategies covered under William Glueck’s grand strategies as one out
of the four types of strategic alternatives.
3.3.1 Ansoff’s Growth StrategiesWe have seen in the previous unit that, new entry opportunities arise on
the basis of knowledge of the entrepreneur and organizational knowledge.
Entrepreneurs and their enterprises have knowledge about the product/service
Check Your
Progress
3. State few reasons
for growth.
4. Can you write
some indicators of
growth?
5. Explain some risks
of growth.
Strategies For Growth And
Development –I
48
NOTES
Business
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they currently produce and market (the existing product) and about the group of
customers to whom they currently sell the product/service (the existing market).
Figure 3.1: Growth Strategies based on Knowledge of Product and/or
Market
Figure 3.1 presents Ansoff’s Product/Market expansion grid which can
be considered as a model of different growth strategies. It shows different
combinations of different levels of these types of knowledge. These growth
strategies capitalize on some aspect of the entrepreneur’s and enterprise’s
knowledge base. In this manner, they can lead to a competitive advantage. These
growth strategies are: penetration strategy, market development strategy, product
development strategy and diversification strategy.
3.3.2 Kotler’s Growth Strategies
Philip Kotler talked about growth strategies in terms of three major
categories: Intensive growth strategy, Integrative growth strategy, and
Diversification growth strategy.
Figure 3.2: Growth Strategies
Check Your
Progress
6. Name the growth
strategies devised by
Ansoff.
Source: H.I. Ansoff, “Strategies for Diversification”: Harvard Business Review, 1957, 5. pp. 113-124,
Quoted in Kazmi Azhar, Business Policy and Strategic Management, Tata McGraw Hill Publishing
Company Limited, New Delhi, 2009, p. 150
Strategies For Growth And
Development –I
49
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Business
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Intensive Growth Strategies :
Intensive growth strategies achieve further growth for existing products
and/or in existing markets. There are three important intensive growth strategies:
market penetration, market development, and product development.
Market penetration strategy
Market penetration strategy emphasizes on the enterprise’s existing product
in existing market. And the entrepreneur endeavors to penetrate this product or
market further by encouraging existing customers to buy more and more of the
enterprise’s existing products. The efforts are directed towards more frequent
repeat purchases. This strategy aims to expand the size of the existing market by
increasing market share. It does not involve anything new for the enterprise.
This strategy is aimed towards increase of the sale of existing/current
products in the existing/current markets. There are various approaches to achieve
this. The entrepreneur attempts to increase the enterprise sales to the current
customers. Again there is a big opportunity of increasing sales by appealing non-
users for using the product. Several non-users can certainly be converted into
users. Some new uses of the existing products need to be communicated to non-
users for motivating them for trial purchases. Alternatively the entrepreneur can
attempt to attract the competitors’ customers along with maintaining its existing
customers. On the basis of core competencies/distinctive competencies,
competitors’ customers could be switched over to the entrepreneurs’ products/
services/brands.
Market development strategy
Market development strategy is meant for growth. This involves selling
the enterprise’s existing products to new groups of customers. New groups of
customers can be categorized on the basis of geographics, demographics, and/or
based on a new product use.
This strategy strive to widen the market for a product/service by selling
the existing product in new locations. This can be done in several different ways.
The entrepreneur can enter into a new geographical market. It may expand to
other cities, other areas, other regions, other states, other countries etc. He/she
may add new market segment/segments and broaden the market. In this manner
the sales are increased by offering the product/service to the customers who
never purchased the product in the past. However, the entrepreneur has to take
into consideration the possibility of regional variations in customer preferences,
cultural differences, language etc and also legal requirements and adapt the product,
packaging accordingly, if needed. Also, there is a possibility of extending the market
by adding new channels of distribution and thereby reaching to more and more
customers.
Like new geographical market, growth can occur through market
development strategies by offering the enterprise’s existing products to new
demographic market. Currently, the entrepreneur is catering to the requirement of
a specific demographic group. Now for growth, the entrepreneur can offer the
same product to a different demographic group.
An entrepreneur may find that the customers use the product in a way
that was not expected or intended. On the basis of this knowledge, an entrepreneur
is in a better position to offer the product to a new group of customers with few
modifications in the existing product if required.
Strategies For Growth And
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50
NOTES
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Product development Strategy
This strategy comprises of developing and selling new products to the
existing customers of the enterprise. Acquaintance with the existing customers is
a source of knowledge and helps the entrepreneurs to sense their problems and
find out the solutions in the form of improved product versions with modification
of some of the product features. Knowledge works as an important resource in
new product development. This strategy enables an enterprise to capitalize on the
goodwill and image of the enterprise. The existing distribution system and the
productive set up can be utilized with this strategy.
This strategy increases the current business by improving the existing
product or by introducing new products with new features. Continuous improvement
of the products is a common and popular strategy adopted by many market leaders.
Integrative Growth Strategies
Integrative growth strategies achieve growth in the same industry either
at the same level/stage of business or at different levels/stages of business. There
are two important integrative growth strategies: horizontal integration, and vertical
integration.
Horizontal integration
This strategy strives to integrate market at the same level/stage of business.
It involves acquisition of one or more competitors. This strategy eliminates or
reduces competition.
Vertical integration:
This strategy aims at integration of different levels/stages of business in
the same industry. It may be backward integration or forward integration.
Backward integration: This strategy involves adding the previous stages
of the current business. An entrepreneur who manufactures a product, decides to
take up the manufacturing of its raw material required for the finished product
under backward integration strategy. This strategy is advantageous to the
entrepreneurs in several ways. It ensures smooth and uninterrupted flow of
materials for manufacturing and/or products/services for marketing and distribution.
It saves money and increases profit margin. This option enables the entrepreneur
to ensure quality of products/services. The entrepreneur may get the benefit of
this arrangement in payment of taxes. On the other hand, sometimes the
entrepreneur may find the cost of making higher than the cost of buying. Due to
backward integration, it may become difficult for the entrepreneur to change the
business or make an exit from the business.
Forward integration: This strategy involves adding the subsequent stages
of the existing business. The manufacturer of a product may take up marketing/
distribution of the product. When a manufacturer of a raw material takes up
manufacture of the finished product, it amounts to forward integration. The
arrangement of forward integration increases revenue of the entrepreneur.
However, there is always a risk of failure. There can be no guarantee of success
with forward integration.
Diversification Growth Strategies :
Diversification means expansion of the market to new geographical areas.
It means selling a new product to a new market. It means making new products
Check Your
Progress
7. Do you know the
growth strategies of
Philip Kotler?
8. ——— this strat-
egy comprises of de-
veloping and selling
new products to the
existing customers of
the enterprise
9. ——— this strat-
egy involves selling the
enterprise’s existing
products to new
groups of customers
10. ——— this strat-
egy emphasizes on the
enterprise’s existing
product in existing
market
Strategies For Growth And
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51
NOTES
Business
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for new markets. The concept of diversification is related to the newness of products
or markets or both. It seems that this strategy is based on a completely new
knowledge base. Some diversification strategies are related to entrepreneur’s
knowledge. By adopting diversification, an entrepreneur does something new such
as making new products or serving new markets or doing both simultaneously.
The diversification strategy comprises of addition of new lines of business. These
new businesses may be related to the existing business or they may be completely
unrelated to the existing business. In the words of Azhar Kazmi, “diversification
involves a substantial change in business definition – singly or jointly – in terms of
customer functions, customer groups or alternative technologies of one or more of
a firm’s businesses”. We can refer to Ansoff’s product-market matrix in figure
3.1 and the diversification matrix in figure 3.2 to understand the concept of
diversification. Figure 3.2 provides a clear classification of diversification strategies.
Related diversification or concentric diversification is when the new
business is related with the enterprise’s existing technology, production facilities
or distribution channels. According to Azhar Kazmi, “when an organization takes
up an activity in such a manner that it is related to the existing business definition
of one or more of a firm’s businesses, either in terms of customer groups, customer
functions or alternative technologies, it is concentric diversification”. The relatedness
is with reference to three dimensions of the business definition. Concentric
diversification is when an enterprise adds new products which have technological
and/or marketing synergies with existing product lines, even though they are meant
for new customer segments. It may be backward or forward integration. Backward
integration denotes a step back (up) on the value-added chain toward the raw
materials. The manufacturer entrepreneur can also become a supplier of raw
materials i.e. the entrepreneur becomes his/her own supplier. Forward integration
is taking a step forward (down) on the value-added chain toward the customers.
The manufacturer entrepreneur also becomes a finished goods wholesaler i.e. the
entrepreneur becomes his/her own buyer. Backward or forward integration are
attractive opportunities for growth of business which are related to the
entrepreneur’s existing knowledge base. The entrepreneur could have some
advantage over others who do not have such experience or knowledge. Being
own supplier and/or buyer provides synergistic opportunities which enables
entrepreneurs to perform the business activities more efficiently than the other
manufacturer entrepreneurs. Further, being own supplier and/or buyer,
entrepreneurs gain a deep insight into the entire business process in such a manner
as to sense and identify new processes and/or new product improvements. Such
kind of learning opportunities would not have been possible in absence of such
types of integration. Horizontal integration is the third type of related diversification.
In this integration, growth opportunity occurs at the same level of the value-added
chain but involves a different, but complementary value-added chain. This is an
opportunity to increase sales of existing products. The new product and the existing
product are complementary. They need each other to work/function. The
relatedness of the new product to the existing product may provide learning
opportunities. It may provide increased value to customers and increase sales.
When an enterprise introduces a product/service which is meant for current
customer but which is technologically unrelated to the current product line, it is
horizontal diversification.
Azhar Kazmi describes three types of concentric diversification:
Marketing-related concentric diversification – A similar type of product is offered
with the help of unrelated technology; Technology-related concentric diversification
– A new type of product/service is provided with the help of related technology;
Check Your
Progress
11. ——— strategy
involves adding the
previous stages of the
current business.
12. ——— strategy
involves adding the
subsequent stages of
the existing business
Strategies For Growth And
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NOTES
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Marketing- and technology-related diversification – A similar type of product/service
is provided with the help of a related technology.
Related diversification is an attractive strategy. It enables diversification
of the organization from its original business and at the same time it is close to the
original business in terms of relatedness. It enables an enterprise to avail the
benefits of various types of synergies such as managerial synergies, financial
synergies, marketing synergies, operational synergies and human resources
synergies.
Conglomerate diversification is unrelated diversification. Unrelated
diversification is expansion of business in unrelated industries. The new business
is completely different from the enterprise’s existing/current product/service,
markets, technology. This strategy deals with activities which are unrelated to the
existing business definition of any of its businesses, either in terms of their respective
customer groups, customer functions or alternative technologies. Some
entrepreneurs go in for conglomerate diversification within the same enterprise.
Some entrepreneurs establish separate enterprises for managing different types
of products. Many entrepreneurs achieve conglomerate diversification by mergers
and acquisitions.
With unrelated diversification, the entrepreneur manages business risks
by dealing with different industries. He/she manages to invest in profitable
businesses and sell out unprofitable ones with unrelated diversification. With
favourable business conditions, they can capitalize on emerging opportunities and
migrate when the environmental threats are to be avoided. On the basis of their
own choice, entrepreneurs can enjoy ownership and management of diverse
businesses.
When the market for the current business is not growing or declining, an
entrepreneur may want to enter into new business and achieve growth.
Diversification provides additional new opportunities for growth. These opportunities
may be from high growth industry. Entrepreneurs choose diversification opportunities
in such a manner so as to have limited competition, stable demand and high
profitability.
Typically entrepreneurs may opt diversification to eliminate or reduce the
risks associated with confining the operations to a single product or limited products,
limited market, single industry etc. it enables entrepreneurs to make better utilization
of the available resources such as talented human resources, marketing skills,
technological capabilities, financial rationale, production facilities etc.
Diversification may be need related. An entrepreneur may introduce new
products to fulfill the customer needs in a better manner, to satisfy the current
customers by fulfilling their all related needs.
Diversification may also be pursued as a strategic option to tackle
competition. An enterprise may opt for diversification so as to develop a competitive
edge. Or otherwise sometimes, they follow the competitors for the sake of business
expansion.
Diversification may be pursued so as to make the most of its capabilities
and business model so as to maximize its strengths. It enables entrepreneurs to
consolidate their position, image etc. It makes talented people to stay with the
enterprise.
Strategies For Growth And
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NOTES
Business
Entrepreneurship - V
If growth in the existing business is hampered due to environmental and
regulatory factors, then diversification remains the only option for the entrepreneur.
Diversification i.e. new business requires more time and energy which
may deprive the old business of adequate attention, energy and needed resources.
And if the new business fails, there is an adverse impact on the existing business
lines. There is no guarantee of success in a new business. In fact, there are more
instances of failures in diversification of many enterprises.
Various types of synergies are possible with diversification. Management
synergy results when diversification requires managerial expertise available in the
enterprise and new business is facilitated by the existing management practices
and techniques. When products/services use common marketing set up such as
distribution channels, sales force management, advertising campaigns, sales
promotion etc; marketing synergy results. Operating synergy can occur by proper,
and effective utilization of facilities, and efficient operations. Investment synergy
is realized from the utilization of same production facilities, technology, materials,
management etc. Synergistic diversification is diversification that results in
realization of synergistic effects. It enjoys the advantages of synergy. However,
due to undue importance of synergy, the entrepreneur may oversee some promising
business opportunities if they do not have with the existing business.
However, diversification is not without risks and threats. It is a complex
strategy to formulate and implement. It requires diverse skills and a wide variety
of competencies. Management of a varied portfolio of businesses need enormous
costs of administration, coordination and control.
3.3.3 Glueck’s Grand Strategies
In the words of W. F. Glueck and L.R. Jauch, “strategic alternatives revolve
around the question of whether to continue or change the business the enterprise
is currently in or improve the efficiency and effectiveness with which the firm
achieves its corporate objectives in its chosen business sector”. According to William
Glueck, there are four grand strategic alternatives: expansion, stability, retrenchment,
and any combination of these three. These strategic alternatives are termed as
grand strategies. Let us discuss the expansion strategies in detail in this unit. The
next Unit 4 will deal with the other strategic alternatives of stability strategies,
retrenchment strategies and combination strategies.
Expansion Strategies:
Expansion strategies are also known as growth or intensification strategies.
This strategy is adopted by entrepreneurs who wish high growth for their
enterprises. This can be achieved by widening the scope of one or more of its
businesses – singly or jointly – for improving their performance.
For better clarity and effectiveness, it is desirable to refer to the concept
of business definition. Derek Abel has suggested defining a business along the
three dimensions of customer groups, customer functions and alternative
technologies. ‘Customer groups’ refer to ‘who’ is being satisfied, ‘customer needs’
state ‘what’ is being satisfied and ‘alternative technologies’ describe ‘how’ the
need is being satisfied.
The enterprises pursuing expansion strategies focus expansion either in
terms of customer groups, customer functions or alternative technologies. The
enterprise moves in one or the other direction and changes its present business
definition significantly. Expansion strategies are the most popular strategies. There
Check Your
Progress
13. Do you know what
diversification means?
14. What are the
reasons for
diversification?
15. State the risks of
diversification.
16. Conglomerate
diversification is ——
d i v e r s i f i c a t i o n
(unrelated / related)
Strategies For Growth And
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54
NOTES
Business
Entrepreneurship - V
is a natural urge for growth. Almost all enterprises aspire for expansion and
substantial growth. Expansion can be sought through: i. Concentration, ii. Integration,
iii. Diversification, iv. Co-operation, v. Internationalization, vi. Digitalization.
i. Concentration strategies: concentration strategies are also known as
intensification, focus or specialization strategies. Concentration strategies are
expansion strategies which converge resources in one or more of enterprises’
businesses in terms of their respective customer groups, customer functions, or
alternative technologies. It involves investment of resources in a product line for
an identified market with the help of proven technology. Ansoff’s product-market
matrix (please refer to figure 3.1 above) provides us three types of concentration
strategies: market penetration, market development, product development which
we discussed above in detail.
For expansion, concentration is often the first preference of the
entrepreneurs. It deals with indulging in the same activity of its expertise. There is
a natural and obvious preference of the entrepreneurs to continue with the same
business and to invest more in known business rather than experimenting with
unknown ones. So they prefer concentration in familiar businesses.
Concentration requires very few organizational changes so planning,
decision making and overall management is easy and simple. By continuing this,
one or a few businesses over a period of time, entrepreneurs develop a deep
insight and expertise in these businesses. It enables them to develop competitive
advantage and outmaneuver the competitors with core competencies. Past
experiences help a lot to the entrepreneurs.
However, concentration strategy is not without limitations. Too much
dependence on only one industry is risky. There are threats of product obsolescence,
changing technology, changes in market, needs, etc to concentrated enterprises.
ii. Integration strategies: integration means combining activities related to the
present activity of an enterprise. Such a combination may be done on the basis of
the value chain. The enterprise may move up or down the value chain to concentrate
more comprehensively on the present customer groups and their present needs.
Igor Ansoff presented the following matrix shown in Figure 3.3 which
explains different types of integration as well as diversification strategies.
Figure 3.3: Ansoff’s Matrix for Diversification Strategies
According to Ansoff, enterprises operate on two dimensions of new prod-
ucts and new functions. On the basis of these two dimensions, there are four
different types of integration and diversification strategies. The integration strate-
gies are of two types: horizontal and vertical integration which we discussed above.
Check Your
Progress
17. Name the strate-
gies to seek expan-
sion.
18. Enlist the three
types of concentration
strategies stated by
Ansoff.
19. What are the limi-
tations of concentra-
tion strategy?
Source: H.A. Ansoff, Corporate Strategy, McGraw-Hill, New York, 1965, Quoted in Kazmi Azhar,
Business Policy and Strategic Management, Tata McGraw Hill Publishing Company Limited, New
Delhi, 2009, p. 153
Check Your
Progress
20. The two types of
integration strategies
are —— and ——
Strategies For Growth And
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NOTES
Business
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iii. Diversification strategies: Diversification involves substantial change in
business definition in terms of customer functions, customer groups or alternative
technologies of one or more of an enterprise’s businesses. Diversification is when
new products are made for new markets. As we discussed above, diversification
can be of two types – related and unrelated. Ansoff refers them as concentric and
conglomerate diversification respectively. Horizontal integration is actually horizontal
diversification. It involves moving laterally into new types of products.
iv. Cooperation strategies: Generally, strategic orientation assumes the exist-
ence of competition and the essence of strategy lies in tackling competition. Sev-
eral strategy experts like Michael Porter analyzed strategies with reference to
competition. On the other hand, thinkers such as James Noorda, Barry J. Nalebuf
and Adam M. Bradenburger pronounced that competition could co-exist with co-
operation. While developing corporate strategies, along with competing with the
competitors, the possibility of mutual cooperation with the competitors has to be
taken into account. This could increase market potential. The concept of compe-
tition and co-operation among the rival firms for the sake of mutual benefit and
sharing of interests is expressed as ‘co-opetition’. Such type of co-opetition could
occur in various ways. The main types of co-operative strategies are: Mergers
and acquisitions (or takeovers), Joint ventures, and Strategic alliances. We will
discuss all these co-operative strategies in the unit 5.
v. Internationalization strategies: International strategies require entrepreneurs
to market their products/services beyond the domestic or national market. He/she
has to analyze the international environment, appraise the capabilities of the
enterprise and then formulate strategies to enter and capture foreign markets.
Michael Porter, has extended his idea of competitive advantage of firms
to the analysis of competitive advantage of nations. In his opinion, four national
characteristics create an environment that is conducive to creating globally
competitive firms in particular industries. These four national characteristics are
interrelated with each other in the form of a diagram known as the Porter’s diamond.
The four factors, called as the diamond determinants, are:
1. Factor conditions: the special factors or inputs of production such as
natural resources, raw materials, labour etc., that a nation is especially
endowed with
2. Demand conditions: the nature and size of the buyer’s needs in the
domestic market
3. Related and supporting industries: the existence of related and supporting
industries to the ones in which a nation excels.
4. Firm strategy, structure and rivalry: the conditions in the nation determining
how firms are created, organized and managed
On the basis of analysis of these four sets of factors, a country can
determine the industry or industry niche in which a cluster of companies that are
globally competitive can be developed.
Check Your
Progress
21. ——— involves
substantial change in
business definition in
terms of customer
functions, customer
groups or alternative
technologies of one or
more of an
enterprise’s busi-
nesses
Check Your
Progress
22. The main types of
co-operative strate-
gies are ——
Strategies For Growth And
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Figure 3.4: The Porter’s Diamond
An entrepreneur’s decision to adopt international strategies depend upon
two factors: cost pressures and pressures for local responsiveness. Cost pressures
refer to the efforts of the entrepreneur to minimize its unit costs. He/she tries for
economies of scale and location economies. Pressures for local responsiveness
refer to the efforts of the entrepreneur to customize the products/services to each
country-market on the basis of variables like customer preferences and wants,
government policies, culture, climate etc. While designing and developing products/
services for every country—market, it is found that both the factors - cost and
local responsiveness act in a contradictory manner. Both the approaches of low-
cost and differentiated products/services across different countries are difficult to
adopt. According to Bartlett and Ghoshal, there are four types of international
strategies: international strategy, multi domestic strategy, global strategy and
transnational strategy, as shown below in figure 3.5.
Figure 3.5: Four Types of International Strategies
Source: M.E. Porter, ‘The Competitive Advantage of Nations’, Harvard Business Review, March-April
1990, p.77 Quoted in Kazmi Azhar, Business Policy and Strategic Management, Tata McGraw Hill
Publishing Company Limited, New Delhi, 2009, p. 173
Source: Azhar Kazmi, Strategic Management and Business Policy, Tata McGraw-Hill Publishing Company
Ltd., New Delhi, 2009, p. 175
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Entrepreneurs adopt international strategy and offer standardized products/
services in different countries with little or no differentiation. Entrepreneurs adopting
a multidomestic strategy try to achieve a high level of local responsiveness i.e.
they attempt to extensively customize their products/services according to the
local conditions in different countries. This requires a high cost. Entrepreneurs
who adopt a global strategy rely on low-cost approach. They offer undifferentiated
products/services in various countries usually at competitive prices. A transnational
strategy refers to a combined approach of low-cost and high local responsiveness
simultaneously. Bartlett and Ghoshal advise to adopt the transnational strategy
being the only viable strategy in a competitive world. They suggest that a
transnational firm should transfer the expertise from its foreign subsidiaries to its
headquarters and from one foreign subsidiary to another subsidiary through a
process termed as global learning.
When an entrepreneur adopts one or more of the international strategies,
he/she has to make a decision about the mode of entry i.e. the manner in which
he/she would commence its international operations. F. R. Root presents different
entry modes in three different categories as follows:
Export entry modes: Under these modes, the entrepreneur produces in
the home country and markets in the overseas markets. Indirect exports take
place with the help of intermediaries in the home country. Direct exports take
place either through a direct agent/distributor or through a direct branch/subsidiary
in the overseas markets. Home-country intermediaries are not involved in direct
exports.
Contractual entry modes are non-equity associations between an
international company and a company or any other legal entity in the overseas
markets. Licensing is an arrangement where the international enterprise transfers
knowledge, technology, patent etc for a limited period of time, to an overseas
entity, in return for some form of payment, usually a royalty payment. Franchising
involves the right to use a business format, usually a brand name, in the overseas
market, in return for the franchiser receiving some form of payment. Along with
licensing, franchising, the other forms of contractual arrangements are technical
agreements (for technology transfers), service contracts (for technical support or
expertise provision), contract manufacturing, production sharing, turnkey operations,
build-operation-transfer (BOT) arrangements etc.
Investment entry modes involve ownership of production units in the
overseas market, based on some form of equity investment or direct foreign
investment. Entrepreneurs can enter into a cooperative partnership through joint
venture or strategic alliances on the basis of financial interests.
In independent ventures or wholly-owned subsidiaries the parent
international enterprise holds 100 per cent equity and is in full control. Such facilities
may be created either through a new venture known as greenfield venture or
acquired through takeover strategies.
After finalizing a decision to enter international markets, the entrepreneur
has to take decisions about which international markets to enter, when to enter the
markets and on what scale. Each of the foreign markets is unique in terms of
risks, benefits, costs etc. Regarding timing of entry into international markets, it is
important to decide whether to be the first mover or make an entry after the other
international players. Being the first mover, an entrepreneur can avail various
benefits like creation of demand, building up image and market share. However,
first movers face more risks and incur high introduction costs.
Check Your
Progress
23. What are the vari-
ous types of interna-
tional strategies?
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vi. Digitalization strategies: This strategic alternative result from digitization of
information. Due to digitalization, information is readily available in an economic manner.
O. Bomsel and G. Le. Blanc define digitalization as digital coding of information and
the growing productivity gains in processing and transmission it enables.
Digitalization influenced the business environment and society in a profound
manner. The early applications of computerization were found in accounting
department where there was a need for database management and for managing
repetitive and routine transactions on a large scale. With computerization, the
processes became more productive and efficient. Later on with further
developments in information technology, progress was observed in not only recording
and storing of data but also in retrieving the desired data in desired formats at the
right time and with needed contents. With further sophistication in computer
connectivity, increasingly entrepreneurs are facilitated in proper management of
information. With provision of right information at the right time to the right person,
the functions of decision making, planning become more timely and effective.
With merging of computing and telecommunication technologies, internet,
networking; enterprises could get more and more help in the form of internet,
intranet as well as extranet. With emergence of e-markets; customers,
entrepreneurs as well as other intermediaries enjoy various conveniences.
Digitalization influences all the dimensions of business definition of
customer groups, customer functions, and alternative technologies. It transforms
the value chain. The business could be redefined in a profitable manner by creation
of new customer groups, and/or focusing on different customer functions, and/or
alternate technologies by application of innovative thinking.
3.4 Summary
This unit deals with various issues concerned with growth of businesses.
For the sake of being aware about possible growth opportunities, we explore
Ansoff’s growth strategies, then Kotler’s growth strategies followed by expansion
strategies covered under William Glueck’s grand strategies as one out of the four
types of strategic alternatives.
Ansoff’s growth strategies can be listed as market penetration strategy,
market development strategy, product development strategy and diversification
strategy. Market penetration strategy aims to penetrate the enterprise’s existing
product/service further by encouraging existing customers to buy more and more
of the enterprise’s existing products. Market development strategy involves selling
the enterprise’s existing products/services to new groups of customers. New groups
of customers can be categorized on the basis of geographics, demographics, and/
or based on a new product use. Product development strategy comprises of
developing and selling new products to the existing customers of the enterprise.
Philip Kotler talked about growth strategies in terms of three major
categories: Intensive growth strategy, Integrative growth strategy, and
Diversification growth strategy. Intensive growth strategies achieve further growth
for existing products and/or in existing markets. There are three important intensive
growth strategies: market penetration, market development, and product
development.
Integrative growth strategies achieve growth in the same industry either
at the same level/stage of business or at different levels/stages of business. There
Check Your
Progress
24. Explain the term
digitalization.
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are two important integrative growth strategies: horizontal integration, and vertical
integration. Horizontal integration strategy strives to integrate market at the same
level/stage of business. It involves acquisition of one or more competitors. This
strategy eliminates or reduces competition. Vertical integration strategy aims
integration of different levels/stages of business in the same industry. It may be
backward integration or forward integration. Backward integration strategy involves
adding the previous stages of the current business. Forward integration involves
adding the subsequent stages of the existing business.
Diversification strategy comprises of addition of new lines of business.
These new businesses may be related to the existing business or they may be
completely unrelated to the existing business. Related diversification or concentric
diversification is when the new business is related with the enterprise’s existing
technology, production facilities or distribution channels. Conglomerate
diversification is unrelated diversification. Unrelated diversification is expansion
of business in unrelated industries. The new business is completely different from
the enterprise’s existing/current product/service, markets, technology.
According to William Glueck, there are four grand strategic alternatives:
expansion, stability, retrenchment, and any combination of these three. These
strategic alternatives are termed as grand strategies. The expansion strategies
are discussed in detail in this unit.
Expansion can be sought through: i. Concentration, ii. Integration, iii.
Diversification, iv. Co-operation, v. Internationalization, vi. Digitalization.
Concentration strategies are expansion strategies which converge resources
in one or more of enterprises businesses in terms of their respective customer groups,
customer functions, or alternative technologies. It involves investment of resources
in a product line for an identified market with the help of proven technology.
Integration means combining activities related to the present activity of an
enterprise. Such a combination may be done on the basis of the value chain. The
enterprise may move up or down the value chain to concentrate more
comprehensively on the present customer groups and their present needs. The
integration strategies are of two types: horizontal and vertical integration.
The concept of competition and cooperation among the rival firms for the sake
of mutual benefit and sharing of interests is expressed as ‘co-opetition’. Such type of co-
opetition could occur in various ways. The main types of co-operative strategies are:
Mergers and acquisitions (or takeovers), Joint ventures, and Strategic alliances.
International strategies require entrepreneurs to market their products/
services beyond the domestic or national market. There are four types of
international strategies: international strategy, multi domestic strategy, global strategy
and transnational strategy. Entrepreneurs adopt an international strategy and create
value by transferring products/services to foreign markets where these products/
services are not available. Entrepreneurs who adopt a multidomestic domestic
strategy try to achieve a high level of local responsiveness by matching their products
and services to the national conditions operating in the countries they operate in.
Entrepreneurs adopt a global strategy and they rely on a low-cost approach on the
basis of their experience and location economies and offer standardized products
and services across different countries. By adopting a transnational strategy,
entrepreneurs adopt a combined approach of low-cost and high local responsiveness
for their products and services. Then we discussed export entry modes, contractual
entry modes and investment entry modes. There are three strategic decisions
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related to international entry modes – which international markets to enter, when
to enter those markets and on what scale.
Digitalization strategies are the strategic alternatives available for the
entrepreneurs which result from digitalization of information.
3.5 Key Term
• Value chain: A set of interlinked activities performed by an organization,
right from procurement of basic raw materials down to the marketing of
finished products to the ultimate consumers
3.6 Questions and Exercises
Questions
1. ‘Related diversification is an attractive corporate strategy as it offers
the best of both the worlds’. Discuss.
2. Explain the various types of concentration strategies.
3. Under what conditions are firms motivated to adopt integration strategies?
4. What is the difference between forward and backward integration?
5. Why is a concentric or relate diversification strategy adopted? Why is a
conglomerate or unrelated diversification strategy adopted?
6. Describe the four types of international strategies. What are the various
types of international entry modes entrepreneurs adopt to enter
international markets?
7. Discuss the advantages and disadvantages of expansion through
internationalization.
8. How do entrepreneurs decide which international market to enter and
when to enter it?
9. Which factors motivate the entrepreneurs to internationalize? Describe
the four types of international strategies.
Exercises
Activity 3.1
Visit at least two medium scale and two large scale enterprises and seek
information about their growth journey.
Activity 3.2
Visit at least three enterprises and discuss with them their growth strategies.
Multiple Choice Questions
1. Which of the following is not true regarding forward integration?
i. This strategy involves adding the subsequent stages of the existing business
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ii. An entrepreneur who manufactures a product, decides to take up
the manufacturing of its raw material required for the finished product
iii. The manufacturer of a product may take up marketing/distribution
of the product
iv. The arrangement increases revenue of the entrepreneur
2. Which of the following is a type of related diversification?
i. Backward integration
ii. Forward integration
iii. Horizontal integration
iv. All the above
3. Which of the following is true regarding backward integration?
i. This strategy involves adding the previous stages of the current
business.
ii. An entrepreneur who manufactures a product, decides to take up
the manufacturing of its raw material required for the finished
product
iii. Both i and ii are true
iv. Both i and ii are wrong
4. Which of the following is associated with market development strategies?
i. New geographical market
ii. New demographic market
iii. New product use
iv. All the above
5. Which of the following is connected with integrative growth strategies?
i. Horizontal integration
ii. Backward integration
iii. Forward integration
iv. All the above
6. Which one of the following is associated with product development strategy?
i. Improving the existing product
ii. Introducing new products with new improved features
iii. Both i and ii
iv. None of the above
7. Which of the following is associated with market penetration strategy?
i. Market development strategy
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ii. Product development strategy
iii. Market penetration strategy
iv. All the above
8. Which one of the following is associated with market development strategy?
i. Entering new market segments
ii. Entering new geographical markets
iii. Adding a new channel of distribution
iv. All the above
9. Which one of the following is associated with market penetration strategy?
i. Increase sales to current customers
ii. Convert non-users into users
iii. Pull customers of competitors’ products/services
iv. All the above
10. Which of the following is associated with integrative growth strategies?
i. backward integration
ii. forward integration
iii. horizontal integration
iv. all the above
11. Pick up the right alternative
i. Integrative growth strategies achieve growth in the same industry
either at the same level/stage of business or at different levels/
stages of business
ii. Horizontal integration strives to integrate market at the same level/
stage of business Vertical integration strategy aims integration of
different levels/stage of business in the same industry
iii. Backward integration strategy involves adding the previous stages
of the current business
iv. All the above
12. Related diversification or concentric diversification is when the new
business is related with the enterprise’s
i. Existing technology
ii. Production facilities
iii. Distribution channels
iv. i and/or ii and/or iii
Answers
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Check Your Progress
8. product development strategy
9. market development strategy
10. market penetration strategy
11. ackward integration
12. Forward integration
16. unrelated
20. horizontal integration, vertical integration
21. Diversification
22. Mergers and acquisitions , joint ventures, and strategic alliances
Multiple Choice Questions
1. ii
2. iv
3. iii
4. iv
5. iii
6. iii
7. iv
8. iv
9. iv
10. iv
11. iv
12. iv
3.7 Further Reading
Cherunilam Francis, Business Policy and Strategic Management, Himalaya
Publishing House, Mumbai, 2010
Hisrich Robert D., Peters Michael P., Shepherd Dean A., Entrepreneurship,
Tata McGraw Hill Education Private Limited, New Delhi, 2007
Jaunch Lawrence R., Glueck William F., Strategic Management and
Business Policy, McGraw-Hill Book Co., New York, 1989
Kalakota Ravi, Robinson M., e-business 2.0: Roadmap for Success, Addison
Wesley, 2001
Kotler Philip, Marketing Management, Pearson Education, Delhi, 2004
Shankar Raj, Entrepreneurship Theory and Practice, Vijay Nicole
Imprints, Chennai, 2012
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UNIT 4: STRATEGIES FOR GROWTH
AND DEVELOPMENT –II
Structure
4.0 Introduction
4.1 Unit Objectives
4.2 Corporate Level Strategies
4.3 Business Level Strategies
4.4 Functional Level Strategies
4.5 Summary
4.6 Key Terms
4.7 Questions and Exercises
4.8 Further Reading and References
4.0 Introduction
We have seen, in unit 1, that strategies could be formulated at different
levels: corporate level, business level and functional level. We will discuss strategic
alternatives at these three levels in this unit. An entrepreneur has to make a decision
about strategic alternatives at these three levels. He/she makes decisions about
corporate strategy at first and then about business level strategy. Then functional
level strategies are worked out in the form of functional plans and policies and
then operational implementation takes place.
4.1 Unit Objectives
After going through this unit, you will be able to
• Learn the context of corporate strategies
• Know and explain the four types of generic corporate-level strategies
consisting of the expansion, stability, retrenchment and combination
strategies
• Understand the framework of business strategies on the basis of
corporate-level strategies, and business definition
• Examine functional strategies comprising of functional plans and
policies
• Study the development of functional plans and policies in the areas of
marketing, finance, operations and human resource management
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4.2 Corporate Level Strategies
The corporate level generic strategies guide entrepreneurs regarding the
decision about which business(es) the entrepreneur shall deal with. Corporate
strategies deal with decisions related with allocation of resources among different
businesses of an enterprise, transferring resources from one business to other
businesses. Actually corporate strategies manage a portfolio of businesses in such
a manner as to contribute to achievement of the corporate objectives.
There are four alternative strategies of stability, expansion, retrenchment
and combination. We have seen all the details of expansion strategies in the previous
Unit 3. Now let us discuss all the remaining corporate level strategies one by one.
Stability Strategies:
Stability strategies are followed by small and medium enterprises for a
short period of time. These strategies are relevant for enterprises which are doing
well presently and which operate in a stable environment.
According to Jauch and Glueck, a stability strategy is a strategy that a
firm pursues when it continues to serve the customers in the same product or
service, market using the existing technology as demarcated in its business definition;
its main strategic decisions focus on incremental improvement of functional
performance. It is less risky since it involves less changes. When the environment
is quite stable, certain and predictable; and expansion may seem to be threatening;
entrepreneurs adopt stability strategies. There are a number of reasons for pursuing
stability strategy.
Stability strategy is not a ‘do nothing’ strategy. It may involve incremental
improvement in the enterprise’s performance by slightly changing one or more of
its businesses in terms of the customer groups, customer functions, and alternative
technologies.
Stability strategies could be of three types: no change strategy, profit
strategy, and pause/proceed-with-caution strategy.
No change strategy:
No change strategy is a deliberate decision to continue with the present
business decision. It may seem to be an absence of strategy but actually it is a
decision to take no decision. This stability strategy is a deliberate decision to do
nothing new.
In the face of certain and predictable external environment and stable
organizational environment, an entrepreneur adopts no change strategy. He/she
finds no need to change the present situation by adopting new strategy. The
organization possesses no major strengths and weaknesses. The external
environment presents no significant opportunities or threats. There is no significant
and remarkable competition. There is no threat of competitors and/or substitute
products. With such kind of internal and external environment, an entrepreneur
decides not to do anything new.
Profit strategy:
The ‘no change strategy’ cannot be continued for a long period of time.
When the situation changes, accordingly the entrepreneur has to change his/her
decision regarding adoption of strategy. When an entrepreneur comes across some
problems and he/she assumes that these problems may remain only for a short
Check Your
Progress
1. Name the four al-
ternative corporate
level generic strate-
gies.
2. What do corporate
strategies deal with?
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time; the entrepreneur may decide that until the situation becomes favorable, it
would be better to adopt a profit strategy and sustain profitability. If the problems
are temporary, profit strategy would be a right decision. Otherwise profit strategy
would result into further deterioration of the enterprise.
Pause/proceed-with-caution strategy:
This is a temporary strategy like the profit strategy. It is a deliberate and
conscious attempt to postpone major strategic changes till the environmental
conditions become favorable or when the entrepreneur would find it appropriate
to choose a right strategy. This is a tactic to check the situation before taking a
major decision.
Retrenchment Strategies:
When an enterprise is in a state of decline, efforts are required to find out
the problem areas and make a diagnosis of the reasons leading to decline. An
entrepreneur follows retrenchment strategies of different kinds in response to
such kind of decline. The entrepreneur has to monitor and control the signals of
decline, analyze the causes of decline and their impact and then provide an
appropriate response to decline. Some of the major consequences of decline are
declining sale, shrinking market share, deteriorating cash flow, reducing profitability,
loss of goodwill and credibility etc. The three types of retrenchment strategies
are: turnaround strategy, divestment (or divestiture) strategy, and liquidation strategy.
Turnaround strategy:
An entrepreneur senses if there is a need of turnaround for survival of the
organization on the basis of several indicators such as negative profits, persistent
negative cash flow, declining market share, deterioration in public facilities,
mismanagement, high turnover of employees and low morale. G. A. Mirchandani
suggests three ways in which turnarounds can be handled: i. the existing chief
executive team handles the entire turnaround strategy with the advisory support
of a specialist external consultant; ii. The existing team withdraws temporarily
and an executive consultant or turnaround specialist is employed to handle the
entire turnaround. This person is usually deputed by banks and financial institutions
and, after the job is over, reverts to the original position; iii. The existing team,
especially the chief executive, is replaced or the sick enterprise is merged with a
healthy enterprise.
Divestment strategies:
Divestment strategy is also called as divestiture or cutback strategy. It
involves sale or liquidation of a portion of a business, or a major division, profit
centre or SBU. It is usually a part of rehabilitation or restructuring plan. An
entrepreneur resorts to divestment strategy, when a turnaround has been proved
to be unsuccessful. Harvesting strategies are a variant of divestment strategies. It
involves a process of gradually letting a company or business wither away in a
controlled and calibrated manner.
There are two approaches to divestment: a part of the company is divested
by spinning it off as a financially and managerially independent company, with the
parent company retaining partial ownership or not; the organization may sell a unit
outright and there is a chance that the unit could be sold profitably.
Many entrepreneurs do not take the decision to divest. They may take it
as an act of failure. It is painful for them to admit their failure.
Check Your
Progress
3. Do you know the
meaning of stability
strategy?
4. State the different
types of stability strat-
egies.
5. Does a no-change
stability strategy in-
volve doing nothing?
6. Name the three
types of retrenchment
strategies
7. List the conditions
that indicate that a
turnaround is needed.
8. Which are the three
ways in which turn-
around can be
handled?
9. What is meant by
divestment?
State whether the fol-
lowing is true or false:
10. An entrepreneur
resorts to divestment
strategy, when a turn-
around has been
proved to be unsuc-
cessful.
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Liquidation strategies:
The liquidation strategy involves closing down an enterprise and selling its
assets. It is the most extreme and unattractive retrenchment strategy. It is generally
considered to be the last resort. This strategy leads to serious consequences such
as loss of employment for the workers and other employees, feeling of humiliation,
no further hope of any possible future opportunity.
Many small enterprises, proprietorship and partnership ventures liquidate
frequently. However, medium and large enterprises liquidate rarely. The
entrepreneurs are unwilling to liquidate due to fear of failure. The government
may not readily agree to liquidate due to political and other reasons. Trade unions
oppose liquidation for loss of employment. It is not easy to get buyers for the
assets. The assets may be unusable and cannot fetch good price.
Combination Strategies:
Combination strategies, also known as mixed or hybrid strategies, are a
combination of stability, expansion or retrenchment strategies, applied either at the
same time in different businesses (simultaneous combination) or at different times
in the same business (sequential combination). Along with simultaneous
combination, and sequential combination; the third type of combination strategies
are combination of simultaneous and sequential strategies.
It is not possible for any enterprise to survive and grow by adoption of a
single ‘pure’ strategy. Entrepreneurs adopt different strategies as per the
requirements of the enterprise and circumstances. An entrepreneur may adopt
any combination of strategies like growth and retrenchment strategies, stability
and growth strategies, stability and retrenchment strategies etc.
4.3 Business-Level Strategies
Strategies at the corporate-level provide the broad direction to the
enterprise. At business-level, entrepreneurs set their strategies. To quote C. A.
Montgomery and M. E. Porter, it is ‘……. at the level of the individual business or
industry where most competitive interaction occurs and where competitive
advantage is ultimate won or lost’.
Corporate-level strategies lay down the foundation in which business
strategies function. At the corporate level, an entrepreneur makes a decision regarding
adoption of expansion, or stability or retrenchment strategies. Then these strategies
are applied at the business level. With appropriate choice of strategies, individual
businesses are able to contribute for accomplishment of the corporate objectives.
Corporate-level strategies are basically about the decisions related to
allocating resources among different businesses of an enterprise, transferring
resources from one set of businesses to others. These strategies manage businesses
in such a manner so as to achieve the corporate objectives.
As we have seen, Abell defines business along the three dimensions of
customer needs, customer groups and alternative technologies. On the basis of
these three dimensions, business strategies are formulated. The formulation of
strategies is based on ‘what, who and how’ related to the business. The ‘what’ of
the business definition refers to the customer needs. Business offers products/
services for satisfaction of these needs. Entrepreneurs try to identify the needs/
Check Your
Progress
11. Do you know the
consequences of liqui-
dation strategy?
Check Your
Progress
Choose the correct
word:
12. It is —— for any
enterprise to survive
and grow by adoption
of a single ‘pure’ strat-
egy. (possible/not pos-
sible) not possible
13. Can you tell the
meaning of combina-
tion strategies?
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wants of the customers and earn money by creating customer satisfaction through
products and services. Customer delights is one step ahead of customer satisfaction
in the sense that it adds more value in the product/service than the expectations of
the customers. Entrepreneurs develop their competitive advantage on the basis of
creation of customer value provided through the products/services. The ‘who’ of
the business definition refers to the customer groups targeted by the business.
Customer groups are categorized on the basis of the needs/wants which the business
seeks to satisfy. Customer groups may be categorized on the basis of demographic
variables such as age, gender, education, income, occupation etc; geographic
characteristics such as rural/urban, south territory/east territory/north territory/
west territory etc); or lifestyle (traditional/modern). On the basis of these customer
groups, entrepreneurs know which needs of these target customer groups are to
be targeted. The ‘how’ of business definition refers to the alternative technologies
used to satisfy the needs/wants of selected target customers groups. The term
alternative technology refers to technical knowledge, skills, and competencies
required to produce products/services. The distinctive competence regarding the
alternative technology would lead to customer delight. In this manner, on the basis
of the three dimensions of business definition, the entrepreneurs could develop
competitive edge and could hope to serve the customers in a far better manner
than that of the competitors.
Business-level strategies are formulated for each business separately for
each customer group to satisfy their needs and create value. Michael E. Porter
worked on business strategies which he referred as competitive strategies. His
areas of focus comprise industry analysis, competitive dynamics and competitive
strategies. He is considered to be a major exponent of the positioning school of
strategy thought.
Porter views industry as a group of competitors producing products/
services that compete directly with each other. It is the industry where competitive
advantage is ultimately won or lost. For winning the battle of competition,
competitive strategy is required.
According to Porter, the choice of a competitive strategy is determined by
two factors: the industry structure and the positioning of an enterprise in the industry.
The industry structure is determined by the competitive forces of the threat of
new entrants, the threat of substitute products/services, the bargaining power of
suppliers, the bargaining power of buyers, and the rivalry among the existing
competitors in an industry. These five factors vary from industry to industry. These
factors determine profitability and prospects of an enterprise in the industry. Each
industry has a distinctive structure. Another determinant for choice of a competitive
strategy of an enterprise is its positioning within the industry. On the basis of
positioning, an enterprise tackles competition. Positioning enables an enterprise to
seek a sustainable competitive advantage which is based on two variables – the
competitive advantage and the competitive scope. Competitive advantage can be
in the form of lower cost and differentiation. Competitive scope can be in terms of
two factors – broad target and narrow target.
There are two generic types of competitive advantages that an enterprise
could seek – the lower cost approach and the differentiation approach. Lower
cost approach is possible out of the competence of an enterprise to design, develop
and market a product/service more efficiently than the competitors. Differentiation
approach is based on the competence of the enterprise to offer unique and superior
value to the consumers regarding durability, aesthetics, economy, superior product
features and the like.
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Porter defines competitive scope as the breadth of an enterprise’s target
within its industry i.e. the range of products, distribution coverage, types of
customers, scope of market. Enterprises require various competencies and
strategies for satisfying customer needs. Because the markets are heterogeneous,
needs of customers are varied. The enterprise has to make a choice of a broad
target approach or a narrow target approach. With broad target approach, the
enterprise offers an extensive range of products/services to a wide range of
customer groups located in a widely-scattered geographical area. A narrow target
approach implies selection of a limited range of products/services to a few customer
groups in a limited geographical area.
These two factors of positioning i.e. the competitive advantage and
competitive scope, when combined together, generates a set of generic competitive
strategies which are known as the business-level strategies.
Competitive advantage is derived from the two approaches of lower cost
and differentiation. Competitive scope may be a broad target or a narrow target.
Porter uses the matrix of competitive scope and competitive advantage and indicates
three types of competitive or business strategies as follows:
• Cost leadership (lower cost/broad target)
• Differentiation (differentiation/broad target)
• Focus (lower cost or differentiation/narrow target)
Figure 4.1: Porter’s generic competitive strategies
Cost leadership business strategy involves offering products/services at
relatively lower cost than the competitors. The competitive advantage consists in
the lower cost of products/services. For achieving cost leadership, the enterprise
strives for offering standardized products/services, attaining economies of scale
etc through operational effectiveness.
Porter observes that the low cost firm “has a broad scope and serves
many industry segments, and may even operate in related industries-the firm’s
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breadth is often important to its cost advantage”. Cost leadership requires efficient
operations, a wide experience in cost reduction, strict cost and overhead control,
cost reduction etc Low cost position enables the enterprise to achieve above
average returns. This revenue can be reinvested for better prospects.
Low cost leaders are in a better position to defend the enterprise against
all the five competitive forces. Regarding the intensity of rivalry, cost leaders are
in a far better position to tackle price competition. Even in recession the cost
leaders can manage to maintain themselves with the help of discounts, trade
promotions, etc.
The additional revenue generated owing to the low cost enables the firm
to reinvest. The effect of buyer’s bargaining power would be lower on the cost
leader than on the competitors. The cost leader is in a better position than the
competitors to cope up with the increasing input prices by the suppliers and also
they are in a better position than the rivals regarding the threats from substitutes.
Further the low cost positioning works as an entry barrier.
There is a threat of imitation of low cost positioning by the rivals because
in that case cost leadership would be easily and rapidly lost. There is a possibility
of non-price competition becoming more important in the industry. Those who
adopt cost focus strategy may have to lower cost further in the chosen segment.
In case of technological changes, cost leadership may become irrelevant.
Differentiation business strategy involves offering differentiated products/
services with special features and attributes. The competitive advantage consists
in differentiated products/services which offers utility and adds value to the products/
services. Of course, customer do not mind paying higher price for differentiated
offer. As long as customers value differentiation, they willingly pay more price for
the offer. However, the differentiator enterprise has to maintain a balance between
the premium price charged and the additional costs incurred for adding
differentiation.
In the words of Porter, with differentiation strategy, “a firm seeks to be
unique in its industry along some dimensions that are widely valued by key buyers.
It selects one or more attributes that many buyers in an industry perceive as
important and uniquely position itself to meet those needs. It is rewarded for its
uniqueness for a premium price”. Necessarily the price premium should be more
than the cost of differentiating.
There are a number of parameters for differentiation such as product
features, after sale service, terms of delivery. The level of differentiation is based
on creativity, innovation, motivation for innovation, R&D.
Differentiation, if copied by the rivals, loses its advantage. With changes
in customer tastes, fashions etc the impact of differentiation may become less
important. If the premium pricing of the differentiating firm and the prices charged
by the rivals widely differ, it would be difficult to pick up the sales.
The entrepreneurs who adopt differentiation strategy are in a strong and
advantageous position while coping up with the five competitive forces. They can
win in competitive rivalry on the basis of the brand loyalty associated with
differentiation. This strong brand loyalty would also act as an entry barrier. The
differentiators are strong enough to ward off threats from substitutes regarding
suppliers. Differentiators enjoy higher margins.
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Focus business strategy is basically either cost leadership or differentiation.
But it serves a narrow segment of the total market. In terms of the market, focus
strategy is niche strategy. Customer groups may be categorized on the basis of
demographic characteristics (age, gender, education, income, occupation etc),
geographic segmentation (rural/urban), or lifestyle (traditional/modern). For the
selected target market segment, a focused enterprise adopts either the lower-cost
or differentiation strategy.
The focus strategy is based on a narrow competitive scope within an
industry. It may be in various forms such as a specific customer segment, a
geographical area of a particular product line etc. The focus strategy has two
variants- cost focus and differentiation focus. In cost focus, an entrepreneur
seeks cost advantage in its target segment and with differentiation focus,
differentiation is sought in its target segment.
In the words of Porter, “while the low cost and differentiation strategies
are aimed at achieving their objectives industry wide, the entire focus strategy is
built around serving a particular segment very well and each functional policy is
developed with this in mind. It is assumed that, with focus strategy the entrepreneur
would be able to serve its narrow strategic segment efficiently or effectively than
competitors who serve broad targets. With focus strategy, the entrepreneur caters
to the needs of a particular target on the basis of differentiation or lower cost in
serving this target or both.
Focus strategy may be imitated by the competitors which is harmful to the
entrepreneurs. There is a probability of change in the customer base and their
needs, wants, preferences etc.
Now, let us deal with tactics for business strategies. A tactic is a sub-
strategy. In the words of J. D. Hunger and T. L. Wheelen, a tactic is a specific
operating plan detailing how a strategy is to be implemented in terms of when and
where it is to be put in action. By their nature, tactics are narrower in their scope
and shorter in their time horizon than are strategies. Azhar Kazmi considered two
tactics of timing (when) and market location (where) used in formulating and
implementing business strategies.
A business strategy, may be - low-cost strategy, differentiation strategy,
or focus strategy –, would prove to be a right move, if it is made at the right time.
The timing of application of a business strategy is an important issue. George
Stalk recognized time as a strategic weapon and a source of strategic advantage.
Timing Tactics
The first enterprise to manufacture and sell a new product/service is the
pioneer or the first- mover enterprise. The enterprises which react immediately to
the first-movers are second-movers and those enterprises which enter the industry
subsequently are the late mover enterprises. Actually, the second-movers are also
late-movers, however fast they might be to react.
It is difficult to make a generalization about whether being a first-mover is
advantageous or not. Whether you are a first mover or late-mover, there are
advantages and disadvantages in both the cases.
First-movers can become market leaders. Their image as a pioneer, will
establish their reputation and image. They are most likely to gain commitment of
suppliers, distribution channels etc. First time customers are likely to remain loyal.
However, being a first-mover is often a costlier option in comparison with being a
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follower. Creation of market, customer awareness and education is not easy. Later-
movers can imitate the first-movers easily. There is no guarantee of customer
loyalty. There is every possibility of first time customers switching over to the
late-movers.
Market Location Tactics
Market location tactics deal with the issue of where to compete i.e. regarding
the target market that the enterprise marks in applying its business strategies.
Each industry consists of a number of enterprises that offer the same or substitute
products/services. Philip Kotler classified market location tactics in four types:
leader, challenger, follower and nichers - on the basis of the role that the enterprises
play in the target market.
Market leaders are the enterprises which have the largest market share
in the relevant product market. They lead the industry with reference to
technological developments, product/service features, trade channel design etc.
Philip Kotler proposes three strategies to take up the market leader position and to
retain it: expanding the total market through new users, new uses, and more
usage; defending the market share through position defense, flank defense,
counteroffensive defense, mobile defense, and contraction defense; expanding
the market share through enhancement of operational effectiveness by means
such as new product development, raising manufacturing efficiency, improving
product quality, providing superior support services or increasing market
expenditure.
Market challengers are the enterprises with second or lower ranking in
the industry in terms of market share. They can either challenge the market leaders
or decide to follow them. The challenger first defines the objectives, the opponents,
choose a general attack strategy and then choose a specific attack strategy. A
general attack approach could be of five types: frontal attack involving matching
the opponent in terms of product, price, promotion and distribution; flank attack
involving challenging the opponent’s weak or uncovered geographical or segmental
areas; encirclement attack involving a grand move to capture the opponent’s market
share through means such as launching an advertising blitzkrieg, making an
unbeatable product-related offering; bypass attack involving ignoring the opponent
and attacking the easier markets such as moving into new geographical areas,
diversifying into unrelated products etc; guerilla attack involving small, recurrent
attacks to annoy and discourage the opponent by means such as price cuts, price
discounts, intensive comparative advertising etc.
Market followers are the enterprises that imitate the market leaders but
do not constitute a significant share of the market. They may adopt four broad
approaches as: counterfeiter strategy which involves duplicating the market leader’s
products and packaging and selling it in black market; cloner strategy involves
emulating the market leader’s products, name and packaging; imitator strategy
involves copying some things from the market leader while retaining some other
features such as pricing, packaging; adapter strategy involves adapting one’s own
products to those of the market leader and selling them.
Market niches are the enterprises that carve out a distinct niche that is
left uncovered by other enterprises in the industry or a niche that is of little or no
interest to others. Market nichers can adopt three approaches: creating niches,
expanding niches, protecting niches.
Check Your
Progress
State whether the fol-
lowing are true or
false:
14. Whether you are a
first mover or late-
mover, there are ad-
vantages and disad-
vantages in both the
cases.
15. First-movers can
become market lead-
ers
16. Later-movers can
imitate the first-mov-
ers easily
Check Your
Progress
17. On the basis of the
role that the enter-
prises play in the tar-
get market, Philip
Kotler classified mar-
ket location tactics in
four types as ——
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4.4 Functional-Level Strategies
Functional strategies are defined in terms of functional plans and policies.
These are the plans or tactics to implement business strategies. Functional strategies
are derived from business and corporate strategies. These are carried out through
functional and operational implementation. Functional implementation is done
through functional plans and policies in different functional areas like finance,
marketing, operations and human resources. Functional plans and policies are
developed to ensure implementation of strategic decisions by all parts of the
enterprise. It is the basis for controlling enterprise activities.
Strategy implementation aligns activities and capabilities of an enterprise
with its strategies. Strategies operate at different levels. There has to be congruence
and coordination among these strategies. Such congruence is the vertical fit. There
has to be a coordination among different activities taking place at the same level
of the enterprise hierarchy. This is the horizontal fit.
Any functional strategy becomes strategic when it is vertically fitted to
higher levels and corporate strategies. In this manner, we could have various
functional strategies like strategic marketing management, strategic financial
management, strategic operations management and strategic human resource
management. Strategic marketing management focuses on the alignment of
marketing management within an enterprise with its business and corporate to
gain strategic advantage. Strategic financial management focuses on alignment of
financial management within an enterprise with its business and corporate strategies
to gain strategic advantage. Strategic operations management focuses on alignment
of operations management within an enterprise with its business and corporate
strategies to gain strategic advantage. Strategic human resource management
focuses on alignment of human resource management within an enterprise with
its business and corporate strategies to gain strategic advantage. Strategic marketing
management implies that such marketing is done in the light of objectives and
strategies of the enterprise. It has a long-term commitment and deals with the
future of the enterprise. Such marketing should have a vertical fit with the business
and corporate strategies as well as a horizontal fit with other functional areas of
the enterprise.
Horizontal fit has to take place during operational implementation.
Operational implementation enables an enterprise to achieve operational
effectiveness.
Functional strategies operate below business strategies. There might be
several sub-functional areas within functional strategies. Functional strategies are
defined in terms of functional plans and policies. These are the plans or tactics to
implement business strategies. They are made on the basis of guidelines set at
higher levels. Functional plans deal with ‘what’ is to be done for guiding functional
managers. Functional policies guide the functional managers regarding ‘how’ the
plans are to be implemented.
Glueck states five reasons while explaining the need for functional plans
and policies. Functional plans and policies are developed to ensure that:
1. The strategic decisions are implemented by all the parts of an organization;
2. There is a basis available for controlling activities in the different functional
areas of business;
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3. The time spent by functional managers in decision-making is reduced as
plans lay down clearly what is to be done and policies provide the
discretionary framework within which decisions need to be taken;
4. Similar situations occurring in different functional areas are handled in a
consistent manner by the functional managers; and
5. Coordination across the different functions takes place where necessary.
Let us discuss some aspects of each functional areas for which plans and
policies are needed on the basis of functional capability factors.
Financial plans and policies of an enterprise are related to management
of money. The financial strategy is aimed towards competitive advantage through
low cost of funds and maximization of wealth of the enterprise. It deals with
sources of funds, and uses of funds, accounting and budgeting, cash management,
credit management, management of risk, cost control, tax planning and the like.
Also working capital management, relationship with borrowers, banks and financial
institutions. The capital structure decision is concerned with optimum debt-equity
ratio i.e. optimum mix of equity capital and debt capital. There are two sources of
funds – external sources and internal sources. Some enterprises depend on external
borrowings while other may adopt a policy of internal financing. Investment
decisions deal with capital investment, acquisition of fixed assets, current assets,
dividend decisions, relationship with shareholders. Management of funds is related
with efficiency and effectiveness of resource utilization in strategy implementation.
Dividend decision affects availability of capital. It influences the cost of capital.
Marketing strategies revolve around the 4 Ps of marketing mix i.e.
product, price, place and promotion. Plans and policies related with product mix
deal with quality, product features, service, branding, packaging, guarantee and
the like. Price related characteristics comprise of discounts, allowances, payment
terms and condition, credit terms, payment period. Price reflect the exchange
value of money. It is the value assigned to satisfaction of needs and wants of the
valued customers. The marketers may choose penetration pricing policy or
skimming pricing policy. Then another issue is of price discrimination, the factors
influencing pricing decisions and various techniques of pricing. Distribution plans
and policies deal with various trade channels, transportation, logistics, storage,
warehousing, inventory management. The success of marketing plans and policies
depend in a major way upon the distribution efficiency, customer relationship
management, supply chain management. The distribution coverage may be intensive,
extensive or selective. The promotion plans and policies comprise of advertising,
personal selling, sales promotion, publicity, public relations as well as direct
marketing.
The operations plans and policies depend upon production system,
operational planning and control, inventory management, materials requirement
and planning, quality control, purchase management, materials management and
the like. The effectiveness of operations strategies depend upon layout, location,
capacity, work systems, research and development. The option of outsourcing
also matters a lot in deciding operations policies and efficiency.
The human resource plans and policies assess human resource needs,
and deal with human resource planning in a systematic and scientific manner.
Recruitment, selection and placement policies are crucial for the success of an
enterprise. The functions of compensation, appraisal, communication, motivation
of human resources are the crucial factors. Effective staffing policy attracts and
retains talented human resources.
Check Your
Progress
18. What do you know
about operations plans
and policies?
19. Write a note on
operations plans and
policies.
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4.5 Summary
Corporate strategies deal with a portfolio of businesses. These strategies
guide the businesses to achieve growth. The business definition comprising the
‘what, who and how’ related to a business indicate Business strategies operate
below corporate level strategies. They are derived from corporate level strategies.
Businesses need strategies to seek their competitive advantage. Business
strategies strive to develop competitive advantage in each of the individual
businesses which an entrepreneur has in his/her portfolio. Corporate-level strategies
transfer resources and skills, and create synergies between different businesses.
Business-level strategies apply these resources, skills and synergies for the sake
of enhancing the competitive advantage. Business-level strategies are reinforced
by functional strategies and operational implementation in each and every business.
An expansion strategy is adopted when he/she focus on high growth.
When the entrepreneur aims at contraction of its activities, it indicates that he/she
follows a retrenchment strategy. And when he/she deals with a combination of
stability, expansion and retrenchment strategies. It implies that he/she adopts a
combination strategy. The combination strategy may be followed either at the
same time in its different businesses or at different times in the same business for
the purpose of improving its performance.
A stability strategy is adopted by an entrepreneur when he/she attempts
at incremental improvement of its functional performance. Stability strategy is
appropriate for an enterprise which faces reasonably certain and predictable
environment. Stability strategies could be of three types: no change strategy, profit
strategy, and pause/proceed- with-caution strategy. When an entrepreneur
consciously decides to do nothing in a particular point in time, it is no change
strategy. When the entrepreneur attempts to sustain the enterprises profitability
by artificial measures, it is known as profit strategy. An entrepreneur follows
pause/proceed with caution strategy when he/she intends to test the market before
adapting a full-fledged corporate strategy or they have adopted expansion strategy
and before moving ahead, they wish to rest awhile.
When an entrepreneur substantially reduces the scope of its activities,
either because of external factors or internal factors, it implies that he/she follows
a retrenchment strategy. There is a need to find out the problems and then diagnose
the causes of the problems. Then several steps are taken for problem solving.
These actions are different kinds of retrenchment strategies. In the face of decline,
an entrepreneur can choose retrenchment strategy out of the three options of a
turnaround strategy or a divestment strategy or a liquidation strategy. In a
turnaround strategy, the entrepreneur focuses on various approaches and methods
to reverse the process of decline. In divestment or divesture strategy, the
entrepreneur gets rid of the loss making units, division or SBUs, curtails product
line or reduces the activities, functions performed. If this does not work, then the
entrepreneur as a last resort may choose a liquidation strategy i.e. to abandon the
activities totally. Turnaround strategy reverses the negative trend and turns around
the enterprise towards profitability. When a turnaround is attempted but proves to
be unsuccessful, divestment is adopted as a part of a rehabilitation or restructuring
plan. It involves the sale or liquidation of a portion of business or a major division
or profit center or SBU. There are two ways to adopt divestment strategy. A part
of the enterprise is divested by spinning it off as a financially and managerially
independent enterprise with the parent enterprise retaining partial ownership or
not or the enterprise may sell a unit outright managers may dislike the decision to
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divest since they perceive it as failure. Liquidation strategy involves closing down
an enterprise and selling its assets. It is the most extreme and unattractive strategy.
Entrepreneurs do not depend on only one strategy. They involve a complex
network of combination strategies. Combination strategies are a mixture of stability,
expansion or retrenchment strategies, applied either simultaneously i.e. at the same
time in different businesses or sequentially i.e. at different times in the same
business.
Functional strategies operate below the corporate and business level
strategies. Functional strategies are defined in terms of functional plans and policies.
These are the plans or tactics to implement business strategies. Functional strategies
are derived from business and corporate strategies and are carried out through
functional and operational implementation.
Financial plans and policies are based on financial needs regarding raising
of money, determining sources of finance, application of funds, cost of capital,
capital budgeting decisions and the like.
Marketing plans and policies are set in terms of identification of needs
and wants of customers, segmentation, targeting, positioning, marketing mix
constituents of product, price, place and promotion.
Operations plans and policies are done in terms of production/operations
planning and control, research and development, production systems.
Human resources plans and policies are based on the functions such as
recruitment, selection, training, placement, induction, compensation, appraisal etc.
4.6 Key Terms
• Plan: a future course of action aimed at achieving predetermined
objectives. It explains what needs to be done, who is to do it, when, how
and where it would be done
• Policy: A definite course of action selected in the light of given conditions
to guide and determine present and future decisions
4.7 Questions and Exercises
Questions
1. Explain the different types of stability strategies.
2. When does an entrepreneur decide to adopt a turnaround strategy? What
actions are required to adopt a turnaround strategy?
3. What is meant by business strategy? How is business strategy related to
corporate-level strategy? Explain the importance of business strategies.
4. Explain the three types of business strategies- cost leadership,
differentiation and focus.
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5. What is meant by being a first mover in an industry? A late mover?
Discuss the advantages and disadvantages in being a first mover in an
industry? A late mover?
6. Discuss Michael Porter’s approach to defining generic competitive/
business strategies.
7. Write a descriptive note on the nature, need and development of functional
plans and policies.
8. Discuss how combination strategies can be adopted sequentially?
Simultaneously?
9. How can a turnaround be managed? List the conditions that indicate
that a turnaround is needed.
10. Under what conditions an enterprise decides to adopt divestment
strategies? What approaches can be adopted?
Exercise
Activity 4.1
Consider any organization of your choice. Outline the various functional
plans and policies that are being formulated and implemented by the organization.
Multiple Choice Questions
1. Which of the following is associated with stability strategies?
i. No-change strategy
ii. Profit strategy
iii. Pause/proceed-with-caution strategy
iv. All the above
2. Which of the following is wrong?
i. Corporate-level strategies lay down the foundation in which business
strategies function
ii. At the corporate level, an entrepreneur makes a decision regarding
adoption of expansion, or stability or retrenchment strategies
iii. i and ii are wrong
iv. i and ii are right
3. Which of the following is wrong?
i. There are two generic types of competitive advantages that an
enterprise could seek – the lower cost approach and the
differentiation approach.
ii. Lower cost approach is possible out of the competence of an
enterprise to design, develop and market a product/service more
efficiently than the competitors.
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iii. Differentiation approach is based on the competence of the
enterprise to offer unique and superior value to the consumers
regarding durability, aesthetics, economy, superior product features
and the like.
iv. i, ii, and iii are wrong
4. Pick the wrong alternative
i. Market challengers are the enterprises which have the largest market
share in the relevant product market
ii. Market leaders lead the industry with reference to technological
developments, product/service features, trade channel design etc
iii. Market challengers either challenge the market leader or decide to
follow them
iv. Market followers are the enterprises that imitate the market leaders
but do not constitute a significant share of the market
5. Which of the following is a type of retrenchment strategy?
i. Liquidation strategy
ii. Divestment strategy
iii. Turnaround strategy
iv. All the above
6. Which of the following is true?
i. Focus business strategy is basically either cost leadership or
differentiation
ii. Focus strategy serves a narrow segment of the total market
iii. Both i and ii are true
iv. Both i and ii are false
7. Which one is wrong?
i. Functional policies guide the functional managers regarding ‘how’
the plans are to be implemented
ii. Functional strategies operate below business strategies
iii. Functional strategies are defined in terms of functional plans and
policies
iv. i, ii and iii are wrong
8. Which of the following is a type of retrenchment strategy?
i. Turnaround strategy
ii. Divestment strategy
iii. Liquidation strategy
iv. All the above
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9. Which one of the following is associated with turnaround strategy?
i. The existing chief executive team handles the entire strategy with
the advisory support of a specialist external consultant
ii. The existing chief executive team withdraws temporarily and an
executive consultant or specialist deputed by banks and financial
institutions handles the entire strategy
iii. The existing team, especially the chief executive, is replaced or the
sick enterprise is merged with a healthy enterprise
iv. All the above
10. Which one of the following is true regarding divestment strategies?
i. A part of the company is spin off as a financially and managerially
independent company with the parent company retaining partial
ownership or not
ii. The organization may sell a unit outright and there is a chance that
the unit could be sold profitably
iii. Both i and ii are true
iv. Both i and ii are wrong
11. Which one of the following applies to divestment strategies?
i. Many entrepreneurs do not take the decision to adopt the strategy
ii. Many entrepreneurs look at the strategy as an act of failure It is
painful for the entrepreneurs to admit the failure
iii. Entrepreneurs resort to this strategy when a turnaround has been
proved to be unsuccessful
iv. All the above
Answers
Check Your Progress
14. True
15. True
16. True
17. Leader, challenger, follower and nicher
Multiple Choice Questions
1. iv
2. iii
3. iv
4. i
5. iv
6. iii
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7. iv
8. iv
9. iv
10. iii
11. iv
4.8 Further Reading
Cherunilam Francis, Business Policy and Strategic Management, Himalaya
Publishing House, Mumbai, 2010
Jaunch Lawrence R., Glueck William F., Strategic Management and
Business Policy, McGraw-Hill Book Co., New York, 1989
Kazmi Azhar, Strategic Management and Business Policy and, Tata
McGraw-Hill Publishing Company Limited, New Delhi, 2009
Porter Michael E., Competitive Strategy: Techniques for Analyzing
Industries and Competitors, the Free Press, New York, 1980
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UNIT 5 : STRATEGIES FOR GROWTH
AND DEVELOPMENT –III
Structure
5.0 Introduction
5.1 Unit Objectives
5.2 Franchising
5.3 Ancillarization
5.4 Collaboration
5.5 Summary
5.6 Key Terms
5.7 Questions and Exercises
5.8 Further Reading
5.0 Introduction
In this book we are attempting to explore the framework for growth strategies
which are generally embraced by small entrepreneurs. Growth strategies vary from
enterprise to enterprise. While having a holistic view of growth strategies, we have
seen internal growth strategies such as expansion, diversification etc. which are
pursued by enterprises on their own without the help and support of other enterprises.
Also we intendto discuss external growth strategies i.e. those strategies which
enterprises adopt with the help and co-operation of external agencies i.e. other
enterprises such as mergers, joint ventures, acquisitions and the like in the next unit.
Entrepreneurship is chiefly associated with establishing and running a new
venture and not buying an existing business. However, nowadays many entrepreneurs
buy well established and successful businesses rather than taking the pains to launch
their own enterprises from a scratch. Buying an existing business has become as
common as starting a new one. Entrepreneurs increasingly adopt the option of buying
into the business through franchise contract. Franchising may be pursued as an
entry strategy to reduce the risk of loss/failure and establish the presence of an
entrepreneur and his/her enterprise in the society. Also franchising can be pursued
as a growth strategy by an entrepreneur to expand his/her business. In franchising,
entrepreneurs play the role both as a franchiser as well as a franchisee.
5.1 Unit Objectives
After going through this unit, you will able to
• Learn the concept of franchising as a strategy to reduce the risk of new
entry and also as a growth strategy to expand business operations
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• Identify the different types of franchise
• Explain advantages and limitations of franchise
• Understand how franchising works
• Steps involved in setting up a franchising system
• Be aware about the meaning and importance of ancillarization
• Discuss the concept of vendor development
• Appreciate the significance of collaboration in entrepreneurial ventures
• Describe various aspects that are required for collaboration
• Analyze the reasons why entrepreneurs collaborate and with whom
5.2 Franchising
“Suppliers and especially manufacturers have market power because
they have information about product or service that the customer does not
and cannot have and does not need if he can trust the brand. This explains
the profitability of the brand” -Peter F. Drucker
There are several ways in which an entrepreneur begins his/her business:
initiating a new enterprise, or buying an existing business or franchising. We will
discuss the option of becoming franchised.
The term franchising is derived from the French word ‘Franchis’ which
means privileged or freedom.It originally meant ‘to free from slavery’. Now we
use the term franchise to mean an agreement between a buyer and a seller. This
agreement permits the buyer i.e. the franchisee to sell the product/service of the
seller i.e. the franchiser. It is a system for selective distribution of products/services
through the outlets owned by retailers or dealers.Entrepreneurs can achieve growth
through franchising without making big investments for creation of infrastructure.
Franchiser is the entrepreneur who owns the product/service or brand whereas
franchisee is a partner entrepreneur who operates the business with permission
from the owner entrepreneur. The process of functioning between a franchiser
and a franchisee is franchising.
The International Franchise Association defines franchise as a ‘continuing
relationship between the franchiser and the franchisee in which the sum total of
franchiser’s knowledge, image, success, manufacturing and marketing techniques
are supplied to the franchisee for a consideration’.
According to David D. Settz,a franchise is a form of business ownership
created by contract thereby a company grants a buyer the rights to engage in
selling or distributing its products or services under a prescribed format in exchange
for royalties or shares of profits. The buyer is called the ‘franchisee’ and the
company that sells rights to its business concept is called a franchiser. He defines
franchising as “an arrangement whereby the manufacturer or sole distributor of a
trademarked product or service gives exclusive rights of local distribution to
independent retailers in return for their payment of royalties and conformance to
standardized operating procedures”.
Check Your
Progress
Fill in the blanks with
appropriate words:
1. The process of
functioning between a
franchiser and a fran-
chisee is ——
2. —— is the entre-
preneur who owns the
product/service or
brand whereas —— is
a partner entrepreneur
who operates the busi-
ness with permission
from the owner entre-
preneur
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David H. Holt has defined franchising as “a business system created by a
contact between a parent company called the franchiser and the acquiring business
owner, called the franchisee, giving the acquiring owner the right to sell goods/services,
to use certain products, names, or brands or to manufacture certain brands”.
In the words of Thomas Zimmerer and Norman M. Scarborough, “in franchising
semi-independent business owners (franchises) pay fees and royalties to a parent company
(franchiser) in return for the right to become identified with its trademark, to sell its
products or services, and often to use its business format and system”.
Basically, franchising is a form of contractual arrangement in which retailer
(franchisee) enters in to an agreement with a producer (franchiser) to sell the producer’s
goods/services for a specified fee or commission. Franchising is the transfer of rights
to sell a trademarked product/ service through a system prescribed by an entrepreneur
who is a franchiser owning the trademark. Franchising is a system of distribution in
which franchisees pay fees and royalties to a parent company i.e. the franchiser in
return for the right to become identified with its trademark, to sell its product/services
and use its business format and system. Franchisees are semi-independent business
owners. They don’t have the freedom to change the way they run their businesses.
They purchase a successful business model. Don DeBolt says “if you are overly
entrepreneurial and you want to invent your own wheel, or if you are not comfortable
with following a system, then don’t go down (the franchise) path. Deviation from the
business model of the franchiser may lead to failure”.
Franchising is an enduring relationship between a franchiser and a
franchisee. Franchiser develops a business system and franchisee operates the
business on a day to day basis with the support of franchiser. The franchiser
offers a proven business system, name, recognition etc. In return, the franchiser
pays an initial franchisee fees as well as an ongoing percentage of his/her outlets
sales to the franchisers as a royalty and agrees to operate the outlet according to
the franchiser’s system. Franchisers develop the business system. The franchisee
use their distribution method. Franchisers exercise substantial control over their
franchisees. Standardization is the basis of franchising success. Franchisee choose
the site with franchiser’s approval. Franchiser provides the prototype design and
franchisee pays for the design implements it. Franchiser decides about products/
services and franchisee modifies products/services if required with franchiser’s
approval. Franchiser recommend prices and franchisee sets final prices. Franchiser
provides general suggestions for employees and their training. Franchisee hires
and manages employees. Franchiser establishes quality standards and franchisees
meet those. Franchisers may require franchisees to purchase from them.
Franchisees purchase from franchiser approved suppliers only.Franchiserpay for
national advertising campaigns. They may require a minimum expenditure on local
advertising. Franchiser sets quality standards and they are maintained by franchisee.
Franchiser inspect quality system and train franchisee for quality assurance.
Franchiseestrain their employees for proper implementation of quality norms and
practices. Franchisers earn money from the franchisees in the form of royalties
and franchisee fees. Sometimes there is a sharing of profit or revenue.
In franchising, an entrepreneur can play a role both as a franchiser as
well as a franchisee. As a franchiser, an entrepreneur creates a business concept
and its replica are sold to others. As a franchisee, an entrepreneur buys a business
which is a part of a chain of similar business units. Entrepreneurs play a foremost
role in developing as well as buying the franchises.
The most common franchise relationship is between a retailer and a
manufacturer or sometime a wholesaler. In our country, manufacturer-manufacturer
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relationship is the oldest. One manufacturer produce products/service for the other
under license. Exclusive dealership is manufacturer-wholesaler franchise
relationship. Manufacturer-retail franchise system is found commonly in India with
emergence of retail and service franchise relationships.
Individual franchise agreement involves the sale of a single franchise for
a specific location. An area level franchise allows the franchisee to own and
operate a specific number of outlets in a particular geography. Master franchise
agreement involves the right to open and operate number of stores or units to
master franchise and also the right to offer to sell the franchise to other people in
the area. The entrepreneurs who buy franchise from a master franchisee are
called sub-franchisees. Sub-franchising involves taking the rights from the franchiser
to sell the rights to operate other individuals who act as sub-franchising units.
Entrepreneurs should plan about franchising activity after a careful
deliberation. Franchising may seem to be an easy way for business growth which
may need meager capital investment. If the right franchisees are not chosen,
there is a possibility of inadequate cash generation. If a product/ service or a
brand is not well established, then there is risk involved. When the entrepreneur is
confident about acceptance of product/service or brand by the market in positive
manner and about growth in demand then the option of franchising should be
pursued for further consideration. Issue such as managing the franchise, developing
the relationship, collection of payments, legal issues, matters regarding relating to
integrity etc. should be carefully looked in to. An entrepreneur who intends to buy
a franchise has to understand all the intricaciesinvolved before deciding to actually
get into franchising. Typically an entrepreneur has to pay attention to an established
product/ service with a good image, trade names, trademarks, a patented design.
Before finalizing the decision, consultation with management experts and field
professionals would always be desirable regarding matters like financial
management, economies of scale for advertising and purchasing, services to be
sought from the franchisers and the like.
Selection of a Franchise
Before starting the journey of franchising, an entrepreneur goes through
the following process:
An entrepreneur sets up a franchise system in a systematic manner. He/she
has to ensure that instead of setting up his/her independent business from the scratch,
he/she wants to be a franchisee. He/she has to critically analyze the pros and cons of
both the options of independent business and a franchise. A careful self-appraisal
would help to ensure the suitability of entrepreneur to the requirements of a franchise.
He/she has to survey market to choose suitable product/service and franchiser. Further,
he/she has to tap various sources of information such as business magazines, trade
journals etc and meet industry professionals, experts as well as existing franchisees if
needed, for ascertaining the market demand and growth prospects.
The franchiser is expected to assess the franchisee in terms of his/her
ability and competence, sincerity and seriousness. The franchisee also seeks
information about a franchiser for evaluation of the prospects on the basis of various
documents such as an estimate of franchise’s initial investment i.e. fixed assets,
working capital, opening inventory, furnishing, décor, real estate expenses etc.;
information about the initial franchise fee and other payments including security
deposits etc; royalties and profit sharing agreements; financial statements of the
franchiser; support services to be provided by the franchiser such as advertising and
merchandising, training of staff, purchase of equipment etc. After seeking information
Strategies For Growth And
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Check Your
Progress
8. Enlist the steps in
starting a franchise.
about the franchiser, and studying all the relevant documents, the prospective
franchisee evaluates the franchiser in a critical manner. If the entrepreneur has a
choice of two or more franchisers, he/she has to prepare and study comparative
data and then negotiate with the franchisers. After negotiations, decisions regarding
location, purchasing accounting, training of employees, leasing etc are finalized along
with the other crucial matters like franchise fees, royalty, patents, trademarks,
inventory branding etc. Before signing the franchise documents, it is desirable to get
the advice of chartered accountants, lawyers etc. for legal rights etc.
Types of Franchising
Franchising arrangements are broadly classified into three types: product
distribution franchising/trade name franchising, manufacturing franchising, business
–format franchising.
Product distribution franchise is the earliest type of franchising. Under
this, dealers are given right to distribute goods for a manufacturer. For this right,
the dealer pays a fee for the right to sale the trademarked goods of the producer.
Product distribution franchising involves a franchiser licensing a franchisee to sell
specific products under the franchiser’s brand name and trade mark through a
selective, limited distribution network.
Tradename franchising involves a brand name. The franchisee purchases
the right to use the franchiser’s trade name without distributing particular products
exclusively under the franchiser’s name. A product/trade mark franchise is one in
which the franchiser gives the franchise the right to buy its product and use its
name. In such kind of approach, a manufacturer works with several dealers and
distributors. The franchisee uses the brand name of the franchiser and sells the
franchiser’s products. The product is controlled by the franchiser. The franchisee
decides the way in which the product to be marketed and distributed at local level.
The franchiser earns money on the product sold by the franchisee.
Manufacturing franchising is an arrangement in which the franchiser gives the
dealer the exclusive right to produce and distribute the product in a particular area.
Business- format franchising (also known as pure franchising or
comprehensive franchising) is the recent type of franchising which is the most
popular one at present. It is an arrangement in which the franchiser offer wide
range of services to the franchise including marketing, advertising, training, strategic
planning, communication system and quality control guidelines. It provides the
franchisee with a complete business format including license for a tradename, the
products or services to be sold, the physical plant, the methods of operations, a
marketing plan, a quality control process, and the necessary business support
services. In this manner, the franchisee purchases the right to use all elements of
a fully integrated business operation. The business format franchise is a popular
approach to franchising. The franchiser provides the way of doing business, along
with training, advertising etc. it includes not only a product and trade name but
also operating procedure such as design facilities, accounting procedures and
practices, quality assurance standards, appearance of business.
Advantages of Franchising
Franchising arrangement is mutually beneficial for both the franchiser as
well as franchisee. Entrepreneurs adopt franchising as a growth strategy and it is
advantageous for both the franchiser entrepreneur as well as franchisee
entrepreneurs.
Check Your
Progress
9. Do you know the
meaning of franchis-
ing?
10. State the types of
franchising
11. What do you mean
by product franchis-
ing?
12. Write down the
meaning of business
format franchising.
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A franchisee gets an opportunity to own the business and expand the
market with low capital investment. Buying a franchise is safer and easier than
trying to launch a new business.There is lesschance of failure because of association
with an established product and brand name.Franchisees benefit from the
franchiser’s business experience, market standing as well as goodwill.
Franchising is less risky than building the business from the ground up.
The success in franchising depends on the franchisee’s managerial skill and
motivation and on the franchiser’s business experience and business model.
Franchiser offerstraining to franchisees before opening a new outlet. Many
franchisers provide follow-up training and counseling also. Training programs equip the
franchisees with day to day operations for running the business in a successful manner.
Franchisee gets protected or privileged rights to franchise within a given
area. Franchising facilitates the process of obtaining loans from banks and other
financial institutions on the basis of brand image, market reputation and goodwill
of the franchiser.
Franchisee benefits from the franchiser’s proficiency in research and
development.Franchisees provide a lot of input and ideas for improving the business
to the franchisers.
It is but natural and obvious that franchisees are highly motivated to run
the business efficiently and earn profit. This relieves the franchiser of strict control
and attention.
Franchisee may increase the franchiser’s purchasing power for inventory,
equipment, services and the like with the increased scale of operations over wide
geographical areas and extensive coverage by numerous outlets of different franchisees.
Franchisers get quick returns on their investment immediately in the form
of franchise fees and royalty.
Disadvantages of Franchising
Along with advantages,there are fewdisadvantages also associated with
a franchise arrangement.
Franchisee has to follow the business model very strictly. There no scope
for deviation for any reason. There is no scope for creativity. Importance is attached
torunning the outlet in a uniformand standardized manner. There are many
restrictions imposed on franchisee regarding holding of a product line, a particular
geographic location, standardized procedures, operations and the like.
There is a possibility of conflict between franchisee and franchiser. There
are a plethora of terms, conditions, dos, and don’ts mentioned in the agreements
and contracts of franchising arrangement which are expected to be honoured by
both the parties. However, there is a probability of confusion, misunderstanding,
and miscommunication when interpreting the agreement/contract. If there is
mishandling, then it may lead to a wrong direction.
Franchise royalty belongs to the enterprise. There is profit sharing between
franchiser and franchisee. Franchiser imposes some type of fees and demands a
share of franchisees’ sales revenue in return for the use of the franchiser’s name,
products/services, and business system.
Check Your
Progress
13. Explain the ben-
efits of a franchise
from a franchiser’s
perspective.
14. Explain the ben-
efits of a
franchisefrom a
franchisee’s perspec-
tive
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Franchiser generally requires franchisees to purchase products, equipment
etc. from the franchiser or from a list of approved suppliers by franchisers. There
is no freedom to franchisee for exercise of the choice.
There may be a stipulation in franchise agreement about sale of products
approved by franchisers only. In case of franchise selling any unapproved products
through the franchise, there is a risk of cancellation of their license .A franchise
may be required to carry an unpopular product or be prevented from carrying a
popular one by the franchise agreement.
The franchise contracts are always written in favor of the franchiser.
Franchiser may or may not be willing to negotiate the terms of their contract. By
signing a contract, a franchisee agrees to sale the franchiser’s product with a
strict uniformity and monitoring of franchisee’s performance to ensure that
franchisee follows system’s specifications.
If unfortunately, franchiser fails in the business due to any reason, there is
a possibility of consequent failure of the franchisee also.
Franchisee may buildup goodwill for his/her business by own efforts;
however, goodwill still remains property of the franchiser.
Franchisee may not be able to sell the business to the highest bidder or
hand it over to any eligible person in absence of the franchiser’s approval.
5.3 Ancillarization
When an enterprise’s scale of operations grows beyond a particular limit,
entrepreneurs are left with no choice but to sub-contract some parts, components,
some items of production to ancillaries. Large enterprises, especially public sector
undertakings sub-contract the standard and low technology items to small
enterprises. This arrangement helps develop a sound base for ancillarization and
support small enterprises.The concept of ancillary development is based on the
principles of division of labour, specialization and optimum utilization of resources.
Previously ancillary unit is used to be defined as an industrial unit which is
engaged in or is proposed to be engaged in the manufacture or production of parts,
components, sub-assemblies, tooling or intermediaries, or the rendering of services
and the undertaking supplies or renders or proposes to supply or render not less
than 50 per cent of its production or services, as the case may be, to one or more
other industrial takings and whose investment in fixed assets in plant and machinery
whether held on ownership terms or on lease or on hire purchase, does not exceed
Rs. 75 lakhs.
The above definition is obsolete. It has no relevance at present in the
business environment, but it is presented just as a basis for the sake of developing
clarity about the concept of ancillarization in your mind. However, in the Micro,
Small and Medium Enterprise (MSME) Development Act, 2006, there is no mention
of ancillary units. No definition of ancillary units is given anywhere in the Act. But
the concept of ancillarization is found in practice being adopted by large enterprises
and small enterprises as a mutually beneficial idea.
The size and scale of operations of large enterprises is increasing
enormously. They are compelled to sub-contract some of the items of production
to ancillary units. It is convenient for them to get some parts, components etc
Check Your
Progress
15. Explain the draw-
backs of buying a fran-
chise
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produced by the small enterprises. This enables them to concentrate on core areas
of their operations and relieve them from the routine, simple, also tedious tasks
such as management of labours, make them work, contacting suppliers, checking
availability of raw materials and so on for manufacture of tools, parts, components
etc. Small enterprises produce the parts, components etc in a cost effective manner
which may not be possible for large enterprises. Large enterprises can save on
transportation costs, storage costs etc. They are free from labour problems,
problems related with supply of raw materials, fluctuations in prices of raw materials,
transportation costs, labour costs etc to the extent of contract for the supply of
parts, components etc. to the ancillary units.
Ancillarization is a mutually beneficial commercial relationship. An
entrepreneur,i.e. a contractor, places an order with another enterprise i.e. sub-
contractor for the production of parts, components, sub-assemblies or assemblies
to be incorporated into a product sold by the entrepreneur. The orders comprise of
processing, transformation, finishing of materials, parts by the sub-contractor as
per the requirement of the contractor entrepreneur. Sometimes, sub-contracting is
associated with ‘job-work’ where parent enterprise supplies raw materials to small
enterprises, and small enterprises process on the materials on the basis of
specifications at a pre-determined rate. Large enterprise provide raw materials
and financial assistance, and marketing support and small enterprises supply
manufactured parts and components. The concept of ancillarization is based on
this type of mutual inter dependence. Large enterprises provide an assured market
for the products produced by small enterprises who work as ancillary units.
Ancillary development idea is beneficial for large as well as small enterprises
and also for the economy as well as the country. Ancillarization contributes to growth
of entrepreneurship. Large enterprises minimize investment since the required production
can be sourced at a lower rate through subcontracting from an ancillary unit. The large
enterprises minimize investment in inventory. Ancillary units are usually located near
the large enterprises. They work with the parent enterprises for product as well as
process development. Ancillary development increases employment opportunities. It
also increases productivity of small enterprises.
If large enterprise delays payments, then ancillary units face difficulties.
It is tough for them to take any legal action. With changes in technology,
modifications in specifications etc, ancillary units find it difficult to survive. With
proliferation of suppliers, ancillary units may not be able to utilize their capacity to
their fullest which may put them in losses.
Large enterprises work with ancillary units based on the model of
partnership and sub-contracting. This arrangement provides assured orders to
ancillariesalong with technology support, specialized manufacturing facilities, raw
materials, tooling and testing facilities, financial assistance etc. Large enterprises
sub-contract their components in a big proportion to ancillaries.
Vendor Development
As we have seen above in ancillarization, there is a need for small as well
as large enterprises to partner with each other for production proficiencies and
symbiotic benefits. Micro, Small and Medium Enterprises Development Institute
(MSME-DI) provides a common platform for MSMEs and large enterprises to
match the requirements through Vendor Development Programmes (VDPs). These
Exhibition-cum-Vendor Development Proogrammes aim at bringing this gap
between support systems and Government departments, public sector units (PSUs),
navy and other defense departments and large enterprises etc.
Check Your
Progress
16. What is meant by
ancillarization?
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According to MSME-DI, Mumbai, the objectives of National Vendor
Development Progrmmes (NVDPs) are:
• To publicize Public Procurement Policy
• To provide business opportunities to micro, small enterprises (MSEs) to
expand their market base in Government/Public Sector Undertakings
and large enterprises
• To bring MSEs & PSUs on common platform for business exchange
through Industrial exhibitions and events during the exhibition.
Every year MSME-DIs organizes VDPs at major industrial centres in the
state. Major public sector units in the state are invited to exhibit their requirements.
Representatives of the PSUs explain to the interested MSEs, their procedure of
procurement and the documentation involved. The standards and specification
are discussed in detail. At the same time, MSMEs also put up stalls to showcase
their capabilities. Such events in the past have resulted in many enduring vendor-
vendee relationships and have led to sustained partnerships.
Entrepreneurs have to go through all the phases of vendor development
process in a systematic manner. They should analyze their own requirements and
needs carefully and then start the search for a suitable vendor for particular
materials. Various sources of information include trade directories, trade journals
and magazines, telephone directories, salesmen, suppliers’ catalogues etc.
Information about the background, experience, expertise of vendors, financial
capacity, reputation, location conveniences etc has to be collected. Then the
shortlisted vendors should be assessed on the basis of vendors’ proposals and
negotiations regarding quality specifications, quantity discount, trade credit etc.
An effort is made to strike a right match between entrepreneur’s needs and
vendor’s needs and experience. In this manner, the vendor development process
comprises of market search, enquiry, negotiation, experience and evaluation.
5.4 Collaboration
The term collaboration is generally used to refer to two individuals who
work together for accomplishment of a common purpose. In business strategy,
collaboration has become an effective growth strategy. Globalization, increasing
focus on quality at lower prices, fierce cut throat competition etc. make it increasingly
difficult for entrepreneurs to grow independently. In the face of such challenges,
collaboration is a dynamic strategy which brings two or more enterprising individuals
together to sense and exploit numerous promising opportunities.
Resources by their very nature are limited. In the face of resource constraints,
collaborative partnering enables two or more entrepreneurs together to join their
hands, share the resources and exploit new opportunities, enter new markets,
showcase their wide experience, and versatile skills. At times, for entering in to the
local market, a strategic partnership can be entered into a local player. Partnering
with collaborative partners may be prove to be an easy and quick route to grow by
means of diversification. Collaborating partnering and planned alliances may prove
to be effective for encouraging research and development for sharing resources and
competencies and decreasing the costs. Strategic partnering in specialized areas of
marketing, research, distribution and the like would fetch competitive advantage for
the entrepreneurs. Whatever can be done individually, tremendous synergies would
Check Your
Progress
17. What do you know
about vendor develop-
ment?
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be observed with strategic partnering in a collective manner. In this manner,
collaboration is sought by the entrepreneurs to achieve business growth.
The growth journey through collaboration may come across various stakeholders
like competitors, enterprises with complimenting skills and supporting competencies,
vendors, suppliers, academic institutions, research institutions and the like.
Sometimes, there is a need to collaborate with competing organizations.
Sometimes an entrepreneur may not be able to fulfill the entire demand of the
market. Sometimes the scale of demand is beyond the capacity of the entrepreneur.
There may not be adequate time at the disposal of the entrepreneur to cater to the
need of the market at right time. The entrepreneur may not be eligible to pick up
an order in terms of investment required, past experience, capacity etc. In several
such situations, entrepreneurs have no choice but to enter into collaboration with
competitors which can be termed as co-opetition i.e. cooperation with the
competition. For the sake of getting a big project, several competitors come together,
form a consortium and bid for valued projects.
In the initial phase, the new entrepreneur may not be able to give justice
for the changing wants/preferences of the customers. In such cases, the
inexperienced entrepreneurs may enter into partnership with experienced
entrepreneurs who are proficient in some skills. Such entrepreneurs may partner
with resourceful entrepreneurs who possess distinctive competencies and learn
from them while ensuring their survival and sustenance.
An entrepreneur has to interact with many vendors for acquiring day to
day necessitiesand for smooth functioning of the enterprise. The transactions with
such vendors are guided by cost benefit analysis. If there is a gap, within no time
incompetent and inefficient vendors can be replaced. There is no specific
preference for a particular vendor.
An entrepreneur is dependent upon a few valuable suppliers. They are an
integral part of the value chain and the delivery process. They provide critical
inputs in the operational process. The relationship with the suppliers is governed
by not just cost but other considerations such as quality, expertise, delivery process,
time frame, sustainability etc. If one or few suppliers are discontinued due to any
reason even for a short while, it would affect the enterprise in an adverse manner.
There is a definite and distinctly identifiable role of innovation, invention
and consequently of research in the success and growth of every enterprise. In
the startup phase, a small entrepreneur may not be able to pay attention to innovation,
research and development. In absence of this, it would be difficult to enter into the
growth phase, typically in such situations entrepreneurs collaborate with academic
institutions, research centers and institutions.
There is a need to throw light on the terms vendors and suppliers in terms
of similarities and dissimilarities. Both a vendor and a supplier provide product/
service to entrepreneurs with an eye in profit. The general usage of the term does
not differentiate between these two terms. However, with reference to partnering
and collaboration it does. Let us discuss the differences.
In the words of Raj Shankar, a vendor is an agency with whom the enterprise
has a transactional relationship; and supplier is an agency who becomes a critical
part of enterprise’s delivery chain. Commercial value of the transaction drives the
relationship with vendor. The value delivered for money, aspects like quality, on time
delivery, specification,fulfillment drive the relationship with the supplier. There is
little differentiation between two vendors offering the same commodity or service.
Check Your
Progress
18. What is meant by
collaboration?
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It is crucial to choose the aligned supplier. Though cost is an important criterion for
consideration, it cannot be the only criterion for selection of supplier.
Vendor transacts mostly with a defined product/ service with very clear
specification. Mostly suppliers are expected to deliver expertise. Vendor is at the
bottom level of value chain of partnering whereas supplier occupies a higher value
position of partnering. With good collaboration, a key supplier can be developed
into a strategic partner.
Types of Collaboration
Collaboration can be categorized on the basis of need, value, benefits,
structure, and characteristics. Need-based collaboration, as the name implies, revolves
around an immediate requirement of the entrepreneurs. There may not be a motive
to develop long-term relationship. It is vendor based relationship, mainly of
transactional nature. This is an arrangement for the sake of commercial benefits by
enterprises with traders or non-core services. Value based collaboration is based on
a long-term survival and sustenance need of enterprises. It is driven by mutually
beneficial aspects of relationship. It can involve enterprises with complementary
and at times supplementary skills. Strategic collaboration is directed at future benefit
with a focus on mutual cooperation and collaborative leadership. It is a symbiotic
arrangement for the concerned enterprises based on individual capabilities. It is
sharing between large enterprises, government, research institutions or with academia.
Need based collaborations are of temporary nature. The concerned
enterprises are interested in cost benefit analysis and not in long-term benefits.
Value based collaborations look for quality, sustainability of the relationship. Strategic
collaboration are based on trust and confidence.
For a successful collaborative engagement, there is a need to pay attention to
relationship interface which comprises of trust, transparency, good governance, problem
solving, human dignity. Collaboration, to be sustainable, has to be based on rules,
regulations and a good legal framework so as to protect interests of the concerned
enterprises who have varied motives and goals. For getting success in collaboration,
the entrepreneurs need to communicate with their team members about the reasons
and motives of collaboration and the kind of benefits it would fetch for them. They
have to overcome the differences in their culture, style of work as well as knowledge.
Otherwise there are various challenges for effective collaboration such as cultural
differences, non-acceptance of risks, leadership issues etc. If such maters remain
unattended, then they would pose a threat to the continuity and success of collaboration.
5.5 Summary
Entrepreneurs use franchising as a strategy for achieving business growth.
Some entrepreneurs may not wish to take the risk of launching a new business
venture. Such franchising provides an established model of success and entrepreneurs
take this opportunity to grow and expand on the basis of this proven approach. For
running a successful franchise, there is a need of entrepreneurial mind who is ready
to take risk. Franchisers permit franchisees to run their brand within the framework
of rules and regulations. The franchisee operate the business within a defined
framework. Franchisee operates business with the assistance and support of the
franchiser. The franchiser develops product/service line, sets quality standards.
Franchising is a system of distribution in which franchisees who are like
semi-independent business owners pay fees and royalties to franchiser i.e. parent
Check Your
Progress
19. Are the terms ven-
dors and suppliers dif-
ferent from each
other?
Check Your
Progress
State whether true or
false:
20. Need-based
collaboration, as the
name implies, revolves
around an immediate
requirement of the
entrepreneurs
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company in return for the right to become identified with its trademark, to sell its
products/services, and to use its business format and system. Franchising is the
transfer of rights to sell a trademarked product/service through a system prescribed
by a franchiser who owns the trademark. Franchising is beneficial to franchiser
also who grows rapidly using franchisees’ money.
Franchising is advantageous to both franchiser as well as franchisee.
Franchiser gains market expansion with low cost capital investment. It is possible
to receive return on investment in the immediate future. Franchiser gets valuable
inputs and lot of ideas for improvement from franchisee. Franchiser is relieved of
work pressures of day to day operations. Franchisee is relieved of investments
needed for running franchise. Expertise and specialized knowledge is available
easily from franchiser. There is a continuous ongoing support of franchiser to
franchise which is a proven business model. This reduces risk for the franchisee.
Several disadvantages are experienced by both franchise and franchisee
regarding franchising arrangements. Franchisee has to deal with huge initial
investment and there is a risk of failure. Strict control is exercised by franchiser
over franchisee and operations of franchise. There is limited freedom and restricted
independence regarding decisions, actions and day to day activities. Franchiser
avails only a small share of profit with franchising arrangement. There cannot be
complete control over the franchisee by franchiser.
Ancillarization is a mutually beneficial commercial relationship. An
entrepreneur, i.e. a contractor, places an order with another enterprise i.e. sub-
contractor for the production of parts, components, sub-assemblies or assemblies
to be incorporated into a product sold by the entrepreneur. The orders comprise of
processing, transformation, finishing of materials, parts by the sub-contractor as
per the requirement of the contractor entrepreneur.
Ancillary development fulfills various objectives such as: growth of
entrepreneurship, development of employment opportunities, increase in productivity
of small enterprises, development of expertise or specialization in several fields,
bringing about economies of scale and reduced production costs etc.
The term collaboration is used to represent working together of two
enterprises to achieve a particular goal. It is accepted by entrepreneurs as a growth
strategy. Collaborations take place for diversification, for entering new markets,
for gaining competitive advantage etc.
Entrepreneurs may want to collaborate with competitors, vendors, suppliers,
academic institutes, research centres etc. collaboration with vendors is of transactional
nature and relationships with suppliers are based on quality, and sustainability.
There are three levels of collaboration – need based collaboration, value
based collaboration and strategic collaboration. Need based collaboration is
transactional in nature. Strategic collaboration seeks long-term future benefits.
5.6 Key Terms
• Royalty: A payment to an owner for the use of property, especially
patents, copyrighted works, franchises or natural resources by those
who make use of it for earning income. Mostly royalties are designed to
compensate the owner for the asset’s use and are legally binding
Strategies For Growth And
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• Tradename: A name under which a product/service is marketed or
under which a business operates; a name with status of a trademark
• Trademark: A name, symbol or other depiction identifying a product; a
recognizable sign, design, or expression which identifies products/services
of a particular source from those of others. A trademark may be located
on a package, a label, a voucher, or on the product itself
5.7 Questions and Exercises
Questions
1. Explain the benefits and drawbacks of buying a franchise.
2. The franchisor-franchisee relationship is a symbiotic one. Explain.
3. Explain the role of franchising in developing entrepreneurship with the
help of examples.
4. Define the concept of business franchise. Franchise is a smart
entrepreneur. Do you agree? Explain.
5. How would you evaluate a franchise option?
6. What a franchisee can expect from buying into a franchise?
7. What are the pitfalls of becoming a franchisee? What precautions you
recommend to a potential franchisee.
8. Explain the benefits and drawbacks of buying a franchise.
9. Describe the various types of franchising.
10. Discuss the right way to buy a franchise.
11. Discuss the significance of ancillarization in India.
12. What do you know about the term ‘vendor development’?
Exercise
Activity 5.1
Visit a local franchise service business and seek information about the
pros and cons of the franchising arrangement.
Multiple Choice Questions
1. An enterprise’s strategic collaboration are usually with
i. R&D institutes
ii. Vendors
iii. Suppliers
iv. Competitors
2. The relationship between a product manufacturer and its distributor falls
under
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i. Value based collaboration
ii. Need based collaboration
iii. Strategic collaboration
iv. None of the above
3. Pick the wrong one
i. As a franchiser, an entrepreneur creates a business concept and
its replica are sold to others
ii. As a franchisee, an entrepreneur buys a business which is a part of
a chain of similar business units
iii. i and ii are wrong
iv. i and ii and right
4. Franchising is a tool for ——
i. Growth
ii. Collaboration
iii. Networking
iv. Vendor identification
5. —— is to be paid by franchisee to start the business
i. Franchise fee
ii. Legal fee
iii. Capital investment
iv. None of the above
6. —— is one where franchiser gives franchisee the right to buy its products
and use its name
i. Business format franchise
ii. Product and tradename franchise
iii. Sub-franchise
iv. None of the above
7. Which of the following is not a misconception about franchising?
i. Franchising is a proven system
ii. Franchising is like an investment
iii. Franchising is a safe investment
iv. Franchising is a medium through which growth can be achieved
without making large investments in creating internal infrastructure
8. Pick up the right alternative
i. A strong industry ensures franchise success
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ii. Franchiser’s stake is very high so he/she would go all out to support
franchisee
iii. i and ii are not correct
iv. i and ii are true
9. Which of the following is a growth strategy?
i. Mergers & acquisitions
ii. Collaboration
iii. Diversification
iv. All the above
10. Which of the following is a level of collaboration?
i. Need based collaboration
ii. Value based collaboration
iii. Strategic collaboration
iv. All the above
11. Which one of the following is wrong?
i. Franchisees are semi-independent business owners
ii. Franchisees have freedom to change the way they run their business
iii. Franchising is a system of distribution in which franchisees pay
fees and royalties to a parent company i.e. the franchiser
iv. All the above i, ii, and iii are wrong
12. Which one of the following is wrong?
i. Individual franchise agreement involves the sale of a single franchise
for a specific location
ii. An area level franchise allows the franchisee to own and operate a
specific number of outlets in a particular geography
iii. Master franchise agreement involves the right to open and operate
number of stores or units to master franchise and also the right to
offer to sell the franchise to other people in the area
iv. None of the above
13. Which one of the following is true?
i. Entrepreneurs can achieve growth through franchising without
making big investments for creation of infrastructure.
ii. Franchising is a system for selective distribution of products/services
through the outlets owned by retailers or dealers
iii. Both i and ii are true
iv. Both i and ii are false
Strategies For Growth And
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Answers
Check Your Progress
1. Franchising
2. Franchiser, franchisee
3. True
4. False
5. True
6. True
7. True
20. True
Multiple Choice Questions
1. i
2. ii
3. iii
4. i
5. i
6. ii
7. iv
8. iii
9. iv
10. iv
11. ii
12. iv
13. iii
5.8 Further Reading
http://msmehyd.ap.nic.in/VendorDevelopment.htm
http://www.msmedimumbai.gov.in/html/nvdps.html
Khanka S.S., Entrepreneurial Development, S. Chand & Co., Ltd., New
Delhi, 2010
Shankar Raj, Entrepreneurship Theory and Practice, Vijay Nicole Imprints,
Chennai, 2012
Zimmerer Thomas W., Scarborough Noman M., Essentials of
Entrepreneurship and Small Business Management, PHI Learning Private Limited,
New Delhi 2011
Strategies For Growth And
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UNIT 6 : STRATEGIES FOR GROWTH
AND DEVELOPMENT –IV
Structure
6.0 Introduction
6.1 Unit Objectives
6.2 Acquisitions
6.3 Mergers
6.4 Joint ventures
6.5 Strategic alliances
6.6 Summary
6.7 Key Terms
6.8 Questions and Exercises
6.9 Further Reading
6.0 Introduction
“Businesses once grew by one of two ways: grass roots up, by
acquisitions…Today businesses grow through alliances – all kinds of
dangerous alliances. Joint ventures and customers partnering which, by the
way, very few people understand” –Peter F. Drucker
In this book, we are trying to explore numerous models which would help an
entrepreneur to look for and/or create opportunities for growth as well as expansion
of existing business. As we have seen in the previous unit 4, co-operative strategies
could be of various types such as mergers and acquisitions (or takeovers), joint
ventures and strategic alliances. The focus is on complementarities among the
interests of rival enterprises based on the view that competition could co-exist with
competition. This view is expressed by thinkers such as James Moore, Ray Noorda,
Barry J. Nalebuff and Adam M. Brandenburger. Co-opetition propagates the idea
of simultaneous competition and co-operation among rival firms for mutual benefit.
This unit continues with the theme of expansion strategies and discusses
various types of co-operative strategies such as mergers and acquisitions (or
takeovers), joint ventures and strategic alliances. Let us see how these strategies
can be pursued by an entrepreneur as a way to grow his/her business.
6.1 Unit Objectives
After going through this unit, you will be able to
• Appreciate various types of co-operative strategies for growth and
expansion
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• Explain the meaning of mergers and acquisitions along with various
strategic, financial, managerial and legal issues involved in mergers
• Be aware about the pros and cons of acquisition as a growth strategy
• Know the meaning of strategic alliances
• Be familiar with joint ventures
• Understand the role of joint ventures in bringing out growth of
entrepreneurial ventures and the challenges of developing and nurturing
a meaningful joint venture relationship
6.2 Acquisitions
An entrepreneur can expand his/her enterprise by acquiring an existing
business. It is an effective approach of expanding the business by entering new
markets or new product areas. An acquisition is purchase of another enterprise,
or part of an enterprise. The enterprise gets completely absorbed and that ends its
independent existence.
While planning for acquisition, from a strategic perspective, an entrepreneur
pays attention for successful integration of acquisition into the entrepreneur’s
venture. He/she strives for synergy in the exiting business with the acquired
business. Otherwise there is a probability of failure to achieve the planned objectives
of acquisition. The acquisition should strengthen the existing business. It has to
supplement the existing set up - may be in the form of a distribution outlet, production
set up, sales efforts and the like. Anyhow, strategic entrepreneurship fits the
acquisition into the overall framework and structure of the present business and
moves the enterprise in the right direction.
There are many advantages in acquiring an existing business. The cost of
acquisition is less than the costs involved with other strategies of expansion. The
acquired enterprise has its own customers, wholesalers, retailers, suppliers, the
entire distribution, sales and marketing structure. Existing employees of the acquired
business would be a great help to the entrepreneur. They are familiar with the
business and are well versed with various stakeholders such as customers, suppliers,
vendors, dealers, distributors and the like. Their association with the business and
experience in running the business would be an assurance to the entrepreneur
about smooth conduct of the business. He/she need not spend time in searching
for new suppliers, trade channels, recruiting new employees, training them and so
on. If the acquired business has been profitable, has an established image and
goodwill, then the entrepreneur would be more successful by continuing with the
existing strategy in the existing customers and markets. He/she can thus focus on
improving and expanding the acquired business.
Along with various benefits, there are several inconveniences and difficulties
associated with acquisition of an existing business. There is a possibility of
overvaluation of the business may be because of its image, customer base etc. In
that case, the return on investment may not be satisfactory. The entrepreneur has
to take a prudent decision regarding the investment required in acquiring a business
in terms of income generation ability, expected profit and future prospects. The
buyer entrepreneur has to carefully review the track record of the business which
is being planned for acquisition. Many of the times such ventures for sale has an
irregular, inconsistent record. Sometimes the buyer entrepreneur may be
Strategies For Growth And
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overconfident about the success in acquisition. There may be a mismatch between
existing venture(s) and to be acquired venture. The possibility of overcoming such
gap has to be tapped in advance. Often key employees leave when the business is
being acquired and this may be harmful for the future in terms of its sustainability.
The buyer entrepreneur has to look into this matter and devise a plan to retain the
talent with the acquired business and infusion of new blood, if required, with a
judicious mix.
There are professional business brokers, like real estate brokers, who can
help buyer entrepreneurs in locating good business ventures through referrals,
advertising or direct sales. They get commission on sale. The other sources of
assistance constitute consultants, accountants, bankers, business associates. Such
type of professionals are familiar with the business environment. They can help in
negotiations. The other important sources of information include the classified
sections of newspaper advertisements, trade magazines.
The buyer entrepreneurs seek information about promising business
opportunities, analyze the information carefully, consult with professionals, and
advisors, find out the suitability of businesses to his/her own situation and then
take the decision about acquisition.
Leveraged Buyouts
In the words of Robert D. Hisrich, Michael P. Peters, Dean A. Shepherd,
a leveraged buyout (LBO) occurs when an entrepreneur (or any employee group)
uses borrowed funds to purchase an existing venture for cash. Most LBOs occur
because the buyer entrepreneur considers that he/she could run the enterprise
more efficiently than the existing owners. The present owner may be an
entrepreneur who wants to retire. The present owner may be a large enterprise
interested in divesting itself of a subsidiary that is too small or that does not fit its
long-term strategic plans.
The buyer entrepreneur needs a large amount of money. The personal
financial resources for acquisition of the enterprise are typically inadequate. The
issuance of additional equity as a means of funding is usually not possible. The
capital is acquired in the form of long-term debt financing and the assets of the
enterprise being acquired serve as collateral. banks, venture capitalists, and
insurance companies provide the debt needed in LBOs.
In most LBOs, the debt capital usually exceeds the equity by a ratio of 5
to 1 with some ratios as high as 10 to 1. This is typically more debt relative to
equity than in a typical capital structure. This involves more financial risk. Success
in LBO depends upon the ability of the entrepreneur to increase sales and profits
so as to cover the principal and interest payments.
6.3 Mergers
Merger is another strategy of expansion. It is joining of two or more
enterprises in which only one enterprise survives. Merger means combination of
two or more existing enterprises into one. It may take place in two ways: an
enterprise or enterprises may be acquired by another, usually a big enterprise it is
called ‘absorption’; or two or more existing enterprises merge into one to form a
new enterprise, it is called amalgamation. In absorption, no new enterprise is formed
whereas, in case of amalgamation, a new enterprise is formed.
Check Your
Progress
1. What is meant by
acquisition?
2. State the advan-
tages of acquisition.
3. Write down the dis-
advantages associated
with acquisition.
4. What are the
sources of information
for locating acquisition
candidates?
State whether follow-
ing is true or false:
5. The cost of acquisi-
tion is less than the
costs involved with
other strategies of ex-
pansion
Check Your
Progress
6. What do you know
about ‘leveraged
buyout’?
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Mergers may lead to monopoly in some cases which is not desirable.
Mergers and acquisitions (or takeovers) strategies can be considered as the external
approach to expansion in which basically two or occasionally more than two parties
are involved in assisting the entrepreneur to grow his/her enterprise. These three
terms- mergers, acquisitions, takeovers – are used as if they are synonymous and
are not different from each other. However, minor differences are technically
seen in the usage of the terms. In case of mergers, the objectives of the buyer
enterprise and the seller enterprise are similar to a noticeable extent. On the other
hand, acquisitions or take overs usually take place on the basis of strong impetus
of the buyer enterprise to acquire another enterprise for growth and expansion. In
literature of strategic management, it is found that mergers and acquisitions are
covered side by side and are commonly referred as M & A as the combined
acronym. They are so similar with each other.
Takeover is a common way for acquisition. A. A. Thompson and A. J.
Strickland define takeover as ‘the attempt (often sprung as a surprise) of one firm
to acquire ownership or control over another firm against the wishes of the latter’s
management (and perhaps some of its stockholders)’. However, many turnovers
in practice, may not have an element of surprise and may not necessarily be
against the wishes of the acquired firm. Actually takeovers are frequently classified
as hostile turnovers and friendly turnovers. Hostile turnovers take place against
the wishes of the acquired firm whereas friendly takeovers take place by mutual
consent, in which case they could also be described as a merger.
A merger is a combination (also known as amalgamation, consolidation or
integration) of two or more enterprises in which one acquires the assets and
liabilities of the other in exchange for share or costs or both the enterprises are
dissolved and assets and liabilities are combined and new stock is issued. For the
enterprise which acquires another, it is acquisition. For the enterprise which is
acquired, it is a merger. If both the enterprises dissolve the identities to create a
new enterprise, it is consolidation.
Mergers and acquisitions are of different types and can be classified as
follows:
1. Horizontal mergers take place when there is a combination of two or
more enterprises in the same business or of enterprises engaged in certain
aspects of production or marketing processes.
2. Vertical mergers take place when there is a combination of two or more
enterprises, not necessarily in the same business, which create
complementarities either in terms of supply of materials (inputs) or
marketing of goods/ services (output).
3. Concentric mergers take place when there is a combination of two or
more enterprises related to each other either in terms of customer
functions, customer groups, or alternative technology used.
4. Conglomerate mergers takes place when there is a combination of two
or more mergers unrelated to each other, either in terms of customer
functions, customer groups or alternative technologies used.
Mergers carried out in reverse are known as demergers or spin-offs.
According to N. Venkiteswaran, demerger involves spinning of an unrelated
business/division in a diversified company into a standalone company, along with a
free distribution of its shares to the existing shareholders of the original company.
Check Your
Progress
7. What is a merger?
8. Are the terms
merger, acquisition,
takeover synonymous?
9. How mergers are
different from acquisi-
tions?
10. State the meaning
of amalgamation.
11. Enlist the types of
mergers.
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Merger takes place with two enterprises- the buyer enterprise and the
seller enterprise. The buyer and the seller enterprise have different motives for
entering into mergers. Glueck and Jauch identified the reasons for mergers and
acquisitions as follows:
Why the buyer wishes to merge:
• To increase the value of the organization’s stock
• To increase the growth rate and make a good investment
• To improve the stability of its earnings and sales
• To balance, compete or diversify its product line
• To reduce competition
• To acquire a needed resource quickly
• To avail tax concessions and benefits
• To achieve advantage of synergy
Why the seller wishes to merge:
• To increase the value of the owner’s stock and investment
• To increase the growth rate
• To acquire resources
• To stabilize operations
• To benefit from tax legislation
• To deal with top management succession problems
While dealing with merges and acquisitions a number of issues need to be
tackled. These issues are related with specialized areas like accounting, finance,
legal matters, negotiations and the like. Actually mergers and acquisitions are
handled by consultancy and legal firms. Azhar Kazmi discusses some strategic,
financial, managerial and legal issues involved in mergers as follows:
Strategic issues: Strategic issues deal with strategic interests between
buyer and seller enterprises. What matters is the extent to which a merger will
achieve positive synergistic results. To achieve this, the strategic advantages and
distinctive competencies of the merging firms have to be analyzed. Further, there
has to be a match between the objectives of the firms. A careful attention of all
these strategic aspects would lead to a successful merger which would accomplish
its goals in a gainful manner.
Financial issues: There are three financial issues- the valuation of the
business and shares of the target firms, sources of financing for mergers and
taxation matters after merger. The valuation of the business of the target firm is a
detailed and comprehensive process. We should take into consideration various
factors such as tangible and intangible assets, the industry profile of the firm and
its prospects and the future earnings and the prospects of the target firm. The
valuation of the shares in a merger has to consider the factors like stock exchange,
price of the shares of the target firm, dividends paid, growth prospects of the firm,
value of assets, quality and integrity of top management, industry and competitive
Strategies For Growth And
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conditions, opportunity cost assessment by computing yields on comparable
investments and market sentiments.
The second financial issue is of sources of financing for acquiring firms.
There are several sources of funds such as acquiring company’s own funds or
borrowed funds, raised through the issue of debentures, bonds, deposits, external
commercial borrowings, global depository receipts, loans from central or state
financial institutions or rehabilitation finance provided to seek industrial companies.
The third issue is of taxation matters that are dealt with under relevant
provisions of the income tax act of 1961 and which are related to various technical
aspects such as the carrying forward or set-off of losses and unabsorbed
depreciation, capital gains tax and amortization of expenses.
Managerial issues: Managerial issues are the problems that arise in
managing firms in the post-merger phase. The perception of post-merger
management is an important aspect which has an impact on the process of merger.
Post-merger phase is characterized by changes in staff, specially chief executives
and top managers. If mangers are reassured that there would be no threat to their
status and their position or that professional management would be adopted then
the process of merger may take place smoothly. If managers perceive the merger
as threatening, then they oppose the process which would hamper it severely.
Several times the mergers don’t go as planned if managers perceive uncertainty
in the post-merger phase; managers get worried about their jobs, their salaries,
promotions, their income, status, positions. If the post-merger phase seems
threatening to them, there would be low morale and low productivity of the workers.
They would strongly resist such changes as a result of mergers and react to the
process of merger severely.
Legal issues: Legal issues in mergers deal with legal provisions regarding
mergers. In our country, the provisions relating to mergers and amalgamations
etc. are contained in the Companies Act 1956 and the Companies (Court) rules,
1959. The strategies of mergers and takeovers can be implemented in a smooth
manner only after proper study of the related provisions in the Act. The term
merger is not used in the Companies Act, instead the term amalgamation is used.
Along with the Companies Act, the Income Tax Act also is relevant for taxation
purposes for amalgamation purposes and provides for carrying forward of
accumulated losses and unabsorbed depreciation of the amalgamating company.
Prasanna Chandra recommended a six step procedure for an acquisition
as follows:
1. Spell out the objective
2. Indicate how the objective would be achieved
3. Assess managerial quality
4. Check the compatibility of business styles
5. Anticipate and solve problems early
6. Treat people with dignity and concern
N. Maluste discusses the reality about mergers and acquisitions in actual
practice. In the first step, the motivation for the takeover is defined, albeit informally.
There are many reasons for takeover such as quick growth, diversification,
establishing oneself as an industrialist, reducing competition, increasing the market
Strategies For Growth And
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share or even creating goodwill (if sick units are taken over for rehabilitation).
Along with these rational reasons, there might be other purely irrational reasons
such as greed or lust for becoming rich, to accumulate wealth, to build an industrial
empire or to humble competitors and business opponents. The second step in a
takeover is to arrange for financing. There are different modes for financing of
mergers and acquisitions. Also, there are leveraged buyouts (LBOs) or bootstrap
acquisitions which involve raising of funds by pledging the assets of the firm to be
taken over. After making an arrangement for money, the next step is taken by a
trusted intermediary who may be an accountant, a lawyer, a businessman, or
development and merchant banker. Then the process of negotiation is carried on
which focuses on factors like valuation of assets, business goodwill, market
opportunities, growth potential etc. and price to be paid for shares transfer is
fixed. In this manner, friendly takeovers take place. Hostile takeovers take place
in a different manner. The shares are picked up from the open market and
controlling interest is obtained. Then with the help of other majority shareholders,
usually one or more of the financial institutions, a bid is made to enter the company’s
board and to acquire control. There is a resistance from the existing management.
The existing management refuses to register the transfer of shares. It may forestall
the moves by deals through court orders and injunctions. There is a noteworthy
role of political support in the success achieved in a bid to takeover a firm.
Why should an entrepreneur merge? There are many defensive and
offensive strategies for a merger devised by F. T. Haner. Merger motivations
range from survival to protection to diversification to growth. Survival requirements
such as capital structure deterioration, technological obsolescence, loss of raw
materials, and market loss to superior products may motivate entrepreneurs for
mergers. The merger may protect against market infringement, lower cost position
of a competitor, product innovations by others, an unwanted takeover. A merger
can support diversification such as countercyclical, counter seasonal, international
operations and multiple strategic plans. A merger may be sought for the sake of
gains in market position, technological edge, financial strength, managerial talent.
Merger offers easy growth opportunities. Entrepreneurs increase their
sales revenue and enlarge their product and brand portfolios with mergers. It
mobilizes resources and facilitates utilization of resources. Mergers provide a
chance to sick enterprises to survive and provide alternatives for selective
divestment. Sick enterprises are rehabilitated by merging into healthy and strong
enterprises. It enables diversification by venturing into new businesses and markets.
It increases market share and decrease competition by consolidation of rival
companies. Mergers ensure management accountability.
There is a negative side also attached with mergers and acquisitions. It is
argued that takeovers do not create any real assets for society and that they are
harmful to the economy. Professionalism gets replaced by money power. The interests
of the minority shareholders are not protected and stresses and strains are created
in the companies taken over or exposed to the threat of takeovers. Takeovers reduce
competition and consequently facilitate monopolistic or oligopolistic tendencies among
the firms. Prices are increased. Employees loss their jobs. Further, there is a probability
of cultural mismatch and resultant strain among the merging firms. Also, hidden
liabilities of the target firms may give rise to some difficulties.
Merger requires meticulous planning for being successful.
Check Your
Progress
12. State merger mo-
tivations.
Fill in the blanks with
appropriate words:
13. In — no new en-
terprise is formed
whereas, in case of —
a new enterprise is
formed
State whether true or
false:
14. In case of merg-
ers, the objectives of
the buyer enterprise
and the seller enter-
prise are similar to a
noticeable extent
15. Acquisitions or
takeovers usually take
place on the basis of
strong impetus of the
buyer enterprise to
acquire another enter-
prise for growth and
expansion
16. Usually, mergers
are classified as —
17. —— means com-
bination of two or more
existing enterprises.
18. Why do buyer
firms wish to merge?
19. Why do seller
firms wish to merge?
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6.4 Joint Ventures
Joint venture is a temporary partnership between two or more enterprises
to undertake a venture jointly. The parties who enter into agreement are called co-
ventures. After completion of the joint venture, the agreement comes to an end.
Profit or loss is shared between the co-ventures in their agreed ratio. In the absence
of such agreement, profit or loss is shared equally.
M .A. Hitt, R. D. Ireland and R. E. Hoskisson say, joint venture occur
when an independent firm is created at least by two other firms. In this globalized
era, for enterprises which aspire for expansion opportunities, joint ventures offer
an appropriate strategic alternative.
Joint venture increases competitive strength of the business. It enables latest
technology, up-to-date knowledge which is not available in the enterprises. The risk is
reduced. Joint ventures increase sales and reduces production and marketing costs.
If there is no proper understanding between the co-ventures, the business
would suffer and the expected benefits would not be seen. There is a possibility
of conflict between co-ventures.
In the words of Azhar Kazmi, a joint venture could be considered as an
entity resulting from a long term contractual agreement between two or more
parties to undertake mutually beneficial economic activities, exercise joint control
and contribute equity and share in the profits or losses of entity. Reserve Bank of
India defines joint venture as: ‘A foreign concern formed, registered or incorporated
in accordance with the laws and regulations of the host country in which the
Indian party makes a direct investment, whether such investment amounts to a
majority or a minority shareholding’.
According to Thompson and Strickland, joint ventures may be useful to
gain access to new business, mainly under four conditions:
1. When an activity is uneconomical for an organization to do alone.
2. When the risk of business has to be shared and, therefore, is reduced for
the participating firms.
3. When the distinctive competency of two or more organizations can be
brought together.
4. When setting up an organization requires surmounting hurdles such as
import quotas, tariffs, nationalistic-political interests and cultural road
blocks.
In this manner, joint ventures are an effective strategy when development
costs have to be shared, risk spread out and expertise combined to make effective
use of resources.
K. Gopalan identified five triggers for a joint ventures: technology,
geography, regulation, sharing of risk and capital, intellectual exchange. Indian
enterprise is well-acquainted with local market. The foreign partner in the joint
venture is expected to introduce high class technology. A foreign player may have
a presence in many global markets. For Indian partner, it is a good opportunity to
participate in a good venture. With opening up of a highly regulated market sector,
tremendous opportunities are seen to attract a flow of foreign players.
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Joint ventures take place within industries, across industries and across
countries. They are more meaningful and effective for entering international
markets. Indian enterprises enter foreign market in a joint venture with a foreign
enterprise. Also, a foreign enterprise enters into a joint venture with an Indian
enterprise. Various types of joint ventures from the point of view of Indian enterprises
are listed below by Azhar Kazmi as:
1. Between two Indian enterprises in one industry
2. Between two Indian enterprises across different countries
3. Between an Indian enterprise and a foreign enterprise in India
4. Between an Indian enterprise and a foreign enterprise in the foreign
country
5. Between an Indian enterprise and a foreign enterprise in a third country
There are various advantages of joint ventures. Joint ventures may
eliminate, control or reduce competition. They increase market share in an effective
manner. When a joint venture takes place across different countries, the
participating firms may follow diversification strategy. With technology as an
important parameter of strategy, joint venture with foreign companies can be
feasible. Sometimes while adopting external expansion, there are constraints from
the legal and regulatory environment. In such kind of difficulties the appropriate
option is in the form of a joint venture strategy with a foreign enterprise in that
foreign country or in a third country. In case of environmental threats within the
country or promising opportunities abroad, enterprises undertake joint venture as
a suitable solution. Joint ventures are seen as a viable strategic alternative regarding
external expansion strategy. For joint ventures, strategic advantage is an appropriate
basis at the time of launching, the joint venture and also for its sustained existence.
Now a days, Indian companies are increasingly adopting joint ventures abroad.
Azhar Kazmi lists various advantages of joint ventures as:
• Minimizing risk
• Reducing investment of individual enterprises
• Getting access to foreign technology
• Broad based equity participation access to governmental and political
support and
• Entering new fields of business and synergistic advantage.
Azhar Kazmi lists the various disadvantages that may arise in joint venture
as:
• Problems in equity participation
• Foreign exchange regulations
• Lack of proper co-ordination among participating firms
• Cultural and behavioral differences and the possibility of conflicts among
the partners.
It is found that many of the joint ventures are not functioning properly as
per the expectations. K. Gopalan analyzed the reasons for failures of joint ventures
and presented some meaningful conclusions which are noted below:
Strategies For Growth And
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• Change of strategy: Interest of a foreign partner in the local market may
get changed. The enterprise may realize that the market was not strategic.
• Regulatory changes: This factor is uncontrollable by the partners. There
is a change in the limit on FDI - either it has been increased or it has
been reduced. It has not been increased in time or if it has been reduced.
• Success of joint venture: The joint venture functions well. One of the
partners wishes to increase its holdings which is not acceptable to the
other partner.
• Having partners hampers growth. Sometimes having a partner hampers
growth prospects. Both the partners felt that they could have done better
on their own.
• Lack of transparency. If the information is not disclosed, it may create
mistrust among partners which may lead to serious consequences.
Joint venture is a risky strategy. It would be effective if the partners share
strategic interests with each other and work diligently and pay attention to all the
aspects of partnership carefully.
6.5 Strategic Alliances
In the words of M .A. Hitt, R. D. Ireland and R. E. Hoskisson, strategic alliances
are partnerships between firms whereby their resources, capabilities and core
competencies are combined to pursue mutual interest to develop, manufacture or distribute
goods/services. Like joint venture, strategic alliances are increasingly adopted by
entrepreneurs who aspire for co-operation among national as well as international partners.
Yoshino and Rangan define strategic alliances in terms of three necessary
and sufficient characteristics:
• Two or more firms unite to pursue a set of agreed upon goals, but remain
independent subsequent to the formation of the alliance;
• The partner firms share the benefits of the alliance and control over the
performance of assigned tasks - perhaps the most distinctive
characteristics of alliances and the one that makes them so difficult to
manage; and
• The partner firms contribute on a continuing basis, in one or more key
strategic areas.
Lando Zeppei defines strategic alliance as a co-operative arrangement
between two or more companies where:
• A common strategy is developed in unison and a win-win attitude is
adopted by all parties
• The relationship is reciprocal, with each partner prepared to share specific
strengths with each other, the spending power to the enterprise
• A pooling of resources, investment and risks occurs for mutual rather
than individual gain
Check Your
Progress
20. Match the pairs:
i. Joint venture
a. People who sell
companies
ii. Acquisition
b. Purchasing all or
part of an enterprise
iii. Brokers
c. Two or more com-
panies forming a new
company
21. What is the mean-
ing of a joint venture?
22. State the advan-
tages of joint ventures
23. What are the limi-
tations of joint ven-
tures?
Strategies For Growth And
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In the words of Mehta and Samanta, strategic alliances are ‘co-operation
between two or more independent firms involving shared control and continuing
contributions by all partners for mutual benefit’.
According to Wakeam, strategic alliances by definition cannot be tactical.
In order to be strategic, an alliance must satisfy one of these criteria:
• It must be critical to the success of a core business goal or objective
• It must be critical to the development or maintenance of a core
competency or other source of competitive advantage
• It must enable blocking of a competitive threat
• It must create or maintain strategic choices for the firm
• It must mitigate a significant risk to the business
Enterprises adopt strategic alliances to enhance their organizational
capabilities and thereby gain competitive or strategic advantage. They continually
endeavor to get a hold of new markets and new sources of supply. They use latest
technology and ensure optimum utilization of resources. When entrepreneurs realize
that it is not feasible to create resources internally or to acquire them; for creating
a network of beneficial relationships they enter in to strategic alliances.
According to Walters Peters and Dess, strategic alliances are adopted for
reasons like entering new markets, reducing manufacturing cost and developing
and diffusing technology. An enterprise with a successful product/service strives
for new markets. It is not very easy to explore foreign markets; however, the best
option is partnership with a local enterprise. By means of strategic alliances with
suppliers and buyers, it is possible to reduce manufacturing cost, via economies of
scale and better utilization of resources. With strategic alliances, technological
capability is developed by leveraging technical expertise of two or more enterprises.
Yoshino and Rangan classify strategic alliances on the basis of two
dimensions of extent of organizational interactions and conflict potential between
alliance partners. The four types of strategic alliances are:
• Pro-competitive alliances (low interaction/low conflict): These are
generally inter industry, vertical, value chain relationships between
manufacturers and their suppliers or distributors. Supplier and buyer firms
entering upon long term contacts constitute pro- competitive alliance
• Non-competitive alliances (high interaction/low conflict): These are intra
industry partnerships between non-competitive firms. Such alliances can
be entered upon by enterprises that operate in the same industry, yet
don’t perceive each other as rivals.
• Competitive alliance (high interaction/ high conflict): These are
partnerships between two rival enterprises, from the same or different
industries, in a co-operative arrangement where intense interaction is
necessary
• Pre-competitive alliance (low interaction/high conflict): These are
partnerships between two different. These are partnerships between
two different enterprises from unrelated industries to work on well-defined
activities. To work on activities such as new product development, new
technology development, joint research and development, activities, mass
awareness campaigns etc.
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Strategic alliance is a difficult co-operative strategy to manage. Walter,
Peters and Dess devised four principles to manage alliances successfully:
1. Clearly define a strategy and assign responsibilities
2. Phase in the relationship between the partners
3. Blend the cultures of the partners
4. Provide for an exit strategy
There are several difficulties in strategic alliances such as lack of trust
and commitment, perceived misunderstandings among partners, conflicting goals
and interests, inadequate preparation for entering into partnership, hasty
implementation of plans and focusing on controlling the relationship rather than on
managing it for mutual benefit. Because of such kind of pitfalls, most of the strategic
alliances don’t achieve the desired results. Also the other dangers of strategic
alliances may be dynamic external conditions. For successful adoption of strategic
alliances, there is a need of leadership and human relation skills of entrepreneurs.
6.6 Summary
This unit continues with the theme of expansion strategies and discusses
various types of co-operative strategies such as mergers and acquisitions (or
takeovers), joint ventures and strategic alliances.
An entrepreneur can expand his/her enterprise by acquiring an existing
business. It is an effective approach of expanding the business by entering new
markets or new product areas. An acquisition is purchase of another enterprise,
or part of an enterprise.
Merger is another strategy of expansion. It is joining of two or more
enterprises in which only one enterprise survives. Merger means combination of
two or more existing enterprises into one. It may take place in two ways: an
enterprise or enterprises may be acquired by another, usually a big enterprise it is
called ‘absorption’; or two or more existing enterprises merge into one to form a
new enterprise, it is called amalgamation. In absorption, no new enterprise is formed
whereas, in case of amalgamation, a new enterprise is formed.
A merger is a combination (also known as amalgamation, consolidation or
integration) of two or more enterprises in which one acquires the assets and
liabilities of the other in exchange for share or costs or both the enterprises are
dissolved and assets and liabilities are combined and new stock is issued. For the
enterprise which acquires another, it is acquisition. For the enterprise which is
acquired, it is a merger. If both the enterprises dissolve the identities to create a
new enterprise, it is consolidation.
Merger takes place with two enterprises- the buyer enterprise and the
seller enterprise. The buyer and the seller enterprise have different motives for
entering into mergers.
Usually, mergers are classified as: horizontal merger, vertical merger,
concentric merger and conglomerate merger.
Mergers carried out in reverse are known as demergers or spin-offs.
Demerger involves spinning of an unrelated business/division in a diversified
Check Your
Progress
24. Why are strategic
alliances ‘strategic’?
25. What are the rea-
sons for using strate-
gic alliances?
Strategies For Growth And
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NOTES
Business
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company into a standalone company, along with a free distribution of its shares to
the existing shareholders of the original company.
Joint venture is a temporary partnership between two or more enterprises
to undertake a venture jointly. The parties who enter into agreement are called co-
ventures. After completion of the joint venture, the agreement comes to an end.
Profit or loss is shared between the co-ventures in their agreed ratio. In the absence
of such agreement, profit or loss is shared equally.
Joint ventures take place within industries, across industries and across
countries. They are more meaningful and effective for entering international markets.
Indian enterprises enter foreign market in a joint venture with a foreign enterprise.
Also, a foreign enterprise enters into a joint venture with an Indian enterprise.
Joint venture is a risky strategy. It would be effective if the partners share
strategic interests with each other and work diligently and pay attention to all the
aspects of partnership carefully.
Strategic alliances are partnerships between firms whereby their resources,
capabilities and core competencies are combined to pursue mutual interest to
develop, manufacture or distribute goods/ services. Like joint venture, strategic
alliances are increasingly adopted by entrepreneurs who aspire for co-operation
among national as well as international partners.
Enterprises adopt strategic alliances to enhance their organizational
capabilities and thereby gain competitive or strategic advantage. They continually
endeavor to get a hold of new markets and new sources of supply. They use latest
technology and ensure optimum utilization of resources. When entrepreneurs realize
that it is not feasible to create resources internally or to acquire them; for creating
a network of beneficial relationships they enter into strategic alliances. For
successful adoption of strategic alliances, there is a need of leadership and human
relation skills of entrepreneurs.
6.7 Key Term
• Leverage: To use something that you already have in order to achieve
something new or better; to use borrowed money to buy an investment
or company; the ability to influence a system, or an environment in a
way that multiplies the outcome of one’s efforts without a corresponding
increase in the consumption of resources
6.8 Questions and Exercises
Questions
1. How do friendly takeovers take place? Hostile takeovers?
2. Under what conditions are joint ventures created?
3. Discuss the different types of mergers and acquisition strategies.
4. Discuss the four types of strategic alliances.
5. Write in detail about digitalization strategies.
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6. Discuss the strategic, financial, managerial and legal issues involved in mergers.
7. How can entrepreneurs manage strategic alliances successfully? What
are the pitfalls in strategic alliances? How the pitfalls can be avoided?
Multiple Choice Questions
1. Joint ventures include sharing of
i. Revenue
ii. Assets
iii. Expenses
iv. All the above
2. Joint ventures take place
i. Within industries
ii. Across industries
iii. Both i and ii
iv. None of the above
3. Which one of the following is not a reason for failure of joint ventures?
i. Change of strategy
ii. Regulatory changes
iii. Success of joint venture
iv. None of the above
4. Joint venture would be effective if the partners ————
i. Share strategic interests with each other
ii. Work diligently
iii. Pay attention to all aspects of partnership
iv. All i, ii, iii
5. Joint ventures are an effective strategy when ——
i. Development costs have to be shared
ii. Risk spread out
iii. Expertise combined to make effective use of resources
iv. i, ii, and iii
6. Which one is wrong?
i. Joint venture is a temporary partnership between two or more
enterprises to undertake a venture jointly
ii. Profit or loss is shared between the co-ventures in their agreed
ratio
Strategies For Growth And
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NOTES
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iii. i, ii are wrong
iv. i, ii are right
7. ———— is characterized by high interaction, high conflict
i. Competitive alliance
ii. Non-competitive alliances
iii. Pre-competitive alliance
iv. Pro-competitive alliances
8. ———— is purchase of another enterprise, or part of an enterprise
i. Acquisition
ii. Joint venture
iii. Strategic alliance
iv. Collaboration
9. Which one is wrong?
i. In case of mergers, the objectives of the buyer enterprise and the
seller enterprise are similar to a noticeable extent
ii. Acquisitions or takeovers usually take place on the basis of strong
impetus of the buyer enterprise to acquire another enterprise for
growth and expansion
iii. Both i, ii are wrong
iv. Both I, ii are right
10. Pick the odd one out
i. Merger facilitates utilization of resources
ii. Mergers may lead to monopoly in some cases
iii. Sick enterprises are rehabilitated by merging into healthy and strong
enterprises
iv. Merger enables diversification.
11. Joint venture is ———
i. Two or more companies forming a new company
ii. Purchasing all or part of a company
iii. Purchasing an existing venture by any employee group
iv. None of the above
12. Which one of the following is true?
i. Merger means combination of two or more existing enterprises
into one
ii. In absorption, no new enterprise is formed
Strategies For Growth And
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iii. In case of amalgamation, a new enterprise is formed
iv. i, ii, iii are true
13. Which of the following is associated with acquisition?
i. An effective approach to expand business by entering new markets
or new product areas
ii. Purchase of another enterprise or part of an enterprise
iii. Purchased enterprise gets completely absorbed and that ends its
independent existence
iv. All the above
14. Which of the following is associated with mergers?
i. It is another strategy of expansion
ii. It is joining of two or more enterprises in which only one enterprise
survives
iii. An enterprise or enterprises may be acquired by another
iv. All the above
15. Which of the following is true regarding mergers?
i. An enterprise or enterprises may be acquired by another, usually a
big enterprise
ii. Two or more existing enterprises merge into one to form a new
enterprise
iii. Both i and ii are true
iv. Both i and ii are false
16. Two or more existing enterprises merge into one to form a new
enterprise. It is called ——
i. Amalgamation
ii. Absorption
iii. Acquisition
iv. All the above
17. Which one is true?
i. Takeover is a common way for acquisition
ii. Many takeovers, in practice, may not have an element of surprise
and may not necessarily be against the wishes of the acquired firm
iii. Friendly takeovers take place by mutual consent, in which case
they could also be described as a merger
iv. All the above
18. Which one of the following is true?
Strategies For Growth And
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i. Hostile takeovers take place against the wishes of the acquired
firm
ii. Friendly takeovers take place by mutual consent
iii. Both i and ii are true
iv. Both i and ii are false
19. Which one of the following is true?
i. For the enterprise which acquires another, it is acquisition
ii. For the enterprise which is acquired, it is a merger
iii. If both the enterprises dissolve the identities to create a new
enterprise, it is consolidation
iv. All the above
20. Which one of the following is right?
i. The merger may protect against market infringement, lower cost
position of a competitor, product innovations by others, an unwanted
takeover.
ii. A merger can support diversification such as countercyclical, counter
seasonal, international operations and multiple strategic plans.
iii. A merger may be sought for the sake of gains in market position,
technological edge, financial strength, managerial talent.
iv. All the above are true
Answers
Check Your Progress
5. True
13. Absorption, Amalgamation
14. True
15. True
16. Horizontal merger, vertical merger, concentric merger and conglomerate
merger
17. Merger
20. i. c
ii. b
iii. a
Multiple Choice Questions
1. i
2. ii
Strategies For Growth And
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3. iv
4. iv
5. iv
6. iii
7. i
8. i
9. iii
10. ii
11. i
12. iv
13. iv
14. iv
15. iii
16. i
17. iv
18. iii
19. iv
20. iv
6.9 Further Reading
Cherunilam Francis, Business Policy and Strategic Management Text and
Cases, Himalaya Publishing House, Mumbai, 2010
Kazmi Azhar, Business Policy and Strategic Management, Tata McGraw
Hill Publishing Company Limited, New Delhi, 2005
Hisrich Robert D., Peters Michael P., Shepherd Dean A., Entrepreneurship,
Tata McGraw Hill Education Private Limited, New Delhi, 2007
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UNIT 7: MANAGING BUSINESS GROWTH
Structure
7.0 Introduction
7.1 Unit Objectives
7.2 Management of Growth
7.3 Designing the Organization
7.3.1Organization culture
7.4 Leadership
7.4.1Succession Planning
7.5 Management of Change
7.6 Summary
7.7 Key Terms
7.8 Questions and Exercises
7.9 Further Reading
7.0 Introduction
Once a new entrepreneurial venture is launched, it commences its journey
into the future. The entrepreneur grooms the enterprise in a systematic manner.
He/she has to plan for satisfactory growth of the enterprise. Growth is a natural
phenomenon and a continuous process in the business. Small enterprises start
small and grow big in due course of time.
Growth ensures not only prosperity but it is essential for survival also
especially in the face of hard times, adversities, difficulties and challenges. A
business enterprise is established in a particular type of business environment at a
particular moment in time with a set of business opportunities as well as
environmental threats. It functions in the business environment with a network of
contacts, relationships and associations. With changing times, business environment
undergoes several changes and consequently enterprises must cope up with the
changes and challenges arising out of those changes. This underlies the need for
growth of business enterprises. Adaptation to change as well as growth is
fundamental to business success.
The organization structure and style of management that contributes to
success for a small enterprise in the startup phase may not support the enterprise
in the growth phases. With growth in the business, organization structure tends to
change. The organization culture, the style and philosophy of management, role of
leadership also requires change consequent to growth stage. There is a need to
imbibe the culture of change management.
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NOTES
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Entrepreneurship - V
7.1 Unit Objectives
After going through this unit you will be able to
• Understand the challenges for managing business growth
• Appreciate the implications of business growth
• Be prepared for managing the challenges of business growth
effectively
• Know the need for restructuring a growing organization and explain the
ways and approaches adopted by entrepreneurs for redesigning his/her
enterprise for sustaining growth
• Be in a position to appreciate the role of leadership in a growing enterprise
in the light of various challenges posed by growth
• Realize the significance of organization culture for sustaining growth
through retention of human resources
• Learn the dynamics of change management
7.2 Management of Growth
“To open a shop is easy, to keep it open is an art”
Strategy is a well-planned course of action aimed at achievement of pre-
determined objectives. A growth strategy is a plan of action to expand business
operations, generate money and make profits, seek desired status in the society
and gain the satisfaction of self-realization and fulfilment. With the help of growth
strategies, enterprises grow big. When the enterprise is able to generate satisfactory
income to survive, then it is said to be in the growth phase. If the growth is very
slow, then the entrepreneur has to pay attention to proper utilization of the enterprise
resources. With expected growth, the entrepreneur would be able to manage it in
a comfortable manner with the help of strategic plans – short term as well as long
term. However, with rapid growth, it may be difficult for the entrepreneur to cope
up with the growth. The entrepreneur has to maintain proper financial control.
He/she has to pay attention to cash flows, management of inventory, receivables,
human resource planning and development etc. With growth, organization structure
need to be revised and redesigned appropriately in terms of delegation of authority,
acceptable span of control, decision making pattern, communication system and
the like. Entrepreneurs are required to make bold decisions. They need to lead the
venture into new areas for exploring new horizons.
An entrepreneur has to tackle various multifarious issues while managing
growth in his/her small enterprise. Increased scale of operations pose challenges of
maintaining competitiveness of products/services. Enterprise operations and processes
are to be modified for achieving increasing scale of operations and activities. Functional
specializations are to be developed for the sake of sustaining efficiency. Also various
types of collaborations and partnerships are to be established.
There are tremendous stresses and strains of getting accustomed to growth
and enhanced scale of operations. Leadership issues emerge. Improper delegation,
ineffective control may hamper the enterprise functioning. Communication gaps
and misunderstandings take place.
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NOTES
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A growing business provides more command and supremacy to the
entrepreneur. Higher scale of operations enhances acceptability of the enterprise
to the customers, financiers, suppliers, and other stakeholders also. It confers
more power and strength to the entrepreneur for influencing the performance as
well as efficiency. However, growth take along change and an entrepreneur has
to learn and implement adaptation to change consequently.
7.3 Designing the Organization
In the initial startup phase of an entrepreneurial venture, the organization
is usually small in size and simple in structure. It is generally of informal type
characterized by informal processes and procedures. In the start-up phase, the
entrepreneur manages the entire show all alone. He/she mostly performs all the
functions single handed on his/her own.
Small enterprises are typically characterized by a simple organization
structure and a personal, unique style of management. With growth of the enterprise,
its culture tend to change. Scale of operations grow wide-spread. Procedures
become more formal. Jobs become more structured. The communication dynamics
change drastically. Consequently management infrastructure requires a change
for supporting the pace of growth. Entrepreneurs must be prepared to cope up
with the challenges of rapid growth.
While swimming on the tides of growth waves, entrepreneurs scrap
traditional organizational structures. They maintain maximum elasticity. Instead of
following rigid policies and procedures, they adopt flexibility. They are quick to
respond and react. While pursuing growth, entrepreneurs must realize that they
should change their management styles, organization structure, business strategy
and methods of operating.
Entrepreneurs need to hire more employees to fulfill the needs of a growing
enterprise. Entrepreneurs strive to keep the employees and the enterprises focused
on growth. The entrepreneur directs the enterprise employees towards achievement
of goals and objectives and whole-hearted commitment for the enterprise’s mission.
As the enterprise grows from a small to a medium enterprise, the
entrepreneur has to take care to continue with the human relations and his/her
personal rapport with all the stakeholders. He/she has to understand that he/she is
not enough to run the business. He/she has to acquire and retain human talent.
Human resource management is an important aspect for all enterprises – small as
well as large. The enterprise performance depends on quality and quantity of
human resources. It is the management of human capital. It began with an
independent personnel department to take care of regulatory aspects of employees
in a factory in the industrial era. Now it has been transformed into a sophisticated
discipline comprising of various themes such as talent management, performance
management, human capital management and the like.
In a small enterprise, there may not be an independent and well-developed
HR department. There may not be an independent HR professional appointed in
the enterprise. But necessarily, the human resource function has to be managed
with focus and attention. In a small enterprise, the entrepreneurs handles it with
care and concern. He/she do not delegate this task unless and until a competent
and reliable person is appointed.
Check Your
Progress
1. Enlist few problems
of rapid growth being
faced by entrepre-
neurs.
2. What are the imme-
diate consequences of
growth for entrepre-
neurs and their enter-
prises?
3. State the benefits of
business growth.
4. Why do entrepre-
neurs aspire for
growth?
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NOTES
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The initial entrepreneurial organization is usually simple which may not
cater to the needs of a growing enterprise. With growth in business, there is a
need to develop proper organization design by bringing out modifications and
improvements in the present organization structure as per the needs and
requirements. There is a need to organize the work in a professional manner. It
requires delegation of responsibilities. It requires establishment of a formal structure
to facilitate coordination of individuals, groups, activities, operations, sections and
divisions. In contrast with the ad hoc responses used by small entrepreneurs to
face challenges; now growth entrepreneurs have to develop systematic procedures
and systems, document rules and regulations and disseminate those to all levels of
the organization hierarchy.
Growth of an enterprise means increased scale of operations which demands
additional human resources possessing varied skills and competencies. Entrepreneurial
style of management now changes drastically. Increasingly now entrepreneurs need
to delegate authority and responsibility. It is difficult for entrepreneurs to delegate
effectively. They are enthusiastic, highly inspired and action oriented. Typically they
set and achieve ambitious and challenging targets and obviously they expect the
same from their employees. They wish to control everything and everyone around
them. They may not give adequate time and freedom for proper discharge of duties
and responsibilities to their employees. They may interfere with the work of their
subordinates. The entrepreneur should lay down objectives to be achieved and the
plans/courses of action to achieve the set objectives. Also he/she should clarify how
the performance would be measured and evaluated.
While moving from the startup phase into the growth phase, entrepreneurs
experience drastic changes in the organizational culture. With growth in the number
of employees, the entrepreneurs loose personal touch with the employees. The
kind of compact and cozy environment in the enterprise undergoes a transformation
in the name of growth.
7.3.1 Organization Culture
“The greatest difficulty in the world is not for people to accept new ideas,
but to make them forget about old ideas” – John Maynard Keynes
Entrepreneurs nurture specific organization culture right from the launch
of their ventures. They have a clear vision about their ventures and progress
towards future with the help of well-articulated business strategies. Entrepreneurs
influence the behaviour and performance of their employees and create a strong
culture and value system. The culture of an enterprise influences everything that
people do. It is manifested in various ways.
According to Thomas W. Zimmerer and Norman M. Scarborough, “a
company’s culture is the distinctive, unwritten, informal code of conduct that govern its
behavior, attitudes, relationships, and style”. Like strategy, culture also has a significant
potential to achieve a competitive edge. Culture of an enterprise influences all those
concerned with the enterprise in a substantial manner, especially the enterprise
employees. It affects the employees’ way of working, their performance, the manner
in which they tackle customers and the like. In the words of Michael H. Morris,
Donald F. Kuratko Jeffrey G. Covin, “Culture can be defined as an organization’s
basic beliefs and assumptions about what the company is all about, how its members
should behave and how it defines itself in relation to its external environment”.
Imbibing of right organization culture begins with recruitment and selection
of proper employees. Good employees are attracted towards organizations when
they believe that the environment of the enterprise is conducive for their growth
Check Your
Progress
State whether true or
false:
5. In the initial startup
phase of an
e n t r e p r e n e u r i a l
venture, the
organization is usually
small in size and simple
in structure
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119
NOTES
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and development. And when they are convinced about quality of work life, then
they continue to stay with the enterprise with total dedication.
For inculcating a desirable culture comprising of values such as honesty,
empathy, integrity, respect, customer concern etc, an entrepreneur need to set
objectives, plans, policies, performance measures in a manner so as to reflect
those cherished values. Such kind of positive culture has a good impact on the
enterprise performance. Employees like working for enterprises which value
honesty, human dignity and integrity. Entrepreneurs define the enterprise’s vision
and endeavour consistently to communicate it effectively to all the stakeholders.
Several researchers believe that entrepreneurship is not an activity; it is a
culture. It instils values, symbols, myths, rules of conduct, and methodology of the
enterprise. Values are the things which employees think as desirable and are worth
having or doing. Entrepreneurial values comprise of creativity, achievement, integrity,
perseverance, change etc. Rules of conduct guide the behaviour in an accepted
way for achievement of goals. The rules are the accepted norms of an organization.
Vocabulary in the form of the language, jargon, signs, slogans, gestures, gossips
etc is also a part of culture. Another component of culture is rituals such as
ceremonies, conferences, parties like the manner in which employees are welcome,
retire and the like. Entrepreneurial organizations have legends, myths, histories
which refer to values, beliefs and norms.
The important issue is which of the elements are most conducive to
entrepreneurship. Timmons stated the components of an entrepreneurial culture
as: clarity, being well-organized, high standards, pressure for excellence,
commitment, responsibility, recognition, esprit de corps. Cornwall and Periman
listed the various components of an entrepreneurial culture as: risk, earned respect,
ethics of integrity, trust, credibility, people, emotional commitment, work is fun,
empowered leadership through firm, value wins, relentless attention to detail, people.
Structure, and process, effectiveness and efficiency. Peters perceived
entrepreneurial culture in terms of: listening, embracing change, customer focus,
total integrity, excellence, involve everyone in everything, experimentation, fast-
paced innovation, small starts and fast failure, visible management and
measurement/accountability. According to Michael H. Morris, Donald F. Kuratko,
Jeffrey G. Covin, the entrepreneurial culture would seem to have the following
elements: focus on people and empowerment, value creation through innovation
and change, attention to the basics, hands-on management, doing the right thing,
freedom to grow and to fail, commitment and personal responsibility, emphasis on
the future and a sense of urgency.
Entrepreneurs make their enterprises ‘learning organizations’. All the
employees are ‘knowledge workers’ who possess high level of learnability.
Entrepreneurs encourage and support the concept of lifelong learning among their
employees. They provide them opportunities to improve their knowledge and skills.
They invest in human capital.
Entrepreneurs offer numerous job-design techniques such as job rotation,
job enrichment, job sharing, jog enlargement, flextime and the like and enhance
employee motivation. Job rotation involves cross-training employees and enable
them to perform a variety of tasks and perform various jobs. Job enrichment offers
every employee an opportunity to be a manager of his/her job i.e. letting him/her to
perform managerial tasks such as planning, decision making, organizing and
controlling. Job sharing is a system in which two or more employees share a full time
job. Job enlargement is a system which make the job varied. Flextime is a system in
which employees have flexibility about performance of the job in terms of time.
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Entrepreneurs have noted that the young generation desires to have work-
home role balance. In response they offer flexi-time i.e. flexible work schedules,
part-time jobs, work-from-home convenience, on-site day care, telecommuting,
job sharing, sabbatical leave etc. Flexi-time arrangement enables employees to
work for normal working hours without losing their lifestyle. They have flexibility
about the work schedules. Job sharing enables two or more employees to share a
full-time job and thereby achieve life-and-work balance. Salary and benefits are
prorated between the employees sharing a job. Flexplace is a system in which
employees enjoy the flexibility of working at a place other than the office. They
can work at a place of their convenience, near their home or at home if required.
The convenience of flexi-place is possible because of telecommuting i.e. using
modern communication technology. With the help of telecommuting, employees
choose to remain connected with the workplace 24x7 wherever they are.
Attractive remuneration and fair compensation also contributes for creation
of a culture which attracts and retains human resources and make them stay in
the enterprise. Good reward system encourages employees for good performance
and keep them motivated always.
7.4 Leadership
Entrepreneurship essentially deals with the dynamics of initiating a new
enterprise. It chiefly focuses on activities and operations concerned with starting
an enterprise, sustaining its activities, and its development and growth. The journey
is not without pressures and challenges of various kinds. To cope up with these
challenges, and facilitate the process of building up the organization, an entrepreneur
has to learn and apply management theories and principles.
An entrepreneur essentially is inspired to convert his/her dream into actual
reality. In the initial phases, an entrepreneur may perform all the tasks concerned
with his/her venture all alone. However, typically in a growing organization, the role
of a manager becomes more prominent. In the context of a growing venture, it is
interesting to analyze the different perspectives of entrepreneurial personality – as a
leader, as a manager along with being an innovator, a visionary and a risk taker.
Some entrepreneurs may not feel comfortable in the role of a leader. However, they
must assume the role of an effective leader especially in the growth phase of their
enterprises. For attracting as well as retaining talented workforce, leaders play a
vital role. In absence of effective leadership, it is not possible to retain talent.
Entrepreneurship, management and leadership are very closely linked with
each other. There is overlapping in several aspects. Stephen Covey explains the
difference between management and leadership in this way: “Leadership deals
with people; management deals with things. You manage things; you lead people.
Leadership deals with vision; management deals with logistics toward that vision.
Leadership deals with doing the right thing; management focuses on doing things
right. Leadership deals with examining the paradigms on which you are operating;
management operates within those paradigms. Leadership comes first, then
management, but both are necessary”.
Leadership and management both are crucial for a small business. Leaders
lead and managers manage. A leader is driven by vision. A manager works with
available resources. Leader is an architect whereas manager can be considered
as a builder of small business.
Check Your
Progress
6. Can you explain the
meaning of
organization culture?
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Leadership is especially important for enterprises in the growth phase. It
needs to be created within a small business. Growth implies exploring the new, the
unknown. There may be an ambiguity, a fear of the unknown. In such a situation,
with leader’s vision of achieving something new, others are driven towards the
goal and make efforts in the new direction. Leaders influence and inspire others
towards a common group goal. He/she empowers them and provides them
favourable and supportive environment as well as freedom to realize their full
potential to achieve the organizational goals. They have to keep faith in employees
and respect their talent and ability.
In small enterprises, all the organization members handle multiple roles
and diverse responsibilities. They deal with multitasking. In large organizations,
everyone has well defined roles and responsibilities to perform. As the enterprise
starts growing, staffing is required to keep the organization equipped with right
human resources possessing right talent. The entrepreneur has to instill a sense of
ownership among the employees. He/she has to create such an environment in
which everyone gets a feeling of belongingness. Entrepreneurs should always
communicate with their team members and keep them motivated always. They
should share their dreams, their goals so that there would clarity regarding what is
expected of them. The leaders are required to build trust and confidence among
their team members. The team members need to constantly upgrade their skills.
Thomas W. Zimmerer, Norman M. Scarborough with Doug Wilson
discussed certain behaviours that effective leaders exhibit. They:
• Create a set of values and beliefs for employees and passionately pursue
them
• Define and then constantly reinforce the vision they have for the company
• Respect and support their employees
• Set the example for their employees
• Create a climate of trust in the organization
• Build credibility with their employees
• Focus employees’ efforts on challenging goals and keep them driving
toward those goals
• Provide the resources employees need to achieve their goals
• Communicate with their employees
• Value the diversity of their workers
• Celebrate their workers’ successes
• Are willing to take risks
• Encourage creativity among their workers
• Maintain a sense of humour
• Create an environment in which people have the motivation, the training,
and the freedom to achieve the goals they have set
• Become a catalyst for change
• Keep their eyes on the horizon
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7.4.1 Succession Planning
In large enterprises and also in family business, entrepreneurs need to
deal with succession planning otherwise there would be problems with continuity
of operations and people. The entrepreneur has to make sure that there is continuity
of business. Critical operations, activities and roles need to be identified with
priorities. Reliable, fair and consistent persons should be identified so as to continue
with the enterprise functioning with full efficiency. There is a need to identify
backup for every role and task. The entrepreneur has to take care of knowledge
transfer and sharing of knowledge and information. Overdependence on few people
has to be avoided in any case. Right from the beginning, knowledge dissemination
practices should be developed and encouraged.
7.5 Change Management
“Change is not mandatory. Survival is optional”.
Change is the only thing which does not change. It is an important feature
of many organizations. Every organization has to change itself from time to time
to cope up with the changing environment. For survival, it is necessary to adapt to
the changes. Otherwise the organization will be left behind or be swept away by
the forces of change. Influence of many factors make organizational changes not
only desirable but also inevitable. It is the responsibility of the entrepreneur to
manage change properly.
The reasons for these changes are varied. Change may be externally imposed
or self-imposed. For acceptance of any change, commitment of the entrepreneur to
practice the desired change is a must. Otherwise this will result in failure.
External environmental change comprises of various trends and issues
which impact on organizations and tasks performed by the entrepreneurs and
managers. Economic factors like economic cycles, interest rates, foreign currency
fluctuations and the like can trigger the need for organizational change. Technology
influence jobs and organizations as a whole. Technological breakthroughs as well
as consequent inventions as well as innovations affect business environment
substantially. Competitive pressures may dictate the need for change. Only the
organizations which can adapt to the changes succeed. Such type of external
environmental influences necessitate changes in internal organizational factors
such as machinery, equipment, human resources dynamics, technology, tasks,
structure, policies, procedures and the like.
Joseph Massie discussed various types of changes in the management field
as: changes in knowledge, information and techniques; changes in the scope of
management; changes in the issues and problems facing managers; and changes in
environments. Being a multidisciplinary subject, the scope of management gets
enhanced with subsequent changes and developments in the related disciplines. In
the initial phases of development, the scope of management was restricted to technical
aspects of production. Subsequent developments made it an all-pervasive, all-
encompassing discipline in the form of an interdisciplinary approach characterized
by the principle of universality. With changes in the economy, society, environmental
components and the like; management undergoes drastic changes regarding the
tasks, approaches, problems etc. Issues like globalization, information revolution,
liberalization policies, global warming, climate changes etc. need to be taken into
consideration by the managers. Values, culture of the society is changing drastically.
Check Your
Progress
7. Why is delegation
important for entrepre-
neurial growth?
8. Leadership and
management are same
or different?
Fill in the blanks:
9. The prime respon-
sibility of a — is to
work with the available
resources and achieve
a pre-determined ob-
jective.
Check Your
Progress
10. What is meant by
succession planning?
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Social norms and conditions, political situations, economic trends have been changing
continuously and putting the impression of such changes on business environment.
Consumerism is picking up. Consumption patterns are changing drastically. Several
population shifts are seen. Consumer markets are expanding. The number of players
in the market is increasing rapidly. The world is changing fast. Consequently, the
organizational variables need to be transformed for the sake of survival and growth.
For this transformation to take place, entrepreneurs have to introduce changes in the
enterprise – may be with reference to technology, people, task or structure.
Resistance to Change
There is nothing more difficult of success, nor more dangerous to
handle than to initiate a new order of things” - Machiavelli
The natural and most obvious reaction to change is resistance. It is but
sure that change upsets many people. Very rarely changes are adopted without
opposition. This behaviour of opposing change arises from the fear of the new and
the unknown. There is uncertainty about the impact of change. There is a typical
human tendency to avoid the unfamiliar. There is an apprehension about the change
process, the adjustments required to accommodate change, and about the adverse
effects of change. Naturally, if there is a negative perception about change, people
will try to resist such king of changes. It is also observed in several situations that
people oppose change agent and not change itself. The resistance may be in the
form of careless performance, submissive approval, aggressive refusal, violent
behaviour and the like. If it is not analyzed carefully, it may be harmful for the
enterprise from the ling-term perspective.
Opposition to change may be triggered by people’s attitudes which are
shaped by several economic, psychological and social factors. Let us discuss some
of these causes to resistance:
Economic needs like job security, safety may lead to oppose change. There
is an apprehension about unemployment due to technological changes. People
may fear that they may be unable to cope up with the new technology. They
worry about the acquisition of new skills associated with the demands of the new
job and new technology. They may not get overtime, bonus or incentives with
new job. There is a possibility of demotion, transfer or loss of job.
People may resist change because they do not have confidence to learn
new methods, techniques. They may fear that it would be difficult for them to
learn about new things. They may not be interested in taking trouble to learn new
techniques. They may not have knowledge about the change or they may be
incapable to realize the impact of change on their jobs and on their future. They
may fear of being exposed in front of their juniors. They may take change as a
blame on their work in the sense change implies that present work is not up to the
mark. The change challenges their way of operations and they feel insecure.
They may feel that change reduces their personal pride since it speaks about
inadequacy of their work method. Sometimes, people oppose change because the
group to which they belong, resist it. There is a tendency to adhere to the group
norms and support the group attitudes.
People oppose change it is brought abruptly without any prior intimation
and when they are not consulted in advance. They may consider that change
would benefit the enterprise and the entrepreneur rather than the employees or
the society. Change may bring some adjustments regarding organization structure
which may disturb social needs such as friendship, companionship etc. They may
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feel alienated due to loss of some social bonds and relationships. They may
apprehend that the new organizational set up would not be comfortable for them.
Resistance to change arises mostly out of some obvious human tendencies
and human relations problems. People oppose changes when they contemplate
that change will affect their status, security and social relationships. They may not
know it well. It is not easy for them to give up their old habits and approaches.
Change Process
The process of change involves several steps. According to Kurt Lewin,
organizations should follow three steps to achieve acceptance of change: unfreeze
the status quo, move and refreeze the new change. He believes that change has
to be accepted readily and willingly. Change should not be a surprise because
unexpected changes are found to be unhelpful and unaccommodating. Instead, by
‘unfreezing the situation’; if at all there is any initial resistance, it can be neutralized.
Change refers to any alteration of the status quo. The status quo can be
regarded as a state of equilibrium. Unfreezing is the first step in the change process.
The unfreezing process prepares individuals for the change. It is concerned with
the realization of the need for change so as to convince individuals, groups,
organizations about accepting the change. According to Edgar H. Schein, unfreezing
is the process of breaking down the old attitudes and behaviours, customs and
traditions, so that they start with a clean slate. The idea of change has to be
popularized in the organization with the help of meetings, announcements, personal
contacts, bulletin boards etc.
Unfreezing is required to move from the equilibrium, to overcome the
resistance to change. This can be done in three ways: the driving forces which
direct behavior away from the status quo can be increased; the restraining forces
which hamper movement from the existing equilibrium can be decreased; or the
combination of the first two approaches will serve the purpose.
The next step in the change process is moving through the efforts of a
trained change agent. After developing preparedness to accept changes, the
behaviour patterns are to be redefined and changed. The change agent inculcates
new values, attitudes and behaviour. He/she introduces change in a highly convincing
manner so as to make it desirable and acceptable among the individuals, groups
and organizations. H. C. Kelmn proposed three methods of reassigning new patterns
of behaviour such as: compliance, identification and internalization. Compliance
involves adhering to the reward and punishment strategy for good or bad behaviour.
Reward or fear of punishment influences the behaviour in a desired manner.
Organizational members are made to identify themselves with their role models
and adopt their behaviour and follow them. Internalization consists in giving freedom
to the members to learn and adopt new behaviour which would fetch success. To
adjust with the changing situation, there is a need to refine the thinking process
and modify the behaviour.
Refreezing happens when the new behaviour becomes a normal and routine
pattern by totally replacing the former behaviour. It stabilizes the change and the
new situation by striking a right balance between the new restraining and driving
forces. The new behaviour should be permanent in nature.
The process of change is continuous one since the environment continuously
changes. Consequently, the activities of unfreezing, moving/changing, and refreezing
remain continuously in process.
Check Your
Progress
11. Enlist the reasons
for resistance to
change.
12. Can you write
some psychological
causes of resistance to
change?
13. What are the so-
cial reasons for resis-
tance to change?
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Figure 7.1: Lewin’s Model of Change
Management of Change
In the light of the role of innovation and flexibility, entrepreneurs must
learn the dynamics concerned with change management. It can be considered as
the ability to adapt to the changing situations in the business environment. It has to
be a part of the organization culture.
Entrepreneurs should introduce change in a systematic and planned manner.
He/she has to define the change to be introduced in the enterprise. It is essential to
lay down the objectives of change and reflect upon its implications. The plan should
state the significance of change for the organization in the prevailing situation. Those
who would be affected by change should be identified separately and the nature of
impact should be studied in detail. Then the time, speed and mode of introduction of
change has to be decided systematically. Prepare a proper schedule for implementation
of change. Give adequate time for each step of the process of change.
According to Warren Bannis, the method of planned change encompasses
the application of systematic and appropriate knowledge to human affairs for the
purpose of creating intelligent action and choices. Planned change aims to relate
to the basic disciplines of the behavioural sciences as engineering does to the
physical sciences or as medicine relates to the biological sciences.
It is desirable to anticipate likely responses and reactions of the employees to
the proposed change. They should be given an opportunity to participate in the planning
process. It will develop a feeling of belongingness and commitment to the proposed
change. They get a feeling of importance being a part of the planning process.
The change should be planned in such a way that it would be easy to
implement it. The planned change should strike a balance between the needs of
the enterprise and the needs of the employees. They need to take a few
representative employees into confidence about the nature and need for change
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which would minimize the resistance and increase the acceptability. It would
minimize the difficulties in implementing change.
There is a need to create about awareness about change and educate the
concerned stakeholders about the change. There is a need to maintain proper
communication with all the stakeholders during the process of management of
change. Feedback should be encouraged to know the responses of the employees
to the organizational change. They should be given opportunities to clarify their
doubts, queries and confusions. They should be satisfied about the proposed change.
For successful implementation of change, the employees should be trained
to acquire new skills, to change their attitudes, and behaviour patterns. They should
be provided with the necessary information details regarding change, the manner
in which they are required to accept change, their role in the process of change.
It is always better to introduce change in a small scale and see the reactions
of the concerned employees in terms of acceptability, fears, as well as
apprehensions. The change process has to be monitored initially and then the
results of change should be compiled in a systematic manner. After analyzing the
reactions to change, if required, with necessary modifications change can be
introduced at the proper time in an appropriate manner. Proper timing is crucial in
increasing acceptance of change.
Leadership plays a vital role in successful launch of change. If the change
agent is dynamic; then he/she has a good influence upon the employees. If he/she is an
authorized leader/informal leader because of expertise, respect; then the followers
would willingly bring about the intended change. The change agent should be a person
with open mind and positive thinking. He/she should be willing to take risks. He/she
should be a creative person who considers organization’s interest above self-interest.
There is a possibility of conflicts of ideas, opinions, views and various
issues during the process of change. The change agent should be dynamic and
influential enough to resolve such type of conflicts.
Everyone in the organization must be made to believe that the proposed
change is beneficial for them. It is an opportunity to be seized and not a threat to
be avoided or be apprehensive about. The particulars of success stories of same
type of change in other places and organizations should be brought to the notice of
the organizational members. Everyone must be involved in the change process.
Those who are not involved may spoil the others.
At group level, it would be effective to introduce change and implement it
effectively. When the basic unit of change is group and not the individual, group
dynamics would help to bring about change. Group interactions facilitate adaptation
to change. Group discussions should be encouraged. Entrepreneurs should convince
the group leaders about the rationale of change and that the change would protect
and support the interests of the group members.
7.6 Summary
The organization structure and style of management that contributes to
success for a small enterprise in the startup phase may not support the enterprise
in the growth phases. With growth in the business, organization structure tends to
change. The organization culture, the style and philosophy of management, role of
Check Your
Progress
14. Which factors ne-
cessitate change?
Write down.
15. What do you know
about planned change?
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NOTES
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leadership also requires change consequent to growth stage. There is a need to
imbibe the culture of change management.
With rapid growth, it may be difficult for the entrepreneur to cope up with
the growth. The entrepreneur has to maintain proper financial control. He/she has
to pay attention to cash flows, management of inventory, receivables, human
resource planning and development etc. With growth, organization structure need
to be revised and redesigned appropriately in terms of delegation of authority,
acceptable span of control, decision making pattern, communication system and
the like. Entrepreneurs are required to make bold decisions. They need to lead the
venture into new areas for exploring new horizons.
A growing business provides more command and supremacy to the
entrepreneur. Higher scale of operations enhances acceptability of the enterprise
to the customers, financiers, suppliers, and other stakeholders also. It confers
more power and strength to the entrepreneur for influencing the performance as
well as efficiency. However, growth take along change and an entrepreneur has
to learn and implement adaptation to change consequently.
Small enterprises are typically characterized by a simple organization
structure and a personal, unique style of management. With growth of the enterprise,
its culture tend to change. Scale of operations grow wide-spread. Procedures
become more formal. Jobs become more structured. The communication dynamics
change drastically. Consequently management infrastructure requires a change
for supporting the pace of growth. Entrepreneurs must be prepared to cope up
with the challenges of rapid growth.
The initial entrepreneurial organization is usually simple which may not
cater to the needs of a growing enterprise. With growth in business, there is a
need to develop proper organization design by bringing out modifications and
improvements in the present organization structure as per the needs and
requirements. There is a need to organize the work in a professional manner. It
requires delegation of responsibilities. It requires establishment of a formal structure
to facilitate coordination of individuals, groups, activities, operations, sections and
divisions. In contrast with the ad hoc responses used by small entrepreneurs to
face challenges; now growth entrepreneurs have to develop systematic procedures
and systems, document rules and regulations and disseminate those to all levels of
the organization hierarchy.
Imbibing of right organization culture begins with recruitment and selection
of proper employees. Good employees are attracted towards organizations when
they believe that the environment of the enterprise is conducive for their growth
and development. And when they are convinced about quality of work life, then
they continue to stay with the enterprise with total dedication.
For inculcating a desirable culture comprising of values such as honesty,
empathy, integrity, respect, customer concern etc, an entrepreneur need to set
objectives, plans, policies, performance measures in a manner so as to reflect
those cherished values. Such kind of positive culture has a good impact on the
enterprise performance. Employees like working for enterprises which value
honesty, human dignity and integrity. Entrepreneurs define the enterprise’s vision
and endeavour consistently to communicate it effectively to all the stakeholders.
Some entrepreneurs may not feel comfortable in the role of a leader.
However, they must assume the role of an effective leader especially in the growth
phase of their enterprises. For attracting as well as retaining talented workforce,
leaders play a vital role. In absence of effective leadership, it is not possible to
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NOTES
Business
Entrepreneurship - V
retain talent. Management and leadership are not the same, but both are vital for
the success of a small business.
Every organization has to change itself from time to time to cope up with the
changing environment. For survival, it is necessary to adapt to the changes. Otherwise
the organization will be left behind or be swept away by the forces of change. Influence
of many factors make organizational changes are not only desirable but also inevitable.
It is the responsibility of the entrepreneur to manage change properly.
Very rarely changes are adopted without opposition. This behaviour of
opposing change arises from the fear of the new and the unknown. There is
uncertainty about the impact of change. There is a typical human tendency to
avoid the unfamiliar. There is an apprehension about the change process, the
adjustments required to accommodate change, and about the adverse effects of
change. Naturally, if there is a negative perception about change, people will try to
resist such king of changes.
Opposition to change may be triggered by people’s attitudes which are
shaped by several economic, psychological and social factors.
The process of change involves several steps. According to Kurt Lewin,
organizations should follow three steps to achieve acceptance of change: unfreeze
the status quo, move and refreeze the new change.
In the light of the role of innovation and flexibility, entrepreneurs must
learn the dynamics concerned with change management. It can be considered as
the ability to adapt to the changing situations in the business environment. It has to
be a part of the organization culture.
7.7 Key Terms
• Learning Organization: An organization that facilitates the learning of
the members with an ideal environment for learning, knowledge
management, innovation etc
• Human Capital: skills, knowledge and experience possessed by an
individual or population viewed in terms of their value or cost to an
organization or country
7.8 Questions and Exercises
Questions
1. What is organization culture? What role does it play in a small enterprise’s
success? What threats does rapid growth pose for an organization’s culture?
2. Why is it important for a small entrepreneur to develop a management
succession plan? Why is it difficult for most entrepreneurs to develop
such a plan?
3. Explain the challenges involved in the entrepreneur’s role as a leader?
What it takes to be a successful leader?
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4. How to create an organization culture that encourages employee
retention?
5. What are the steps that are involved in creating a management succession
plan?
6. Why is managing cash flow important for new ventures?
7. Explain why growth is important but can be dangerous. State some of
the major problems created by rapid growth.
8. What are the differences between a leader and a manager? How do
leaders of a small enterprise differ from that of a large enterprise?
9. Why is change resisted in organization? What can the management do
to overcome it?
10. How can group dynamics be used to overcome resistance to change?
11. “People sometimes resist change for the sake of resistance”. Comment.
12. Trace the reasons for human resistance to change. How can this be
overcome?
13. Describe some of the factors that increase resistance to change. What
steps can be taken to contain this resistance and mange it effectively?
14. What it takes to be a successful leader? Explain the challenges involved
in the entrepreneur’s role as leader.
Multiple Choice Questions
1. Leaders overlook ————
i. Opportunities
ii. Theory
iii. Constraints
iv. Practicality
2. In the initial startup phase of an entrepreneurial venture, ————-
i. Organization is usually small in size and simple in structure
ii. Organization is generally of informal type characterized by informal
processes and procedures
iii. The entrepreneur manages the entire show all alone
iv. All the above
v. With growth of an enterprise Procedures become more formal Jobs
become structured Communication dynamics change drastically All
the above
3. With growth of an enterprise
i. Procedures become more formal
ii. Jobs become structured
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iii. Communication dynamics change drastically
iv. All the above
4. Culture can be defined as an organization’s basic beliefs and assumptions
about ———
i. What the organization is all about
ii. How organizational members should behave
iii. How organization defines itself in relation to its external environment
iv. All the above
Answers
Check Your Progress
5. True
9. Manager
Multiple Choice Questions
1. iii
2. iv
3. iv
4. iv
Exercise
Activity 7.1
Interview a CEO/General Manager of an entrepreneurial venture and
discuss with him/her about leadership in the organization. Try to appreciate the
initiatives being taken to develop leaders within the organization.
7.9 Further Reading
Hisrich Robert D., Peters Michael P., Shepherd Dean A., Entrepreneurship,
Tata McGraw Hill Education Private Limited, New Delhi, 2007
Morris Michael H., Kuratko Donald F., Covin Jeffrey G., Entrepreneurship
and Innovation in Corporations, Cengage Learning, New Delhi, 2008
Raichaudhuri Anjan, Managing New Ventures Concepts and Cases on
Entrepreneurship, PHI Learning Private Limited, New Delhi, 2010
Zimmerer Thomas W., Scarborough Noman M., Essentials of
Entrepreneurship and Small Business Management, PHI Learning Private Limited,
New Delhi, 2011
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UNIT 8: FINANCING FOR BUSINESS
GROWTH
Structure
8.0 Introduction
8.1 Unit Objectives
8.2 Management of Financial Resources
8.3 Venture Capital
8.4 Incubators
8.5 Accelerators
8.6 Angel investors
8.7 Summary
8.8 Key Terms
8.9 Questions and Exercises
8.10 Further Reading
8.0 Introduction
Growth is essential. Even for survival and sustenance of an enterprise at
a particular level, growth is a must. In absence of growth, at least proportionate
with the rate of inflation, the very existence of the venture would be endangered.
Quite often, there is a talk of raising money for new entrepreneurs while
initiating their new ventures. Also, there is a need to focus attention on cash
requirements of growth phase of enterprise. With rapid growth of business, there
is a change in the normal cash flow patterns, working capital management, costs,
profits and the like. The requirement of cash increases tremendously so as to
maintain business growth. There is a pressure of expanded operations in terms of
acquisition of increased quantity of raw materials, higher production, research and
development etc. Growth entrepreneurs need to be more careful about proper
working capital management.
For fulfilling financial needs of growth enterprises, along with the
conventional sources of financing, new and newer sources are emerging and
increasingly being adopted by the entrepreneurs. Business incubators, accelerators,
angel investors have become vital resources for startups. They help increase
entrepreneurial success by enabling them to exploit various attractive business
opportunities. These organizations nurture small startup enterprises. They provide
them with various services which they may not be able to acquire on their own.
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8.1 Unit Objectives
After going through this unit, you will be able to
• Be familiar with the challenges of managing business growth and explain
how to be prepared to manage these challenges
• Comprehend the management of financial resources
• Understand the relevance of venture capital
• Learn about incubators, accelerators and angel investors
• Explain the dynamics involved in financing for business growth
8.2 Management of Financial Resources
Growth is an essential component of entrepreneurial journey. A growth
entrepreneur has to develop complete clarity on the level of growth, type of growth
and the speed with which growth is to be achieved. He/she has to begin with
defining growth. Growth is commonly measured in terms of business parameters
such as sales, profitability, return on investment etc. The growth parameters are
defined on the basis of nature of business, the industry in which the business
operates, business model, etc. Not only the entrepreneur, and senior managers but
everyone in the organization has to think of growth. While planning for growth, the
sustainability of the growth has to be achieved. Growth has to be planned at a
speed at which the entrepreneur would be able to manage it. Along with the rate
of growth, the entrepreneur has to pay attention to cost implications of growth
also. For the desired business growth, the business requires various resources. To
enable growth, the needed resources of desired quality are to be obtained in adequate
quantity and this requires availability of enough and timely cash.
To manage the demands of growth, the entrepreneur aims for generation
of cash flow. He/she has to manage working capital in a proper manner. Working
capital management is concerned with management of short term assets and
liabilities. It requires the growth entrepreneur to pay attention to debtors/account
receivables, creditors/account payables and inventory. Cash gets locked up in
debtors, creditors as well as inventory. For availability of adequate amount of cash
at the right time, growth entrepreneurs have to carefully manage these three items
of working capital.
The entrepreneur has to maintain a sound working capital position. He/
she needs adequate working capital to run the business operations. Both the dangers
of excessive as well as inadequate working capital position are to be avoided.
Excessive working capital position indicates idle funds which is not desirable.
Inadequate working capital results in production interruptions and inefficiencies.
There should be optimum investment in working capital. It reflects on the need to
manage working capital well.
Working capital management is management of all aspects of current
assets i.e. cash, marketable securities, debtors, and inventories and current liabilities.
Investment in current assets constitutes a significant portion of the total investment
in current assets. It is important to manage current assets and current liabilities
carefully. A small enterprise may not have much investment in fixed assets, but it
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has to invest in current assets. Also, the role of current liabilities in financing
current assets is far more significant.
There is a direct relationship between sales and needs of working capital.
With growth in sales, the entrepreneur has to invest more in inventories and book
debts. Continuous increase in sales may also require additional investment in fixed
assets. New enterprises require to make large investments in fixed assets.
Machinery and equipment will be depreciated over time.
For a growing enterprise, the entrepreneur has to apply some financial
skills to manage the business in a proper way. He/she has to be more skillful for
managing cash flows, the income statement and the balance sheet.
In a growing enterprise, there is a possibility of cash outflows exceeding
cash inflows. The entrepreneur need to make a systematic assessment of cash
position at a frequent interval of time. Preparing a monthly cash flow statement is
a useful approach for good financial control.
Cash is the most important current asset for the operations of any business.
An entrepreneur has to keep sufficient cash - neither more, nor less. He/she
needs cash to invest in inventories, receivables, and fixed assets, to make payments
for operating expenses in order to maintain growth in sales and earnings. Cash
shortage will interrupt the enterprise operations, while excessive cash will impair
profitability. The entrepreneur has to be particular about maintaining a sound cash
position. Cash management is concerned with managing of cash flows into and
out of the enterprise, cash flows within the enterprise and cash balances with the
entrepreneur at a particular point of time.
The entrepreneur is required to be particular about cash planning, managing
the cash flows, optimum cash level, and investing idle cash. Cash inflows and
outflows should be planned with the help of cash budgets. Cash budget is a summary
statement of the enterprise’s expected cash inflows and outflows over a projected
time period. On this basis, the entrepreneur determines the future cash needs of
the enterprise, plan for financing of these needs, and exercise control over the
cash and liquidity of the enterprise. Cash forecasts are needed to prepare cash
budgets. Cash planning may be done on daily, weekly or monthly basis.
The entrepreneur prepares cash budget, then establishes net cash flow
and then ensures that there is no significant deviation between projected cash
flows and actual cash flows. He/she has to improve cash management efficiency
through a proper control of cash collection and disbursement. He/she has to
accelerate cash collections and delay cash disbursements as much as possible.
It is crucial to see that the entrepreneur maintains a sound liquidity position
of the enterprise so that dues may be settled in time. The test of liquidity is availability
of cash to meet the enterprise’s obligations when they become due.
Trade credit creates book debt or receivable which the enterprise is
expected to collect in the near future. It constitutes a substantial part of current
assets of the enterprise. There is a need of careful analysis and proper management.
Credit management is aimed at maximization of value of the enterprise by achieving
a tradeoff between liquidity i.e. risk and profitability. The objective of credit
management is not to maximize sales, nor to maximize profitability. For maximization
of value, the entrepreneur is required to manage its trade credit so as to obtain
optimum, and not maximum sales; to control the cost of credit and keep it at
minimum; and maintain investment in debtors at optimum level.
Check Your
Progress
1. What is cash bud-
get?
2. An entrepreneur
has to keep sufficient
cash. Why?
Fill in the blanks with
appropriate words:
3. —- is a summary
statement of the
enterprise’s expected
cash inflows and out-
flows over a projected
time period
State whether the fol-
lowing is true or false:
4. The test of liquidity
is availability of cash to
meet the enterprise’s
obligations when they
become due
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The entrepreneur should adopt credit policy after careful consideration of
various issues such as credit period, cash discounts. The credit standards should
be adopted after analyzing its probable impact on sales and receivables. The extent
to which credit standards can be liberalized should depend upon the proper balance
between the profit arising due to increased sales and the costs to be incurred on
the increased sales.
Some customers are slow-payers and some are non-payers. The collection
policy should be devised in a manner to accelerate collections from slow-payers
and reduce bad-debt losses.
Effective credit management requires chalking out of clear guidelines and
procedures for granting credit to individual customers and collecting the individual
accounts. While extending credit, the credit policy should differ depending upon
the customers. Credit information is to be collected from financial statements,
bank references, trade references, credit bureau reports. There is a need to
undertake credit investigation and credit analysis.
Generally, enterprises sell products/services frequently on credit basis.
Accounts receivable are the unpaid bills against invoices submitted to the customers
for products/services delivered to them. On the other hand, entrepreneurs procure
needed resources from vendors/suppliers on credit basis. Creditors or accounts
payable are the outstanding to be paid by the entrepreneur to the vendor/supplier.
Inventory refers to the material or resources tied up by the entrepreneur in raw
materials, finished goods, semi-processed goods, etc. This stock is required to
ensure timely availability of materials, parts, components in right quantity so as to
maintain smooth production flow and enable timely delivery of products/services
in the market. Proper inventory management is based on cost benefit analysis. A
proper balance has to be struck between ordering cost and inventory carrying
cost. If there is excess investment in inventory, unnecessarily cash would be tied
up. Unless the inventory is used for the production, cash cannot enter the system.
If there is improper management of working capital that is if cash gets
locked up in debtors, inventory; there would be scarcity of cash. Cash may not be
available when needed. Management of operating cash cycle will make adequate
amount of cash available as and when needed throughout the operating cash cycle.
During the growth phase, it is difficult to manage inventory. To meet
customer demand, the entrepreneur makes high investment in inventory which
ties up cash in manufacturing, transportation, storage and warehousing expenses.
But in case of too little inventory, the entrepreneur may lose customers if their
demands are not met at right time.
8.3 Venture capital
Entrepreneurs need financial support for growth and development of their
ventures. Venture capital is a form of financing for an enterprise in which
entrepreneur has to give up a part of ownership and control of enterprise in
exchange for capital for a particular time period. It is a form of risk capital which
is invested as equity rather than as a loan and the investor gets a higher rate of
return to compensate them for their risks. It provides a long term committed share
capital for the enterprises to grow and succeed. It is available to entrepreneurs for
startup phase, expansion, and buy out a business, and also for turnarounds. There
is a substantial difference between acquiring venture capital and raising a debt or
Check Your
Progress
5. Inventory manage-
ment requires a proper
balance between —
and —
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a loan from a lender. Irrespective of success or failure of the enterprise, lenders
have a legal right to interest on a loan and repayment of the capital. Venture
capital is invested in exchange for an equity stake in the business. As a shareholder,
the venture capitalist’s returns depend on growth and profitability of the business.
This return is generally earned when the venture capitalist exits by selling its
shareholding or when the business is sold to another venture.
The European Venture Capital Association describes venture capital as
risk finance for entrepreneurial growth oriented enterprises. It is an investment
for medium or long term return. It does not only deal with capital investment, but
it is a comprehensive package of development of the enterprise itself. It is a
partnership with the entrepreneur in which the investor adds value to the enterprise
based on his/her knowledge, experience, networking and contacts.
Neil Cross defines venture capital investment as the provision of risk bearing
capital, usually in the form of a participation in equity, to companies with high
growth potential. In addition, the venture company provides some value added
service in the form of management advice and contribution to overall strategy.
The relatively high risks for venture capitalists are compensated by the possibility
of high return, usually through substantial gains in the medium term.
According to I.M. Pandey, venture capital is an investment in the form of
equity, quasi-equity and sometimes debt-straight or conditional (that is interest and
principal payable when the venture starts generating sales), made in new or untried
technology or high risk venture, promoted by a technically or professionally qualified
entrepreneur where the venture capitalist expects the enterprise to have a very
high growth rate.
The venture capitalist provides assistance to entrepreneurs with
management and business skills for meeting the growth needs of the enterprise.
He/she expects medium to long term gains. However, he/she do not expect any
collateral capital provided.
J.C.Verma differentiates between venture capitalists and conventional
financers as follows:
Venture capitalists are risk takers like entrepreneurs. Conventional financers
avoid risk. Their main objective is protection of funds. Venture capitalists acquire
equity, a share of ownership and with it a share of risk. They do not eliminate risk
but manage it through in-depth monitoring, assisting and through portfolio
diversification. They consider themselves as a partner in entrepreneurial venture.
Conventional financer try to eliminate risk by loaning money against collateral and
ensuring ability of debt repayment capacity. Venture capitalists specialize in
management services including finance as one of the functional areas of
management. They deal with the entire range of operations including all resources
and functional divisions. Conventional financiers specialize in financial services.
They do not deal with management or marketing. Venture capitalists have extensive
operating experience. They provide full hands-in support to entrepreneurs.
Conventional financiers do not require such kind of experience. Venture capitalists
channel funds into the lowest tier of the market that is the emerging enterprise.
Conventional financiers avoid such situations of risk. Venture capitalists imbibe
vitality and innovation into the business whereas conventional financers do not
provide such support which may be required by new enterprises along with
investment. Venture capitalists assist the flow of new investment opportunities by
encouraging entrepreneurs, by developing entrepreneurial infrastructure, by
establishing different types of venture funds. Conventional financers assist only in
Check Your
Progress
6. What is meant by
venture capital?
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investments. Venture capitalists provide promoters capital gap which conventional
financiers may not do always. Venture capitalists provide second stage financing
for full achievement of investee companies’ potential for realizing its business
opportunities which may not be the case for conventional financers. Venture
capitalists provide finance for turnaround of sick, potentially sick but viable
enterprises which may not be the case with conventional financiers. Venture
capitalists encourage entrepreneurial initiatives and innovations which accelerate
business development and the pace of national economic growth. Conventional
financers also help achieve business development and economic growth.
In structuring their investment, venture capitalist may use one or more of
the of share capitals such as ordinary shares, preferred ordinary shares, and
preference shares. Ordinary shares are typically held by the management and
family shareholders rather than the venture capital shares. Venture capital loans
typically are entitled to interests and are usually though not necessarily, re-payable.
Loans may be secured on the enterprise’s assets or may be unsecured. A loan
may be convertible into equity shares. Venture capital investments are often
accompanied by additional financing at the point of investment. Other forms of
finance provided in addition to venture capital equity include loan capitals, clearing
banks, merchant banks, finance houses, factoring companies, mezzanine firms.
Venture capitalist is a wealthy financier who wants to fund startup
companies. They are high risk investors. In accepting these risks, they expect a
higher return on their investment. A venture capitalist manages his/her risk reward
ratio by investing in businesses after careful investigation and selecting the business
which matches their investment criteria. Venture capital firms are generally private
partnerships or closely held corporations funded by private and public pension
funds, endowment funds, foundations, corporations, wealthy individuals, foreign
investors and venture capitalists themselves. Even individuals may be venture
capitalists. Venture capitalists finance new and rapidly growing enterprises,
purchase equity securities, assist in the development of new products/services.
They have a long term orientation. They add value to the enterprise through active
participation. They take higher risk with the expectation of higher rewards.
Assessment of Business Opportunities and Venture Capitalists
The entrepreneur seeks information about venture capitalist and proceeds
to identify the investors to match his/her funding requirements. He/she contacts
the venture capital firm. When the venture capitalist expresses interest in the
entrepreneurial venture as an investment opportunity, he/she views business plan.
The entrepreneur’s business plan should establish the feasibility of the investment
opportunity. The business plan covers the nature of the entrepreneur’s business
which he/she wishes to pursue, how he/she is going to achieve the goals within the
specified time with the help of information details such as estimation of market
potential, business strategies for exploitation of business opportunities, the
management team, financial projections and profitability.
The venture capitalists begin the investment process with an initial review
of the business proposal to assess whether it matches with the investment criteria or
not. Then in a meeting with the entrepreneur and his/her management team, there is
a preliminary screening in terms of the knowledge and ability of the team for
achievement of the strategy and objectives. Then there is an agreement between
the venture capitalist and the entrepreneur in terms of Memorandum of Understanding
(MoU). After the preliminary screening is over and the process of negotiation for
investment is completed then the next step of the investment process is negotiation
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of the final terms and submission of investment proposal to the venture capital
firm. After approval of the investment proposal, legal documents are prepared.
A venture capitalist takes a decision about his/her share in the equity
capital of the enterprise on the basis of valuation of current investments made in
the enterprise. There are different valuation methods which venture capitalist use
before finalizing a decision to invest. Comparable Publicly Held Companies
approach includes assessing comparable publicly held companies and the prices
of those company’s securities. Present Value of Future Cash Flow is another
widely used valuation approach. This method adjusts the value of the cash flow of
the business for the time value of money and the business and economic risks.
Replacement Value Method is used when the buyer wants unique assets. The
valuation of the enterprise is based on the amount of money it would take to
replace the asset or another important asset or system of the venture. Book Value
approach uses the adjusted book value or net tangible asset value to determine the
enterprises’ worth. Earnings approach method provides the best estimate of the
probable return on investment to the potential investor. Factor approach uses three
factors to determine value: earnings, dividend paying capacity and book value.
Enterprises require funds at different stages in their life cycle – before
the beginning, at the time of actual launch, and at the time of expansion. Venture
funding happens in different stages such as seed stage, start up stage, early growth
stage, expansion stage, mature stage, the turnaround stage. Let us see what happens
in each of the stages regarding venture funding:
Seed stage is concerned with testing feasibility of a business idea. Very
few venture capitalists work with seed funding. In this stage, there is exceptionally
high risk and high expectations. If a venture capitalist invests in a seed stage
enterprise, the equity expectations would be very high. At the startup stage, the
business concept is validated. Now for prototype development, money is required.
This stage also involves very high risk, although slightly lesser than the seed stage.
In the early growth stage, funds are required for full scale operations. The
enterprise itself would be a few years old. This could also be the first round of
funding from a venture capitalist. The expansion stage of an enterprise indicates
its profit making status. Mostly the enterprise achieves success on the basis of
market acceptance. The enterprise now wish to increase revenue capital, increase
working capital, product development and penetration of markets. VCs fund this
through second and third round of funding. The mature stage is characterized by
fully profitable operations, positive cash flow and generation of ample income.
Now the entrepreneur needs money for new product development, new market
development, acquisitions, etc. Venture capitalists provide financing, funding for
liquidity either through IPO or sale of business. There is low risk of investment in
mature businesses, when products are losing their effectiveness and also loyal
customers, there is only marginal profit being earned. The reason may be market
fluctuation or wrong management decisions. Some venture capitalists specialize
in funding such businesses. They provide money for re-organization and
restructuring. The money is required to reduce the debt burden, settle liabilities
and to buy out existing venture investments. The risk for venture capitalists is
medium to high.
Venture capitalists are typically very small firms with about five to seven
people. The team decides the period for which they would function which is
generally for about ten year cycles. They expect to make investments during the
early stages and ensure that they get the expected returns.
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There are two types of venture capitalists: General venture capitalists
who invest across industries and specialized venture capitalists who invest only in
certain types of industries. Sometimes venture capitalists focus only on certain
markets. Venture capitalists are required to possess high level of analytical skills
and human relations ability. They have to interact with a rather large audience.
They examine several business plans and communicate with the people. They
also provide non-monetary health to enterprises for achievement of required levels
of growth.
On the basis of types of promoters, venture funds in India can be classified.
Various types of organized/institutional venture capital funds are as follows: Venture
capital funds (VCF) promoted by the central government: control development,
financial institutions such as Risk Capital and Technology Finance Corporation
Ltd. (RCTFC) by the Industrial Finance Corporation of India (IFCI) and Risk
Capital Fund (RCF) by IDBI. VCF is promoted by state government. VCF is
promoted by public sector banks. Canfina by Canara bank and SBI-cap by State
Bank of India. VCF is promoted by foreign banks: private sector companies and
financial institutions like Indus Venture Fund, Credit Capital Venture Fund,
Grindlay’s India Development Fund.
8.4 Business Incubators
New ventures can use an incubator approach for getting started in some
places. The basic purpose of an incubator is to increase the chances of survival
for new ventures with a provision of support services such as financial, managerial,
technical, administrative and the like. The incubators provide such an environment
where small businesses are not alone. The anxiety and pressure associated with a
startup is reduced, it is shared with others.
The term business incubator refers to all such organizations which help
entrepreneurs develop their ideas from inception to launching of a new venture. It
includes technology centres, business and innovation centres. Many incubators
assist in project report preparation. They provide access to financial and technical
services and also sharing equipment and services such as offices communication
services, business services and various facilities and equipment services.
According to National Business Incubator Association (NBIA), an
incubator is “a business support process that accelerates the successful
development of startup and fledgling companies by providing entrepreneurs with
an array of targeted resources and services. These services are usually developed
or orchestrated by incubator management and offered both in the business incubator
and through its network of contacts”.
According to David A. Lewis, Elsie Harper-Anderson, and Lawrence A.
Molner, “Business incubation programmes are designed to accelerate the successful
development of entrepreneurial companies through an array of business support
resources and services, developed or orchestrated by incubator management and
offered both in the incubator and through its network of contacts. A business
incubation programme’s main goal is to produce successful firms that will leave
the programme financially viable and freestanding. Critical to the definition of an
incubator is the provision of management guidance, technical assistance, and
consulting tailored to young and growing companies.
Check Your
Progress
7. Enlist the valuation
methods used by ven-
ture capitalists before
finalizing a decision to
invest in an entrepre-
neurial venture.
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European Commission defined a business incubator as: ‘a place whereby
newly created firms are concentrated in a limited space. Its aim is to improve the
chance of growth and rate of survival of these firms by providing them with a
modular building with common facilities (telefax, computing facilities etc) as well
as with managerial support and back-up services. The main emphasis is on local
development and job creation’.
The business incubator may be set up by government, business alliance,
or academic groups such as universities, research labs or specialized institutes
interested in basic research, with an aim to help small enterprises in the incubator
to ensure their survival through the startup phases. It is supposed to provide an
institutionalized environment to facilitate startup enterprises and their business
ideas to grow. It caters to the entrepreneurs’ needs regarding business planning,
marketing programmes. It includes entrepreneurial advice and mentoring. Through
incubators, entrepreneurs get an easy access to innovators, successful
entrepreneurs and professionals. Along with networking and business advice,
incubators offer a variety of resources and services such as marketing assistance,
technology assistance, business training programmes, help in financial management
and accounting, access to bank loans and the like. They also provide access to
angel investors, venture capital. The incubator always provides mentorship, hands-
on support, and also professional services. Business incubators improve the chances
of survival as well as growth prospects by providing a support in the form of
sharing facilities and providing services and enabling the entrepreneurs to reduce
overhead costs.
In incubator, an idea is developed and then an external team is engaged to
launch and manage it; and the incubator takes a significant equity share for its
services. Or an external team is engaged with its ideas and incubator provides
support, training and deals with mentoring; and incubator charges a monthly fee to
share and utilize the incubator’s resources over a period of time. Generally,
entrepreneurs pay a monthly fee to participate in the programme.
Incubators mainly support new ventures during the exploration phase aimed
at developing a business model. Through several trials and errors and feedback
from early adopters, it is attempted to develop a prototype of product/service and
test its acceptability by the target customers. Incubator is meant to support in
experimentation as well as assessment.
Some researchers divided incubators into four types: with walls, without
walls (also called virtual incubators), international incubators and accelerators. An
incubator with walls is a business incubation programme with a multitenant business
incubator facility and on-site management. This offers entrepreneurs space to
operate their businesses, but the focus of the programme is on the business
assistance services provided to the start-ups. Virtual incubators do not offer on-
site space for clients although they may have a central office to coordinate services,
for their staff and for meeting the clients. International incubators help foreign
entrepreneurs for their entry. They also provide some specialized services such as
translation services, language training, cultural training, immigration and visa
assistance, housing assistance and the like. Business accelerators may be defined
as a late-stage incubation programme which assists entrepreneurial ventures which
are mature and ready for external financing. Business incubators can also be
categorized by their industry focus as manufacturing incubators, mixed-use or
general purpose incubators, technology incubators, and service incubators. There
are various types of incubators. The objectives of each type vary. Some incubators
Check Your
Progress
8. Do you know the
concept of business
incubator?
State whether the
following is true or
false:
9. Incubators mainly
support new ventures
during the exploration
phase aimed at
developing a business
model
10. Business incubator
is supposed to provide
an institutionalized
environment to
facilitate startup
enterprises and their
business ideas to grow
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are organized by government organizations or departments. Non-profit incubators
are organized and managed through chambers of commerce, associations etc.
8.5 Accelerators (or Seed Accelerator or Business
Accelerators)
Accelerators are the institutions which accelerate the growth of new
ventures by providing numerous services, resources; Business accelerators are
more likely to be financed by venture capitalists. They generally provide all the
services offered by a business incubator. Not necessarily all, but many seed
accelerators do provide physical space. Entrepreneurs gain access to future capital
and business networks through accelerators. One of the main objectives for startups
to participate in an accelerator programme is the connection to a network of
investors and mentors.
According to Miller and Bound, the general characteristics features of an
accelerator are:
• An application process that is open yet highly competitive
• Provision of pre-seed investment, usually in exchange for equity
• A focus on small teams, not on individuals
• Time-limited support comprising programmed events and intensive
mentoring
• Startups supported in cohort batches or ‘classes’
Unlike business incubators, the application process for seed accelerators
is open to anyone, but highly competitive. The accelerator can call selected
applicants for an interview in which a qualified and experienced panel of judges
assess the applicants and their potential. A seed investment in the startups is usually
made in exchange for equity. The focus is on small teams, not on individual founders.
Accelerators very rarely accept a single entrepreneur. Accelerators consider that
all the work associated with startup is difficult to be managed by a single individual.
They believe that instead of as a single individual, a team can give justice to the
task of initiating and managing a venture. The startups receive mentoring and
training from experienced founders and investors during a period of generally
three months. They are required to rehearse. On a ‘demo day’, the startups present
to investors and accelerators end their programmes. Now the startups manage on
their own. If the accelerator retains equity, then the accelerator is obviously
interested to help startup to raise money and be benefitted thereby.
Traditional business incubators are often government funded, generally
take no equity and focus on biotech, medical technology, product-centric companies;
accelerators can be either privately or public funded and focus on a wide range of
industries.
8.6 Angel Investors
Entrepreneurs may wish to help others after enjoying their own success.
They may like to invest in other entrepreneurial ventures. Employees of the enterprise
Check Your
Progress
11. What do you know
about business accel-
erators?
State whether the fol-
lowing are true or
false:
12. Traditional busi-
ness incubators are
often government
funded, generally take
no equity and focus on
biotech, medical tech-
nology, product-cen-
tric companies
13. Accelerators can
be either privately or
public funded and fo-
cus on a wide range of
industries
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may have idle money which they invest in business. They might have been bored
with the daily routine, and monotony associated with their job which no more is
interesting to them. They are in search of some opportunity of their interest in
which they can take pleasure.
An angel investor (also known as a business angel, angel funder, informal
investor, private investor, or seed investor or informal venture capital) is an investor
who provides financial backing for small entrepreneurs in exchange for convertible
debt or ownership equity and also advice. They are typically wealthy individuals.
They usually come with their own money in exchange for equity in that enterprise.
They may be the entrepreneur’s family members or friends. They may be former
entrepreneurs or professionals such as doctors, lawyers, accountants, dentists; or
business associates such as suppliers, vendors, customers, employees, executives,
competitors, brokers. They provide starting or growth capital to promising ventures.
In addition to the supply of money, angel investors play a key role in extending
strategic and operational expertise for new ventures. They also provide social
capital i.e. their personal networks. In the words of Nahapiet and Ghoshal, social
capital is a network of strong personal relationships that provide the basis of trust,
co-operation and collective action.
Mason and Harrison define angel network as “a high net worth individual,
acting alone or in a formal or informal syndicate, who invests his or her own
money directly in an unquoted business in which there is no family connection and
who, after making the investment, generally takes an active involvement in the
business, for example, as an advisor or member of the board of directors”.
In the words of Lerner and Kortum, angel investor is, “a wealthy individual
who invests in entrepreneurial firms. Although angels perform many of the same
functions as venture capitalists, they invest their own capital rather than that of
institutional or other individual investors”.
Unlike venture capitalists, angel investors usually work alone or in very
small groups. They are deemed to be angels in comparison with greedy investors
such as venture capitalists. Unlike venture capitalists, many angels are not motivated
solely by profit. They wish to earn money, at the same time they are motivated to
help entrepreneurs to succeed. They are inspired by a promising business venture
and take risk willingly to invest money in that venture. In return, they do not
expect control of the potentially profitable business in return. In comparatively
less time, entrepreneurs can take investment from angels in comparison with venture
capitalists. Angel investors are more liberal and provide more favourable terms
than other lenders. They are more concerned about helping the entrepreneur than
about the viability of the venture. They are more concerned with helping the
entrepreneur succeed rather than earning profit from their investment.
There is not adequate awareness about angel investment. Individual angel
investors keep information about his/her investment private. But now angel
investment sector is growing. It is becoming more formalized and organized with
creation of angel groups and networks.
Angels can be classified into two groups: affiliated and unaffiliated. An
affiliated angel is in contact with the entrepreneur and/or his/her enterprise; but
not necessarily related to or acquainted with the entrepreneur. A nonaffiliated
angel has no connection with the entrepreneur or his/her business.
Affiliated angels are in contact of the entrepreneurs during routine
functioning of the business. Some customers of products/services of the
entrepreneur may market the products/services to other markets or process the
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products/services further to manufacture new products/services. Such customers
make excellent angels. Suppliers, vendors make money when the entrepreneur
achieves success. Such suppliers, vendors make excellent angels. They may not
directly invest money. They may help in the form of attractive payment terms,
cheaper prices. They may use their influences and help the entrepreneur to borrow
money/seek loan. Familiarity with the business/enterprise/enterprises, make the
affiliated angels successful.
Affiliated angels are contacted easily because of their previous contact
and association. For approaching nonaffiliated angels, advertisements can be placed
in newspapers etc.; business brokers can be approached. Intermediaries, also
called as boutique investment bankers, can help for finding angels. Telemarketing
as well as networking can also help in tapping the probability of searching for
wealthy individuals interested in investing.
8.7 Summary
A new as well a growing enterprise requires capital. For financing the
enterprise, there are number of alternatives available such as entrepreneur’s own
capital, arranging debt finance, seeking an equity partner such as in case of private
equity and venture capital. Private equity refers to any type of non-public ownership
equity securities that are not listed on a public exchange. Private equity includes
both early stage (venture capital) and later stage (buy out expansion) investing.
Venture capital is a means of equity financing for rapidly growing private companies.
In the startup phase, for development, expansion or purchase of a business, there
is a need of finance. Venture capital firms invest funds on a professional basis.
Venture capital is formal or professional equity. It is an important source of funding
for young, technology-based enterprises. It is appropriate for high-growth
enterprises which are usually technology or science based.
Venture capitalists basically deal with equity finance for new enterprises.
It may not be possible for the new entrepreneurs to go to capital market for raising
funds. However, such investment is not exclusively equity investment. The basic
objective of venture capital financing is to earn capital gains on equity, investments
at the time of exit and debt financing is only supplementary. It is a long term
investment in growth oriented small as well as medium enterprises. Venture
capitalists prefer to invest in small and medium scale enterprises preferably in the
early stage of their development.
The term business incubator refers to all such organizations which help
entrepreneurs develop their ideas from inception to launching of a new venture. It
includes technology centres, business and innovation centres. The basic purpose of an
incubator is to increase the chances of survival for new ventures with a provision of
support services such as financial, managerial, technical, administrative and the like.
The incubators provide such an environment where small businesses are not alone.
Accelerators are the institutions which accelerate the growth of new
ventures by providing numerous services, resources. Business accelerators are
more likely to be financed by venture capitalists. They generally provide all the
services offered by a business incubator.
An angel investor is an individual who invest his/her own money in an
entrepreneurial venture. He/she is often an experienced entrepreneur or experienced
person who constitutes an important source of equity capital at the seed and early
Check Your
Progress
14. Do you know the
meaning of angel in-
vestor?
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stage of an entrepreneurial venture. Instead of investing in traditional investment
options, angel investing is preferred due to the possibility of seeking attractive
returns in comparison. Institutional venture capitalists invest other people’s money.
8.5 Key Terms
• Ordinary shares: These are equity shares that are entitled to all income
and capital after the rights of all other classes of capital and creditors
have been satisfied.
• Preference ordinary shares: These are equity shares with special
rights
• Preference shares: These are non-equity shares. Their income rights
are defined and they are usually entitled to a fixed dividend
• Operating cash cycle: The period during which an enterprise buys
raw materials, manufactures goods, scores up inventory, markets the
products, distributes the goods, prepares invoices and receives payment
from the customers
8.6 Questions and Exercises
Questions
1. Explain the role and functioning of business incubators.
2. What do you know about angel investors?
3. Explain the significance of venture funds.
4. Give an account of the guidelines for management of financial resources
during the growth and development of small enterprises.
Exercise
Activity 8.1
Browse the internet and write the profiles of at least five venture capitalists,
accelerators and angel investors each
Multiple Choice Questions
1. Venture capitalists generally do the following:
i. Finance new and rapidly growing enterprises
ii. Purchase equity security
iii. Assist in the development of new products/ services
iv. All the above
2. Which of the following holds true regarding venture capitalist?
i. Add value to the enterprise through active participation
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ii. Take higher risk with the expectation of higher regards
iii. Have a long term orientation
iv. i, ii, iii
3. Pick up the main attribute of venture capital from the following
i. Equity participation
ii. Long term investment
iii. Participation in management
iv. i, ii, iii
4. Arrange the steps of the investment process in a sequential manner:
a. Negotiating investment
b. Preliminary screening
c. Approvals
d. Preparation of legal documents
i. b, a, c, d
ii. a, b, c, d
iii. d, c, b, a
iv. a, c, d, b
5. Which of the following is a valuation method used by venture capitalist
before taking a decision to invest?
i. Replacement value
ii. Present value of future cash flow
iii. Earnings approach
iv. All the above
6. Which of the following is true regarding business incubators?
i. In incubator, an idea is developed and then an external team is
engaged to launch and manage it; and the incubator takes a
significant equity share for its services
ii. An external team is engaged with its ideas and incubator provides
support, training and deals with mentoring; and incubator charges a
monthly fee to share and utilize the incubator’s resources over a
period of time
iii. i, and ii are true
iv. i, and ii are false
7. Which is one of the following is true for incubator?
i. Idea development
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ii. Infrastructure
iii. Structure
iv. All the above
8. Which one of the following applies to accelerator?
i. Getting things done
ii. Startup growth
iii. Action
iv. All the above
9. Working capital management requires the growth entrepreneur to pay
attention to ————
i. Debtors/account receivables
ii. Creditors/account payables
iii. Inventory
iv. i, ii and iii
10. The objective of credit management is ———
i. To obtain optimum sales
ii. To maximize sales
iii. To maximize profitability
iv. None of the above
11. Improper management of working capital means ——————
i. Cash gets locked up in debtors
ii. Cash gets locked up in inventory
iii. Both i and ii
iv. None of the above
12. Pick up the wrong alternative
i. Excessive working capital position indicates idle funds which is not
desirable
ii. Inadequate working capital results in production interruptions and
inefficiencies
iii. Working capital management is management of all aspects of
current assets i.e. cash, marketable securities, debtors, and
inventories and current liabilities
iv. i, ii and iii are wrong
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Answers
Check Your Progress
3. Cash budget
4. True
5. Ordering costs, Inventory carrying costs
9. True
10. True
12. True
13. True
Multiple Choice Questions
1. iv
2. iv
3. iv
4. i
5. iv
6. iii
7. iv
8. iv
9. iv
10. i
11. iii
12. iv
8.7 Further Reading
Hisrich Robert D. Peters Michael P., Shepherd Dean A., Entrepreneurship,
Tata McGraw Hill Education Private Limited, New Delhi, 2010
http://www.cses.co.uk/upl/File/Benchmarking-Business-Incubators-main-
report-Part-1.pdf
https://www.entrepreneur.com/encyclopedia/angel-investor
https://www.inbia.org/docs/default-source/research/download-
report.pdf?sfvrsn=0
Reddy P. Narayana, Entrepreneurship Text and Cases, Cengage Learning,
Delhi, 2010
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UNIT 9: EXIT STRATEGIES
Structure
9.0 Introduction
9.1 Unit Objectives
9.2 Exit Strategy
9.2.1Succession of Business- Transfer to Family/Non-Family members
9.2.2Harvesting Strategy – Direct sale, Employee Stock Option Plan,
Management Buyout
9.2.3Going public (IPO)
9.2.4Liquidation
9.3 Bankruptcy
9.4 Summary
9.5 Key Terms
9.6 Questions and Exercises
9.7 Further Reading
9.0 Introduction
All entrepreneurial ventures do not necessarily succeed. Some enterprises
are closed down. The entrepreneurs may fail in their efforts. They may fail miserably
in management of money, human resource and adoption of new technology, or in
approaching right customers with right approach. There may be some problem in
production set up or with quality of product/service. Some unanticipated financial
problems may not be solved. Maybe something goes wrong in the economy, or
state or nation which is beyond the control of the entrepreneur. Sometimes
entrepreneurs get success in the initial period but later on it may not be possiblefor
them to maintain success. They may not be able to continue the business beyond
a particular life span. And at that time, the entrepreneur has to take a decision to
wind up the enterprise. It is an agonizing and undesirable decision.
Entrepreneurs have a limited time span.Therefore,there is a need of planning
for the future of the enterprise and management succession.There are various
options that an entrepreneur can adopt for harvesting or exiting. He/she may pass
on the business to family members or sell the business. There is a possibility of a
management buyout or a leveraged buyout. Sometimes the entrepreneur may have
to take a painful decision to wind up the enterprise. The decision is inevitable in
several cases. When the entrepreneur is unable to pay attention to manage the
business operations, it leads to liquidation or bankruptcy.
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While planning an exit, the entrepreneur has to maintain transparency. He/she
has to communicate the concerned stakeholders about the possibility of exit. Employees,
partners, vendors, investors, customers, clients should know in advance about the probable
exit plan. The entrepreneur should be prepared to cope up with challenges arising through
the process of exit and after the process of exit is over. He/she should the plan the
process in such a manner as to protect the image of the enterprise.
9.1 Unit Objectives
After going through this unit you will be able to
• Learn the meaning of exit for an enterprise
• Realize the need for exit strategies
• Elucidate the exit strategies available to entrepreneurs
• Comprehend winding up of business
• Explain the pros and cons of Initial Public Offer (IPO)
• Evaluate the option of selling the business
• Know about business liquidation
• Understand the meaning of bankruptcy
9.2 Exit Strategy
Some enterprises tend to exit very early in their life span whereas some
enterprises exit over a longer period of time. Exit may be viewed by entrepreneurs
as an opportunity for wealth generation. Through exits, investors such as venture
capitalists, angels etc reap the return on their investment. They get an opportunity
to liquidate their investments. Serial entrepreneurs convert their dream into reality
and when they take up their dream venture up to a certain level, they typically
move on to the next challenge. Exit is an opportunity for them to create wealth,
they hand over the venture to professionals and continue the search for new
prospects. Some entrepreneurs are not comfortable with a growing organization
beyond a particular level because of different challenges involved with growth. So
they opt for exit. For some ventures the future does not seem to be attractive;and
the entrepreneur is in favour of harvesting the potential of the business.
Every entrepreneur has to give a thought to an exit strategy. This section
presents a number of exit strategies available to entrepreneurs such as an initial
public offering (IPO), private sale of stock, succession by a family member or a
non-family member, merger with another enterprise or liquidation of the enterprise.
Each of the exit strategies has its advantages and disadvantages. An entrepreneur
has to plan and decide an exit strategy at the time of startup stage.
9.2.1 Succession of Business
An entrepreneur may take the decision to hand over the business to family
members. If the business is family owned, it would be easier to find a family
member to entrust the responsibility. If no family member is interested in the
Check Your
Progress
1. What does “exit” in
an enterprise mean?
2. Write down the
important reasons for
entrepreneurs to think
of exits?
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business, then the entrepreneur has to sell the business to outsiders or train some
eligible employee of the enterprise to take over.
Transfer to Family Members
An entrepreneur has to work on succession plan with consideration of
many issues like what he/she will do after handing over the business, what would
be his/her role, duties in the transition stage, whether he/she will work full time, or
part time? Is he/she likely to retire? He/she has to keep an eye on the current
business environment while planning this succession. He/she has to pay attention
to family dynamics in terms of the relationships between various family members,
compatibility of the family members with each other, their income etc. Tax
implications of the decision are also important.
The successor family member should be made familiar with the tasks and
responsibilities of the enterprise. It is always desirable to hand over the responsibility
of running the business with adequate training and ensuring sufficient exposure to
the business environment. It should be seen that the successor is being familiar
with the work culture and operational responsibilities also in a proper manner. To
get a grasp of the entire enterprise, the operations and the scope, the successor
should practice job rotation. The existing employees, especially the senior ones
should be made to interact with the successor and assist him/her. There is a
possibility of conflict to arise while working with the senior employees about
accepting the authority of comparatively junior member of the family as a leader.
They may feel offended. However, in such cases, the successor has to prove his/
her mettle. He/she has to exhibit the talent, ability, potential which resulted in the
choice of the successor. It would be always good to accompany the successor as
an advisor by the owner entrepreneur in the initial phases after assuming the
charge of the enterprise.
Transfer to Non-Family members
Sometimes, an entrepreneur may not find a suitable and eligible family
member to hand over the charge of the enterprise. No family member may be
interested in accepting the responsibility. In such a situation, the entrepreneur can
take the decision to sell the business. Or otherwise he/she can opt to choose a
deserving key employee and train him/her to run the enterprise successfully.
Being associated with the enterprise, the successor employee is well
familiar with the enterprise, the market and all the stakeholders. He/she is
experienced and well-trained. There may not be a major problem in accepting the
successor by the enterprise members. The owner entrepreneur can choose to be
a minority owner, stockholder or a consultant.
The entrepreneur has to decide about the issue of ownership i.e. how
much ownership and control he/she plans to retain with him/her. Managerial ability
and skills of the employee as well as the financial capacity are important
considerations for deciding the extent of transfer of ownership. It is seen that the
transfer or succession of an enterprise takes many years to fulfill all the requirements
of all those who are concerned with the decision. It is often advised to begin the
process of planning and decision making long before the need realizes for sell or
transfer of ownership of the enterprise.
In case of a family business,succession of business to a family member
may take place in the near future. Until then, the entrepreneur may hire a manger
to take care of the business. It may not be very easy to find such an eligible person
for the time being. There is no assurance about equity in the business. There is
Check Your
Progress
3. What do you under-
stand by transfer of
business to non-family
members?
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also uncertainty about the time duration for which the person has to manage the
enterprise. It is difficult to find such a person.
In non-family business situations, there is no question of involvement of
family members.The successor has to be selected either from internal or external
sources. In a partnership firm, the process of finding the successor may be clearly
identified. It might involve a predetermined choice or an option to find the outside
successor for partnership. However, for facilitating the process it is always advised
to have well-defined job descriptions and specification of skills and talent required
for the particular position. There is a need of transparency in the process. Almost
all the employees should be involved in the process so that there would be
acceptance to the final decision. No one would object the decision and leave the
organization with such type of participation in the selection process. The strategy
for succession plan should be clearly communicated to everyone on the organization.
Senior members must be fully committed to the succession plan.
The last option left is harvesting. That is, selling the business to either an
employee or an outsider. Let us discuss the harvesting strategy.
9.2.2 Harvesting Strategy
A number of alternatives are available to the entrepreneur in harvesting
the venture such as direct sale, Employee Stock Option Plan (ESOP), management
buyout. Some of these issues are simple and some comprise complicated financial
matters etc. The entrepreneur has to study all the methods properly and then
decide which one to adopt for his/her enterprise in the light of his/her goals and
priorities. It is always advisable to seek guidance and consultancy of experts before
finalizing the decision.
Direct sale
The entrepreneur can sell the business and retire or may begin the search
of a new venture. When he/she is unable to meet the growing needs of the
enterprise, selling is the only option left;because the enterprise requires additional
resources for survival and growth. Sometimes entrepreneur sells his or her business
and accept an employment in the same business or be a consultant or adviser to
an enterprise. This may be an acquisition form of growth. Large entrepreneurs
wish to grow by acquisition and they are interested in successful small businesses.
When the enterprise is very small or it cannot confirm to the IPO norms
due to some reasons, the only alternative left for the entrepreneur is sale to a
strategic buyer. The valuation and price offers are more attractive than that of
financial investors. Mergers and acquisitions deal with strategic buy-outs as a
growth option. Strategic buyers pay a premium for synergy for a clear addition of
value. In absence of a perfect strategic fit, it is not easy to find buyers at high
valuation. Along with strategic sale out, the other exit routes are sale to financial
investors, sale back to promoters or co-investors.
Direct sale is the most common exit strategy. It requires systematic planning
and proper timing. The entrepreneur has to work on various details which might
be required while initiating and finalizing the sales transactions such as reasons of
selling the business, valuation of the enterprise, condition of machineries, equipment
and other assets, market standing of the enterprise, availability of human resources
in terms of quantity as well as quality.
There are three popular methods of valuation used for business: Market
approach, Income approach, Asset approach. Market approach deals with valuation
Check Your
Progress
4. What do you under-
stand by transfer of
business to non-family
members?
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of business in comparison with other competitors. Private ventures are generally
valued at lower levels than public companies due to their lower equity. The income
approach analyses an enterprises’ income- both present income and future cash
flow. The approach defines future approach. This approach deals with net present
value by discounting future income at agreed rates. The asset approach is based
on assets and liabilities of the enterprise. Sometimes fair market value is used
instead of book value of the assets. Alternatively, this approach considers liquidation
value and the company value are calculated as if all assets are calculated and
debts are repaid. The asset approach is believed to be more accurate method for
valuation of business.
Some entrepreneurs may get the help of business brokers to actually sale
a business. They are busy in their activities. It may not be possible for them to
spare time for finalizing the sale transaction. Brokers help in the sale of business
on a commission basis. The entrepreneurs interested in buying are shown a
comprehensive business plan which exhibits the value of the business. A five-year
business plan provides the buyer entrepreneurs with a future perspective and
potential of the enterprise.
There may be direct sale of the business or otherwisethe entrepreneur
may sell it through a management buyout or a leveraged buyout. The existing
managers of the enterprise may take the opportunity of buying the venture. In
leveraged buyout, an investor obtains a majority of the enterprises’ equity. The
finance may be through borrowed money or debt.
Employee Stock Option Plan(ESOP)
Employee stock option plan (ESOP) is a two to three year plan to sell the
business to employees. The time period depends upon the entrepreneur. The ESOP
is often viewed as an alternative to a pension plan. Small enterprises may not be
able to offer and execute a pension plan. The decision of ESOP is in the interest of
the employees. In ESOP, the founder contributes stock or cash for buying the
owner’s interest in the venture.
ESOP serves as an incentive to employees. It motivates them to put their
best in the work performance since they belong to the organization. They dedicate
their time, energy, attention since they know that they are working for themselves
and they want to enjoy the fruits of their efforts. They take more and more interest
in the future, in the long-term success of the venture. They focus in innovation,
apply new methods and techniques.Loyal employees are rewarded for their
commitment and long-term association. Those who stayed with the enterprise
even in the bad times, now reap the benefits. Through a well-drafted agreement,
the business is transferred to the faithful employees.
ESOP is not a simple plan. It is a complicated one to launch. To calculate
the amount of ESOP package, complete valuation of the venture is required. Several
issues are to be taken into consideration such as taxes, payout ratios, amount of
equity to be transferred per year and the amount actually invested by the employees.
The agreement stipulates whether the employees can buy or send additional shares
of stock after completion of the plan.
After careful evaluation of all the alternative options for harvesting the
venture, the entrepreneur sells his/her business to a family member, or an employee.
Now the entrepreneur’s involvement with the sold business depends upon the sale
agreement or contract with the buyer entrepreneur(s) or new owner(s). As per
the requirement, sometimes the seller entrepreneur stays with the sold enterprise
for a short while until the routine operations are streamlined. In such situations,
Check Your
Progress
4. What are the op-
tions available to an
entrepreneur for har-
vesting his/her ven-
ture?
5. Enlist the methods
available for valuation
of business.
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the seller entrepreneur should negotiate an employment contract that specifies
time, salary, and responsibility. The buyer entrepreneur may not need the seller
entrepreneur for running the business. The buyer entrepreneur may request the
seller entrepreneur to sign an agreement not to engage in the same business for a
specified number of years. These agreements are of different types. They are
prepared by lawyers with all minute details in a clear manner.
An entrepreneur may also plan to retain a business for only a specified
period of time with an intention to sell it to employees. This may involve all
employees through an employee stock option plan or through a management buyout
which allows only few managers of the business to buy.
Management Buyout
An entrepreneur wants to sell or transfer the enterprise to loyal and
deserving employees. The ESOP as discussed above seems to be complicated.
The entrepreneur finds a direct sale a better option. Management buyout often
involves a direct sale of the venture at a predetermined price. The price is calculated
on the basis of valuation of all the assets, past revenues and goodwill.
The sale of an enterprise to key employees takes place for cash or through
any other method of financing. If the value of the transaction is not significant,
then it would be a cash sale. Otherwise, if the value of the business is substantial,
then the sale can be financed through a bank, or the entrepreneur could also opt to
carry the note. This is a convenient arrangement. The income from the sale would
be spread out over a period of time as per the agreement. This system would
provide cash flows and reduce the tax burden. Another alternative of the enterprise
sale could be to use stock as the method of transfer. The buyer managers may sell
voting or non-voting stock to other investors. These funds would then be used as
a full or a partial payment for the venture. A bank or other investors take interest
in buying the stock since the venture has a long standing in the market. Further, it
is continuing with the same management team.
9.2.3 Going public (IPO)
Entrepreneur and other equity owners of the enterprise offer and sell
some part of the organization to the general public through a registration statement
filed with the Securities and Exchange Board of India (SEBI) which is known as
going to the public. Small entrepreneurs need capital for growth which they may
raise through an IPO i.e. Initial Public Offering. It is the first sale of shares to the
company by an enterprisein the capital market. This brings money into the enterprise
from a large number of stockholders. Mostly, newly issued shares are sold and
money is raised. Now the enterprise can have a greater access to capital markets
in the future. This is the most popular form of exit for entrepreneurs and venture
capitalists. It is the process though which part of ownership is offered to the public
by a sale of equity shares. After the IPO is over, the enterprise gets listed and
traded on a stock exchange.
IPO in India is done either by book building method, fixed price method or
a combination of both of these methods. The steps of the process include: preparing
draft, offer document for SEBI approval, offering the document to registrar of the
issue and stock exchanges, issuingprospectus, opening public issue for investors,
closing the issue, and finalizing the pattern of share allotment and transferring
shares to investors. It is imperative that the risk factors should be given explicitly
in the prospectus to ensure that the buyers of stock are not misled.
Check Your
Progress
6. What is meant by
employee stock option
plan?
Check Your
Progress
7. What is the mean-
ing of management
buyout?
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There are several advantages as well as disadvantages of going public.
An entrepreneur has to carefully assess the benefits as well as limitations of going
public before initiating the process.
Going to the public is a sign of growth for the entrepreneur. It creates a
good image in the society. It provides for strength and transparency. Public
companies enjoy a good status in the society. They are better known and have a
good access to numerous sources of capital. When an entrepreneur on his/her
own is not in a position to mobilize funds needed for expansion, diversification,
acquisitions, R & D, working capital, or marketing of the business, then he/she
goes to public with limited dilution of the entrepreneur’s ownership stake. The
additional money borrowed increases the capacity of the entrepreneur to acquire
more resources. With IPO, there is no botheration of fixed repayment commitment
as in case of bank loans. Trading of shares on public exchanges provides them
market value and also liquidity to the enterprise. This liquidity leads to increased
wealth to the entrepreneurs. Entrepreneurs can offer stock options to their
employees so as to attract and retain them with the enterprise.
The procedure for going to the public is tedious, and complicated. It is
time consuming and expensive for small entrepreneurs. A number of formalities
are required before being allowed to go public. A number of regulations need to be
complied with. Entrepreneurs need to plan properly and interact with investment
bankers, underwriters, lawyers, advisors, accountants etc. For going to the public,
confidential information of the small enterprise need to be disclosed to the public.
Going public means inviting and adding more number of owners which may result
into loss of control of the entrepreneur and less authority over the enterprise.
There is a need of shareholders’ approval for major decisions. So there is less
freedom and flexibility in management. It is not very easy to convince the public to
invest into an IPO. Generally, people are ready to invest in reputed companies. To
create awareness and promote image, an extensive promotion programme is required
before the launch of IPO. To satisfy the public, the entrepreneur has to continue
with growth and maintain an increasing trend of growth which may give rise to
stress and heavy pressure for the entrepreneur. There is a possibility of the enterprise
being acquired through acquisition of shares.
9.2.4 Liquidation
When an entrepreneur starts realizing about the troubles and difficulties
the enterprise is going through, he/she taps various options to recover the situation.
All the way outs are tried to avoid bankruptcy/closure of the business. He/she
tries for reorganization and restructuring of the organization. He/she identifies the
profitability, growth rate, and future prospects of various divisions, branches,
sections, product lines, products and the like. Then he/she may take a decision to
eliminate unprofitable/loss making/weak products, divisions, branches. Further,
economy drive is adopted. Some low cost items are offered.
If the enterprise generates regular income, still the entrepreneur has a
chance to control the situation. He/she tries for getting extended time for making
payments. A plan for repayment is made with proper time schedules with mutually
agreeable terms and conditions. This enables the entrepreneur to continue to own
and operate the business.
Even if after getting extended time for payments, the entrepreneur is unable
to come out of the financial crisis, the only option left is liquidation. The entrepreneur
files a voluntary bankruptcy petition. The enterprise is considered as bankrupt. If
Check Your
Progress
8. IPO is ——
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creditors file a petition about bankruptcy without the consent of the entrepreneur,
it is involuntary bankruptcy.
Liquidation is a process of winding up of a business by selling its assets
for the sake of paying off the liabilities. The secured creditors are given priority in
payment and then the shareholders are given the remaining amount in proportion
of their shareholdings.
Modes of Winding up
The winding up of a company may be either –
i. By the tribunal; or
ii. Voluntary
i. Winding up by the Tribunal.
Circumstances in which company may be wound up by Tribunal:
a. If the company is unable to pay its debts;
b. If the company has, by special resolution, resolved that the company be
wound up by the Tribunal;
c. If the company has acted against the interests of the sovereignty and
integrity of India, the security of the State, friendly relations with foreign
States, public order, decency or morality;
d. If on an application made by the Registrar or any other person authorized
by the Central Government by notification under this Act, the Tribunal is
of the opinion that the affairs of the company have been conducted in a
fraudulent manner or the company was formed for fraudulent and
unlawful purpose or the persons or the persons concerned in the formation
or management of its affairs have been guilty of fraud, misfeasance or
misconduct in connection therewith and that it is proper that the company
be wound up;
e. If the company has made a default in filling with the Registrar its financial
statements or annual returns for immediately preceding five consecutive
financial years; or
f. If the Tribunal is of the opinion that it is just and equitable that the company
should be wound up.
Company Liquidators and their appointments:
1. For the purposes of winding up of a company by the Tribunal, the Tribunal
at the time at the passing of the order of winding up, shall appoint an
Official Liquidator.
2. The terms and conditions of appointment of a Liquidator and the fee
payable to him/her shall be specified by the Tribunal on the basis of task
required to be performed, experience, qualification of such liquidator
and size of the company.
3. On appointment as a Liquidator, as the case may be, such liquidator shall
file a declaration within seven days from the date of appointment in the
prescribedform disclosing conflict of interest or lack of independence in
respect of his/her appointment, if any, with the Tribunal and such obligation
shall continue throughout the term of his/her appointment.
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Removal and replacement of liquidator:
1. The Tribunal may, on a reasonable cause being shown and for reasons
to be recorded in writing, remove the provisional liquidator or the
Company Liquidator, as the case may be, as liquidator of the company
on any of the following grounds, namely:-
a. Misconduct;
b. Fraud or misfeasance;
c. Professional incompetence or failure to exercise due care and
diligence in performance of the powers and functions;
d. Inability to act as provisional liquidator or as the case may be,
Company Liquidator;
e. Conflict of interest or lack of independence during the term of his
appointment that would justify removal.
2. In the event of death, resignation or removal of the provisional liquidator
or as the case may be Company Liquidator, the Tribunal may transfer
the work assigned to him or it to another Company Liquidator for reasons
to be recorded in writing.
Effect of winding up order:
The order for the winding up of a company shall operate in favour of all
the creditors and all contributories of the company as if it had been made out on
the joint petition of creditors and contributors.
Submission of report by company Liquidator:
1. Where the Tribunal has made a winding up order or appointed a Company
Liquidator, such liquidator shall, within sixty days from the order, submit
to the Tribunal, a report containing the following particulars, namely:-
a. The nature and details of the assets of the company including their
location and value, stating separately the cash balance in hand and
in the bank, if any, and the negotiable securities, if any, held by the company:
Provided that the valuation of the assets shall be obtained from
registered values for this purpose;
b. Amount of capital issued, subscribed and paid-up;
c. The existing and contingent liabilities of the company including
names, addresses and occupations of its creditors, stating separately
the amount of secured and unsecured debts, and in the case of
secured debts, particulars of the securities given, whether by the
company or an officer thereof, their value and the dates on which
they were given;
d. The debts due to the company and the names, addresses and
occupations of the persons from whom they are due and the amount
likely to be realized on account thereof;
e. Guarantees, if any, extended by the company;
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f. List of contributors and dues, if any, payable by them and details of
any unpaid call;
g. Details of trademarks and intellectual properties, if any, owned by
the company;
h. Details of subsisting contracts, joint ventures and collaborations, if any;
i. Details of holding and subsidiary companies, if any;
j. Details of legal cases filed by or against the company; and
k. Any other information which the Tribunal may direct or the Company
Liquidator may consider necessary to include.
2. The company Liquidator shall include in his/her report the manner in
which the company was promoted or formed and whether in his/her
opinion any fraud has been committed by any person in its promotion or
formation or by any officer of the company in relation to the company
since the formation thereof and any other matters which, in his/her
opinion, it is desirable to bring to the notice of the Tribunal.
3. The Company Liquidator shall also make a report on the viability of the
business of the company or the steps which, in his opinion, are necessary
for maximizing the value of the assets of the company.
4. The Company Liquidator may also, if he/she thinks fit, make any further
report or reports.
5. Any person describing himself in writing to be a creditor or a contributory
of the company shall be entitled by himself/herself or by his/her agent at
all reasonable times to inspect the report submitted in accordance with
this section and take copies thereof of extracts therefrom on payment of
the prescribed fees.
ii. Voluntary winding up
Circumstances in which company may be wound up voluntarily:
A company may be wound up voluntarily,-
a. If the company in general meeting passes a resolution requiring the
company to be wound up voluntarily as a result of the expiry of the
period for its duration, if any, fixed by its articles or on the occurrence of
any event in respect of which the articles provide that the company
should be dissolved; or
b. If the company passes a special resolution that the company be wound
up voluntarily.
If the entrepreneur wishes to go back to the business, he/she needs to set
up a new business.
Liquidation provides little opportunity for the recovery of funds for creditors.
To petition for a company’s liquidation, creditors have to bear costs.
9.3 Bankruptcy
Check Your
Progress
9. Can you explain the
meaning of liquida-
tion?
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Entrepreneurs wish to have a continued existence of their ventures.
However, some ventures fail due to one reason or the other. It is essential to know
the options for ending and salvaging a venture. This section deals with the issues
and decisions involved in ending the venture.
Bankruptcy is not always the end of a business. It does offer an opportunity
to an entrepreneur to reorganize or merge with another enterprise. However, in
several situations, the entrepreneur has to face liquidation of his/her venture.
However, it leaves behind many biases for the entrepreneurs and others. An
entrepreneur who has declared himself/ herself insolvent or bankrupt is not
considered trust worthy and creditworthy by the community, financing agencies
and suppliers. The financing agencies will not entertain his application for financial
assistance for his new venture at least for a certain duration of time.
Hence, it is always advisable for the entrepreneur to address the crises
areas, try to rehabilitate the venture by trying all options before declaring bankruptcy.
Here below are a few ways to avoiding bankruptcy.
Reorganization: Entrepreneur has to work on several fronts simultaneously.
It is procurement, processing, market, recovery of proceeds, human resource,
statutory obligation so on and so forth. It is not always possible to be proficient on
every front, which leads to crises. Problem can arise on any front any time. If the
entrepreneur has to survive and sustain the enterprise he/she has to identify the
problem and reorganize the structure to make it sustainable. This can work only
when one or two fronts out of ten are having crises due to its problems.
If it is human resource then it can be solved by either impressing on staff
the need to work with trust and wholeheartedly. He/she needs to use motivational
skills, offer incentives, improve the working conditions etc. to get them to see the
light or fire them with compensation and get new staff recruited for better work
culture and enhanced productivity. If the workforce has stayed with the enterprise
for a long period, their salary wage is disproportionately high vis-a-vis their
productivity due to regular increments;in such cases it is a better option to retire
them with compensation and appoint a fresh staff with better qualities on less
salary or wage.
If it is a procurement problem such as quality of material, delayed supply
of materials, untrustworthy supplier, inordinately high cost of material or logistic
then the structure can be reorganized by sourcing other suppliers, logistic services
without discontinuing the present suppliers for certain duration of time. It may
happen that the existing suppliers feel the heat and fall in line.
If it is processing problem, the entrepreneur can think of alternate
technology, material, process or process flow. This is needed to be done with the
help of experts in the field. Entrepreneur can think of changing or adding the
product(s) which can be produced with the same installation. He/she can think of
changing the packaging or adding a few more features for value addition.
If it is a finance problem, the financing agencies are prepared to reorganize
the loans; creditors are ready to permit the entrepreneur for delayed payments.
This can happen only when other fronts such as production and marketing are
doing well and they envisage their loans and credits are safe. This re-organisation
of finance is considered if the entrepreneur sustains loss due to a situation which
is beyond his/ her control such as market fluctuation, government decisions etc.
Financing agencies also entertain one time settlement proposals under
which a few concessions are given. One time settlement amount also can be paid
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in installments spread over a period of time with concessional rate of interest on
the outstanding loans.
Extended Time Payment Plans: If the entrepreneur defaults on repayment
of loans to the financing agencies or payment to creditors he/she can ask for re-
schedulement of the same with a concrete plan. Such a situation arises when the
sale proceeds are delayed and book debts go high beyond normal level. Enterprise
may offer cash discount for speedy recovery to ensure payment to financing
agencies and creditors.
Liquidation: Entrepreneur can think of salvaging or putting to more
remunerative use surplus assets such as land, building, machinery or material.
Land and building can be sold or given on rent, machinery can be rented out on
hour-rate basis and the surplus inventory can be salvaged to raise the required
funds for sustaining. This is partial liquidation of assets without hampering the
basic performance and helps a lot.
Business Turnarounds: It is seen that a truly motivated and committed
entrepreneur with whatever situation the enterprise is can get it out of crises with
sustained efforts and strategies. Taking a finance partner, technocrat partner, going
in for ESOP option, adding value added products to or removing loss making
products from the range of products, pumping in funds, reducing the debts by
partial liquidation of assets, strengthening marketing network, cutting costs on
production floor and in market are a few of many ways to avoid debt trap and
financial crises which leads to being bankrupt. It is a result of innovative ideas in
the areas of crises the entrepreneur implements can bear result and turnaround of
enterprise.
9.4 Summary
An entrepreneur has to plan and decide an exit strategy at the time of
startup stage. Some enterprises tend to exit very early in their life span whereas
some enterprise exit over a longer period of time. Exit may be viewed by
entrepreneurs as an opportunity for wealth generation. Through exits, investors
such as venture capitalists, angels etc reap the return on their investment. They
get an opportunity to liquidate their investments. Serial entrepreneurs convert their
dream into reality and when they take up their dream venture up to a certain level,
they typically move on to the next challenge. Exit is an opportunity for them to
create wealth, hand over the venture to professionals and continue the search for
new prospects. Some entrepreneurs are not comfortable with a growing organization
beyond a particular level because of different challenges involved with growth. So
they opt for exit. For some ventures the future do not seem to be attractive. And
the entrepreneur is in favour of harvesting the potential of the business.
Entrepreneurs have a limited time span. Therefore, there is a need of
planning for the future of the enterprise and management succession. An
entrepreneur can consider different strategies for harvesting or exiting such as:
passing the business to a family member, selling the business including a
management buyout or a leveraged buyout, going public i.e. initial public offering
(IPO), or dissolving the business. There are advantages as well as limitations
associated with different exit strategies. With involvement of a family member,
integrity and continuity of the business is maintained. Family may not be interested
in the business. Engaging a family member in the business may be harmful for
relationships. The option of sale of business is beneficial during recession or
Check Your
Progress
10. What is meant by
turnaround?
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depression. However, value negotiation has to be properly managed. There is no
assurance about the brand or idea integrity. It may not protect the interests of the
employees. An entrepreneur may also plan to retain a business for only a specified
period of time with an intention to sell it to employees. This may involve all
employees through an employee stock option plan or through a management buyout
which allows only few managers of the business to buy.IPO is an attractive source
of financing which creates liquidity. It involves prestige. But it is an expensive
process. It results in dilution of ownership. It generates additional responsibility
towards shareholders. There is a pressure to meet earnings per share. There is a
need for regular scrutiny. Dissolving the business is the most undesirable and the
least financially attractive exit strategy. However, the entrepreneur can pursue
any new activity of his/her choice. Sometimes the entrepreneur may have to take
a painful decision to wind up the enterprise. The decision is inevitable in several
cases. When the entrepreneur is unable to pay attention to manage the business
operations, it leads to liquidation or bankruptcy. Bankruptcy is not always the end
of a business. It does offer an opportunity to an entrepreneur to reorganize or
merge with another enterprise. However, in several situations, the entrepreneur
has to face liquidation of his/her venture.
While planning an exit, the entrepreneur has to maintain transparency.
He/she has to communicate the concerned stakeholders about the possibility of
exit. Employees, partners, vendors, investors, customers, clients should know in
advance about the probable exit plan. The entrepreneur should be prepared to
cope up with challenges arising through the process of exit and after the process
of exit is over. He/she should the plan the process in such a manner as to protect
the image of the enterprise.
9.5 Key Terms
• Exit: A way out; Point at which an investor (usually a venture capitalist)
sells his or her stake in an enterprise to realize his /her gains (or losses).
Generally it is a move planned at the time of investment decision and
may also be included in the firm’s overall plan.
• Exit strategy: Plannedexit of an owner from his/her business which
maximize benefit and/or minimize damage; a way of ‘cashing out’ an
investment
9.6 Questions and Exercises
Questions
1. What do you mean by ‘going public’? What are the advantages and
disadvantages of going public?
2. Why is going public a popular option for growth of a successful small
enterprise? What are the challenges involved in going for an IPO?
3. What advice would you give to an entrepreneur planning to handover
control to a family member?
4. What are the typical signs of a venture approaching bankruptcy?
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5. Under what circumstances will you take a decision to sell your business
that you have started?
6. Under what conditions will you not go public?
7. What are the reasons that would lead an entrepreneur to consider exiting
the enterprise? What are the possible exit routes?
8. Write in detail about different exit strategies available to an entrepreneur.
Exercise
Activity 8.1
Contact at least three entrepreneurs about their plans for passing their
ventures on to the next generation.
Multiple Choice Questions
1. Which one of the following is not an advantage of going public?
i. Enhanced ability to borrow
ii. Liquidity and Valuation
iii. Disclosure of information
iv. Prestige
2. Which one of the following is not a disadvantage of going public?
i. Loss of control
ii. Enhanced ability to raise equity
iii. Expensive
iv. Pressures to maintain growth
3. Entrepreneurs think of exits due to the following reason
i. Wealth creation
ii. Lack of future prospects
iii. Both i and ii
iv. None of the above
4. Exit communication is critical to all except –
i. Bank
ii. Employees
iii. Competitors
iv. Investors
5. While going for IPO, the following factor is to be considered
i. The time of exit
ii. The economic situation
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iii. The sentiment on the trading markets
iv. All the above
6. An exit benefits all of the below mentioned group directly except
i. Entrepreneur
ii. Financial investors
iii. Employee ESOP
iv. Strategic vendors
7. Pick the odd one out
i. Going to the public is a sign of growth for the entrepreneur
ii. The procedure for going to the public is tedious and complicated
iii. The procedure for going to the public is time consuming and
expensive
iv. A number of formalities are required before being allowed to go
public
Answers
Check Your Progress
8. Initial Public Offering
Multiple Choice Questions Exercise
1. iii
2. ii
3. iii
4. iii
5. iv
6. iii
7. i
9.7 Further Reading
Hisrich Robert D., Peters Michael P., Shepherd Dean A., Entrepreneurship,
Tata McGraw Hill Education Private Limited, New Delhi, 2010
http://finmin.nic.in/reports/DraftInsolvencyBankruptcyBil2015.pdf
Raichaudhuri Anjan, Managing New Ventures Concepts and Cases on
Entrepreneurship, PHI Learning Private Limited, New Delhi, 2010
Shankar Raj. Entrepreneurship Theory and Practice, Vijay Nicole Imprints
Private Limited Chennai, 2012
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UNIT 10: NETWORKING
Structure
10.0 Introduction
10.1 Unit Objectives
10.2 Meaning of Networking
10.3 Benefits of Networking
10.4 Entrepreneurs’ Networks
10.5 Summary
10.6 Key Terms
10.7 Questions and Exercises
10.8 Further Reading
Appendix I
Appendix II
10.0 Introduction
“Coming together is a beginning, staying together is progress, and
working together is success” – Henry Ford
This unit presents the role and importance of personal and social human
network in entrepreneurial success. Successful entrepreneurs possess the ability
to network. They know how to network effectively. It is more than meeting people.
It is a plan to be in contact with the people who may do business with you and
develop relationships with them.
Networking must be focused and strategic. Entrepreneurs are required to
be proactive. They make a networking plan, commit to it, imbibe networking skills
and then execute the plan. Networking plan takes care of several issues in a
systematic manner such as the objectives of networking, the target individuals and
organizations to be contacted for business purposes, image building.
10.1 Unit Objectives
After going through this unit, you will be able to
• Know the meaning of networking
• Realize the benefits of networking
• Be aware about various networking forums for entrepreneurs
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• Appreciate good networking practices
10.2 Networking
Networking is simply interacting with people and entering into numerous
transactions for mutual benefit. It is the process of developing relationships with
the stakeholders i.e. with people and organizations with an eye on getting the
things done.
Networks can be personal or social. Personal network comprises of family
members, friends, relatives. Social network is one level ahead of the personal
network which outspreads beyond the personal contacts to comprise of business
associates, partners, suppliers, customers, vendors, investors, debtors, creditors,
consultants, advisors, experts, professionals etc.
According to Raj Shankar, Networking is defined as the process of
identifying, aligning, engaging, adding value thereby creating and sustaining
relationships.
According to Hubert Osterle, Elgar Fleisch, Rainer Alt, networking is a
socioeconomic business activity by which businesspeople and entrepreneurs meet
to form business relationships and to recognize, create, or act upon business
opportunities, share information, and seek potential partners for ventures.
In Business Dictionary, networking is defined as creating a group of
acquaintances and associates and keeping it active through regular communication
for mutual benefit. Networking is based on the question “How can I help?” and
not with “What can I get?”
As per Wikipedia, in business, entrepreneurial networks are social
organizations offering different types of resources to start or improve entrepreneurial
projects. Having adequate human resources is a key factor for entrepreneurial
achievements.
According to Merriam-Webster.com, networking is the exchange of
information or services among individuals, groups, or institutions; specifically: the
cultivation of productive relationships for employment or business.
In the words of Susan Ward, “business networking is the process of
establishing a mutually beneficial relationship with other people and potential clients
and/or customers. The primary purpose of business networking is to tell others
about your business and hopefully turn them into customers”.
Networking is a business activity by which entrepreneurs, businessmen
meet to form mutually beneficial business relationships. A business network is a
system to reach markets. It is an effective method to reach target customers. It is
possible to approach opinion leaders, decision makers through business networking
whichotherwise is very difficult through any other means or through conventional
advertising and promotion.
Networking can also be considered as a marketing technique. It becomes
more effective with personal contacts, referrals, and recommendations. Very
conveniently business opportunities can be developed though business networking.
Business networking can be considered as a low-cost marketing technique for
developing contacts, relationships and sales opportunities. There is sharing of
information. Also these networks recognize, create and act upon business
Check Your
Progress
1. What is meant by
networking?
2. Can you define net-
working in your own
words?
Networking
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opportunities. Possibilities of strategic alliances, partnerships, joint ventures and
the like are facilitated by such type of business networks.
The members in such type of networks meet regularly. Either they conduct
face-to-face meetings, gatherings or may contact through phones, e-mails etc.
Networking is commonly done at business or community events. It is usually
organized by business networking groups or organizations. These events may be
arranged on a local or national level. Networking is also done virtually with the
help of online networking sites. This option is low cost and has the added advantage
of local as well as worldwide contact. The networking eventsare usually planned
around different activities. The members are given opportunities to meet and
interact with the other networkers either before the activity or after the activity is
over. Such interactions prove fruitful for building long lasting business relationships
with free sharing of ideas, thoughts and knowledge details.
Nowadays, there is a popularity of online social and business networking
websites such as WhatsApp, Facebook, LinkedIn, Twitter, My Space, You Tube,
Flickr, blogs, wikis etc. Various online social networking sites have become popular.
These sites are useful for entrepreneurs to create networks and increase new
personal contacts. There are various online newsletters of businesses, industry
associations from which entrepreneurs can get latest information and updates
about conferences, events, and opportunities.
Person-to person interaction is just indispensable. Wherever possible face-
to-face network be should be adopted. However, we should not overlook the
effectiveness and convenience of social media platforms for the sake of
communicating with business contacts.
The networks support entrepreneurs by facilitating business operations
by extending favours and using influences. It is not about the use of social medium,
web or internet only. But it is about the use of personal human network of an
entrepreneur that plays a vital role in his/her life.
Business networking can be conducted at a local level, or at a regional
level, national level or international level. There are several places or forums wherein
networking activities can be initiated. An entrepreneur can begin the networking
efforts with his/her own schools, colleges, universities, institutions in which he/she
has past association of some kind. It is easy to begin development of professional
relationships with people and places of previous acquaintance for developing
confidence. One or more family members/friends may be good at networking.
People contact them for dissemination of some important information. They look
upon the networkers as a channel for passing on information or for seeking
assistance of any kind. Such types of networkers maintain relationship not for
immediate personal gain. They work for something beyond their personal interests
and benefits.
Customers are a good starting point for networking. When you are beginning
to build relationships with known members, it is always easier to extend those
relationships in future also. Along with customers, potential customers also would
develop favourable impressions about the entrepreneurs and thereby become a
part of network.
Peer community i.e. the industry in which the entrepreneurs operate
presents another important networking opportunity for entrepreneurs. The other
players in the industry become aware about the entrepreneurs’ existence and
presence. And entrepreneurs know what the others are doing. This enables
availability of interesting and meaningful information about the competitors. Of
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course there is a risk of disclosure of new business ideas and business practices to
the competitors. However, interactions with other industry players i.e. co-partners,
co-founders, key personnel, core team members and the like may prove fruitful
from strategic perspective. Entrepreneurs may pick up promising employees,
strategic partners and associates through such networks.
Entrepreneurs can find networking opportunities on the basis of their age,
hobbies, interests, lifestyles and the like. Such type of lifestyle groups meet
frequently. They share their experiences, interests, problems as well as
achievements. Then there are numerous opportunities for developing networks on
the basis of common interests based on some subjects, activities, philosophies etc.
Also several networks are developed out of the need to serve the society, to fulfill
certain needs etc. Such kind of common purpose groups also are not uncommon.
There are several different ways, places and means to build networks. It
is always advisable to be in touch with as many relevant networks as possible on
the basis of pre-decided networking objectives and avail the advantages for taking
the business to the higher levels.
10.3 Benefits of Networking
By learning more and more about networking systematically, an
entrepreneur consciously builds networks and seeks success out of that. It is a
skill and it can be learnt and practiced. It requires many traits such as patience,
genuineness, honesty, empathy, social responsibility and the like. It can be acquired
if there is a will. No one is born as a natural networker. But everyone definitely
can become one.
Networking increases visibility of the entrepreneurs. They get noticed for
their work and their contribution to the society through regular contact by means
of the networking opportunities. They can build their image in the manner in which
they wish by ensuring regular attendance to business and social events.Regular
interaction with optimistic and dynamic entrepreneurs improves the motivation
level and raises morale of the networkers. Sharing of experience as well as
knowledge is one more advantage which networkers seek.
Networking helps entrepreneurs for setting up a new venture or grows an
existing business. Through networking, networkers can become aware about new
opportunities. It is an inexpensive way to promote and increase business. This is
basically the prime reason for participation in networking activities and therefore
entrepreneurs choose to seek membership of different networking groups.
All the networkers are motivated to help others. Obviously tremendous
opportunities are thrown open through a huge business network. It is also helpful
for finding customers, suppliers, business partners, investors. Also, it is advantageous
to seek client leads, to tap the probabilities of partnerships as well as joint ventures,
to find the chances of sales of assets or the business venture. The services of
accountants, lawyers and other professionals can be hired with recommendations
of other networkers. It is very much convenient to fulfill the needs of equity financing
by finding venture capitalists, accelerators, angel investors through networking
channels.
Entrepreneurs tell others about their ventures and gain new clients.
Networking is a way to build a sustainable business. Due to familiarity with the
Check Your
Progress
2. Where should you
network?
Check whether the fol-
lowing is true or false:
3. Networking is
based on the question
“How can I help?”
and not with “What
can I get?”
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networkers, there is an assurance that the opportunities match with the
entrepreneurs’ vision and goals.
Business networking is a cost-effective way of increasing awareness about a
particular business and enhancing the scope of market as well as number of customers.
Entrepreneurs get many referrals through networking. The important thing is these
referrals can be turned into clients with proper follow-up. Since they are suggested by
acquaintances, these referrals are of high quality. It also contributes to increase in
sales, and income. This method requires comparatively low-cost in comparison with
advertising, public relations etc.being based on personal contacts and relationships.
Networks are very much helpful for sharing information of various types.
They are also useful for exchanging business leads.Through networking,
entrepreneurs may come across numerous attractive business opportunities. They
can find investors, business partners, new suppliers, new customers through
networks. Effective business networking connects individuals and organizations
together. With continued relationships, trust builds up among the members.
Networking makes referrals to other members and increases business significantly.
It provides exposure to numerous business professionals. All the members help
each other. They serve as walking advertisements for each other. Some
entrepreneurs are recognized as a strong resource and they often are approached
for queries regarding ideas, suggestions, names etc.
Majority of the people prefer to enter into transactions with the people they
know or who are known to those they know. For becoming known and developing
some kind of trust is not an easy time. It requires hard work, time, energy, relentless
efforts and what not. Networking is a device with which you can interact with known
people and your chances of being known to many increases manifold. It is the most
proficient, fruitful and enduring way to build relationships and enhance effectiveness.
Human being by nature is a social being. Everyone is a networker in his/
her own way. Everyone strives for friendship, association, community. We are
talking about business networking. While developing professional associations,
personal friendships also get developed.Since all those who have common interest,
such types of like-minded persons meet regularly. The networkers can get advice
also even for personal matters from the other networkers.
Entrepreneurs get to know about several success stories of entrepreneurial
ventures through networking. They get an opportunity to learn from the success
of others.
Networking enables entrepreneurs to come across numerous influential
people who otherwise may not be accessible to them. Several times, entrepreneurs
experience that, ‘it’s not what you know, but who you know’. This holds valid for
their businesses. Ultimately, what matters is not ‘who you know but who knows
you’. Networking offers several such sources of contacts and links to be in touch
with big shots. Along with the networkers, entrepreneurs add networkers’
networkers also in their own network. And with that, the extent of advice and
expertise to be availed by the entrepreneur networkers increases manifold.
Networking is an effective technique for solving various types of business
problems and critical issues. At the same time, those who provide the solutions get
the pleasure of helping others. Networking enables entrepreneurs to help others
and also seek help from others. Those who seek help and those who offer help
both increase their confidence.
Check Your
Progress
4. Write down few ad-
vantages of network-
ing.
5. Do you find any dis-
advantages of net-
working?
Check whether the fol-
lowing is true or false:
6. No one is born as a
natural networker. But
everyone can defi-
nitely become one.
7. Networking is a skill
and it can be learnt and
practiced
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10.4 Entrepreneurs’ Networks
There are some associations which are specifically formed for the purpose
of stimulating the spirit of entrepreneurship; and supporting the budding as well as
successful, well-settled and established entrepreneurs. These associations provide
a platform where entrepreneurs come in contact with each other and freely seek
guidance, advice as well as provide support to each other. A representative, and
not exhaustive, list of entrepreneurs’ networks is given below:
1. Entrepreneurs’ Organization (EO):
https://www.eonetwork.org/
The Entrepreneurs’ organization (EO), the peer-to-peer network
exclusively for entrepreneurs, is founded in 1987. It enables entrepreneurs
to learn and grow from each other leading to greater business success
and an enriched personal life. It is a global business network of 11,000+
leading entrepreneurs in 157 chapters and 48 countries. It educates,
transforms, inspires, and offers valuable resources in the form of global
events, leadership development programmes, an online entrepreneur
forum and executive education opportunities and the like.
2. The Indus Entrepreneurs (TiE):
www.tie.org
The Indus Entrepreneurs (TiE), was founded in 1992 in Silicon Valley by
a group of successful entrepreneurs, corporate executives and senior
professionals with roots in the Indus region. There are 13,000 members,
including over 2,500 charter members in 61 chapters across 18 countries.
TiE’s mission is to foster entrepreneurship globally through mentoring
networking, education incubating and funding. TiE influenced liberalization
of key economic sectors in India and Pakistan. It has significant
involvement in social entrepreneurship.
3. LinkedIn:
www.linkedin.com
LinkedIn, a business-oriented social networking service, launched in 2003.
A useful website for those who want to network with like-minded
individuals or those who search for jobs, or wish to set up an enterprise.
This professional network allows entrepreneurs to be introduced and
collaborate with other professionals. This website offers many resources
for entrepreneurs. They can discover and catch right business
opportunities; search for service providers, partners. With proper branding,
entrepreneurs come across appropriate business opportunities
4. Trepup:
www.trepup.com
Founded by John Verbic, who, along with Rahul Dhingra, developed the
first concept beta for TrepUp in 2012.trepup claims to be a trusted
community of 551,239 businesses. Entrepreneurs can browse global
business directory, search for products, updates, reviews; discover
businesses that for their usual and unusual needs.
5. National Entrepreneurship Network (NEN):
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www.nenglobal.org
National Entrepreneurship Network (NEN), founded in 2003 by
Wadhwani Foundation with a mission to inspire, educate and support
high-growth entrepreneurs and SMEs as a catalyst for creating millions
of high-value jobs through programmes like learning, mentor and investor
networks, workshops, experiential programmes, reward and recognition
platforms, e-marketplace, financing growth, incubators, accelerators,
domestic and international expansions.
Skill Development Network (SDN):
Skill Development Network (SDN) is established in 2011, aims to leverage
technology and provide vocational education and training to millions of
youth in high-demand job roles leading to entry-level mid-skills jobs
Opportunity Network for Disabled (OND):
Opportunity Network for Disabled (OND) aims to mainstream the
educated disabled in sustainable high-quality corporate jobs through a
business value proposition with the help of NGO partnerships, employers
and content and educational institutes.
Research and Innovation Network (RIN):
Research and Innovation Network (RIN) offers role model programmes
in partnership with existing research institutions government and industry.
6. SNEHA (Society for Networking, Empowerment & Holistic Action)
Foundation:
www.snehafoundation.in
Sneha is a registered non-governmental and non-political organization which
runs all types of social welfare projects with focus on educational programmes
i.e. professional and vocational training course under Entrepreneurship
Development Programme, Rural Development Programme
7. Business Networking and Referrals (BNI):
www.bni.com
Business Networking and Referrals (BNI), founded by Dr. Ivan Misner,
is a business and professional networking, referrals and word of mouth
marketing organization built upon the idea of ‘Givers Gain’ with a mission
‘to help members increase their business through a structured, positive,
and professional ‘word-of-mouth’ programmes that enable them to
develop long-term, meaningful relationships with quality business
professionals
8. Indian entrepreneur:
www.indianentrepreneur.com
Indian entrepreneur is an online publication and community that is focused
on showcasing some of the best startups and entrepreneurs from India.
It is founded by Manish Singh.
9. Headstart Network Foundation
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www.headstart.in
Headstart Network Foundation
10. Google Small Business
https://plus.google.com/+GoogleBusiness
Google for Business is an official page for businesses using Google to
connect with people. This page is created to help business people to
make the most of the web, as a place to bring useful information and
access to industry events.
Google Small Business Community connect entrepreneurs with peers and
experts both inside and outside of Google ready to share advice and support.
11. Entrepreneur India
https://www.entrepreneur.com
12. Entrepreneur Network
http://www.entrepreneurnetwork.com/
Entrepreneur Network is a premium video network providing
entertainment, education and inspiration from passionate thought leaders
to the millions of entrepreneurs seeking actionable, entertaining content.
Entrepreneur Network publishes to Entrepreneur.com and to millions of
fans on YouTube and Facebook.
13. Cofounder
www.cofounder.co
Cofounder.co is a new innovative partnership to help startups and
entrepreneurs reach their full potential in the Bay Area. It is a group of
experienced partners with founder/CEO and investor experience (Raj
Kapoor is the first founding partner – others are added later) that works
very closely with a few tech startups mostly in the internet and mobile
for consumer/small business/enterprise sector that either reside the Bay
area or want to relocate here. A partner joins the company as a cofounder
at the earliest stages (either at founding or sometime before funding)
and spends the equivalent of one day a week (so they only partner with
4-5 startups at any time) helping in all areas of the company including
financing recruiting, strategy, product development, and mentoring the
CEOs. It’s a much deeper and focused involvement than most angels,
advisors and accelerators and for a longer period of time (several years).
Cofounder.co is a community for entrepreneurs, programmers, designers,
investors, and other individuals involved with starting new ventures.
Comprises of idea makers, entrepreneurs, programmers, web designers,
investors, freelancers and executives. It is a strictly private network.
Without registration for an account, no one can have an access to the
profiles of members. Membership requires a valid university or work
email address. You have to sign up, then specify your abilities and the
people you want to network with and then post your ideas on the bulletin
board or in the forum
14. E.Factor
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www.efactor.com
E-factor is an online community and virtual marketplace of more than
1.9 million designed for entrepreneurs, by entrepreneurs. It enables
entrepreneurs to connect with fellow entrepreneurs to around the world
and give them the proven tools to help grow their business. It offers
resources and tools such as accounting, advertising, banking, business
consultancy, catering, coaching, coffee services, corporate responsibility,
education, event management, factoring, funding, graphic design, ICT,
ICT supplies, insurance, legal, meeting space, notary, office space, security,
social media, team building and web design.
15. Ecademy
http://www.ecademy.com
https://www.linkedin.com/company/ecademy
Ecademy is a membership organization for entrepreneurs and business
owners who belong to a community that connects, supports and transacts
with one another. It provides a platform for businesses to learn, network
and develop and a peer to peer knowledge exchange through blogging
and boardroom events. It is apremier online business network for creating
contacts and sharing knowledge and to keep up to date with networking
and social media skills.
https://www.linkedin.com/groups/1158547/profile
Ecademy is a business social network of employees partners, suppliers
and customers which is concerned with trusted business introductions,
referrals and trading; advertising for business across the globe; contacts,
knowledge, support and transactions.
16. Networking for Professionals
https://www.networkingforprofessionals.com
Networking for Professionals is a business network that combines online
business networking and real-life events. It is founded in New York city
in 2002 with branches in many cities now.
17. Heart Link Women’s Network for women entrepreneurs
www.theheartlinknetwork.com
The Hear Link Network is founded by Dawn Billings. It is dedicated to
encouraging and empowering women small business professionals which
provides safe intimate, non-threatening, women-only business networking
opportunities for professional women. It is dedicated to showcasing
advertising, enriching and empowering professional women in business.
18. PerfectBusiness
www.perfectbusiness.com
Perfect Business is a network of entrepreneurs, investors, and business
experts that encourage entrepreneurship and mutual success. It
introduces entrepreneurs to new business contacts and answer their
questions. It also provides professional business planning software, startup
resources and inspiring interviews with leading entrepreneurs. Services
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include exclusive offers from VirginMoney, LegalZoom, Entrepreneur
magazine and other strategic partners. It provides everything needed to
launch and grow a business, including educational videos, articles, events,
business plan software, and access to experts and investors.
19. Plaxo
https://www.plaxo.com
Plaxo is an enhanced online address book tool for networking and staying
in contact which stores over 50 million address books with 3.7 billion
contacts. The users can export their data using popular standards such
as Outlook (CSV) and vCard (VCF).
20. Ryze
https://www.ryze.com
Ryze is a business networking community, founded by Adrian Scott, which
allows users to make connections and build their networks, make quality
business contacts. It enables the users to get practical advice, tips and
resources from the field professionals, and make deals though Ryze
members. There are more than 5, 00,000 Ryze members in more than
200 countries. The basic membership is free and there are paid
subscriptions for advanced features like contacting distantly-connected
members for a few dollars a month.
21. StartupNation
https://startupnation.com
StartupNation, founded in 2002 by Jeff and Rich Sloan, is a community
focused on the exchange of ideas between entrepreneurs and aspiring
business owners. It has inspired, educated and attracted entrepreneurs
and small business owners from Main Street America.
22. Upspring
www.upspring.com
Upspring is a social networking site for promotion and social
networking that enable businesses to attract, grow, and monetize their
audience, prospects and customers.
23. Xing
https://www.xing.com
Xing is a European business network in German-speaking countries
with more than 10 million members worldwide.
24. Viadeo
www.viadeo.com
www.corporate.viadeo.com
Viadeo is a professional social network in France. It has 200
employees spread across four cities: Casablanca, Moscow, Paris, and
San Francisco.
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25. Cmypitch.com
www.cmypitch.com
cmypitch.com is a business website for UK entrepreneurs to get quotes,
advice etc.
26. Yammer
https://www.yammer.com
A private social network that helps employees collaborate across
departments, locations and business apps. Yammer provides a simple
way to collaborate, share knowledge, and engage everyone across the
company
27. Anoox
https://www.anoox.com
Anoox is a not-for-profit social networking based search engine and
news.
28. The Entrepreneurs Network (ten)
www.tenentrepreneurs.org
The Entrepreneurs Network (ten) is a think tank for ambitious owners
of Britain’s fastest growing businesses and aspirational entrepreneurs;
housed in Adam Smith Institute with the support of Octopus Investments
29. Jumpstart Entrepreneurial Network
www.jumpstartnetwork.org
Jumpstart Entrepreneurial Network is a connected group of
entrepreneurial support organizations which offer the resources suchas
capital, space advice and connections to tech-based entrepreneurs. Works
for accelerators, incubators, startups, angel funds and other organizations
dedicated to fostering entrepreneurship across the 21 countries of
Northeast Ohio. By working together, these organizations provide a
comprehensive continuum of resources and support for startups and
their diverse entrepreneurs.
It is supported in part by Ohio Third Frontier Network partners collaborate
to help entrepreneurs grow early stage companies in Northeast Ohio.
30. Global Entrepreneurship Network (GEN)
www.wearegen.co
Global Entrepreneurship Network (GEN) is aimed at creating one global
entrepreneurial ecosystem, GEN helps people in 160 countries to unleash
their ideas and turn them into promising new ventures with the following
programmes:
Global Entrepreneurship Week – www.wearegen.co/gew
Global Business Angels Network – gban.co
Startup Experience – www.startupexperince.com
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Global Enterprise Registration – ger.co
Global Entrepreneurship Library - www.unleashingideas.org
Startup Open – www.wearegen.co/startupopen
GEN Starters Club – www.wearegen.co/gen-starters-club
Startup Compete – www.startupcompete.co
Global Entrepreneurship Research Network – www.gern.co
Startup Nations – www.startupnation.co
Useful because of the focus on content which is neglected by most
social networks such as articles, forums, blogs on-demand seminars,
and podcasts
Global Entrepreneurship Index – www.thegedi.org
Compass Report
Global Entrepreneurship Congress - www.gec.co
31. Perfect Business
www.perfectbusiness.com
PerfectBusiness is a network of thousands of entrepreneurs, experts
and investors from a variety of industries wherein entrepreneurs can
find potential business partners, potential clients and advisers. It provides
professional business planning software startup resources and inspiring
interviews with leading entrepreneurs. Services include exclusive offers
from VirginMoney, LegalZoom Entrepreneur magazine and other
strategic partners.
32. The Funded
www.thefundedcom
This is an online community, founded in 2007 by Adeo Ressi, comprising
of over 20,000 CEOs, Founders and entrepreneurs to discuss fundraising,
rate and review angel investors and venture capitalists, and discuss
strategies to grow a startup business. The entrepreneurs who research,
rate and review funding sources worldwide.This is a review website in
which users can post anonymous ratings and reviews of venture capital
investment firms. They can discuss the functioning of enterprises and
their operations. The member entrepreneurs can view facts, reviews
and commentary on funding resources. They can access detailed fund
profiles with specialty, reference investments, and investment criteria.
33. Founder Dating
www.founderdating.com
Founder Dating is a network of talented entrepreneurs which provides
access to world-class advisors regarding entrepreneurial problems.
34. New Jersey Entrepreneurial Network (njen)
www.jjen.org
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The New Jersey Entrepreneurial Network (njen) is a non-profit
organization providing educational and informational services to
entrepreneurs, investors, persons in related fields and the public in general.
The meetings are attended by a select group of entrepreneurs, company
executives, venture capitalists, and professional service providers.
35. Dartmouth Entrepreneurial Network (DEN)
www.den.dartmouth.edu
DEN fosters and promotes entrepreneurship among students, faculty,
clinicians, researchers, staff, alumni, and community members from all
schools at Dartmouth the Dartmouth-Hitchcock Medical Center, the
Dartmouth Regional Technology Centre. It includes 45,000 people and
14 chapter cities, courses, workshops, speaker series, startup
competitions, and networking activities. The network offers a wide range
of services to the Dartmouth community from strategic advice, to one-
on-one mentoring, to educational programmes, to networking
opportunities, to infrastructure, and office and lab space. Since Jan. 2001,
the office has provided support for over 400 projects and companies.
36. Young Entrepreneur Council (YEC)
https://yec.co
YEC, founded by Scott Gerber, is an invite-only nonprofit organization
comprised of the most promising young entrepreneurs. It promotes
entrepreneurship as a solution to youth unemployment and
underemployment and provides its members with access to tools,
mentorship, and resources that support each stage of development and
growth of business. The members avail the benefits: thousands of travel
discounts, 24/7 peer support forums, members-only web and mobile
dashboards, media exposure and content syndication, trusted, vetted peer
community, high-touch support, access to affordable healthcare options,
access to thousands of workspaces, free personal website and custom
reputation plan, virtual speaker series and webinars, volume discounts
and expense optimization, private events at conferences and tradeshows.
37. Barrie Entrepreneur’s Connect
www.barrie.entrepreneursconnect.ca
Barrie Entrepreneur’s Connect is a portal for aspiring and accomplished
entrepreneurs to access required resources and information as well as
network with other entrepreneurs
38. Quora
https://www.quora.com
Quora connects people who have knowledge to the people who need it. It
brings people with different perspectives together so that they can understand
each other better; and empowers everyone to share their knowledge for
the betterment of all. You can ask questions at Quora and get answers.
39. About.Me
https://about.me
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About.me is a social directory.It is founded by Ryan Freitas, Tony Conrad
and Tim Young. It is an online platform enabling users to create and
maintain a curated page for self-expression
www.aboutme.com
40. Twitter
https://twitter.com
Twitter is an online social networking, created by Jack Dorsey, Evan
Willioams, Biz Stone and Noah Glass in 2006, in which registered users
send and read short 140-character ‘tweets’ while unregistered users
can only read them.
41. Facebook
http://www.facebook.com
Facebook is an online social networking service, launched by Mark
Zuckerberg, that enables its users to connect with friends and family as
well as make new connection. The users can create a profile, update
information, add images, send friend requests, and accept requests from
other users, exchange messages, post status updates and photos, share
videos, use various apps, and receive notifications when others update
their profiles. Users can join common-interest groups
42. Under30CEO
www.under30ceo
Informative business articles and fantastic interviews with high level
entrepreneurs
Blogging and commenting on bogs is just as much of a social network.
Active members, who frequently comment on blogs become well-known.
Meaningful relationship get developed among the bloggers and peers in
various groups.
43. WeMedia.com
www.wemedia,com
This is an organization which deals with online networking, physical
conferences and start-up cash for entrepreneurs. They provide tips for
entrepreneurs on their website and their staff provide advice on building the
business. They are very keen on providing resources, guidance and capital.
85Broads
This community connects and empowers women from more than 90
countries around the world.
44. Yo! Success
www.yosuccess.com
Yo! Success is an initiative to build a community of entrepreneurs, startups
and industry stalwarts to celebrate success and to learn from shortfalls.
The mottos is ‘Contribute, Inspire and Embellish Entrepreneurship’. It is
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a community of entrepreneurs who implement a pioneering idea, build
new technology, develop a unique business model and the like.
45. Yunus Social Business
http://www.yunussb.com/
Yunus Social Business – Global Initiatives (YSB) grows entrepreneurs
in emerging economies to solve problems of poverty in a business way.
It is active in several countries where local country teams source, coach
and mentor entrepreneurs through tailored accelerator programmes. YSB
subsequently finances the most promising social businesses and also
provides long-term support to maximize impact
46. Ashoka India
www.India.ashoka.org
Ashoka, founded by Bill Drayton in 1980, is an international networks of
social entrepreneurs worldwide, with over 3,000 Ashoka Fellows in 70
countries. In India, Ashoka has over 350 fellows. Ashoka’s mission is to
enable an “Everyone a Changemaker” world.Ashoka in India focuses
on core areas: Changemaker schools- a global networked to identify,
connect and support innovative schools around the world; Full economic
citizenship – Housing for All initiative in which businesses and social
organizations collaborate; Health and nutrition initiative – to enable schools
to improve the nutrition of communities; Lum Stic – a product suite to
enable positive societal change in a methodical way through a ‘data
ecosystem’; and Youth venture – an ecosystem to support youth to
connect the key stakeholders in the society.
47. Swedish Entrepreneurship Forum
www.entreprenorskapforum.se
Swedish Entrepreneurship Forum is a leading Swedish network
organization which generates and transfers policy relevant research in
entrepreneurship and small enterprise development. It initiates and
disseminates research relevant to policy in the fields of entrepreneurship,
innovation and SME. It offers entrepreneurship researchers a form for
idea sharing, to build national and international networks in the field and
to bridge the gap between research and practical application.
10.5 Summary
Entrepreneurs network effectively. Successful entrepreneurs possess the
ability to network. It is more than meeting people. It is a plan to be in contact with
the people who may do business with you and develop relationships with them.
Networks can be personal or social. Personal network comprises of family
members, friends, relatives. Social network is one level ahead of the personal
network which outspreads beyond the personal contacts to comprise of business
associates, partners, suppliers, customers, vendors, investors, debtors, creditors,
consultants, advisors, experts, professionals etc.
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Business networking can be conducted at a local level, or at a regional
level, national level or international level. There are several different ways, places
and means to build networks. It is always advisable to be in touch with as many
relevant networks as possible on the basis of pre-decided networking objectives
and avail the advantages for taking the business to the higher levels.
Networking increases visibility of the entrepreneurs. They get noticed for
their work and their contribution to the society through regular contact by means
of the networking opportunities. Through networking, networkers can become
aware about new opportunities. It is an inexpensive way to promote and increase
business. Networking is a way to build a sustainable business. Due to familiarity
with the networkers, there is an assurance that the opportunities match with the
entrepreneurs’ vision and goals. Entrepreneurs get to know about several success
stories of entrepreneurial ventures through networking. They get an opportunity
to learn from the success of others. Networking enables entrepreneurs to come
across numerous influential people who otherwise may not be accessible to them.
Networking enables entrepreneurs to help others and also seek help from others.
At the end of the unit, several popular and useful networking forums along
with their website addresses and few relevant details are given.
10.6 Key Terms
• Networking: A socio-economic activity by which entrepreneurs interact
with each other and develop business relationships and recognize, create
and exploit business opportunities
10.7 Questions and Exercises
Questions
1. What is meant by networking? explain the benefits of networking
2. Are you aware about some entrepreneurs’ networks? Discuss.
Exercise
Activity 11.1
Meet a few entrepreneurs and ask them about the places of networking
and the benefits received by them through networking. Also seek the information
about their approaches to networking.
Multiple Choice Questions
1. Business networking is a valuable way ———
i. To expand your knowledge
ii. To attain new clients
iii. To learn from the success of other entrepreneurs
iv. i, ii and iii
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Answers
Check Your Progress
3. True
6. True
7. True
Multiple Choice Questions
1. iv
10.8 Further Reading
Shankar Raj, Entrepreneurship Theory and Practice, Vijay Nicole Imprints
Private Limited, Chennai 2012
www.bni.com
http://www.businessdictionary.com/definition/networking.html
http://mashable.com/2009/03/12/entrepreneur-networks/#pIYMeJt_1aql
https://www.sitepoint.com/social-networking-sites-for-business/
h t tp : / /www.inc .com/drew-hendr icks /50-bes t -websi tes- for -
entrepreneurs.html
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Annexure I
List of Industry Associations working for Entrepreneurship
Development
1. Federation of Indian Micro and Small and Medium Enterprises (FISME)
2. Confederation of Indian Industry (CII)
3. Federation of Indian Chambers of Commerce Industry (FICCI)
4. Associated Chamber of Commerce and Industry (ASSOCHAM)
5. World Association for Small and Medium Enterprises (WASME)
6. Federation of Associations of Small Industries of India (FAASI)
7. Self Employed Women’s Association (SEWA)
8. Federation of Indian Women Entrepreneurs (FIWE)
9. Laghu Udyog Bharati (LUB)
10. All India Association of Industries (AIAI)
11. Confederation of Indian Industry (CII)
Annexure II
List of Industry Associations, Federations and Chambers of Commerce
in Maharashtra
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UNIT 11: PROJECT MANAGEMENT - I
Structure
11.0 Introduction
11.1 Unit Objectives
11.2 Project Management
11.3 Need for Project Management
11.4 Challenges of Project Management
11.5 Project Life Cycle
11.6 Summary
11.7 Key Terms
11.8 Questions and Exercises
11.9 Further Reading
11.0 Introduction
It is difficult to sustain in the face of pressures posed by the dynamic
environment for organizations with traditional management structure and hierarchy.
Project based organizations are seen to grow well in a vibrant environment since
they have the flexibility in putting their efforts. They are known for better utilization
of resources, better control and enhanced performance.
Traditionally work in construction business and defense procurement was
viewed as project but now it is seen that many proactive organizations are adopting
management-by-project approach; they are structuring their work as a project
and using project management techniques for the sake of ensuring successful
completion. Project management techniques are now increasingly being adopted
by almost all industries. Entrepreneurs as well as managers are seen interested to
gain professional project management knowledge. Particularly they wish to learn
project management planning and control techniques. Many big corporates now
adopt management-by-project approach for the sake of making their work
manageable and innovative.
11.1 Unit Objectives
After going through this unit, you will be able to
• Explain the meaning and significance of project management
• Appreciate the need for project management
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• Realize the challenges of project management
• Learn about the various phases of project life cycle
11.2 Project Management
Let us begin the discussion on project management with meaning of the
word ‘project’. What is a project? A project can be defined as a set of multiple
interdependent activities that require people and resources. It is characterized by
a definite start and end and a specific set of criteria that define successful
completion. The dictionary meaning of project is that it is a scheme, a design, a
proposal or something intended or devised to be achieved.
In the words of James Lewis, “a project is a one-time job that has defined
starting and ending dates, a clearly specified objective, or scope of work to be
performed, a pre-defined budget, and usually a temporary organization that is
dismantled once the project is complete”.
To quote Newman and his associates, “a project has typically a distinct
mission that it is designed to achieve and clear termination point, the achievement
of the mission”.
Gillinger defines project “ as a whole complex of activities involved in
using resources to gain benefits”.
The Project Management Body of Knowledge (PMBOK) published by
the Project Management Institute (PMI) defines a project as “Any undertaking
with a definite starting point and defined objectives by which completion is defined”.
According to Paul C. Dinsmore, “a project is a unique undertaking, is
composed of activities, involves multiple resources, is not synonymous with the
‘product of the project’, and has a managerial emphasis on timely accomplishment
of the project”.
The Project Management Institute USA, defines a project as a one-shot,
time-limited, goal-directed, major undertaking requiring the commitment of varied
skills and resources. It also describes a project as “a combination of human and
non-human resources pooled together in a temporary organization to achieve a
specific purpose”.
A project is initiated to achieve a mission. It is not simply the end result. It
is triggered with a technically feasible, economically viable, politically suitable and
socially acceptable idea and approval of the investment proposal for the same.
Then with the help of human and non-human resources, activities and tasks are
performed for accomplishment of the mission. After fulfilling the mission, the project
is concluded.
A project has some typical characteristics. It has objectives to fulfill. After
fulfillment of the objectives, the project comes to an end. The end is spelt out in
the objectives. However, it cannot continue endlessly. It has a life cycle revealed
by growth, maturity and decline. It is one entity. It is the responsibility of the
project-in-charge who works with his/her team which is composed of members
from different disciplines, organizations, states and even countries. The project is
typically characterized by unity in diversity in terms of people, skills, backgrounds,
technology, machinery, equipment, materials, work culture etc. Majority of the
work in a project is done through contractors. More the complexity of the project,
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Entrepreneurship - V
more is the extent of contracting. A project is designed and developed strictly as
per the requirements, terms and conditions of the customer. Each project is unique
in its own way. No two projects are exactly similar. They differ in terms of location,
infrastructure, people, the agencies etc. A project is subject to change always.
Some changes may have a drastic impact on the nature and character of a project.
There is always risk as well as uncertainty associated with every project.
A project is defined by the goal and its scope. The goal indicates the end
result to be gained and the project scope indicates the set of standards and criteria
that the customer defines as successful completion. After knowing about the project,
it is required to develop a clarity about the objectives in terms of a combination of
tasks that concern specific functional groups or structural areas. The objectives
are specified in terms of financial needs, marketing plan, operations plan, as well
as various other plans for providing human resources, facilities, materials and the
like. Further, each of the objectives are expressed in tasks to be performed i.e. the
project manager has to see that each task contributes to completion of one or
more objectives. A task is a combination of activities that lead to the achievement
of a definable result. Each task must be broken down into a series of activities. An
activity is a time-consuming piece of work with a definite beginning and a definite
end. When the task is broken down into activities, it becomes much more
manageable. One person can easily accomplish one task or tasks. Each activity
need not be assigned to a different individual. For proper performance of a project,
planning needs to be in terms of specific duration. Duration is the elapsed time
from the beginning to the end of an activity, task or objective. It is the time from
the beginning of an activity till it is delivered.
While planning and scheduling a project, it is converted into objectives,
tasks, and activities. For perfect scheduling of the project, it is essential to predict
the duration of each task and activity in an accurate manner.
Project management is an organized endeavor for managing projects.
Previously it was considered to be the prerogative of construction business and
defense industries. Nowadays, many businesses are taking up various new ventures
as projects and manage them as projects. Project management is assuming more
and more importance. It has attained the status of an independent branch of
management. Since traditional management is not adequate to manage projects
effectively. Effective project management require special skills, techniques,
resources to accomplish the project in the allotted budget and stipulated time period.
The Association of Project Manger’s (APM) body of knowledge (BOK)
defines project management as ‘the most efficient way of introducing change —
achieved by:
• Defining what has to be accomplished generally in terms of time, cost,
and various technical and quality performance parameters;
• Developing a plan to achieve these and then working this plan, ensuring
that progress is maintained in line with these objectives;
• Using appropriate project management techniques and tools to plan,
monitor and maintain progress;
• Employing persons skilled in project management – including normally a
project manager – who are given (single) responsibility for introducing
the change and are accountable for its successful accomplishment’.
Check Your
Progress
Explain each of the
following terms in your
own words:
1. Project:
2. Goal:
3. Objective:
4. Task:
5. Activity:
6. Duration:
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Project management is defined by the Project Management Institute’s
(PMI) Project Management Body of Knowledge (PMBOK) as: “… the application
of knowledge, skills, tools and techniques to project activities in order to meet
stakeholder’s needs and expectations from a project”.
As per the definition, a project manager has to fulfill stakeholder’s needs
and expectations. Project manager is the single point of responsibility. He/she has
to take care of the demands of the project, requirements of the organization,
interests of the stakeholders and also the needs of the individuals working on the
project. He/she must do whatever is required to make the project happen.
The discipline of project management has been described in terms of its
component processes; as defined by the PMBOK as nine knowledge areas:
integration, scope, time, cost, quality, human resource management, communication,
risk and procurement. The four core elements of the body of knowledge – scope,
time, cost and quality – determine the deliverable objectives of the project. The
other knowledge areas – integration, human resources, communication, risk,
procurement and contract – provide the means of achieving the deliverable objectives.
Project management is an integration of planning, execution and control
with inputs from several knowledge areas. It is planning, organizing, and managing
resources to bring about the successful completion of goals and objectives of the
project. It is a planned and organized effort to attain a project. It includes development
of a project plan which consists of defining projects goals and objectives, specifying
tasks/activities for achieving goals and objectives, deciding about resource
acquisition, developing budgets and time schedules for successful completion. While
implementing the project plan, controls are set on the project path so as to ensure
project implementation exactly in line with the plan. On the whole, project
management comprises of several activities such as planning to achieve objectives,
defining products of the project, assigning tasks, directing activities, communicating
with the stakeholders, estimating resources, allocating resources, acquiring human
and non-human resources, assessing and controlling risk, controlling project
execution, reviewing and reporting progress, analyzing the results, quality
management, defect prevention, problem solving, identifying, introducing and
managing change, project closure, forecasting future trends in the project
Project scope management comprises all the processes required to
complete the project successfully. It consists of authorization, scope planning, scope
definition, scope change management and scope verification. Project time
management includes activity definition, activity sequencing, duration estimating,
establishing the calendar, schedule development and time control. Project cost
management deals with the process required to ensure that the project is completed
within the approved budget. It includes resource planning, cost estimating cash
budgeting, cash flow and cost control. Project quality management is concerned
with quality planning, quality assurance and quality control. Project human resource
management consists of organization planning, staff acquisition and team
development. The process ensures the most effective use of human resources of
the organization. Project communication management performs the process needed
to ensure collection, and dissemination of project information in a right and
appropriate manner with the help of communication planning, information
dissemination, project meetings, and progress reporting. Project risk management
comprises of risk identification, risk evaluation, response development and risk
control. It includes the process concerned with identifying, analyzing, and responding
to project risk. Project procurement management includes the process required to
acquire goods and services from outsiders which consists of procurement planning,
solicitation planning, solicitation, and source selection.
Check Your
Progress
7. What is a project?
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Entrepreneurship - V
Management – by - Projects Approach
Projects used to be managed typically through a classical functional
hierarchical organization structure. With the growing importance of multi-disciplines,
multi-departments, and multi-national projects; people are increasingly moving
towards management – by - projects. They are adopting project teams and matrix
organization structures.
There is a difference between project management and management – by
- projects. Project management executes a project by using a specific set of skills
aimed at, controlling quality, costs schedules, and risk etc. it is a management system
which guarantees delivery of results and no chance of failure when it is effectively
applied. It is the result of a management – by - projects approach. Projects are
completed on the basis of project management principles. They operationalize the
strategic objectives of the organization. Project management is planning, control,
decision making of a project. Management - by - projects deals with multiple projects.
It is an integration, prioritization, communication and continuous control of multiple
projects. Project management is a discipline whereas management - by - projects is
an operating environment. Project management applies to a project; and management
– by - project applies to the entire organization. Project management is a tactical
issue and management - by -projects is a strategic issue.
Management - by - project approach is characterized by organizational
flexibility, decentralized management responsibility. It views at various issues and
problems with a holistic and integrated approach. Management - by - projects is a
management philosophy which uses cross functional approach with the practice of
trained and specialized project teams to deliver strategic objectives. It allocates a
restricted number of clearly defined responsibilities to trained managers. They are
given necessary resources and commensurate authority to achieve those assigned
duties and responsibilities. They are given complete control over the method by which
the results are delivered to the project management team. In contrast to this, in the
general traditional management approach, managers have a comparatively larger
number of tasks to perform. There is some degree of uncertainty regarding resourcing.
Management – by - projects approach involves the entire organization. It
affects all aspects of the organization right from the development of corporate
strategy, planning process and the like. The systems of management - by - project
encompass multiple levels and departments. All the functional activities are viewed
as projects and such potential projects are evaluated against corporate strategy.
Operational plans for all functional activities are prepared with a project orientation.
At the end of the planning process, it is ensured that the set of projects/programmes
are properly aligned with the corporate strategy.
With management - by - projects approach, there is effective
communication between the project and the functional departments. While allocating
and managing resources across the multiple project organizations, it is seen that
the strategic projects get the valuable and scarce resources at a priority.
11.3 Need for Project Management
Swift growth of global markets, rapid penetration of global players,
increasing importance of quality and the drive towards continuous improvement
necessitate more and more need for enhancement of performance and
organizational effectiveness. The skills of project management are needed for
sustaining in this highly competitive world for meeting the challenges arising out of
the external environment. There is a need not only to accept but initiate change(s)
Check Your
Progress
8. What do you know
about management –
by - project approach?
9. Is there a difference
between project man-
agement and manage-
ment - by - projects?
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Business
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in response to the external changes. Introduction of change has to take place in an
effective and successful manner. The organizations need to introduce new products,
processes. They have to find out new procedures, new practices, new techniques
so as to react effectively to competitive pressures, technological breakthroughs
and maintain their competitiveness. They are required to be learning organizations.
Project is a unique activity outside the normal, routine operations. It is not
usually a routine common task but it may include several routine tasks. It is very
unlikely that a project would be repeated again in the same manner by the same
teams to deliver the same results. It has a unique objective which is explicitly defined
so as to convey a common meaning to all the concerned people. It is focused on
customer and customer expectations. It is comprised of a collection of activities
which are linked together since they are performed to bring the desired outcome. It
has a clearly defined and agreed upon deadline by which the task is to be
accomplished. Along with the time constraints, it has cost constraints also. The
people working on the project need to be fully aware about the time as well as cost
limitations and ensure the viability of the project from time to time. Completion of a
project require diverse skills and often a large number of versatile people. Project is
usually complex since the work involves people from different departments. It may
be performed on different sites. It involves many unknowns within the task, regarding
the human talent, skills of the people doing the work, and the external influences on
the project. It provides a distinctive opportunity to learn and imbibe new skills. It
challenges the established, set and fixed stereotyped thinking. It is not without risks
at every step of the process. Project is required to be flexible as it has to be modified
as the work proceeds. In due course of time, it has to accommodate change(s).
Change is a common feature of a project since it creates something for the first time
which never existed before. Such type of activities are carried out along with the
regular routine functioning of the organization.
For being effective and dynamic, entrepreneurs use project management
as a tool. It is a popular business discipline. At some point in life, one has to play
the role of a project manager. However, one may not be a project manager forever.
Project vary significantly in type, size, nature, objectives, complexity and
also time duration. However, every project has a starting point and an end point with
specific objectives. Basically it is a course of action with explicit objectives and
definite time perspectives. It should be completed without any delay. It should involve
as less investment as possible. It should use the least amount of human and non-
human resources. All these requirements are fulfilled by project management.
Typically project work is characterized by inter-dependence and inter-
relationships. No work, task, activity is independent, or isolated. No decision can
prove to be meaningful if it is taken in isolation, without paying attention to inter-
relationships. The effectiveness of performance depends upon realizing the
importance of task in relation to other tasks and to the whole.
The work and interrelationships change with time but the ultimate objectives
do not change. In the light of future uncertainty, there is a need of adaptation to
the changing needs. In a dynamic environment, plan is required to be dynamic,
flexible so as to offer a quick and prompt response whenever needed.
Project management is a flexible and generalist approach and not a rigid
and specialist one. In functional management, functional specialization receives
priority at the cost of the totality of work. A task is done in an effective manner if
it is done as a whole. In project management, communication is faster, and decision
making is quick. It works on the principle of management by exception. There is
no hierarchical protocol.
Check Your
Progress
Fill in the blanks with
appropriate blanks:
10. Project manage-
ment is a —and —
approach and not a —
and — one. (flexible,
rigid, generalist, spe-
cialist)
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NOTES
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Entrepreneurship - V
11.4 Challenges of Project Management
The success of project management depends upon completion of task
against the set specifications and time, cost and performance targets. Necessarily,
a project must be completed within the stipulated time, allocated budget and must
perform to customer satisfaction.
Project management offers a structured approach to managing projects.
Projects involve all kinds of people, both within the enterprise and outside. The in-
house team members are from research and development department, marketing
department, cross functional teams and accounting. Out-of-house team members
may include architects, vendors, technicians, customers. Project team members
may belong to different occupations. Some project teams may contain
representatives of customers so as to ensure clarity regarding the clients’ priorities.
The project manager has to tackle all these team members who represent different
backgrounds, priorities, agendas, loyalties; also diverse and sometimes opposing
needs and expectations from the project.
For successful completion, the project has to be firmly integrated into the
organization culture. The organization culture need to be project oriented.
Each and every project, by its basic nature, faces certain constraints in
terms of cost, time, quality, scope. Typically several constraints are in the form of
resources.
Cost constraints may be in the form of limited budget, profit margin.
Sometimes project managers are given a fixed budget and they need to manage
within that budget. Sometimes, a general budget is given and project manager has
to work out the required one with all minute details.
Cost is calculated from the time variable. Cost of an internal project can
be calculated as cost of the team members multiplied by time. When an independent
consultant is hired for a project, cost will be determined by the consultant or the
organization’s hourly rate multiplied by an estimated time to complete.
Every project comes with a deadline. Project managers are given start
dates and completion dates. The deadlines may be set by the client. It may be
production start-up date. It not given, then he/she has to establish an appropriate
deadline. After fixing the deadline, it is to be translated into a schedule for the
convenience of the team members.
While receiving a project, the project manager is given quality specifications
for the end product. It may be a detailed document conveying all the needed
requirements.
Quality of the project depends upon the extent of time put into individual
tasks. With adequate time, some tasks may be performed in a good manner. And
when more time is spent on such tasks, the tasks are performed in an excellent
manner. Quality of any project depends upon time and cost. Time and cost
requirements of a project depends upon quality needs.
Scope of a project is an explanation of the end result of the project. It
describes what the end result should be. All the requirements for the end result
are specified in the scope.
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Always some types of risks are associated with projects. Risk indicates
the probability of failure. It is the likely point of failure. With adequate time and
sufficient resources, most risks or potential failures can be avoided.
A project is viewed as a complex set of activities from diverse areas such
as adoption of relevant technology, acquisition of appropriate machinery and
equipment, procuring adequate financial resources, hiring right human resources,
execution of the project with proper scheduling of necessary activities and the
like. Some of the activities are entrusted to sub-contractors specialized in a particular
kind of activity. Then the coordination becomes a vital task.
In this manner, project management is unique in its approach and task
which make it imperative to fulfill the pre-determined objectives in the light of
time, cost and performance standards.
In contrast with the functional management, individuals in project teams
work in a temporary role. After completion of the project, they return to other
operational duties or join another project with different teams. Working in project
management is often very different than working with general functional
management with a fixed hierarchical team. Project team members typical come
from different departments in the organization, maybe from different sites. Team
members need to report to project manager for project related work and to the
functional manager for other work. This may create problems due to dual command.
Project manager evaluates the performance of his/her team members. For persons
working on different projects simultaneously with different project managers and
still holding some functional responsibilities, problems or issues may arise regarding
their performance appraisal. Team members may not know each other. It requires
time until they know each other, develop a good team work, set team norms and
share information, ideas, opinions as well as problems. The project manager need
to be well conversant with the techniques and dynamics of conflict management
and conflict resolution strategies. Team membership is less likely to be stable. In
the light of time constraints, it is difficult for the team manager to take out time to
guide, counsel, advise and provide coaching to his/her team members.
Role of a Project Manager
A project manager is one who is entrusted with the task of managing a
specific project. Project management is his/her responsibility. He/she is responsible
for developing a definition of project. He/she is supposed to be the project’s single
point responsibility and the organization’s representative to the client and other
stakeholders. He/she manages relationships with all the concerned stakeholders.
He/she is responsible for the complete project. He/she ensures that the project is
delivered on time, within the set budget and to the agreed specifications and expected
quality norms. He/she strives to accomplish the project objectives, reduce the risk
of failure and directs the project team towards progress.
There are some technical aspects associated with the role of a project
manager such as development of project definition, managing project’s work flows,
and performance. For the sake of having control over the project, some baseline
metrics and parameters need to be established for the implementation phase. The
project manager is required to be ready with a toolkit of various techniques for
applying in planning, scheduling controlling, decision making phases for successful
completion of the project.
In the GOAL/QPC Project Management Memory Jogger, the project
manager’s job is defined as supplying “project teams with a process that helps
them coordinate their efforts so they may create the right product (or service,
Check Your
Progress
State whether the fol-
lowing are true or
false:
11. The success of
project management
depends upon comple-
tion of task against the
set specifications and
time, cost and perfor-
mance targets.
12. Necessarily, a
project must be com-
pleted within the stipu-
lated time, allocated
budget and must per-
form to customer sat-
isfaction.
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NOTES
Business
Entrepreneurship - V
process of plan), at the right time, for the right customer within the resource limits
established by the organization”.
Project manager is a change agent. He/she is required to work under
pressure, uncertainty, complexity in the dynamic environment. He/she must be
well conversant with application of knowledge, skills, tools and techniques so as to
plan, organize, and control various phases of the project for success and progress.
Planning is a crucial task of a project manager. He/she has to plan what
needs to be done, who is going to do it, when it needs to be done and how it is
required to be done. Planning is an iterative process that has to take place throughput
the life of the project. He/she has to plan and define the scope of the project
meticulously. Another important task is of activity planning, sequencing and scheduling.
Another essential task is setting up the project team’s structure. It is about
the decision regarding functional, matrix, or project organization structure. Then
identification of roles and positions, assigning of responsibility, delegation of authority
are the other tasks to be performed.
Project manager has to act as a project leader. The role of a project
manager as a leader involves various challenging aspects of work including
motivating the team members, assigning work, maintaining communication, and
setting team direction. For seeking the best performance from the project team,
good communication skills need to be applied.
Controlling is needed to keep the project on track. It is done through the
steps of setting the standards, measuring the project progress, comparing the
performance with the standards, determining the causes of deviations, if any, from
the standards, and taking corrective actions to address deviations.
The project manager deals with initiation, planning, design, execution,
monitoring, controlling and closure of a project. He/she makes all the decisions
required for successful completion of the project. He/she has to assess and measure
the risks associated with project. It is needed to control risk and minimize uncertainty
associated with the project.
He/she integrates and coordinates all the efforts and activities and guides
the team members to complete the project successfully. He/she should be well
conversant with project management methods and techniques. He/she should
possess the ability to visualize and solve problems in their totality with good decision
making skills. There is a need to possess the ability to handle project management
software tools and packages. There is a need to integrate the project stakeholders.
He/she should be able to appreciate the environment in which work in an
environment of constant change.
The project manager should know how to build and lead teams. He/she
should be able to select and develop an operational team. He/she need to be
proficient in management of human resources. There has to be a considerate
approach towards views and opinions of team members. He/she should possess
conflict resolving capacity. The project manager must be an excellent communicator,
good leader and efficient manager. He/she should be well conversant with planning
and organization skills. The ability to plan, expedite and get the things done would
fetch success as a project manager. He/she maintains a co-operative, motivated
and successful team. There is a need of achievement orientation, high energy
levels, initiative, risk taking ability as well as entrepreneurial skills. There is a need
of patience, tolerance for difference of opinion, ambiguity, uncertainty and delay.
He/she should possess negotiation skills and resource allocation skills. He/she
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Entrepreneurship - V
should possess change orientation. When needed, he/she should offer alternative
decisions and take appropriate actions quickly. Further, effective time management
is another desirable requirement for a project manager. He/she should be able to
maintain good rapport with the client. There is a need of maintaining cordial
relationship not only with the client but also with all the stakeholders.
Duties and responsibilities of a project manager vary from industry to
industry, organization to organization and even from project to project several
times. However there are some basic duties and key tasks which are expected
from the project managers for ensuring successful completion of their projects
such as planning and defining scope, risk analysis, resource planning, developing a
budget, developing schedules, estimating cost, estimating time, assuring quality of
deliverables by converting it into specifications, documentation, monitoring project
progress and performance, recruiting project staff, managing and leading project
team, coordinating various agencies and working groups in project work, identifying
user’s needs correctly, managing project training and user training on the basis of
needs within the approved budget and the like.
11.5 Project Life Cycle Approach
Peter Morris describes project management as: ‘… the process of
integrating everything that needs to be done (typically using a number of special
project management techniques) as the project evolves through its life cycle (from
concept to handover) in order to meet the project’s objectives’.
Organizations performing projects generally subdivide their projects into
several phases or stages for ensuring effective and successful performance.
Collectively these phases are called as project life-cycle. The project life cycle
divides the scope of work into sequential project phases.
A project passes through several distinct phases over a period of time as
it matures. The project life cycle is linked with a clear starting point and an end
point with a time scale. It comprises of all phases from the point of initiation to the
final termination of the project. The interfaces between the phases of the life
cycle are rarely clearly separated.
The PMBOK states;’…. because projects are unique and involve a certain
degree of risk, companies performing projects will generally subdivide their projects
into several project phases to provide better management control. Collectively
these project phases are called the project life-cycle’. Projects do pass through a
number of clearly identifiable stages from initiation to completion. All these stages
are interrelated and dependent on each other. Every project goes through a series
of stages during its life irrespective of scope or complexity of the project.
Project life cycle refers to a logical sequence of activities directed at
achievement of project’s goals or objectives. The four phases of project life cycle
are: conceptualization and initiation phase, design and development phase,
implementation or construction phase and commissioning and handover phase.
The project phases derive their names from the deliverables of the phases such as
initiate, design, construct, and handover.
Conceptualization and Initiation phase: The first phase of the project is
conceptualization and initiation phase. This is a stage of commencement. It starts
with identification of need for a project. There may be an opportunity for a new
product/service or facility. On the basis of goals, available alternatives are explored.
Check Your
Progress
13. What are the con-
straints with which
projects must be man-
aged?
14. What are the at-
tributes of a good
project manager?
15. Outline the role of
a project manager.
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NOTES
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The feasibility study is carried out and then the feasible proposal moves to the next
phase. In this birth or concept stage, outputs and critical success factors are defined.
Design and Development phase: This is a stage of planning and organizing
in which the project is divided into smaller parts or tasks. It is based on the guidelines
set up by the feasibility study. The product is designed. Detailed schedules of
project activities are developed. For implementation of the project, necessary
resources are allocated. Budgeting of capital expenditure is done. This stage deals
with studying cash flows, ranking of investment proposals, sensitivity analysis, risk
analysis, site preparation and investigations, government clearances, project
infrastructure and enabling services, and rationing of capital. In all, in this stage
detailed schedules and plans are made for making or implementing the project.
Some organizations prepare documents such as Project Execution Plan in this
stage. This phase is often considered as a part of implementation phase. Many
activities including field work are carried out during this phase.
Implementation or Construction phase: This is a stage of implementation
in which the project plan is executed. After preparation of specifications for
equipment and machinery, orders are placed with the manufacturers. Contractors
are lined up, and construction drawings are issued followed by civil construction,
construction of equipment foundations, equipment and machinery erection, plant
electricals, piping, instrumentation, testing, checking, trial run and subsequently
commissioning of the plant takes place. The plan prepared in the previous stage is
implemented in this stage. Major project work is done in this phase. All techniques
of project management are applied. Every attempt is made to fast track i.e. overlap
the various sub-phases such as engineering, procurement, construction and
commissioning to the maximum extent. There is a need of coordination and control.
Commissioning and Handover phase: This is a stage of termination. In
this stage, resources are released and handed over to the clients or parent
organization. Drawings, documents, files, operation and maintenance manuals are
catalogued and handed over to the customer. Test runs are conducted to ensure
customer satisfaction. All the contractual obligations regarding the performance
are fulfilled. Project accounts are closed, outstanding payments made and dues
collected during this phase. There is a confirmation of project implementation as
Source: https://www.google.co.in/
search?noj=1&tbm=isch&q=construction+project+life+cycle&sa=X&ved=0ahUKEwiUzcv-
xcrNAhXEQ48KHX3CBJcQhyYIIg&dpr=1&biw=1366&bih=643#imgrc=uhSwMOkYQ5ihpM%3A
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NOTES
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Entrepreneurship - V
per the design and this terminates the project. The closure or exit phase marks the
completion of the project.
Figure 11.1: Project Life Cycle
Conceptually, all the phases of project life cycle should follow each other
in sequence. However, this happens very rarely in actual practice. Sometimes
succeeding phases overlap with the preceding phases. There may be a complete
overlap of all the phases.
The sequence of project phases deals with some form of technology
transfer or handover from one phase to the other such as project brief to design
and development, detailed design to manufacture, construction to commissioning
and commissioning to operation. As the project moves from one phase to another;
the goals, objectives also change consequently. This gets reflected in the process
of project management. In the end of each phase, a review of deliverables and
performance is taken; and on the basis of the review, a decision is taken about
continuation of the project in the next phase. Each phase can be planned and
controlled as a mini project. Each phase may be performed by different departments
and contractors.
Project activities must be grouped in phases. With proper grouping of
activities, the project manager efficiently plans and organizes resources as per the
demand of each of the phases. Then he/she measures the performance and takes
a decision to continue further, correct or terminate.
As we have seen above, with project life cycle approach, there are four
different project phases of stages. These phases can be further subdivided into an
input, process and output format. Let us discuss the project management process
in terms of input, output, tools and techniques.
The concept stage begins with identification of a problem or opportunity
and then proceeds forward with feasibility study. The concept stage ends with
feasibility study, project proposal and execution strategy. If the project is found to
be not feasible, then it is abandoned. Otherwise, for a feasible project, the process
continues with the next design phase. Input for the design phase is in the form of
approval to go ahead to design and develop the product. With the help of processes
like design product, develop detailed schedule, work breakdown structure (WBS),
critical path method (CPM) and budgets; and modelling as a key activity; the
design stage offers the output of baseline plan with design and schedule. After
getting the approval to implement the project, the next step of implementation
starts. The implementation stage deals with various processes as award contracts
and issue instructions, procure equipment and service, make the product, solve
problems. The output of the implementation process is in the form of certificate of
completion. After the approval, the project is ready to commission. The commission
stage triggers after receiving the input in the form of commissioning plan and
notification of completion. Then it proceeds forward with startup and testing of
the product. After seeking approval of the project acceptance by the client, the
output is in the form of closeout report.
11.6 Summary
This unit basically deals with the concept of project and fundamentals of
project management. A project is initiated to achieve a mission. It has objectives
to fulfill. It is accomplished by performing a set of activities. Each project is unique.
No two projects are similar. Activities of a project are unique and non-routine. A
Check Your
Progress
16. What are the four
stages in a project life
cycle?
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project cannot continue forever. It has a definite time limit. The project is typically
characterized by unity in diversity in terms of people, skills, backgrounds, technology,
machinery, equipment, materials, work culture etc. Majority of the work in a project
is done through contractors. More the complexity of the project, more is the extent
of contracting. A project is designed and developed strictly as per the requirements,
terms and conditions of the customer. Each project is unique in its own way. No
two projects are exactly similar. They differ in terms of location, infrastructure,
people, the agencies etc. A project is subject to change always. Some changes
may have a drastic impact on the nature and character of a project. There is
always risk as well as uncertainty associated with every project.
Project management is an organized endeavor for managing projects.
Traditional management is not adequate to manage projects effectively. Effective
project management require special skills, techniques, resources to accomplish
the project in the allotted budget and stipulated time period.
A project manager has to fulfill stakeholder’s needs and expectations.
Project manager is the single point of responsibility. He/she has to take care of the
demands of the project, requirements of the organization, interests of the
stakeholders and also the needs of the individuals working on the project. He/she
must do whatever is required to make the project happen.
Project management is an integration of planning, execution and control
with inputs from several knowledge areas. It is planning, organizing, and managing
resources to bring about successful completion of goals and objectives of the
project. It is a planned and organized effort to attain a project.
Management – by - projects approach involves the entire organization. It
affects all aspects of the organization right from the development of corporate strategy,
planning process and the like. The systems of management - by - project encompass
multiple levels and departments. Management - by - project approach is characterized
by organizational flexibility, decentralized management responsibility. It looks upon
various issues and problems with a holistic and integrated approach.
A project has a life cycle. The project life cycle consists of four phases:
Conceptualization and Initiation phase, Design and Development phase,
Implementation or Construction phase, Commissioning and Handover phase. In
conception stage, project ideas are conceived. In design phase, detailed designs of
different project ideas are worked out. Then the project is implemented as per the
design. The project is commissioned after implementation. Commissioning of a
project indicates the end of its life cycle.
11.7 Key Terms
• Life cycle: The series of changes that something (as an individual,
organizations, process, product) goes through from the beginning of its
life until death; the length of time that something lasts or can be used
11.8 Questions and Exercises
Questions
1. What is a project? Explain the important characteristics of a project.
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2. Discuss the challenges faced by project managers
3. Explain the concept of project life cycle.
4. What do you know about project management? Describe its significance.
5. Explain the meaning of management – by – project?
Exercise
Activity 11.1
1. Collect information about any one live local project.
Multiple Choice Questions
1. The success of project management depends upon target in terms of
————
i. Time
ii. Cost
iii. Performance
iv. All the above
2. Which one of the following is true?
i. Project is a unique activity outside the normal, routine operations.
ii. It is very unlikely that a project would be repeated again in the
same manner by the same teams to deliver the same results.
iii. Project has a clearly defined and agreed upon deadline by which
the task is to be accomplished
iv. All the above
3. —— is the characteristic of a project.
i. Definite time limit
ii. Uniqueness
iii. Sub-contracting
iv. All the above
4. Which one of the following statements is wrong?
i. Project management as a technique is assuming greater importance
since it aims at optimum utilization of resources
ii. Project management has grown into a separate branch of
management since traditional management techniques are found
inadequate to handle projects effectively
iii. i and ii are wrong
iv. i and ii are right
5. ——— a key task of a project manager
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i. Resource planning
ii. Risk analysis
iii. Leading project teams
iv. All the above
6. Tick the basic attribute of a project
i. A course of action
ii. Specific objectives
iii. Definite time perspectives
iv. i ii, and iii
7. Which one of the following is wrong?
i. Project is a unique activity outside the normal, routine operations.
ii. Project is usually a routine common task
iii. It is very unlikely that a project would be repeated again in the
same manner by the same teams to deliver the same results.
iv. Project vary significantly in type, size, nature, objectives, complexity
and also time duration.
Answers
Check Your Progress
10. Flexible, generalist, rigid, specialist
11. True
12. True
Multiple Choice Questions
1. iv
2. iv
3. iv
4. iii
5. iv
6. ii
7. ii
11.9 Further Reading
Burke Rory, Project Management Planning and Control Techniques, John
Wiley & Sons, Noida, 2003
Choudhury S., Project Management, Tata McGraw Hill Publishing
Company Limited, New Delhi, 2002
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NOTES
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Desai Vasant, Project Management, Himalaya Publishing House, New
Delhi, 2011
Ghattas R. G., Mckee Sandra L. Practical Project Management, Pearson
Education Asia, Delhi 2001
Goel B. B., Project Management Principles and Techniques, Deep and
Deep Publications Pvt. Ltd., New Delhi 2004
Gupta C. B., Srinivasan N. P., Entrepreneurship Development in India,
Sultan Chand & Sons, New Delhi, 2005
Nagarajan K., Project Management, New Age International Publishers,
New Delhi 2010
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NOTES
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UNIT 12: PROJECT MANAGEMENT – II
Structure
12.0 Introduction
12.1 Unit Objectives
12.2 Project Classification
12.3 Tools and Techniques of Project Management
12.4 Network Analysis
12.4.1 PERT
12.4.2 CPM
12.5 Summary
12.6 Key Terms
12.7 Questions and Exercises
12.8 Further Reading
12.0 Introduction
Project management is an organized venture for managing projects. It is
essential for ensuring timely and successful implementation of projects. It improves
performance and help management achieve desired level of efficiency. Project
management approach is different from traditional management. It comprises of
‘systems approach’ to planning, scheduling and controlling.
Every enterprise needs project management techniques in one form or
the other. These techniques are applied in planning, financing, implementing and
controlling project activities or tasks to achieve predefined objectives within
constraints of time, cost, quality and quantity.
12.1 Unit Objectives
After going through this unit, you will be able to
• Know about different classifications of projects
• Appreciate the significance of tools and techniques in project
management
• Comprehend the concept of network analysis
• Learn about PERT and CPM
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NOTES
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• Explain similarities and differences between PERT and CPM
12.2 Project Classification
On the basis of project classification, we can understand and highlight the
characteristic features of projects. There are several different ways to classify
projects. Let us discuss some of the important classifications of projects.
Projects had been classified, according to Indian Planning Commission,
on the basis of various sectors such as agriculture and allied sector, irrigation and
power sector, industry and mining sector, transport and communication sector,
social services sector, information technology sector, miscellaneous sector.
The projects in which quantitative assessment of benefits is possible are
termed as quantifiable projects like projects concerned with industrial development,
power generation, mineral development etc. In non-quantifiable project, such type
of quantitative assessment of benefits is not possible. Projects concerned with
health, education, defense, irrigation etc are non-quantifiable projects.
The projects based on techno-economic characteristic are techno-
economic projects. These can be classified in several different ways. Factor
intensity-oriented classification speaks about two categories of projects: capital
intensive projects and labour intensive projects. The degree of labour intensity is
typically measured in proportion to the amount of capital required to produce goods/
services. Higher the proportion of labour costs required the more labour intensive
the business. Labour intensive project requires a large amount of labour to produce
goods or services. In labout intensive projects a larger portion of total costs is due
to labour as compared with the portion of costs incurred in purchase, maintenance
and depreciation of capital equipment. Capital intensive projects rely mainly on
capital; capital costs are higher than labour costs. Capital projects are often identified
by their large scale and large cost relative to other investments requiring less
planning and resources.
On the basis of causation, projects can be classified as demand based and
raw material based projects. Raw material based projects are founded on availability
of certain raw materials, skills or other inputs. The existence of demand for certain
products or services make the project demand-based.
The service oriented projects are classified as: welfare projects, service
projects, research and development projects and educational projects.
Based on the type of activity, there are two categories of projects such as
industrial projects and non-industrial projects. Industrial projects are set up for
manufacturing of goods. Non-industrial projects such as health care projects,
educational projects, irrigation projects, soil conservation project, pollution control
projects and the like benefit the entire society. Such types of non-industrial projects
are financed by government.
Based on the geographical location of the project, projects can be classified
as national projects and international projects. National projects are set up within
the national boundaries of a country. International projects are set up outside the
boundaries of a country. They may be either set up by government or by a private
player. They may be in the form of fully owned subsidiaries established abroad,
joint ventures established abroad, or establishment of projects abroad through
mergers and acquisitions. International projects involve higher risk and more efforts
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NOTES
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in comparison with national projects. Further, it requires numerous procedural
formalities. Expertise is needed to handle international projects.
Based on the project completion time, and need of execution, there are
two types of projects - normal projects and brash projects. Normal projects have
no constraint on time. Brash projects are to be completed within the stipulated
time. Due to the fixed deadline for completion of the projects, the project may end
up with high project costs. For disaster projects, anything is allowed to gain time.
Defensive project is the project initiated to stabilize and sustain the current
business situation. Aggressive project is the project initiated to enter into new
business in a commercial manner which depends upon the future prospective rather
than the current scenario.
On the basis of ownership, projects can be classified as private sector
projects, public sector projects and joint sector projects. As the name implies,
ownership rests with project promoters and investors for private sector projects.
Profit maximization is the focus of private sector projects. Investors make an
investment in private sector enterprises only with an objective to earn good returns
on the investment. Public sector projects are owned by state for developmental
reasons. An enterprise is considered as public enterprise when state or any other
national, regional, or local authority holds at least 51% of its capital and holds
control over the project. In our country, public sector undertakings can be owned
either by central government of by state governments. It is vital for the government
to invest in growth sectors; no private player may volunteer since huge investment
is required and there are unattractive returns to this investment. The government
has to invest and nurture industries in such planned sectors of the economy. The
other examples of public sector projects are strategic sectors such as defense,
space research, atomic research, public utility services, natural resources – mining,
dam construction, and hydro power plants etc. Private sector is not allowed to
invest in strategic sectors of the nation. Public utility services cannot be fully
entrusted to the private sector players. Private sector is oriented towards profit
maximization and not towards welfare maximization. The natural resources of a
country are controlled by the government. Public sector deals with natural resources
since huge investment is required and ownership of the resources rests with the
government. In joint sector projects, government and private entrepreneurs share
ownership. Government shares the investment required for the project and in return,
avails the managerial talents, marketing expertise and entrepreneurial skills of
private entrepreneurs.
Size of the project is another parameter for classifying projects into three
types – small projects, medium projects and large projects. The size is generally
stated in terms of the amount of investment required. The investment limits for
different categories of projects are announced by the government from time to
time. For small projects, investment in plant and machinery is up to Rs. 5 crores.
For medium projects, investment in plant and machinery is up to Rs. 10 crores.
For large projects, investment in plant and machinery is up to Rs. 100 crores.
Projects with investment in plant and machinery beyond Rs. 100 crores are
categorized as mega projects.
Financial institutions classify projects on the basis of their age, experience,
and the purpose for which the project is being taken up. They are: new projects,
expansion projects, modernization projects, diversification projects.
New projects deal with a new product/idea. Entrepreneurs find out a gap
in the present market offerings regarding fulfillment of needs and wants of
Check Your
Progress
1. What is a brash
project?
2. What is meant by a
small project?
Fill in the blanks with
appropriate words:
3. For medium
projects investment in
plant and machinery is
up to Rs. — crores.
4. In — sector
projects, government
and private entrepre-
neurs share owner-
ship.
5. Profit maximization
is the focus of — sec-
tor projects.
6. —— projects in-
volve higher risk and
more efforts in com-
parison with ——
projects.(national, In-
ternational)
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NOTES
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customers. And accordingly new products/services are made to fulfill the gap
through a new project. Finding out a gap and then identifying and formulating a
new project is not an easy task. It requires expertise and proficiency.
Expansion project is aimed at increasing plant capacity for the current
product range by establishing additional plant capacity or by acquisition of another
organization in the same line of activity. Expansion project is undertaken for products
with good demand potential and promising future prospects.
Modernization project is undertaken when plant and machinery or
production process become obsolete with growing technological innovation. In
absence of modernization, inferior quality products would be produced, the cost of
production would be higher.
On the basis of need for project, projects can be classified as balancing
projects, replacement projects, backward integration and forward integration
projects.
Balancing project is undertaken to improve upon the manufacturing
capacity of one or more production units that will result in improvement in the
overall production capacity of the project as a whole.
Replacement project is meant for maintaining the same or better operational
efficiency. It involves replacing some of the old machinery with new machinery.
Over a period of time, there is wear and tear of machinery and maintenance costs
rise up along with the subsequent problems of breakdown of machinery, poor
quality of products, reduction in capacity of output etc. And the need for
replacement project is observed.
Diversification project aims for product diversification. Product
diversification is offering more than one product to the customers. Diversification
project is meant to offer more than one product to the market. Diversification may
be related or unrelated. Related diversification is closely related to the product line
of the organization. When the organization offers products different from the existing
ones, it is said to be unrelated diversification. Diversification aims for improved
profitability. There is a drive to tap the unexplored potential of the market behind
diversification project.
Backward integration project involves adding manufacturing or processing
facilities at beginning stages of a product line. A manufacturing organization starts
production of raw material instead of acquiring it from the suppliers and the
organization is said to be on backward integration.
Forward integration project involves adding additional manufacturing or
processing facilities at completion stages of a product line. After including additional
manufacturing/processing facilities at the end of the production line, the currently
produced products go through further processing resulting in further value addition.
In forward as well as backward integration, capacity of the added
production facilities must match with the existing production facilities.
Depending upon the speed needed for execution of a project, there can be
three categories of projects as normal projects, brash projects, and disaster projects.
Normal projects are implemented with adequate time. All the phases in a normal
project are allowed to take normal time as per the needs. Such type of normal
projects possess quality. They require minimum capital cost. Brash projects need
additional capital cost for speedy implementation of the projects. Additional
expenditure is required for procuring materials from vendors in a speedy manner.
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NOTES
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For saving time, construction contractors demand extra charges. The requirement
of time saving may lead to overlapping of various phases of the project. There is
a possibility of quality compromises for time saving. Disaster projects compromise
at various levels to gain time. The requirement is to reduce time drastically. Vendors
who can supply speedily are preferred even if they charge extra price. Quality
compromises are accepted; the only criteria is to reject failure level. There is no
question of competitive bidding. The work is in progress 24x7. Obviously for saving
project time, capital cost goes up in an exorbitant manner.
12.3 Tools and Techniques of Project Management
Project management involves the three phases of project planning, project
scheduling and project controlling. The role of project planning and scheduling is
seen before actual start of the project. The project controlling phase begins during
execution of the project. It is meant for removing the bottlenecks and completing
the project in time. During all these phases of project management, the network
techniques of PERT and CPM are useful.
A project is comprised of several interrelated activities which must be
performed in a sequence for its completion. The process of dividing the project into
these activities is called work breakdown structure (WBS). Project planning begins
with setting objectives of the project on the basis of certain assumptions. Then work
breakdown structure is developed depending upon the objectives in the form of
clearly definable activities. Project planning deals with identification of jobs, tasks
and activities to be performed and estimation of the required resources of various
types such as human resources, equipment, machineries, financial resources, material
resources, operational resources, time, space etc. Proper planning and estimation of
all resources including time is helpful for estimation of time and cost of various
activities of the entire project. Project planning involves analysis of various alternative
courses of action for achievement of objectives. Further, it is important to develop a
sequence of performing the activities in a systematic manner.
Project scheduling is preparation of time schedules of execution of activities
and computation of resources required at various stages of operation. It is the process
of laying out all the actual activities of the project in the time order in which they are
to be performed, in the light of logical sequence of the activities. The logical sequence
of activities of a project would be enterprise registration, appointment of consultant,
mobilization of resources, land acquisition, site development, preparation of civil work
designs, plans and estimates, entrusting the work to civil contractors, preparation of
design specifications and placing order for plant and machinery, receiving plant and
machinery on project site, erection of machinery, commissioning the plant, taking
trial runs, and commencement of regular production.
Scheduling also identifies the tasks that are critical and the resources that
are limited so as to ensure execution of the project in an orderly and systematic
manner. The process lays out the project activities in a time sequence in the order
of their performance, assign starting time and finishing deadlines and then allocates
resources to them. In all, the project scheduling phase sets start and finish times of
each activity, identifies critical activities that require special attention, allocate
resources to each activity, determines slacks and floats for non-critical activities
and then focuses on various constraints due to limitation of resources.
Project controlling phase takes follow up of the planning and scheduling
phases during the actual execution of the project. To begin with, standards and
Check Your
Progress
7. Distinguish be-
tween modernization
project and diversifi-
cation project.
8. How forward inte-
gration project is dif-
ferent from backward
integration project?
9. Give an example
each for forward inte-
gration project and
backward integration
project.
10. What are the cir-
cumstances that ne-
cessitate backward in-
tegration projects?
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NOTES
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targets are set in terms of time and cost of the project. The performance is measured
by comparing it with the set standards and targets. The project is monitored; the
progress is reviewed on the basis of work scheduled at various stages of operation
in the light of time. It is attempted to find deviations in actual progress from the
scheduled plan and evaluate the effect of deviations on the project plan. The
project schedule is updated. To rectify the deviations from the plan, corrective
measures are suggested.
If the project is large and complex involving numerous interrelated
activities, requiring several resources in the form of men, money, machines,
materials etc.; it is very difficult for the management to make and execute an
optimum schedule on the basis of past experience, availability of expertise, skills
and intuition. Therefore, they are in search for some methods, techniques which
may help them in planning, and successfully implementing such type of projects.
The focus of project management is on proper planning, scheduling and controlling
of the project. It aims to develop a sequence of activities for completion of the
project in fixed time, within the set budget and available resources. For systematic
planning, the management has evolved various techniques applying network
strategy. Project management requires various tools and techniques such as bar
charts, milestone charts, velocity diagrams and network techniques.
Bar charts are the two-dimensional pictorial representation showing various
activities of a project. In a bar chart, activities of a project are shown on one axis
and their durations are represented on the other axis. In the axis that represents
activities, the different activities involved in a project are drawn in the form of
bars. Time taken for completion of each activity is represented by length of the
bar. It helps to review the project progress, and allows for rescheduling of the
project. It highlights critical activities and other bottlenecks in the completion of
the project in a proper manner.
A bar chart is normally suited to small projects. It cannot be effectively
used for medium sized and large projects. It cannot represent the interrelationships
between various activities of the project. It cannot take into account the
uncertainties in activity duration. They are difficult to update when there are many
changes. When there are many changes between the plan and actual performance,
bar charts become obsolete. They do not equate time with cost. Time-cost
relationship cannot be derived from bar charts.
Milestone charts are the modified and improved versions of bar charts. Bar
charts represent activities and milestone charts represent the events which mark
either the beginning or the end of an activity. They are more detailed and offer better
control than bar charts. They show most of the drawbacks like bar charts.
Velocity diagrams are useful for representing the activities which require
a series of crews working in a given sequence.
Big and large sized projects are comprised of a large number of activities and
conventional scheduling methods like bar charts may not be effective for such large
and complex projects. If scheduling is not properly done, there may be an overestimation
or underestimation of project implementation period; both are not desirable.
Programme Evaluation Review Technique (PERT) and Critical Path
Method (CPM) are the widely used techniques for planning, scheduling and
controlling of large and complex projects. PERT was developed in the year 1957
by Morgan R. Walker of DU Pont and James E. Kelly of Remington Rand. PERT
was developed in the year 1958 by the US Navy.
Check Your
Progress
12. What is a bar
chart?
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NOTES
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With slight modifications, PERT and CPM have given rise to several other
network techniques such as Programme Evaluation Procedure (PEP), Resource
Allocation for Multi-Project Scheduling (RAMPS), Least Cost Estimating and
Scheduling (LESS), and Scheduling and Control by Automated Network System
(SCANS) etc.
C. Choudhury groups several techniques which contribute significantly
towards effective project management under the following heads:
1. Project selection techniques
a. Cost benefit analysis
b. Risk and sensitivity analysis
2. Project execution planning techniques
a. Work breakdown structure (WBS)
b. Project execution plan (PEP)
c. Project responsibility matrix
d. Project management manual
3. Project scheduling and coordinating techniques
a. Bar charts
b. Life cycle curves
c. Line of balance (LOB) and
d. Networking techniques (PERT/CPM)
4. Project monitoring and progressing techniques
a. Progress measurement technique (PROMPT)
b. Performance monitoring technique (PERMIT)
c. Updating, reviewing and reporting technique (URT)
5. Project cost and productivity control techniques
a. Productivity budgeting technique
b. Value engineering (VE)
c. COST/WBS
6. Project communication and clean-up techniques
a. Control room
b. Computerized information systems
12.4 Network Analysis
A project consists of a number of organized activities and tasks. The
compilation of all the activities of the project in a sequence is known as project
Check Your
Progress
13. Name some tools
and techniques of
project management
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NOTES
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logic. When it is represented in the form of a graphical depiction, it is called as
network. A network (also called as network diagram or network technique) is a
graphical representation of inter related activities of the project. It indicates the
specific activities required to complete a project. It depicts flow as well as sequence
of well-defined interdependent activities and events concerned with a project. It
clearly indicates start and finish time of each activity of a project. It enables the
project manager to assign duties and responsibilities for each specific activity.
Resources are allocated for each specific activity. The project manager may deploy
resources from non-critical activities to critical activities for the sake of project
duration needs.
A network path comprises of a set of activities which are well connected
from network beginning event to the network terminal event. It generally comprises
a set of symbols connected with each other in a sequential relationship with each
step making the completion of an event. It is a symbolic representation of the
essential characteristics of a project. On the basis of network diagram and
scheduling computations, it is possible to identify the longest series of activities
through the project implementation phase and decide about the project duration.
The longest path through the network is called as critical path. Length of the
critical path determines the minimum duration in which the project can be completed.
Network enables project managers to view the entire project in terms of
a sequence of activities and events. It indicates all the activities which follow one
after another leading to an event. It becomes clear that which tasks will be
performed simultaneously and which ones sequentially. The entire project can be
seen on one network. Since projects are broken down into simple activities and
these activities are arranged in a logical sequence. Time, costs and other resources
are allocated to different activities.
The working methodology of Critical Path Analysis (CPA), which includes
both CPM and PERT, according to P.C. Tulsian and Vishal Pandey, consists of the
following steps:
• Analyze and breakdown the project in terms of specific activities and/or
events
• Determine the interdependence and sequence of specific activities and
prepare a network
• Assign estimate of time, cost or both to all the activities of the network
• Identify the longest or critical path through the network
• Monitor, evaluate and control the progress of the project by replanning,
rescheduling and reassignment of resources
There are various network techniques available such as:
• Critical Path Method (CPM): The CPM is a logical mathematical model
of the project based upon the optimal duration required for each activity
and optimal use of available limited resources. It is a deterministic model.
• Programme Evaluation and Review Technique (PERT): The PERT is
basically a scheduling technique. It shows a project as a set of processes
or operations called ‘activities’ which must take place in a certain
sequence. To accomplish the project, all activities have to be completed.
It is a probabilistic model. It introduces uncertainties in the project
network.
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NOTES
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• Graphical Evaluation and Review Technique (GERT): The GERT is a
recently used network. This is superior to CPM and PERT. It allows for
probabilistic events while all events in CPM and PERT are deterministic.
In the networks representing research and development project the
process is repeated till the desired outcome is achieved. CPM and PERT
cannot be used in such situations. Only in GERT network simulation can
be used.
• Line of Balance (LOB): Line of balance uses graphic techniques to
show the progress of the project with reference to key events.
• PERT/Cost: It is an extension of the basic PERT system to cover cost
of the project. It helps to plan the completion of a project not only within
a certain time but also within a certain cost.
• Workshop Analysis Scheduling Programme (WASP): This techniques
was developed by the British Automatic Energy Authority.
Prem Kumar Gupta and D.S. Hira note the objectives of network analysis
as:
• To complete the project within the stipulated period
• Optimum utilization of available resources
• Minimization of cost and time required for the completion of the project
• Minimization of idle resources and investments in inventory
• To identify the bottlenecks, if any, and to focus attention on critical
activities
• To reduce the set-up and changeover costs
Network techniques are very much useful for planning, scheduling and
control of operations in large and complex projects. With the application of network
techniques, project managers benefit immensely with optimum utilization of
resources, effective decision making, improved communication saving of time,
cost saving. They exercise management control in a far better manner. With the
help of these tools, it is possible to evaluate the performance by comparing actual
performance against the planned targets. These techniques help project managers
to predict the probable project duration and accompanying cost. Project managers
apply network techniques to achieve the objectives with least cost and in minimum
time. They are in a better position to anticipate the probable problems and difficulties
in actual execution of the project and thereby they can take correction action well
in time. They are able to minimize delays and hold-ups during execution.
Construction of networks for complex projects is time consuming and
complicated since it deals with time-cost trade off procedure. It adopts trial and
error approach. It is difficult to make an accurate, realistic and reliable estimation
about duration of various activities. For new and non-repetitive projects, the time
estimates are based on guesses. It is not easy to perform and analyze in the face
of resource constraints. Individuals trained in the network methodology are needed
to plan and implement networks. Either trained professionals are to be recruited
or existing employees need to get trained in networking techniques. There are
several difficulties in determination of the level of network detail. Planners take
decisions on the basis of judgement and experience.
Check Your
Progress
14. What is meant by
network analysis?
15. State the impor-
tance of network
analysis.
State whether the fol-
lowing is true or false:
16. PERT and CPM
are the most com-
monly applied tech-
niques for project plan-
ning and control.
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NOTES
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Entrepreneurship - V
12.4.1 Programme Evaluation and Review Technique (PERT)
Programme Evaluation and Review Technique (PERT) is a popular method
used in project planning and control. It is a scheduling technique. It shows a
sequence of activities to be completed for concluding a project. It is primarily
concerned within project time. It enables project manager to schedule and coordinate
various activities so that the project can be completed on scheduled time. It is
generally used for those projects which are not of repetitive nature and where
time required completing various activities are not known in advance.
The steps of the process of PERT can be listed as:
• Identification of activities of the project
• Estimation of activity time
• Defining inter-dependent relationships between the activities
• Identification of critical activities for efficient allocation of resources
• Closer control on critical and other activities
PERT expedites planning. PERT facilitates management to use the
resources in the best possible manner for achievement of an objective within the
overall time and cost limitations. It enables optimum allocation of limited resources.
It determines critical activities in the project. It determines the expected duration
of activities and consequently of the project duration. It determines the most
economic schedule for fixed duration project. It incorporates risk analysis in project
network. In all, it supports management to take right action, at the right point, and
at right time to achieve a given goal.
The time estimates to perform activities constitute a major limitation of
PERT. Activities are of non-repetitive type. If the estimates are not satisfactory,
then the network will be highly unrealistic. The probability distribution of total time
is assumed to be normal in PERT which in real life situations may not be true.
Simple PERT technique does not consider resources required at various stages of
the project. If a certain resource must be used to perform more than one activity
and at the same time if it can be used for only one activity at a time then the
network diagram will become infeasible. For controlling a project with PERT,
there is need of frequent updating and revision of PERT calculations and this
exercise increases expenditure.
12.4.2 Critical Path Method (CPM)
CPM uses activity oriented network which consists of a number of well
recognized jobs, tasks, activities. CPM is generally used for simple, repetitive type
of projects for which activity times and costs are known precisely with a high
degree of certainty. It is deterministic rather than probabilistic model. CPM has
two time-cost estimates for each activity – one time-cost estimate for the normal
situation and the other estimate for the crash situation. It does not incorporate any
statistical analysis in determining such time estimates. It operates on the assumption
that there is a precise known time that each activity on the project will take.
CPM determines the critical or bottleneck activities and the critical path
on which the project duration depends. It gives the most economical schedule for
a fixed duration. It determines the pattern of allocation of available limited resources.
CPM helps in ascertaining the time schedule. With CPM, management
can have a control easily. It identifies the most critical elements and thus more
Check Your
Progress
17. Write a short note
on PERT
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attention can be paid to these activities. It contributes to detail planning. Through
CPM, it is convenient to communicate project plans, schedules time and cost
performance.
CPM allows for a comprehensive view of the entire project. Because of
the sequential and concurrent relationships, time scheduling becomes more effective.
Identification of critical activities keeps the project manager alert and attentive.
He/she becomes prepared with alternative plans ready, if needed. The project is
broken down into small components. This permits better and more effective control
over the activities. It is beneficial to use selective management principle. In network
analysis, critical activities become A items, sub-critical items B items and all others
C items. Through the plan schedule derived from CPM, delegation can be more
effective.
CPM is deterministic model based on certainty assumptions as regards
time which may not be true in practice. CPM does not use statistical analysis in
making time estimates. It operates on the assumption that there is a precise known
time that each activity in the project will take. But this may not be true in actual
life. CPM cannot be used as a controlling device because any changes will alter
the entire structure of network. One has to repeat the entire evaluation ow the
project each time when changes are introduced in the network. CPM was initially
developed as a static planning model and not as a dynamic controlling device.
Comparison between PERT and CPM
PERT and CPM both are used in planning and controlling projects. Both
the techniques use near about the same networking principles. They are similar in
terms of their basic structure, rationale, and mode of analysis. Yet there are
differences between them.
• The origin of PERT is military (naval) and the origin of CPM is industrial.
• PERT is an event oriented approach whereas CPM is an activity oriented
approach. In PERT, the emphasis is on completion of task rather than
the activities required to be performed to reach a specific event or task.
CPM is built on the basis of activities.
• PERT is a probabilistic model with uncertainty in activity duration. CPM
is a deterministic model with well-known activity (single) time based
upon the past experience.
• PERT uses three estimates of time and CPM uses single estimate of
time for activities. PERT takes into account uncertainties involved in the
estimation of time of a job or an activity. It uses three estimates of the
activity time namely, optimistic, pessimistic and most likely, with a view
to take into account uncertainty in time. Expected duration of each
activity is probabilistic. Expected duration indicates that there is 50%
chance of completing activity within that time. CPM does not take into
account the uncertainties involved in the estimation of time for execution
of an activity. On the basis of past experience, each activity is assigned
a single time. In CPM, the emphasis is on cost.
• PERT is time based and CPM is cost based. PERT lacks the cost-time
function of CPM which is an important factor for project control. PERT
is predominantly concerned with time only. It helps to schedule and
coordinate various activities so that project can be completed in scheduled
time. CPM is concerned with project time as well as cost and finds
Check Your
Progress
18. Write a short note
on CPM
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trade-off between project time and project cost. To reduce project
duration at optimum cost, it employs additional resources and manipulates
project duration within certain limits.
• PERT lays emphasis on reduction of the execution time of the project
without too much cost implications. CPM lays emphasis on the greatest
reduction in completion time with the least increase in project cost.
• PERT averages time while CPM does not average time.
• PERT does not demarcate between critical and non-critical activities
while CPM does mark the critical activities.
• PERT allows uncertainty whereas CPM does not allow uncertainty.
• PERT is suitable when high precision is required in time estimates. CPM
is suitable when reasonable precision is required.
• PERT is generally used for projects where time required for completing
the activities is not known in advance. It is generally used for those
projects which are non-repetitive in nature. PERT is used for large, one-
time research and development type of projects. CPM is mainly used
for projects which are repetitive in nature and comparatively small in
size. And where one has previous experience in handling similar projects.
• In PERT, the concept of crashing is not applied. In CPM, the concept of
crashing is applied.
• CPM relies on past experience whereas PERT do not take past
experience into consideration.
• Over a period of time, these differences between PERT and CPM have
become less significant. Now cost considerations have been included in
PERT analysis. These distinctions are of academic interest only. For the
purpose of analysis, both PERT and CPM are treated as synonymous.
12.6 Summary
There are several different ways to classify projects. The projects in which
quantitative assessment of benefits is possible are termed as quantitative projects
and the projects in which quantitative assessment of benefits is not possible are
non-quantitative projects. In labour intensive projects a larger portion of total costs
is due to labour as compared with the portion of costs incurred in purchase,
maintenance and depreciation of capital equipment. Capital intensive projects rely
mainly on capital; capital costs are higher than labour costs. The service oriented
projects are classified as: welfare projects, service projects, research and
development projects and educational projects. Industrial projects are set up for
manufacturing of goods. Non-industrial projects are done for the upliftment of the
society and done with social welfare objectives. National or domestic projects are
within one’s own country. International projects are built in other foreign country.
In normal projects time limits are set and adequate. In brash projects additional
costs are involved to gain time. Disaster projects allow any deviation to meet the
time deadline. Public sector projects are of the state, centre or both forms of
government. Private sector projects are mostly done with an objective to earn
profit. They are the projects with a complete ownership of promoters and investors.
Owner may be an individual, partnership firm or a company. In joint sector projects,
Check Your
Progress
19. What are the simi-
larities between PERT
and CPM?
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there is a partnership between an entrepreneur and government – may be state
government or central government. On the basis of expertise, these types of
partnerships occur. Balancing project augments or strengthens the capacity of a
specific area within a sequence of entire production plant for the sake of scaling
to the capacity in order to have optimum utilization. Replacement project involves
replacing old machinery with new machinery to maintain the same or better
operational efficiency. Diversification project is meant to offer more than one
product to the market. Diversification may be related or unrelated. Backward
integration project involves adding manufacturing or processing facilities at beginning
stages of a product line. Forward integration project involves adding additional
manufacturing or processing facilities at completion stages of a product line.
Modernization project is concerned with adopting and upgrading the technology to
increase the productivity. Expansion project is undertaken to increase the production
capacity of goods and services. Rehabilitation project is undertaken to revive a
loss making enterprise.
Project management requires various tools and techniques such as bar charts,
milestone charts, velocity diagrams and network techniques. Programme Evaluation
Review Technique (PERT) and Critical Path Method (CPM) are the widely used
techniques for planning, scheduling and controlling of large and complex projects.
CPM uses activity oriented network which consists of a number of well
recognized jobs, tasks, activities. CPM is generally used for simple, repetitive type
of projects for which activity times and costs are known precisely with a high
degree of certainty. It is deterministic rather than probabilistic model.
Programme Evaluation and Review Technique (PERT) is a popular method
used in project planning and control. It is a scheduling technique. It shows a
sequence of activities to be completed for concluding a project. It is primarily
concerned within project time. It enables project manager to schedule and coordinate
various activities so that the project can be completed on scheduled time.
PERT and CPM have developed independently. They have a common
basis i.e. optimization of resources for implementation of the project as per the
pre-determined time, cost and performance. They assist in long-term planning.
They clearly indicate the inter-dependencies as well as problem areas. These
techniques allows mangers to focus on vital activities by proper allocation of time
and money. These techniques facilitate systematic allocation and utilization of
scarce and limited resources and contribute in achievement of goals within the
constraints of time and cost. They provide a powerful means to obtain trade-off
between cost and time.
12.7 Key Terms
• Event: A specific accomplishment that occurs at a recognizable point
of time and does not call for either the need of time or resources
• Activity: The work required to complete a specific event
12.8 Questions and Exercises
Questions
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1. Discuss various phases of project life cycle.
2. How will you classify projects? Which criterion seems to be more rational
and acceptable for classification of projects?
3. Discuss the similarities and differences of CPM and PERT.
4. Discuss the applications of PERT and CPM in project planning and
explain the difference between them.
5. What is PERT/CPM? What does each involve? How are they similar?
Different? What particular advantages does PERT have over CPM?
6. Explain the classification of projects.
7. What is meant by CPM? What are it salient features?
8. Explain the advantages and limitations of PERT.
9. What do you mean by network analysis? Explain clearly the nature of
network techniques and network planning.
Exercise
Activity 12.1
Meet two local entrepreneurs and ask the about the use of tools and
techniques of project management.
Multiple Choice Questions
1. Which one of the following is wrong?
i. For small projects, investment in plant and machinery is more than
to Rs. 5 crores.
ii. For medium projects, investment in plant and machinery is up to
Rs. 10 crores.
iii. For large projects, investment in plant and machinery is up to Rs.
100 crores.
iv. Projects with investment on plant and machinery beyond Rs. 100
crores are categorized as mega projects.
2. Pick out the wrong alternative
i. Capital intensive projects invest heavily in plant and machinery.
ii. Labour intensive projects involve a large number of human
resources.
iii. Industrial projects are financed by government.
iv. Industrial projects are set up for manufacturing of goods.
3. Which one of the following is non-industrial project?
i. Irrigation project
ii. Pollution control project
iii. Educational project
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iv. All the above
4. Pick the odd one out
i. Profit maximization is the focus of public sector projects.
ii. Normal projects have no constraint on time.
iii. Crash projects are to be completed within the stipulated time.
iv. International projects involve higher risk and more efforts in
comparison with national projects.
5. Which one of the following applies for private sector projects?
i. Ownership rests with project promoters and investors
ii. Profit maximization is the focus
iii. Investors make an investment with an objective to earn good returns
on the investment
iv. All the above
6. Which one of the following is true?
i. All the phases in a normal project are allowed to take normal time
as per the needs
ii. Crash projects need additional capital cost for speedy implementation
of the projects
iii. Disaster projects compromise at various levels to gain time
iv. All the above
7. Which one of the following does not apply to PERT?
i. Cost based
ii. Time based
iii. Use of three estimates of time
iv. A probabilistic model
8. Which one of the following does not apply to PERT?
i. Cost based
ii. Time based
iii. Use of single estimate of time
iv. A deterministic model
9. Pick the odd one out
i. PERT is an event oriented approach
ii. PERT does not take into account uncertainties involved in the
estimation of time of a job or an activity
iii. PERT lays emphasis on reduction of the execution time of the project
without too much cost implications
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iv. PERT is suitable when high precision is required in time estimates
10. Pick the odd one out
i. CPM takes into account the uncertainties involved in the estimation
of time for execution of an activity
ii. CPM lays emphasis on the greatest reduction in completion time
with the least increase in project cost
iii. CPM is concerned with project time as well as cost and finds trade-
off between project time and project cost
iv. CPM is suitable when reasonable precision is required
Answers
Check Your Progress
3. 10
4. Joint
5. Private
6. International, national
16. True
Multiple Choice Questions
1. i
2. iii
3. iv
4. i
5. iv
6. iv
7. i
8. ii
9. ii
10. i
12.9 Further Reading
Burke Rory, Project Management Planning and Control Techniques, John
Wiley & Sons, Noida, 2003
Choudhury S., Project Management, Tata McGraw Hill Publishing
Company Limited, New Delhi 2002
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Desai Vasant, Project Management, Himalaya Publishing House, New
Delhi 2011
Ghattas R. G., Mckee Sandra L. Practical Project Management, Pearson
Education Asia, Delhi 2001
Goel B. B., Project Management Principles and Techniques, Deep and
Deep Publications Pvt. Ltd., New Delhi 2004
Gupta C. B., Srinivasan N. P., Entrepreneurship Development in India,
Sultan Chand & Sons, New Delhi, 2005
Gupta Prem Kumar, Hira D.S., Operations Research, S. Chand &
Company Ltd., New Delhi, 2009
Jhamb L.C., Quantitative Techniques for Managerial Decisions, Everest
Publishing House, Pune, 2001
Nagarajan K., Project Management, New Age International Publishers,
New Delhi 2010
Tulsian P.C. Pandey Vishal, Quantitative Techniques Theory and Problems,
Pearson Education Asia, Delhi, 2002
Project Management – II